Dec. 29 (Bloomberg) -- Russia and Ukraine failed today to reach an agreement on gas debts, leaving two days to avoid a cutoff that threatens to disrupt fuel supplies to Europe and cause a fresh Russian rift with the West.

Ukraine “doesn’t want to pay” the debt it owes OAO Gazprom, Russia’s natural-gas exporter, for supplies, Russian Prime Minister Vladimir Putin told reporters in Moscow today. He spoke on the phone for almost an hour with Ukrainian President Viktor Yushchenko while a delegation from Ukrainian energy company NAK Naftogaz Ukrainy met Gazprom officials in Moscow.

The Russian state company supplies a quarter of Europe’s gas, four-fifths of which passes through Ukraine’s pipeline system. Russia, whose August war with Georgia strained ties with the U.S. and Europe, faces pressure from its largest gas consumers, including Germany, to avoid a repeat of a 2006 fuel war with Ukraine that affected European consumers.

“Russia will only hurt itself by pressuring Ukraine; it will bring the country even closer to the West” and allow it to appear “as a victim,” Alexander Rahr of the German Council on Foreign Relations in Berlin, said in a phone interview.

Conflict with Ukraine over gas deliveries has been one of the most contentious issues between the two former Soviet partners. Russia also is challenging Ukraine’s aspirations to join the North Atlantic Treaty Organization and blames the Ukrainian leadership for supplying weapons to the Georgian army, which fought Russia over the breakaway region of South Ossetia.

Gazprom Claims

Russian Deputy Foreign Minister Andrei Denisov said he hoped a deal will be reached by New Year, Interfax reported today. Gazprom says Ukraine owes it $2.1 billion and will not sign a new delivery contract until the money is paid. Spokesman Sergei Kupriyanov said over the weekend there is about a 50 percent chance that Gazprom will end supplies of gas to Ukraine at midnight on Jan. 1, the deadline for an agreement.

Gazprom also said today that if it charges Ukraine full market prices like European countries, the cost of gas next year could rise to $418 per 1,000 cubic meters, from $179.5 now.

Gazprom curtailed deliveries to Ukraine in January 2006 after a price dispute that the former Soviet nation said was punishment for its pro-Western policies. That led to natural-gas shortfall throughout Europe and called into question Russia’s reliability as an energy supplier.

Export Commitments

The Russian company today said it would fulfill its export obligations to Europe and created a special Web site to inform consumers of the latest developments in the dispute.

“Gazprom is committed to communicating as clearly as possible throughout the negotiations with Naftogaz Ukrainy,” Gazprom said in an e-mailed statement.

Ukraine owes $806 million for November gas and $862 million for December, plus about $450 million in fines.

The only way out of the crisis is for Ukraine to pay off the debts and sign a long-term gas supply agreement with Russia, said Volodymyr Omelchenko, an analyst at Kiev-based Razumkov Center for Economy and Political Studies.

“This will allow Ukraine to avoid political influence on energy prices in the future,” he said.

Ukraine, though, like other emerging markets, has been shaken by a lack of credit, a weakening currency and plunging demand for its products due to the global financial crisis. Last month, Ukraine received approval for a two-year, $16.4 billion International Monetary Fund loan to help support its banking system and widening current-account deficit.

Ukrainian Growth

The Ukrainian economy is in danger of its worst decline since the mid-1990s aftermath of the Soviet Union’s collapse. Its gross domestic product, which has expanded at an average annual rate of 7 percent since 2000, may shrink 5 percent next year, Oleksandr Shlapak, deputy chief of staff to the country’s president, said last month.

Belarus, an ally of Russia that is considering stationing Russian weapons to counter a planned U.S. missile shield, secured an undisclosed lower gas price for 2009, after paying $129 per 1,000 cubic meters this year. Ukraine has unsuccessfully pressed Russia to cut the price it pays for gas.

Unlike the 2006 gas dispute, a response to the 2004 Orange Revolution in Ukraine that brought Western-backed opposition leaders to power, “this is mainly commercial, it’s about money,” said Rahr in Berlin. Gazprom itself “desperately needs” funds to invest in Siberian gas fields amid the global financing crunch, he said.

Ukraine may be able to avoid a shutoff of Russian natural gas by settling its debt to Gazprom through deductions from future transit fees that Ukraine charges Russia for transporting gas to Europe, Kupriyanov said.

Efforts to reach a compromise are complicated by an ongoing power struggle between Yushchenko and Prime Minister Yulia Timoshenko, two Orange Revolution leaders.

“It isn’t clear who is in charge and who is the right counterpart for Russia to talk to,” said Masha Lipman, an analyst at the Carnegie Moscow Center research group in Moscow. “Ukraine is in political turmoil and in the midst of a serious economic crisis.”

To contact the reporter on this story: Henry Meyer in Moscow at hmeyer4@bloomberg.net

Last Updated: December 29, 2008 12:26 EST