Ukraine Nears Russian Gas Deal as Eastern Clashes Persist

Russia and Ukraine moved closer to a deal that would keep gas flowing between the countries even as they spar over Russian support for separatists seeking to break away from the government in Kiev.

After talks brokered by the European Union in Berlin, Ukraine made its first payment in months to Russia’s OAO Gazprom (OGZD), transferring $786 million to pay for gas received in February and March. While debts and future payments remain in dispute, EU Energy Commissioner Guenther Oettinger welcomed yesterday’s steps as “building blocks for a package that, given the evident goodwill of all parties today, doesn’t seem out of reach.” Talks are due to continue on June 2 and Ukraine doesn’t rule out arbitration as a solution to the price dispute.

“Those talks will end either with a signing of an agreement or with filing an arbitrage,” Ukrainian Prime Minister Arseniy Yatsenyuk said at a cabinet meeting in Kiev yesterday. Ukraine “will never accept” Gazprom’s “price of almost $500” per 1,000 cubic meters.

The Ukraine conflict escalated after the toppling of a pro-Russian government by protesters in February, and President Vladimir Putin’s annexation of Crimea a month later. Leaders in Kiev and their U.S. and European Union allies accuse Putin of encouraging tumult in the eastern regions, while Russia says Ukraine’s army should stop targeting its own citizens.

Insurgents Attack

In eastern Ukraine, around 80 pro-Russian insurgents attacked a border guard base in the Dyakove village in the Luhansk region wounding 3 servicemen, the border guard service said on its website today. A government forces’ fighter jet Su-27 helped repel the attack. Rebels probably used the night assault to distract attention while guns were being smuggled from Russia across other sections of the border, according to the statement.

Insurgents killed a Ukrainian soldier and wounded two in an attack on a military vehicle in the eastern Kharkiv region, the National Guard said on its website yesterday. A day earlier, the separatists downed a military helicopter, killing a general and 13 soldiers.

‘Packing Up’

This week’s flare-up in fighting halted gains in Russian financial assets. The benchmark Micex stock index fell 1.1 percent yesterday. The ruble dropped for a fifth day against the dollar, posting a weekly loss of 2.1 percent, the most since January.

Yield on Ukraine’s government bonds due 2013 rose for the second day and closed at 8.913 percent yesterday, the highest since May 26, data compiled by Bloomberg shows. The hryvnia strengthened to 11.7950 per dollar from 11.84 on May 29.

The markets had rallied in the previous few weeks as Putin made conciliatory gestures.

Russia has withdrawn at least two-thirds of the tens of thousands of troops it massed near the Ukraine border, Colonel Steve Warren, a Pentagon spokesman, told reporters yesterday. He said remaining forces also “appear to be packing up.”

Russia still hasn’t taken the necessary steps to ease tensions, and should “use its influence” over the rebels, Deputy National Security Adviser Ben Rhodes said in Washington.

‘National Catastrophe’

His comments mirrored a call by Russia’s Foreign Ministry for the U.S. and other countries to use their influence over the Kiev government to stop Ukraine from “sliding into a national catastrophe.”

Rhodes said President Barack Obama will meet with Ukrainian President-elect Petro Poroshenko during a trip to Europe next week. Poroshenko, who won elections on May 25 with 55 percent of the vote, has vowed rapid action to suppress the separatists.

While there’s no indication the conflict will end as fast as the new leader has pledged, there were signs this week of infighting among the rebels.

A group of heavily armed gunmen seized control of the headquarters of the self-declared independent authority in Donetsk from another faction. Alexander Maltsev, a spokesman for separatist leader Denis Pushilin, said by phone that the move was “a cleanup of our ranks” intended to prevent a repeat of recent looting in the city.

‘Little Time’

The allegiances of the groups aren’t always clear, and Ukraine’s government has pointed to a growing number of Russians involved in the conflict, including some from the Caucasus. The U.S. has expressed concern that the separatists are receiving arms and reinforcements from Russia.

The gas talks in Berlin highlight one of the areas where the Russia-Ukraine dispute may have a wider impact. Ukraine carries about 15 percent of Europe’s annual demand through its Soviet-era pipelines.

Ukraine accuses Russia of using gas as a political weapon by ramping up prices, and says it may seek international arbitration.

Gazprom says Ukraine has run up $5.2 billion in debt and must pay $1.7 billion in advance for next month’s gas or risk a shutdown. That would tighten the economic squeeze on a country that’s facing a 7 percent contraction this year, according to the European Bank for Reconstruction and Development, and has sought a $17 billion International Monetary Fund bailout.

Russian Energy Minister Alexander Novak said after yesterday’s talks that there’s “very little time left to reach an agreement.”

To contact the reporters on this story: Elena Mazneva in Moscow at emazneva@bloomberg.net; Brian Parkin in Berlin at bparkin@bloomberg.net; Ewa Krukowska in Brussels at ekrukowska@bloomberg.net

To contact the editors responsible for this story: Will Kennedy at wkennedy3@bloomberg.net Elizabeth Konstantinova, Pawel Kozlowski

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