Russia has cut off gas supplies to Ukraine in a dispute over unpaid bills that could disrupt supplies to the rest of Europe.
Moscow said today that Kiev missed a deadline for a $1.95bn debt payment and it would now only get gas it has paid for in advance. It insisted Ukraine must also ensure that it lets Russian gas flow through international pipelines to Moscow's clients in the EU.
The talks come during the on-going political crisis between the two countries and Kiev and Moscow blamed each other for the failure to agree overnight on the price of future gas deliveries and refused to abandon well established positions: Russia offering a discount and Ukraine rejecting that as a tool for political manipulation.
"Thanks to the unconstructive position of the Ukrainian government, today a prepayment system was introduced," Alexei Miller, the chief executive of Russian state exporter Gazprom , told Prime Minister Dmitry Medvedev during a sombre meeting at a government residence at Gorki, outside Moscow.
He said Ukraine had "adopted a position that can only be called blackmail", adding: "They wanted an ultra-low price."
The dispute revolves around a disagreement on price and the prospect of changes to a 2009 contract that locked Ukraine into paying the highest price in Europe at $485 per 1,000 cubic metres.
Kiev wants to pay $268.50 per 1,000 cubic metres of gas – the price it had been offered when Viktor Yanukovich, the Kremlin-friendly leader who was ousted in February, was in power – but in a compromise last week, agreed to pay $326 for an interim period until a lasting deal was reached.
Moscow had sought to keep the price at the 2009 contract level, but had offered to waive an export duty, bringing down prices by about a fifth to $385, broadly in line with what Russia charges other European states. However, Kiev says waiving the duty rather than agreeing a new contract price means Moscow could use the threat of cancelling the waiver to keep Ukraine under its thumb.
EU energy commissioner Guenther Oettinger, who has been brokering the talks, said Moscow had declined a compromise proposal under which Kiev would pay $1bn immediately and then make monthly debt payments to Gazprom. Ukraine would also pay $385 per 1,000 cubic metres in winter and around $300 in the summer months.
According to Miller, Moscow would no longer accept Kiev paying off part of its total debt to restart supplies. It would restart gas supplies only when Ukraine paid off all the almost $4.5bn it owed and paid up front for a month's deliveries, he said.
Ukrainian Prime Minister Arseny Yatseniuk accused Russia of deliberately blocking a deal to cause Kiev supply problems next winter, when temperatures plunge and heating needs increase.
"But it is not about gas. It is a general Russian plan to destroy Ukraine," Yatseniuk said in Kiev. "It is yet another step against the Ukrainian state and against Ukrainian independence."
A source at Gazprom said supplies to Ukraine had been reduced as soon as the deadline passed and Ukrainian Energy Minister Yuri Prodan said the country was receiving no gas. Ukraine has at least 12 billion cubic metres of gas in storage, enough to meet its and the EU's needs over the summer.
A long-term reduction of supply could hit EU consumers, which get about a third of their gas needs from Russia, around half of it through pipelines that cross Ukraine. Earlier price disputes led to "gas wars" in 2006 and 2009, and Russian accusations Ukraine stole gas destined for the rest of Europe.
Energy expert Professor Michael Bradshaw, from Warwick Business School, said there is little immediate threat to European supplies as it is summertime and the level of gas storage remains high after a mild winter, but an extended standoff could have ramifications for the UK as its modest gas storage means it is dependent on European markets in periods of heightened demand.
“Everyone is a loser in this stalemate,” he said. “It is doing Russia reputational damage and the EU is stiffening its resolve to reduce its reliance on Russian gas, but many European companies have contracts into the 2020s with Gazprom.”
Gazprom's Miller said Russia would provide Ukraine with the volumes necessary to cover EU demand, but implied that Kiev may take some of those supplies for their own use – a potential shortfall Moscow could not be expected to cover.
"Regarding transit risks, they exist and they are not insignificant," Miller said of supplies reaching the EU.
Oettinger said the EU should top up its storage or could face problems in winter and urged Russia to reconsider a compromise and held out the prospect of future talks. Both sides have filed lawsuits at the Stockholm international commercial arbitration court to try to recover billions each says they are owed.