Ukraine pays Russian gas bill

Yulia Tymoshenko, Ukraine's prime minister, said on Friday the recession-ravaged country had squeezed enough funds from consumers and cash-strapped state coffers to pay a $500m October gas bill to Gazprom, Russia's natural gas giant.

Gazprom has not yet confirmed receipt of the payment. But the announcement extinguished fears in Brussels that Kiev and Moscow could be heading towards a repeat of last January's energy standoff.

It was "extremely difficult," but "today we paid Russia the next $500m" Ms Tymoshenko said .

On Thursday the European Commission urged Ukraine to avoid any delays in payment for Russian gas that could spark cut-offs in flow to European Union consumers.

José Manuel Barroso, the Commission president, telephoned President Viktor Yushchenko after Vladimir Putin, the Russian prime minister, warned EU officials there was a risk of a repeat of previous years' supply cuts. Mr Putin accused Mr Yushchenko of blocking a $500m (€336, £301m) payment for October's supplies ahead of Saturday's deadline.

"European citizens must not be subject to further disruptions of gas supplies from Russia through Ukraine," an EU spokesman told Reuters news agency.

The spokesman said Mr Barroso had also expressed concern over the future of the International Monetary Fund's $16.4bn aid programme for Ukraine after Mr Yushchenko approved wage and pension increases.

Mr Yushchenko backed the increases despite warnings from the IMF and Yulia Tymoshenko, Ukraine's prime minister and his rival in January's presidential contest. She has accused the president of attempting to sabotage her government's talks with the IMF and attempts to pay Russian gas bills.

The fresh fears in Brussels over a potential repeat of last January's three-week gas supply cuts came as Naftogaz, the Ukrainian energy company that plays a key role in the supply of Russian natural gas to Europe, announced on Thursday that it had avoided default by successfully restructuring $1.6bn in external debt. But doubts still run high over the cash-strapped company's ability to cover import bills owed to Russia's Gazpom.

In a statement on Thursday, Oleg Dubyna, Naftogaz's chairman, said the debt restructuring offered "relief", but he gave no clear indication of how bills to Gazprom would be covered in the coming months.

State-owned Naftogaz said more than 90 per cent of creditors had agreed to restructure the company's external debt - including a $500m Eurobond and loans owed to Deutsche Bank (Xetra: 514000 - news) , Credit Suisse and Depfa bank (Xetra: DEP.DE - news) - into a new $1.6bn Eurobond. Credit Suisse served as lead manager on restructuring of the debt into a five-year issue with a coupon of 9.5 per cent.

Tim Ash, head of emerging Europe research at the Royal Bank of Scotland (LSE: RBS.L - news) , said: "The Naftogaz restructuring deal is significant due to the strategic importance of the company to Europe's energy security. But with Ukraine, there are always a lot of surprises and there is the risk that Ukraine could default on its gas bills to Russia."

Forced to resell increasingly expensive Russian gas to domestic consumers at below market levels, Naftogaz has found its finances stretched to the limit this year. Rolling over external debt frees up finances in the near term.

Mr Yushchenko blames Ms Tymoshenko for Naftogaz's woes, insisting she has refused to raise household gas prices to market levels, fearing a backlash from voters.

Naftogaz closed the debt roll-over days after Mr Putin warned Brussels that European gas supplies were at risk should Kiev struggle to cover its import bills in the coming months. On Monday, he urged the EU to avoid another gas crisis by bailing Kiev out with loans.

EU officials ruled out stepping into often murky and politicised gas dealings between Kiev and Moscow, and urged both sides to find a resolution.

Meanwhile, Ukrainian officials sent mixed messages this week over whether Naftogaz would be able to pay its October Gazprom bill, conceding that collections from end consumers had taken a turn for the worse.