Roman Olearchyk in Kyiv -

Ukraine avoided a standoff with Russian energy giant Gazprom over gas supplies as both sides signed an agreement on Monday, October 9 that lays out terms for repaying for what Moscow said was now $2bn debts for gas shipments to Kyiv.

The agreement is viewed as a sweet-but-sour success for Ukraine. It appears to have avoided a repeat of the 2006 pricing dispute which saw Gazprom cut shipments to Ukraine, triggering supply shortages in Europe. But Ukraine's reputation has taken a battering as a result of the week-long debt dispute, even though to a large degree the dispute involved arrears owed by Gazprom's partners, not Ukrainian consumers directly. The deal could also weaken Ukraine's position in any future negotiations on the price of gas.

The deal was struck during a trip to the Russian capital by Viktor Yanukovych, Ukraine's Moscow-friendly prime minister. "We created a mechanism allowing us to regulate this issue," Yanukovych was quoted as saying in Moscow on October 9.

The agreement, which was not made immediately public, was said to have been signed by Gazprom and its partners in the business of supplying gas to Ukraine and reselling it to end-consumers: Swiss-registered RosUkrEnergo and Ukrgaz-energo, a Russian-Ukrainian joint venture.

Ukraine Energy Minister Yury Boiko brokered the deal and pledged to ensure companies that have accumulated the debt repay by November 1, partially in cash and partially by transferring gas held in vast underground storage facilities strategically located near the EU border.

The announcement of the debt deal comes a week after Gazprom threatened to cut supplies to Kyiv if the country failed to settle some $1.3bn in debt by November 1. The announcement, made a few days after Ukraine's snap parliamentary elections produced results in which a likely pro-Western government will replace Yanukovych's governing coalition, raised concerns of a new standoff between the two countries. A worst-case scenario was a repeat of the cuts in supplies to Europe, which relies on about 80% of its Russian gas imports passing through Ukraine.

With a surprisingly strong parliamentary finish, opposition leader Yulia Tymoshenko looked set to become Ukraine's new prime minister by forming the next coalition government. That seems to have Moscow worried. Tymoshenko has pledged to remove shadowy intermediaries from the lucrative gas trade business between Ukraine, Russia and Central Asia.

Upper hand

Viktor Zubkov, Russian prime minister, claims the debt had risen by early October to $2bn. Zubkov said about $1.2bn would be paid by handing over to Gazprom's export arm, Gazexport, gas stored in Ukraine's underground facilities. And just over $900m would be paid in cash from the companies involved. As of October 9, it remained unclear why the debt had within one week increased from $1.3bn to more than $2bn.

RosUkrEnergo, monopoly supplier of gas to Ukraine, said its overdue debt to Gazprom stood at $929m. A similar figure was given by Ukrgaz-energo.

Ukrainian officials in recent days admitted that domestic consumers have been slow in paying their gas bills. However, they insist that much of the debt was owed not by the Ukrainian state - as Gazprom initially charged - but by the two Gazprom-appointed intermediaries in charge of exporting gas to Ukraine and reselling it on the domestic market, namely RosUkrEnergo and Ukrgaz-energo.

Gazprom owns 50% of RosUkrEnergo, which in turn owns 50% of Ukrgaz-energo, the supplier of gas to Ukrainian industry. Both companies have built up massive stockpiles of gas in underground storage facilities, but have had trouble paying Gazprom due to the global credit crunch.

While the debt deal could avoid supply cut-offs, observers warn that the mess has significantly boosted Gazprom's leverage in future price talks with Ukraine, whose pipeline system serves as the key artery for Russian supplies to Europe.

Control over the gas that is stored underground near the European border could enable Gazprom to squeeze Kyiv by reducing supplies to Ukraine, while all the time keeping shipments to Europe stable. Ukraine's economy has grown impressively in recent years, but the country has struggled to adjust to high inflationary pressures after two stiff gas price hikes since 2006.

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