Ukraine said on Wednesday it would seek to negotiate lower import prices for Russian natural gas, insisting that current fees were too high for its cash-strapped budget even after a sharp discount was agreed five months ago.

Gazprom, Russia’s state-controlled gas monopoly, declined to give any immediate comment, leaving it unclear how it would respond to such a proposal and whether a fresh energy spat was brewing between the two nations.

The comments from Mykola Azarov, Ukraine’s prime minister, threaten to reopen an issue that had been thought closed. In April, the ruling coalition of Ukraine’s new president, Viktor Yanukovich, secured a 30 per cent discount on import prices for Russian gas after several years of sharp rises.

In return, Russia won a 25-year extension to its lease on the Crimean port of Sevastopol, home to Russia’s Black Sea fleet. Analysts believed the deal meant the threat of disruption to gas supplies this winter had been removed.

Europe has twice in the past six years seen gas flows disrupted due to price disputes between Kiev and Moscow. Europe fills a quarter of its gas import needs with Russia supplies, the majority of which flows through Ukraine’s pipeline system.

Previous disputes occurred while Kiev was headed by a pro-western leadership that had poor relations with Moscow. Relations have sharply improved under the Ukraine’s current Moscow-friendly leadership, but a fresh attempt by Kiev to land a further discount could test the Kremlin’s nerves.

“We have set as a goal a revision of the extremely unfavourable agreement with the Russian Federation and we will continue to try to convince our Russian partners of the need to do this,” Mr Azarov, Kiev’s premier, said during a cabinet meeting on Wednesday.

Mr Azarov said it was necessary to revise a price formula brokered in 2009 by the previous Ukrainian government before Mr Yanukovich won the presidency in February.

Ukraine’s reliance on Russian gas is hampering its ability to pull out of the deep economic recession it suffered last year.

The current leadership says the 2009 pricing formula set a base price that was above those of western European countries. Mr Azarov warned that the price had been rising by some $25 per thousand cubic meters of gas each quarter – which could quickly eat up the $100/tcm discount agreed in April.

“This formula continues to weigh on us and this is a fact that cannot be denied,” Mr Azarov said.

It remains unclear what Ukraine could offer Moscow to secure an additional discount. But Moscow’s leadership has long coveted Ukraine’s gas pipeline system and has this year called for the two nations to merge vast industries that were united in Soviet days, including gas, aviation and nuclear power companies.

Ukraine is expected to post 4.5 per cent gross domestic product growth this year after its economy plunged by 15 per cent during last year’s global recession. Standby loans from the International Monetary Fund have kept stretched state finances afloat.

But to land a fresh $15bn IMF loan package in late July, Kiev agreed to tough austerity measures, including a 50 per cent rise in long-subsidised natural gas prices for households. Further increases are envisioned for next year to remove the unsustainable subsidies.

Recent public opinion polls show that higher prices on gas and food, the latter linked to poor harvests in the Black Sea region, have sharply eroded the popularity of Mr Yanukovich’s Regions party ahead of elections on October 31 to provincial and municipal legislatures. Securing a further gas price discount could improve its chances in the polls.

Financial Times

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