Ukraine raised the stakes in its spat with Russia over gas prices on Friday, announcing plans to scrap national energy company Naftogaz and tear up its existing gas contracts with Moscow.
Ukrainian President Viktor Yanukovych instructed Prime Minister Mykola Azarov to set out plans for reorganizing national energy company Naftogaz by October 1, the president's official website said on Friday.
"Examine proposals in regard to the future use of Naftogaz Ukraine and its subsidiary companies' non-profile stocks," Yanukovich's order stated.
"Naftogaz as a company will cease to exist. There will be a liquidation period. Some time later, after all necessary formalities become valid, totally new companies will operate on the market. This is why all existing agreements will be revised," Azarov said.
That statement brought a swift response from Gazprom Chairman Alexei Miller.
"Of course after Gazprom merges with Naftogaz, [the latter] will cease to exist, there will be a liquidation period and then some time later, after all the necessary formalities become valid, a completely new company will be operating on the market. This is why all existing agreements will be revised," Miller said.
Gazprom has long coveted Ukraine's gas transit system, and Russia has proposed a merger of the two companies, but Ukraine has insisted such a deal would infringe its sovereignty.
Investcafe analyst Grigory Birg said Ukraine likely intended to separate Naftogaz's production capacities and maintain ownership of them to sustain the country’s energy independence while the gas transit system would be sold to Gazprom.
"Russia has made it clear that Ukraine has to make concessions to get reduced prices for gas. And I believe sale of the gas transit assets of Naftogaz to Gazprom will become such a concession," said Birg.
However, Azarov's spokesman Vitaly Lukyanenko denied any talks on the merger between Gazprom and Naftogaz.
"No talks about any merger, the question is about restructuring of a national company to boost its efficiency to improve our oil and gas sector independently and eliminate energy dependence," Lukyanenko said.
Russian Prime Minister Sergei Shmatko also poured cold water on the Ukrainian announcement.
"I think, the contracts are signed, they exist and it will be hard to revise them on unilateral manner," he said, adding he hoped to reach a compromise in Russian-Ukranian negotiations.
Ukraine has been trying to revise a 2009 agreement with Russian gas giant Gazprom which tied the gas price to the price for oil boosting Kiev's bill. Former Prime Minister Yulia Tymoshenko is now on trial for exceeding hesigning it.
Ukraine said on Tuesday that it would slash Russian gas purchases by a third to 27 billion cubic meters in 2012, from 40 bcm this year. However, Gazprom said that under the contract, based on a 'take-or-pay' principle, Kiev would have to pay for 33 bcm of gas regardless of actual purchases.
Azarov said that the 2009 deal violated a 2004 agreement, which says the two countries should revise the volumes of gas.
"Unfortunately, the 2004agreement, which has an inter-state validity and is above national law, was never fulfiled. Therefore, we believe that the contracts which were signed in 2009 contradict (it), at least in the part concerning annual gas supplies," Azarov said.
Last week Russian President Dmitry Medvedev said Ukraine might get discounts for gas if joined the Customs Union of Russia, Belarus and Kazakhstan and agreed the acquisition Naftogaz by Gazprom. But Azarov said Ukraine wanted no discount, but a fair contract.
"We have all reasons to propose to the Russian government in accordance with the intergovernmental agreement (of 2004) holding talks on gas supplies and transit terms. We have sent a letter on the matter," Azarov said.