Gazprom Threatens to Cut Gas to Ukraine

Gazprom's net earnings climbed to $10.2 billion in an unaudited 2008 first half earnings report released Tuesday. But the same report showed the company with debts totaling $84.5 billion in the first quarter, up from $69 billion a quarter earlier.

In recent years, the state gas company has spent billions to acquire oil and other corporations on behalf of the Kremlin.

Analysts said Tuesday that Ukraine would be hard pressed to pay the $418 price for future gas deliveries.

"This year is especially tough because the financial crisis has hit Ukraine hard," said Ron Smith, chief strategist at Alfa Bank. "I'm sure Gazprom's suggesting the debts can be exchanged for Gazprom ownership of the Ukrainian transit pipes, which, of course, Ukraine will not do."

Gas analysts noted that Gazprom reviews gas prices in its European contract every quarter to reflect changes in the market price for energy.

Valery Nesterov, a gas analyst with Troika Dialog, predicted that Ukraine may agree to the $418 price in the short run, expecting that price to decline in coming months and years.

"It would be hard for Ukraine to come to terms with $300 to $400, but in the next three or five years we are not going to see this level of prices," he said.