Russia angered by Ukraine-EU gas deal

Ukraine agreed to clean up corruption in its gas export industry in return for Western investment in a deal with the EU yesterday which sparked a sharp warning from its powerful neighbour, Russia.

Moscow warned it would "review" its relations with the European Union if Russia was left sidelined by the discussions here, which followed a damaging winter dispute between Kiev and Moscow that disrupted gas supplies to Europe.

Ukraine's President Viktor Yushchenko told government and industry officials in Brussels that he would "restore order" and "reject all corruption" in Ukraine, which needs billions of euros to upgrade its aging gas infrastructure.

Ukraine signed an agreement with the European Commission, the World Bank, the European Investment Bank and the Bank for European Reconstruction and Development.

Under the deal, the Ukrainian gas transport company will have to prove its legal independence from outside influence, offering access to its pipeline at transparent prices that respect European norms.

However, Ukraine has no intention of giving up ownership of the hugely strategic asset, through which 80 per cent of the gas Russia sends to the European Union transits.

Vladimir Putin slammed the agreement as "unprofessional", in comments reported by Russian news agencies after the Brussels meeting, and warned Moscow could review its ties with the bloc.

"If the interests of Russia are going to be ignored then we will be compelled to begin to review the principles of our relationship," Mr Putin was quoted as saying in the southern city of Sochi.

"It is to be hoped that the situation does not come to this."

European confidence in Ukraine as a serious gas-transit partner country suffered a major blow in January when supplies from Russia to EU markets were cut for two weeks over a standoff between Kiev and Moscow.

"We cannot allow our citizens to face fuel shortages in the depth of winter again," EU External Relations Commissioner Benita Ferrero-Waldner told a conference in Brussels on modernising Ukraine's gas infrastructure.

"All of us... have an interest in ensuring Ukraine provides a reliable and secure transit route for gas in decades to come."

The agreement lays out the commitments that Kiev is to make to pave the way for much-needed foreign investment in its gas pipeline network, which is crucial for delivering Russian gas to European markets.

Mr Yushchenko said he intends to have metering stations set up along transit pipelines in Ukraine and open up access to the country's considerable underground gas storage facilities.

Russian Energy Minister Sergei Shmatko, who also attended the conference, voiced "surprise" that the agreement "makes no mention of Russia as a strategic provider and partner".

"Russia has always clearly said that it is ready to participate in this modernisation, including on the financing," he said.

"Without Russia's involvement, that could call into question other planned diversification projects."

Moscow is currently involved in several gas pipeline projects with European companies, such as the Nord Stream project which aims to bypass Ukraine with a pipeline beneath the Baltic Sea to Germany.

While the EU wants to tread carefully with Kiev and Moscow, it wants to diversify its sources of gas shipments, by backing the Nabucco pipeline that will bring gas from the Caspian Sea region through Turkey.

Ukrainian Prime Minister Yulia Tymoshenko warned that building new pipeline networks by-passing Ukraine would be much more expensive than updating Ukraine's network.

"A lot is said about alternative supply routes bypassing Ukraine, but building new pipelines costs tens of billions of investments," she said.

Ukraine is seeking more than €4.1 billion to expand its gas pipeline network, but refuses to give up ownership of the infrastructure.