* All gas supplies through Ukraine halted
* Russian gas supplies to Europe halved
* Russia says Ukraine must pay market price for gas
By Dmitry Zhdannikov and Pavel Polityuk
MOSCOW/KIEV, Jan 7 (Reuters) - Russia shut down all gas
flows to Europe through Ukraine on Wednesday and told Kiev it
would restore supplies only after it had agreeed to pay full
market prices.
The Kremlin quoted Russian President Dmitry Medvedev as
telling Ukrainian leader Viktor Yushchenko in an evening
telephone call that gas supplies had become hostage to
squabbling within the Ukrainian leadership.
The apparent tone of the conversation reflected the broader
political tensions between Ukraine and its former Soviet master
in Moscow. Yushchenko's efforts to join NATO are bitterly
opposed by Moscow and viewed with wariness even by European
members of the alliance and by investors.
The row over gas prices and debts owed by Ukraine to Russia
cut heating to tens of thousands of households in Bulgaria and
hit supplies as far west as France and Germany as Europe faced
freezing mid-winter temperatures.
"The price should be a market price based on a pricing
formula," the Kremlin quoted Medvedev as telling Yushchenko.
"There will be no discounts or preferences for Ukraine."
Ukraine, an ex-Soviet state with a large Russian-speaking
population, had long been paying prices below world levels for
gas.
Russia's move to raise prices and its August invasion of a
breakaway region of ex-Soviet Georgia have both been a source of
conflict between Yushchenko and his prime minister, Yulia
Tymoshenko.
Ukrainian state energy firm Naftogaz dismissed as
'provocative' accusations by state-run Russian gas export
monopoly Gazprom that Kiev had broken international law and its
gas transit obligations by holding back gas deliveries intended
for transit to Europe.
It said its head Oleh Dubyna might meet the chief executive
of Gazprom in Brussels on Thursday and was ready for
constructive talks.
Kiev and Moscow blamed each other for the cut in supplies
and the European Union said they should allow an EU monitoring
mission to check how much gas was entering Ukraine from Russia.
MARKET RISE
"If this is agreed, nothing will stand in the way for
transit supplies to be restored... That does not mean that
success is 100 percent assured," said Mirek Topolanek, the Prime
Minister of the Czech Republic, which currently holds the
European Union presidency.
The two sides will meet in Brussels on Thursday and the EU
said they appeared willing to accept monitors.
Gazprom said it had fully suspended supplies of transit gas
towards Ukraine on Wednesday after accusing Kiev of tapping it
off.
Gazprom said it was increasing supplies to the European
Union and Turkey via other routes. Despite those measures, the
dispute cut Russia's supplies to Europe -- which depends on
Moscow for a quarter of its gas supplies -- by half.
The reduction in supplies started on Jan. 1 when Russia
reduced gas volumes to Ukraine, and has been sharper and more
prolonged than a similar disruption in January 2006.
Pro-Western President Yushchenko appealed to the European
Union to use all efforts to help end the crisis.
Eastern and central Europe have borne the brunt of the row,
with Bulgaria cutting back or suspending supplies to industrial
users and at least 45,000 Bulgarian households going without
central heating on Wednesday. Schools were shut and some
companies were closed.
Croatia's government declared a crisis after all its Russian
gas deliveries were halted, and said it would start ranking
consumers in terms of priority.
The Hungarian unit of Japanese car maker Suzuki, one of
Hungary's biggest exporters, halted production after Hungary
imposed restrictions on industrial users of gas, a Suzuki
spokeswoman said.
In Bosnia, the sole alumina factory said it had been forced
to stop production and ArcelorMittal said it was suspending
production at its Zenica plant.
The euro zone's major economies have escaped significant
economic repercussions, but France has reported a drop in
supplies and an Italian industry ministry spokesman said Italy
has begun tapping its stockpiles of natural gas.
German energy provider E.ON Ruhrgas reported a drastic
decline in incoming Russian gas deliveries, but said no industry
or households would be short of gas. It has warned that
prolonged cuts combined with a cold spell could cause shortages.
Big energy users like aluminium, glass and metals makers
could be hurt by a lengthy crisis.
Energy prices on international markets have risen in
response to the Ukraine-Russia dispute. On the British gas
market, the biggest and most liquid market in Europe, contracts
on Tuesday rose to the highest level since October, although
they softened on Wednesday.
(Additional reporting by Christian Lowe, Robin Paxton and Amie
Ferris-Rotman; writing by Philippa Fletcher; editing by Ralph
Boulton)
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