By Tanya Mosolova and Ron Popeski
MOSCOW/KIEV (Reuters) - Moscow halved gas supplies toUkraine on Tuesday in a payments row that threatened to disruptgas flows to Europe from Russian gas export monopoly Gazprom,the power base of president-elect Dmitry Medvedev.
A similar row between Moscow and Kiev disturbed supplies toEurope early in 2006, leading to questions about Russia'sreliability as a supplier of a quarter of Europe's gas needs.
Gazprom said it could reduce supplies further if no deal isreached, a tactic the International Energy Agency (IEA) called"excessively harsh". Kiev hinted it could retaliate by drawingon Russian gas flowing to Europe through pipelines across itssoil if it ran short of domestic supplies.
"The Russian side expects Kiev to intensify its efforts toquickly settle debts for deliveries," Russian agencies quotedMedvedev as telling Ukrainian President Viktor Yushchenko, whohad phoned to congratulate him on a "brilliant" victory inSunday's presidential elections.
Medvedev, Gazprom's chairman and a close ally of thecurrent President Vladimir Putin, has vowed to follow thepolicies of his mentor, who has been often accused by the Westof using energy as a tool of intimidation.
Yushchenko, who has managed to improve ties with Moscow inthe past months, has major political differences with hisformer ally the current Ukrainian prime minister, YuliaTymoshenko, whom he has accused of failing to keep to gaspayment schedules.
Both Ukraine and Gazprom said deliveries to Europe wererunning normally, but Deutsche Bank said this could changeshould Gazprom cut volumes further.
"We view the current situation as a major challenge toGazprom's status as a reliable gas supplier to Europe," itsaid.
"In the long run, this may have an impact on Europeanconsumers' preferences as they try to diversify sources of gasaway from Gazprom," said Pavel Kushnir from Deutsche Bank.
APPROPRIATE ACTIONS
Ukrainian state firm Naftogaz said it would guaranteetransit to Europe as long as it had enough gas for local needs.
"Naftogaz reserves the right to introduce appropriate,asymmetrical actions to defend the interests of Ukrainianconsumers," spokesman Valentyn Zemlyansky told journalistsadding that mild weather and sufficient reserves would allowUkraine to cope for now.
Not everyone in Ukraine was convinced it could do so.
"Reductions will firstly affect production areas withround-the-clock operations, like steel and chemicals," saidAnatoly Kinakh, head of the Ukrainian Union of Industrialists.
"They will hit equipment and quality of output so it cannotgo on for any length of time. There is no basis for anysuggestion that we could live for a month on our reserves."
Gazprom's cuts started with a 25 percent supply reductionon Monday as it says Kiev owes $600 million (300 millionpounds) in unpaid bills and had not resumed negotiations sincelast week. It followed up with another 25 percent reduction onTuesday evening.
Ukraine will get around 70 million cubic metres of gas aday, 50 percent of usual levels. By comparison, Gazprom'ssupplies to Europe currently run at around 360 mcm a day.
Though all of Gazprom's exports are reaching Europe,Ukraine said the firm had paid no transit fees for gas going toEurope since December, a statement denied by Gazprom.
Yushchenko last month clinched a deal on arrears andsupplies with Putin, but that appears to have unravelled aftera visit by the more strident Tymoshenko to Moscow. Tymoshenkoopposes the existence of any intermediaries in gas trade.
"Everything is linked to the fact that Tymoshenko is now inpower and her attempts to eliminate intermediaries from the gastrade. This is what has caused the increased tension," saidVolodymyr Fesenko from Penta, a Kiev-based think tank.
Tymoshenko, who last week said the gas cutoff would neverhappen, made no comment on Tuesday.
Diplomats say most key Gazprom decisions are takenpersonally by Putin, who is set to be prime minister underMedvedev, who will be inaugurated in May.
(Additional reporting by Pavel Polityuk in Kiev, writing byAmie Ferris-Rotman and Michael Stott, editing by AnthonyBarker)