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Russia might take a step towards securing a long sought-after stake in Ukraine's gas pipeline system in exchange for offering cheaper gas when Russian Prime Minister Vladimir Putin visits Kiev on Wednesday, analysts say.
The system is a conduit for 80% of Russian gas supplies to the European Union, and disputes between Kiev and Moscow over pricing have led to gas wars in the past which have hit supplies to EU countries.
Putin's trip will be his first to Ukraine since he stunned its new leadership in April by proposing a merger between Russia's energy giant Gazprom and Ukraine's state-owned Naftogaz.
And though Ukraine is still holding that proposal at arms length, Prime Minister Mykola Azarov said on Monday he was now ready to discuss a joint venture between the two companies if it buys cheaper gas.
The idea involves joint exploitation of some Russian gas fields and a lower price of gas for Ukraine in exchange for a Russian stake in Ukraine's pipeline system.
That in itself would lead to a serious readjustment in the relationship between Naftogaz and Gazprom and remove a strong trump card that Ukraine has always been able to play in tricky stand-offs with its giant neighbour.
The ex-Soviet republic of 46 mln relies hugely on imports of Russian gas particularly for urban domestic heating in housing blocks where most town dwellers live.
But the monthly bill is a drain on the cash-strapped government. The September bill, calculated on a basis of $248 per 1,000 cubic metres, amounted to $715 mln, and Gazprom says next year's base price may rise to at least $250.
$1 BILLION TRANSIT FEES
Azarov last month urged Russia to cut gas prices, saying their current deal was unacceptable and would not work for its full 10-year term, despite a discount agreed last April.
On Tuesday, his spokesman said he still ruled out a merger but saw as "realistic" the setting up of a joint venture.
In Moscow, Putin's spokesman Dmitry Peskov told journalists: "The issue of gas prices will feature during talks if it is brought up by the Ukrainian side."
Ukraine has hitherto jealously protected its control over the transit network which earns Naftogaz more than $1 bln per year in transit fees.
Other factors weighing on it now include Russia's apparent commitment to the South Stream project which would build an alternative transit network for Russian gas to Europe, bypassing Ukraine. Ukraine is eager for Moscow to shelve the plan.
Ukrainian commentators were divided on Tuesday on how far the Kiev government would go in surrendering to Russian pressure during Putin's visit.
Since President Viktor Yanukovich came to power in February vowing to improve ties with Russia, the political opposition has been on alert for anything it suspects of being a sell-out of national interests.
A deal last April between Yanukovich and Russian President Dmitry Medvedev providing cheaper gas in exchange for an extension of the lease for the Russian navy in a Ukrainian Black Sea port led to riots in parliament.
With important local elections coming up in Ukraine on October 31, Yanukovich may not want to hand his opponents easy ammunition.
Current legislation anyway bans the privatisation or renting of Ukraine's export gas pipeline network, though analysts do not rule out Kiev adapting legislation if it decides to go ahead with a joint venture.
"It is theoretically possible to expect a memorandum on mutual understanding in the energy sector, but there will not be a detailed agreement," independent analyst Volodymyr Saprykin said.
"Ukraine's transit system brings in more than $1 bln per year and what a joint venture would bring is not yet clear … and for Ukraine to give up its (transit fees) profits is not very likely," he said.
"The likelihood of a Naftogaz-Gazprom joint venture is very, very high. Its creation under Russian conditions above all pre-supposes a change in the base formula for the price of Russian gas which Ukraine has been actively working for," said another independent analyst, Valentyn Zemlyansky.
