Putin says debt in Ukraine threatens gas supply

MOSCOW -- Vladimir Putin warned European leaders Thursday that unless they help Ukraine settle its enormous gas debt to Russia, their supplies of Russian natural gas will be threatened.

The Russian president's letter to 18 mostly Eastern European leaders, released Thursday by the Kremlin, aimed to divide the 28-nation European Union and siphon off to Russia the billions that the international community plans to lend Ukraine. It was all part of Russia's efforts to retain control over its neighbor, which is teetering on the verge of financial ruin and faces a pro-Russian separatist mutiny in the east.

Hundreds of pro-Russian protesters -- some armed -- were occupying Ukrainian government buildings in Donetsk and Luhansk as authorities sought a peaceful solution Thursday to the five-day standoff. In northwest Romania, U.S. and Romanian forces began a week of joint military exercises.

The amount Putin claims Ukraine owes is growing by billions every week -- and his letter raises the specter of a new gas dispute between Russia and Ukraine that could affect much of Europe. In 2009, Moscow turned off gas supplies to Kiev in the middle of winter, leading to freezing cities across Eastern Europe as Russian gas stopped moving through Ukrainian pipelines to other nations.

In the letter, Putin said Ukraine owes Russia $17 billion in gas discounts and potentially another $18.4 billion as a minimal take-or-pay fine under their 2009 gas contract. He added, on top of that $35.4 billion, Russia also holds $3 billion in Ukrainian government bonds.

The total amount is far greater than the estimated $14 billion to $18 billion bailout that the International Monetary Fund is considering for Ukraine.

Putin warned that Ukraine's mounting debt is forcing Moscow to demand advance payments for further gas supplies. He said if Ukraine failed to make such payments, Russia's state-controlled gas giant Gazprom will "completely or partially cease gas deliveries."

Putin told the leaders that a shutdown of Russian gas supplies will increase the risk of Ukraine siphoning off gas intended for the rest of Europe and will make it difficult to accumulate sufficient reserves for next winter. He urged quick talks between Russia and European consumers of Russian gas.

"The fact that our European partners have unilaterally withdrawn from the concerted efforts to resolve the Ukrainian crisis, and even from holding consultations with the Russian side, leaves Russia no alternative," Putin said.

The letter was addressed to 18 heads of states in Europe, including Serbia and Bulgaria, which both rely on Russia for about 90 percent of their gas supplies.

Putin has been tightening the economic screws on the cash-strapped Kiev government since it came to power in February after Ukraine's Russia-leaning president fled the country after months of protest.

Starting this month, Russia state energy giant Gazprom scrapped all discounts on gas to Ukraine, meaning a 70 percent price hike that will add to the debt figure. Ukraine has also promised the IMF it will cut energy subsidies to residents in exchange for a bailout -- which means gas prices were set to rise 50 percent on May 1 even before Putin's latest salvo.

Ukrainian Prime Minister Arseniy Yatsenyuk added to European fears of a disruption in gas supplies as he criticized Ukraine's national energy company Naftogaz of mismanagement.

"Naftogaz has 7.2 billion cubic meters of gas in underground storages while it is supposed to be 20 billion. It wasn't me who stole that gas," he said.

Energy Minister Yuri Prodan said earlier this week that Ukraine has not being pumping in new gas from Russia, which means it has been relying on storage supplies it previously bought.

The effect of a possible halt in gas supplies would be harsh for Europe but not as severe as in January 2009, since Gazprom has built a new pipeline bypassing Ukraine and increased the capacity of existing ones.

The IMF has pledged the loans to Ukraine on condition it undertake economic reforms, with the United States and EU also providing support. The Ukrainian parliament on Thursday passed some of the necessary laws, including cuts in import duties.

The IMF loans, however, are likely to come in several tranches over two years while the Kremlin seems to be demanding the debt to be settled immediately.

In other news Thursday:

-- Ukraine's acting president Oleksandr Turchynov said pro-Russian activists occupying government buildings in the eastern cities of Donetsk and Luhansk will not be prosecuted if they lay down their arms. Protest leaders defied the request to leave.

-- Tensions were still high in Donetsk, where about 1,000 protesters stood outside the occupied building chanting "Russia! Russia!" Activists also reinforced the barricades, piling up rubber tires or building brick walls out of cobblestones. They have demanded a referendum on broader autonomy or even secession from the new Kiev authorities.

-- Ukraine's Deputy Interior Minister Serhiy Yarovyi said authorities are still hoping for a compromise in both Donetsk and Luhansk but they reserve the right to forcibly seize the buildings.

-- In northwest Romania, some 450 U.S. and Romanian troops and technical staff kicked off a week of joint military exercises, flying U.S. F-16 fighter jets alongside Romanian ones. Romania, Russia and Ukraine all border the Black Sea.

--NATO chief Anders Fogh Rasmussen again condemned Russia for its annexation of Crimea as he visited Prague to assure the Czechs of support against any moves by Russia to expand its orbit of influence.

"Russia is trying to justify its actions by accusing the Ukrainian authorities of oppressing Russian speakers and by accusing NATO of a cold war mentality. This is nothing but propaganda," he said.

--The Council of Europe rights group voted to suspend Russia's participation for the rest of the year.

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Vasilyeva reported from Kiev, Ukraine. Peter Leonard in Donetsk, Ukraine contributed to this report.