Ukraine can ill afford Russia's gas demands

By Guy Faulconbridge and Sabina Zawadzki - Analysis

KIEV (Reuters) - Ukraine's crisis-gripped economy and deadlocked political system mean the former Soviet state can ill afford the more than twofold increase in gas prices Russia is now demanding.

Russia's state-controlled gas firm, Gazprom, halted supplies to Ukraine on New Year's day over gas bill debts and a disagreement over 2009 gas prices. European Union supplies have been disrupted.

Gazprom now demands Ukraine pay $450 per 1,000 cubic meters (tcm), up from $179.5 in 2008.

But as Ukraine's economy heads into its worst recession for a decade and politicians gear up for a presidential election in 12 months, President Viktor Yushchenko and Prime Minister Yulia Tymoshenko would be loath to pay such prices.

They may not even be able to.

"We expect a 4.7 percent contraction of the Ukrainian economy in 2009 assuming a gas price in the $200-220 range," said Svitlana Maslova, an analyst at Barclays Capital in London.

"So agreeing on the price higher than that would lead to a deterioration in already bleak growth outlook and even raise the possibility of a wholesale collapse of the Ukrainian economy."

Sinking world demand has hammered the steel and chemicals sectors, which account for more than half of exports, and popped a domestic consumer boom. Indebted Ukrainians now face rising unemployment as industrial output sank 20-30 percent.