BRUSSELS - Ukraine and Russia began talks with international lenders and the European Union on Monday on loans to help Kiev pay for Russian gas and avert a new crisis that could cut off supplies to Europe.

Ukraine transports the bulk of Russian gas supplies to Europe and is seeking $4-5 billion in funds to build up stockpiles of gas before winter, when demand rises by a third.

But Ukraine's political leadership is badly divided and Kiev's relations are tense with former Soviet master Moscow, increasing European leaders' fears that Russia could halt gas supplies to parts of Europe, as in January.

The International Energy Agency (IEA) showed its concern by saying it feared flows of gas could be disrupted at any time and the International Monetary Fund (IMF) mission to Ukraine called for political consensus in Kiev to stave off a crisis.

The difficult economic situation in Ukraine makes every monthly payment a challenge, and tensions remain high, IEA executive director Nobuo Tanaka said in a statement.

The IMF, European Commission, European Bank for Reconstruction and Development, European Investment Bank, Russian gas export monopoly Gazprom and Ukrainian state energy firm Naftogaz met in Brussels for talks to secure money for Naftogaz.

If they start pumping by the beginning of August, we should be okay, an EU official said.

But banks are wary of pouring money into the state-owned gas company without assurances it will be radically restructured to cope with Ukraine's severe economic crisis.

A power struggle between Ukrainian Prime Minister Yulia Tymoshenko and President Viktor Yushchenko and looming elections could make agreement on Naftogaz hard to reach in a country that is strategically positioned between Europe and Russia.
Ceyla Pazarbasioglu, the IMF's mission chief to Ukraine, said political consensus was important on how to make Naftogaz more transparent and improve its finances.

For us, it will be key to have consensus on how to address (Naftogaz's) problems and to have a time-bound action plan, said Pazarbasioglu, who was attending the Brussels meeting.

From our perspective we would like to see a reasonable and feasible financing plan by the company ... From a medium-term perspective we would like to make sure this isn't a permanent drain.

MONTHLY FEARS

Concerns are growing about Ukraine's ability to pay monthly bills for its own domestic gas needs. The next is due on July 7.

Ukraine expects a bill of about $300 million for June imports of 1.1 billion cubic metres of gas, and Yushchenko's energy envoy said last week about $120 million of that would have to be borrowed.

Yushchenko has accused Tymoshenko of pursuing policies that will lead to Naftogaz's destruction by issuing credits through state banks to ensure payment of gas.

Russia, which opposes Yushchenko's drive to join NATO and the EU, wants the EU to bail out Ukraine. The European Commission has acknowledged stop-gap funds as well as a lasting solution are needed but has no fund for helping Ukraine.
Gazprom, which has also been hit by the recession, has said it is confident Ukraine will pay its bills for June consumption, but EU gas experts predict increasing problems as it ramps up the amount of gas it puts into storage as winter approaches.

About 19.5 billion cubic metres has already been stored, and a further 9 bcm could be needed for storage before the winter, and EU official said, citing Russian sources.

(Additional reporting by Daniel Fineren and Lesley Wroughton)

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