Russia and Ukraine have reached an 11th hour deal in a row over gas debts during summit level talks in the Kremlin today, minutes before Moscow was due to carry out its threat to cut supplies.

The row between the two former Soviet states had sent jitters through customers in Europe, who feared it could escalate into a repeat of early 2006, when a pricing dispute between Moscow and Kiev disrupted shipments to the EU.

“We have agreed that Ukraine will on Thursday start repaying the debt which was amassed in November-December of last year because supply contracts had not been signed by the structures involved,” Ukrainian President Yushchenko told a news conference.

“Gazprom is satisfied with proposals made by the Ukrainian side,” Vladimir Putin, the Russian President, told the same news conference.

Russian gas export monopoly Gazprom, which provides a quarter of Europe’s gas, had threatened to cut 25 percent of its supplies to Ukraine at 1500 GMT if there was no deal on the debt, which Russia put at $1.5 billion. Kiev put the figure at just over $1 billion.

Most Russian gas exports pass across Ukrainian territory but both countries have assured Europe that westward gas flows will not be interrupted.

Many analysts had predicted Russia and Ukraine would clinch the deal, since Mr Putin wanted to show support for Mr Yushchenko at a time when he is locking horns with Ukraine’s new prime minister, Yulia Tymoshenko, who is more openly critical of Moscow.

Both presidents looked exhausted and pale after talks which lasted for four hours.

Mr Putin, concerned about Ukraine’s ambitions to join NATO, warned Kiev that Russia could be forced to redirect its missiles towards its former Soviet neighbour if it joined the Western military alliance and deployed a U.S. missile defence shield.

Gazprom insisted the dispute with Ukraine was a purely commercial one over unpaid bills, but it is likely to revive criticism that Russia is using its energy clout to exert political pressure on its neighbours.

The row blew up less than two months after Ms Tymoshenko returned to the prime minister’s job after winning a parliamentary election, replacing Viktor Yanukovich, who had warmer relations with Moscow.

Ms Tymoshenko, who clashed with Russia over gas during her earlier stint in office, now blames Russian-imposed gas middlemen for racking up the debt.

She has demanded Moscow axe some of the intermediaries immediately, a move previously opposed by Yushchenko.

“We are all interested in making our cooperation as transparent as possible,” said Mr Putin.

“We have also agreed that (Ukrainian state energy firm) Naftogaz and Gazprom form a working group, which should in the nearest future come up with a proposal on simpler and more transparent relationship...,” said Mr Yushchenko.

Naftogaz’s head Oleg Dubyna told reporters the two state firms would switch to a new scheme from 2009.

Mr Yushchenko said Russia had pledged to stick to the agreed price of $179.5 per 1,000 cubic metres despite earlier demands by Moscow for Kiev to pay over $300 for supplies in January.

The gas Russia supplies to Ukraine is a mixture of fuel from Russian fields and cheaper Central Asian gas, which flows through Gazprom’s pipeline network.

The markets in Moscow closed before the deal was announced.

The shares of Gazprom, Russia’s largest firm by market value, closed 3.6 percent up, in line with the broader market.

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