KIEV- Dmitry ZAKS, Donetsk- Anna MALPAS (AFP) – Russia cut the flow of gas to Ukraine on Monday after last-ditch talks failed to resolve a price dispute that threatens to disrupt supplies to Europe for the third time in a decade.
The failure of EU-mediated negotiations on gas prices only compounds the problems of Ukraine’s new pro-Western leaders as they battle an eastern insurgency that threatens the survival of the ex-Soviet state.

Kiev was dealt a further blow when dozens of Kalashnikov-wielding pro-Russian militia seized the central bank in the separatist stronghold city of Donetsk in a bid to win control over the economically vital region’s assets.

Russia’s state gas giant Gazprom said it had switched Ukraine to a pre-payment system at 0600 GMT — a move that effectively halts all shipments because Kiev has not forwarded any money for future gas deliveries to Moscow.

Ukraine’s Prime Minister Arseniy Yatsenyuk called the measure “another stage of Russia’s aggression against the Ukrainian state”, while Washington urged Moscow to resume negotiations with Kiev.

Gazprom said it had further notified Europe of possible gas disruptions and lodged a $4.5 billion (3.3 billion euro) lawsuit against Ukraine with an arbitration court in Stockholm.

Kiev responded by lodging its own $6.0 billion suit against Gazprom with the same Stockholm court to recover past “overpayment” for gas.

Gazprom chief Alexei Miller later told Russian television the firm may lodge a second lawsuit against Ukraine’s gas group Naftogaz seeking $18 billion in unpaid gas bills.

Analysts said Ukraine had been urgently filling up its gas storage tanks in anticipation of Russia’s decision and that no disruptions to Europe were likely until the winter heating season begins.

“The authorities estimate they have sufficient reserves to last until the end of this year,” London’s Capital Economics consultancy said.

Naftogaz said a delegation would travel Tuesday to Budapest to woo European firms into selling them gas, saying some offers have already come in.

– ‘A cold winter’ –

The third “gas war” between Russia and Ukraine since 2006 flared when Moscow nearly doubled its rates in the wake of a winter uprising that pulled Kiev out of the Kremlin’s sphere of influence.

Ukraine receives half its gas from Russia and transports 15 percent of the fuel consumed in Europe — a reality that prompted EU Energy Commissioner Guenther Oettinger to urgently step in to try to resolve the feud.

Oettinger conceded in Vienna that Europe “would have a problem with a cold winter” if Ukraine ran out of storage supplies.

The European Commission said Oettinger had offered a compromise deal that would have seen Ukraine pay $385 per 1,000 cubic metres of gas — the price proposed by Russian President Vladimir Putin — in the winter and see its rate drop to $300 “or a few dollars more” during summer months.

“The Ukrainian side was ready to accept this, but for the moment the Russian partners were not,” the European Commission said in a statement.

Washington called the EU deal a “fair and a reasonable compromise” and urged Russia to “re-engage on this basis”, said US State Department spokeswoman Jen Psaki.

Arriving in Serbia for a two-day visit, Russian Foreign Minister Sergei Lavrov said: “We said everything which must be said. The news can only come from the Ukrainian leadership, which has to stop the violence, which has to deal with the gas issue. All the cards are on that side of the table.”

– Rebels seize Donetsk bank –

The raid by pro-Russian militias on the central bank building in Donetsk threatened to deprive Kiev of effective control over the industrial region’s finances.

“We have been preparing this for more than a month,” a rebel named Oleksandr Matyushyn told AFP as five separatist gunmen stood guard at its main entrance and bank staff filed out of the building.

“We want the tax revenues to stay here instead of going to Kiev,” he added.

The Ukrainian government’s press service said the raid had already halted the payment of pensions, social benefits and salaries to state employees.

Donetsk and the neighbouring heavily Russified region of Lugansk declared independence in disputed May 11 referendums whose legitimacy was rejected by Kiev and the West.

The head of Ukraine’s national security and defence council estimated on Monday that Donetsk and Lugansk had a combined force of 15,000 to 20,000 armed militants.

“According to field reports, half of these men came from the Russian Federation,” Andriy Parubiy told reporters.

The escalating campaign by Ukraine government forces to regain control over the region of seven million people has now claimed the lives of more than 370 civilians and fighters on both sides.

The United States accused Russia of undertaking “further efforts to aid and abet separatists” in the east by sending tanks and rocket launchers, a charge Moscow denies.

Assistant Secretary for Europe Victoria Nuland said the US and Europe were evaluating the situation in Ukraine “on a daily basis” while sending a signal to Putin “that if he doesn’t change course, there will be costs.”

The United Nations estimates that 34,000 Ukrainians have been forced to leave their homes in the east.

UN humanitarian chief Valerie Amos warned that, “in the absence of a political settlement, we could face a humanitarian crisis.