KIEV, Aug. 28 ??“ Ukraine has been preparing for at least a 42% hike in natural gas prices next year during on-going talks with Russia, First Deputy Prime Minister Mykola Azarov said.

As an optimistic scenario, the Ukrainian government believes the price would not increase to more than $135 per 1,000 cubic meters in 2007, up from $95/1,000 cu m in 2006, he said.

???We have taken into account the optimistic scenario,??? Azarov said in an interview with Profil-Ukrayina business magazine published Monday. ???In reality, things could be worse.???

The disclosed gas price figure shows Ukraine??™s level of resistance in talks with Russia, suggesting that Moscow has been insisting on a greater price hike that could potentially hurt the economy.

Prime Minister Viktor Yanukovych, after talks with Russian President Vladimir Putin 1.5 weeks ago, said the price may actually increase to between $150 and $230 per 1,000 cu m.

Many Ukrainian chemical and steel companies may become unprofitable and reduce production if the price of gas increases to $150/1,000 cu m, according to government officials.

Meanwhile, in spite of the optimistic forecast, the Ukrainian government has been preparing for a steeper gas price hike and setting up a special fund to offset the price hike.

The government will set up a special $600 million stabilization fund next year to use in the event that gas price increases to more than $135/1,000 cu m, Azarov said.

???If we fail to reach a deal with Russia, this money will be used to compensate increasing spending,??? Azarov said.

Meanwhile, the increase in Russian gas prices may trigger a wave of responses from Ukraine that had already warned it would have to charge Russia more for its gas shipping services.

Naftogaz Ukrayiny, the national oil and gas company, currently charges Russia $1.6 for shipping 1,000 cu m for a distance of 100 km. Gazprom, Russia??™s gas giant, is expected to pay Naftogaz $2.13 billion for gas shipments in 2006, with Naftogaz??™s after-tax profits from this line of business estimated at $508 million.

Any increase in gas price would force Naftogaz to charge more, but would probably trigger resistance from Russia, analysts said.

Naftogaz needs to buy at least 7 billion cu m of gas annually for technological needs in order to be able to successfully move 110 billion cu m, or up to 80% of Russian gas exports to Europe. (tl/ez)