Ukraine-Russia peace hopes rise as gas deal edges closer

Milan (AFP) - Ukraine and Russia both signalled progress towards settling their festering row over gas, raising hopes of an EU-backed resolution of the broader conflict embroiling the Soviet-era allies.

Russian President Vladimir Putin met his Ukrainian counterpart three times in the space of ten hours in Milan Friday, twice in the company of various European Union leaders then, finally, in their first private meeting since late August.

"We have some certain progress (on the gas issue) but left some details which need to be discussed," Ukrainian President Petro Poroshenko said after the final meeting, adding that he hoped a deal could be done at or before already-scheduled talks in Brussels next week.

"Before October 21, we hope to find a solution for the energy question," he said.

Putin also implied a deal was close and urged EU governments to help finalise the complex funding package required for it to happen.

French President Francois Hollande had earlier described a gas deal as "within reach," following a four-way meeting involving himself, Putin, Poroshenko and German Chancellor Angela Merkel.

EU-brokered talks with Ukraine and Russia have produced a draft accord whereby cash-strapped Kiev would pay $3.1 billion (2.4 billion euros) in unpaid bills to Moscow by end-October, with a new contract to cover subsequent deliveries.

If confirmed at Tuesday's talks in Brussels, this could represent a real advance.

Putin threatened earlier this week to cut supplies completely if no agreement was reached -- a move that could disrupt winter supplies to Europe.

Russia accounts for around one third of the EU's consumption, half of which transits via Ukraine, and previous disruptions, in 2006 and 2009, led to sharp spikes in prices.

In a sign of continuing uncertainty regarding the Russian economy, ratings agency Moody's downgraded Moscow's credit rating to Baa2 from Baa1 on Friday, citing the Ukraine crisis as one of the reasons.

- Hollande sees real advances -

Hollande said progress had also been made on the implementation of a ceasefire and peace accord reached in Minsk between Kiev and pro-Russian rebels in early September.

"There has been progress. We have not reached the end yet but there are good things, including gas," Hollande said.

According to the French president, Ukraine and Russia reconfirmed their commitment to the Minsk accords, agreed to speed up prisoner exchanges and moved forward on the idea of border monitoring by the OCSE using satellites and drones.

Putin also said there had been progress on this but Poroshenko struck a downbeat note when adding: "Unfortunately this is the same that we (previously) agreed... the main problem is implementation of the agreement."

- Key sticking point -

British officials said a key sticking point is whether Putin can be pressured into using his perceived influence with the rebels to ensure nationwide Ukrainian elections on October 26 are held across the country, including in rebel-held territory.

The rebels are currently threatening to stage their own vote, underlining their demand to be treated as virtually an independent sub-state.

"What we have achieved ... while not a definitive resolution of the crisis, marks progress which will be confirmed in the coming days," Hollande said.

More than 3,600 people have died in fighting in eastern Ukraine since Russia annexed Crimea in March, punishing its former Soviet satellite Ukraine for having turned its back on Moscow in favour of ties with the European Union.

- ASEM summit overshadowed -

The diplomatic exchanges over Ukraine took place on the sidelines of an Asia-Europe (ASEM) summit completely overshadowed by a crisis which has also claimed Asian victims.

Netherlands Prime Minister Mark Rutte and Australian Foreign Minister Julie Bishop both met Putin to demand better cooperation with an investigation into the July shooting down of Malaysia Airlines flight MH17 over eastern Ukraine.

The incident cost nearly 300 lives, more than half of them Dutch and 38 of them citizens or residents of Australia.

The next ASEM summit, due in 2016, will be held in Mongolia.