Ukraine has ended its dispute over unpaid gas supplies from Russia by agreeing to pay Gazprom cash and gas to cover its debts. The agreement brings and end to the prospect of a repeat of the 2006 dispute, which resulted in gas supply shortages in Europe.

The Ukrainian government has agreed to repay its debts – which have reached $2 billion – by November 1. Last week Russian energy giant Gazprom threatened to cut gas supplies to its neighbour if it failed to settle the debt, raising renewed fears of gas shortages in Western Europe.

The deal was signed in Moscow by Viktor Yanukovich, Ukraine’s outgoing pro-Moscow Prime Minister. Ukraine will pay $900 million of the debt in cash and then transfer $1.2 billion worth of gas held in vast underground storage facilities to Russia.

About 80 per cent of Europe’s gas supplies from Russia pass through Ukraine’s pipeline network. In 2006, a similar dispute between Ukraine and Moscow resulted in the latter turning off supplies to Ukraine for three days.