Russia and Ukraine on Tuesday agreed to cut out a controversial Swiss-registered trading company at the heart of a dispute between the two nations, as Kiev and Moscow settled a broader deal over natural gas debts, Financial Times reports.

RosUkrEnergo – 50 per cent owned by Gazprom, the Russian state gas monopoly, and 50 per cent by two Ukrainian businessmen – has been a bone of contention between the two capitals. It won a monopoly on Gazprom’s supplies to Ukraine following a standoff over prices in 2006.

Yulia Tymoshenko, Ukraine’s prime minister, had vowed to eliminate the trader as a middleman, calling it a “criminal canker”. But Gazprom had warned its replacement could lead to an increase in gas prices.

Vladimir Putin, Russia’s president, and Viktor Yushchenko, his Ukrainian counterpart, emerged from talks in the Kremlin on Tuesday to announce they had negotiated settlement of more than $1bn (?690m, £513m) in debts Gazprom claims is owed by Kiev.

The two leaders agreed the deal just minutes before a deadline which would have seen Gazprom reducing supplies to Ukraine, a threat that had renewed fears in Europe that its supplies could be affected.

Alexei Miller, Gazprom’s chief executive, said last night that a deal had been clinched to axe RosUkrEnergo and replace it with a joint venture owned directly by Gazprom and Ukraine’s energy monopoly, Naftogaz Ukrainy.

A spokesman said the new entity would supply gas from central Asia and Russia to Ukraine on the same terms and prices as RosUkrEnergo for 2008. He could not say when the joint venture would be formed.

The trader had looked to be threatened after Semyon Mogilevich, suspected by Ukrainian politicians to be connected to the regional gas business, was arrested in the Russian capital last month on charges of tax evasion related to a Moscow perfume retailer. Political analysts in Moscow have suggested his arrest could have been connected to a shake-up in the Ukraine-Russia gas trade.

Ukraine’s security service had investigated RosUkrEnergo for possible ties to Mr Mogilevich in 2006. The investigation was never completed.

RosUkrEnergo, Dmytro Firtash and Ivan Fursin, who together own half the trader, have denied any ties to Mr Mogilevich. A lawyer for Mr Mogilevich has denied his client has any links to the gas business.

A spokesperson for Mr Firtash declined to comment last night on the news the trader was no longer the middleman. A spokesman for RosUkrEnergo also declined to comment.

By Catherine Belton in Moscow and Roman Olearchyk in London,

The Financial Times