EU Observer: Ukraine's New Year gas nightmare

Throughout 2011 Ukraine was locked in a dispute with Russia over gas prices. The quarrel is set to escalate in 2012 as Russia squeezes Kyiv to choose deeper integration with Moscow in exchange for cheaper gas.

The current gas contract, agreed in 2009 between Russian Prime Minister Vladimir Putin and former Ukrainian prime minister Yulia Tymoshenko, was formulated in a way that saw a gradual increase in price.

While the deal kicked-off with a reduced price, Ukraine must now pay more than $415 per 1,000 cubic meters. Ukraine's leadership maintains it can stretch this year's budget to cover the increase, but it could be 'touch and go.'

Kyiv needs to renegotiate this deal. However, a cheaper price comes with strings attached. It seems that Moscow is asking Ukraine to join its new Eurasian Union, annul its membership of the EU's energy community, form a consortium with Moscow (which excludes the EU) to control Ukraine’s gas transit system and forget about the free trade agreement with Brussels.

Unless Ukraine moves in this direction Russia will maintain the current agreement until it ends in 2019. This risks an eventual collapse of Ukraine's economy.

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