The current price for a "mixed basket" of Russian and Central Asian gas was agreed upon in January during the course of tense negotiations that ended in the cut off.
If Gazprom follows through on its threat, the impact on the Ukrainian economy could be huge.
The economy is already in trouble. A recent European Bank for Reconstruction and Development (EBRD) projection said that Ukraine's GDP growth rate could halve from 2.4 percent in 2005 to 1.2 percent in 2006. According to the report, the likely cause is the higher prices Ukraine is already paying to import gas. Add to that the worsening disarray in the country's state-owned energy sector, which is sliding into greater debt.
If Gazprom manages to get its way and increase the price of gas, this might mean an additional bill of $625 million-$875 million from July-December.
On May 31, the Ukrainian government announced that beginning on July 1, domestic consumers will pay $82.80 for 1,000 cubic meters of gas, a 50 percent increase. Raising it again in the near future might prove difficult.
In the first six months of 2006, the increased cost of energy has seen consumer prices rising at an annualized rate of 19 percent. A further increase in the price of gas is likely to exacerbate inflation.
A severe economic downturn could bring down a pro-Yushchenko government and force the president to appoint a government from the pro-Russia Party of Regions.
Ukraine has few, if any, options to avoid the price increase or to retaliate. The transit fee for Russian gas going through Ukrainian pipelines was set for 10 years in the January agreement and is unlikely to be raised before then.
Increasing the rent for the Russian Black Sea fleet based in Sevastopol is unlikely, largely due to Yushchenko's reluctance to anger the Kremlin.
Some energy conservation efforts have only begun being implemented, but will not produce significant savings for another five or 10 years.
One option could be Ukraine handing over control of its pipeline system and underground storage system to Russia in return for cheaper gas. That, however, is highly unlikely to happen as Yushchenko has often stated that he will not give these up.
Why has Russia chosen to make the decision to raise prices now?
The simple answer is the fact that, according to Moscow, the contract signed in January is up for review in six months.
"In our contract, the price was agreed upon for the first half of 2006," Gazprom deputy head Aleksandr Medvedev told RIA Novosti on May 26. "The end of this period is approaching and both sides will discuss the price for the following period."
But Ukraine seems to understand the terms of the contract a little differently. Yushchenko has made numerous assurances to his countrymen that the price agreed upon in January will remain at the $95 level for five years. Now that his promise has been challenged by Gazprom officials, the Ukrainian government might well feel the need to protect the image of the president and put up fierce resistance to any price rise.
It's also possible that policymakers in the Kremlin are timing their decision to increase gas prices for Ukraine to coincide with the upcoming Group of Eight industrialized economies (G8) summit in July.
That could be Russia's signal to the West that it will conduct business in the CIS to promote its own geopolitical interests, regardless of how any of the G8 members might react.
Another possible explanation for the thinly veiled threat to raise gas prices for Ukraine is that this is a form of pressure being applied by the Kremlin to prevent the appointment of Yuliya Tymoshenko as prime minister. During her short term as premier in 2005, Tymoshenko was outspoken about the need to remove RosUkrEnergo, the controversial middleman for gas deliveries from Central Asia, from the Ukrainian market.
After Tymoshenko left office, RosUkrEnergo, reportedly at the insistence of the Kremlin, was given a lucrative role to play in the delivery and sale of gas to Ukraine. The January contract provided for RosUkrEnergo to create a joint venture company with Naftohaz Ukrayiny, the state-owned oil and gas monopoly,named UkrHazEnergo. The newly created company recently announced that it is expanding and intends to drill for gas in Ukraine and Russia.
If Tymoshenko is appointed prime minister, Moscow fears she might exclude UkrHazEnergo and RosUkrEnergo from the Ukrainian market.
On May 30, Russian Ambassador to Ukraine Viktor Chernomyrdin linked the gas issue with political relations. Chernomyrdin was quoted by Interfax as saying that Ukrainian-Russian relations were affected by relations between Ukraine and NATO, the problems with the Russian Black Sea Fleet, Kyiv's "search for democracy," and the creation last month of the "Organization for Democracy and Economic Development-GUAM."
He also said that Kyiv and Moscow could settle the problem of a possible gas-price rise with an improvement of political relations.
Russia's Gas Strategy
RUNNING HOT AND COLD The crisis over Russian supplies of natural gas to Ukraine that erupted on New Year's Day has implications that spread well beyond these two countries and will impact both economic and political policymaking throughout Europe. On January 19, RFE/RL's Washington, D.C., office hosted a briefing the examined the ramifications of the natural-gas conflict.
CLIFFORD GADDY, a senior fellow at the Brookings Institution, outlined Russia's "grand energy strategy," in which Ukraine is perceived as merely an obstacle frustrating Russia's energy ambitions in Western Europe and therefore a nonentity in Russia's broader strategic planning. According to Gaddy, Russia's strategic goal regarding energy is to maximize the role of its own energy resources in the world energy markets, so as to increase its geopolitical influence. To do this, it must reduce competition and maximize dependency on its own energy resources, as well as ensure a stable supply.
TARAS KUZIO, a visiting assistant professor at George Washington University, rebutted Gaddy's argument, claiming that Russia's actions evidenced a complete lack of geopolitical strategy and resulted in strong denunciations by Western countries and a loss of political allies in Ukraine. According to Kuzio, Russian President Vladimir Putin's desire to have a deal signed by the January 4 European Union energy summit outweighed his hope of reinforcing opposition to Ukrainian President Viktor Yushchenko during the run-up to Ukraine's March 26 parliamentary elections.
RFE/RL Coordinator of Corruption Studies ROMAN KUPCHINSKY did not fully agree with Kuzio's assessments of Yushchenko or Ukraine. He outlined three major problems that are feeding the conflict between Russia and Ukraine. The biggest, he argues, is that the state-controlled Russian gas giant Gazprom holds a monopoly on natural-gas sales outside the CIS. Kupchinsky also decried Ukraine's consumption of natural gas, terming it "out of control." Corruption is also a major factor in the conflict, Kupchinsky said, although the extent to which it taints the deal struck between Russia and Ukraine remains unknown.