Ukraine's New Year gas nightmare

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.

Ukraine feels disappointed by what it perceives as lack of support from the EU. While solidarity in energy security issues is a legal commitment under the terms of the Energy Community Treaty, presently the EU seems reluctant to involve itself in what it seems to view as a bilateral quarrel between Moscow and Kyiv.

It seems that only in the case of EU-bound transit being affected is the EU likely to step in.

This energy nightmare has been further exasperated by Russia's Nord Stream and South Stream projects. These two pipelines aim to diversify Russian gas supply routes, reducing dependency on transit states such as Ukraine. Presently around 80 percent of Russian gas heading for EU market transits Ukraine.

Nord Stream, which became operational in November, runs from Russia under the Baltic Sea to Germany, while South Stream, which is scheduled to be completed by 2015, will run from Russia under the Black Sea to Bulgaria and onwards to Greece, Italy and Austria.

While South Stream has frequently been seen as little more than a political project aimed at undermining the EU-backed Nabucco pipeline, in recent months it has gathered speed. There remain question markets over some issues, such as financing, but the recent decision of Turkey to allow Russia to use its Black Sea Exclusive Economic Zone, which Putin described as a "New Year's gift" and Serbia's agreement to provide underground gas storage are important developments.

Two thirds of the gas presently transiting Ukraine will seemingly be diverted to South Stream. Nord Stream and South Stream combined will almost equal the amount of gas presently transiting Ukraine, thereby significantly reducing Ukraine's transit role.

However, if Ukraine becomes more 'agreeable' Russia might rethink its South Stream project, which has a hefty price-tag of some €25 billion. Indeed, Gazprom chief Alexei Miller recently said that construction of South Stream depended on negotiations with Kyiv.

Ukraine's options are limited. To cave in to Moscow would almost be like selling Ukraine's sovereignty. However, because Ukraine remains Gazprom's biggest customer, importing some 40-50 billion cubic metres of gas annually, Moscow has considerable leverage.

Nord Stream and South Stream have also significantly weakened Ukraine's bargaining power and Kyiv needs to accept its near-monopoly on supply of Russian gas to the EU is over. Ultimately Ukraine needs to urgently speed up efforts to diversify energy sources, increase its energy mix and stop burying its head in the sand.

Amanda Paul is an analyst at the Brussels-based think-tank, the European Policy Centre