Former allies Russia and Ukraine have now seen their relationship deteriorate rapidly since the Orange Revolution, not exactly an unexpected development. However, Russian antagonism has escalated the breach into a full-fledged economic battle, with both sides holding the other hostage over Russian oil:

Russia and Ukraine are on the brink of a political crisis over gas prices that symbolises the widening gulf between the two former Soviet countries.

The state-controlled Russian gas monopoly, Gazprom, is threatening to cut off flows on January 1 if Ukraine does not agree to pay quadrupled prices for the energy that comprises a third of its needs.

Ukraine currently buys Russian gas for its homes and factories at a heavily subsidised $50 (£29) per 1,000 cubic metres but a disgruntled Moscow wants to raise the cost to $230, in line with world prices.

Kiev has retaliated by threatening to increase tariffs for gas transit to western Europe and raise the rent paid by the Russian navy to keep its Black Sea fleet in the Ukrainian port of Sevastopol.

Russia notes that eighty percent of its European deliveries has to pass through Ukraine, making the government in Kiev a de facto partner in Russia's oil exportation, along with their military supremacy on the Black Sea. The Russians could cut off Ukraine altogether, but Ukraine could at that point revoke all licenses to transmit oil to Europe as well as evict their navy from its Black Sea ports. Such a move would then guarantee a response from Russia's European clients, pressuring them to settle their differences with Kiev.

What are those differences? It appears that the revocation of the subsidies came as a direct result of Ukrainians electing the West-leaning Viktor Yuschenko over the hand-picked Russian favorite, Viktor Yanukovich. Vladimir Putin has decided to take that decision rather personally, and as a result feels the need to punish the intransigent Ukrainians that dare to prefer closer ties to European democrats over ties to increasingly autocratic Russia -- and this temper tantrum demonstrates why.

Europe may have to reconsider allowing Russia to take on the G-8 presidency next week until this has been resolved. That may put more public pressure on Putin to behave himself and convince him that price wars will be harmful to everyone in the long run.

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