Ukraine is on the edge of bankruptcy. One of its financial problems is that the government in Kyiv is in arrears by $3.5 billion (2.54 billion euros) on its gas bill payments to Gazprom, which coordinates its pricing policy closely with the Kremlin. Gazprom now says Ukraine will have to pay in advance for each month's gas supplies.

Cheap gas in exchange for Ukraine's loyalty to Russia

Gazprom says that if Ukraine fails to settle its debt - or fails to pay in advance for June deliveries - then it will cut off gas supplies. This would present a major problem for Kyiv, since Russia supplies two thirds of the gas consumed by Ukraine. It also presents a problem for the rest of Europe, since transit pipelines crossing Ukraine deliver about half the gas that Russia sells to Europe (about 15 percent of Europe's total gas supply).

Under a 2009 contract, Ukraine agreed to pay $485 per 1,000 cubic meters of gas. In late 2013, Gazprom offered to drop the price by 45 percent to $268.50. At the time, the European Union and Russia were competing with each other for Ukraine's political and economic allegiance. Gazprom's discount offer was part of a package of Russian benefits on offer in exchange for Kyiv's loyalty. Viktor Yanukovich, who was then President of Ukraine, accepted the Russian offer rather than the EU's offer.

No Ukrainian loyalty to Russia means no cheap gas

The European Union, USA, and many people in western Ukraine were unhappy about this. The result was the Maidan movement - a determined push by a coalition of citizens' groups and political forces to topple Yanukovich from office.

That push succeeded on February 22, 2014. A Western-leaning interim government took power in Kyiv. Gazprom accordingly withdrew its gas discount offer, and reinstated the previous price of $485 - the highest price Gazprom charges to any European country.

At a meeting with Gazprom CEO Alexei Miller on Monday, Russian Prime Minister Dmitry Medvedev said he was confident that Kyiv had the money to pay arrears on its gas supplies, because it had just received the first tranche of a $17 billion IMF credit, amounting to $3.2 billion. But he said Kyiv had so far not shown willingness to pay its gas bills.

nz / hg (Reuters, AFP)