Sometimes you just have to cut and paste, unabridged. this is the best piece yet on what actually happened with Russia and the Ukraine:
On October 2 last year, the Russian and Ukrainian prime ministers signed a memorandum envisaging the two countries' intention to switch to market prices in the business between their gas companies - Gazprom and Nafotgaz - with the Russian side allowed to sell directly to end users in Ukraine.
The follow-up negotiations were in an advanced stage by end-November when Kiev inexplicably began stalling on the repayment of pending debts for gas supplied to it earlier (an amount of US2.4 billion), which was a precondition for a new gas deal for 2009.
The transfer to market prices is important for Russia as it has been heavily subsidizing the supplies for Ukraine at an average cost of $179.5 per 1,000 cubic meters, whereas it buys and delivers from the Central Asian producers at $375 per 1,000 cubic meters. Russia sought a reduction of the subsidies with a gradual increase in gas price to $250 per cubic meters for the 2009 contract, but Ukraine declined and broke off negotiations. (Gazprom also pays a transit fee to Ukraine for getting the gas across to the European market at $1.6 per 1,000 cubic meters per 100 kilometers.)
With no contract to supply gas for 2009 in place, Moscow cut off the gas supplies to Ukraine on January 1. Ukraine retaliated by refusing to allow the transit of Russian gas to Europe. A related problem is that Ukraine had been illegally siphoning off gas destined for the European market and creating a gas reserve of its own at no cost.
Gazprom sold to Ukraine roughly 55 billion cubic meters (bcm) gas at $179 per 1,000 cubic meters in 2008 as compared to 155 bcm at roughly $480 per 1,000 cubic meters to the European market. That is to say, Gazprom earned in excess of six times as much revenue from European countries for only thrice the volume it sold to Ukraine. Based on 2008 sales, Gazprom lost $12 billion by selling gas at a subsidized price to Ukraine. The company is in the red and has asked for a financial bailout from the Russian government.