Russia is looking like an even less reliable trading partner than Ukraine at this point, but neither of them look at all good.

This conflict has been going off and on since the breakup of the Soviet Union.  It always follows roughly the same pattern as this time.

I know of no compelling reason why the Ukraine should receive a huge discount to natural gas market prices from Russia -- the soviet union is dead, and the Ukraine is not exactly the callow subservient nation to Russia that Belarus is.

A large fraction of the infrastructure which sends natural gas to Europe is in Ukraine.  The pipelines in Ukraine are about 1000km long, and so is most of the natural gas storage capacity in Russia and Eastern Europe.  It's always been the deal that Russia gets cheap gas transportation across Ukraine, and Ukraine gets cheap gas in return.  

While underpaying for Russian gas, Ukraine was also under-charging Gazprom for the transit to Europe. Its fee of $1.70 for 1,000 cubic metres of gas per 100km is half that charged by other European countries.

Also, Ukraine is a lot closer to Russia than Western Europe, so transportation costs are a lot lower.  Trying to charge full Western European rates is obviously intended as a punitive measure.

It's worth noting that Ukraine claims to have paid their gas debts but not penalties to the company which exists only to siphon Gazprom money to high-level Ukrainian and Russian officials.

As for Russia -- this is not merely political flexing, they need the money in light of the current fiscal crisis.

Western Europe uses about 2/9 of the gas Russia produces.  Eastern Europe uses about 1/9 at about 1/2 the price.  Russia uses about 2/3 at about 1/4 the price.  Between the price subsidies and massive graft, Gazprom has never made all that much money for Russia.  About 55 percent of Russia->Western Europe pipeline capacity goes through Ukraine, and without this export capacity, Gazprom loses money quickly at current oil prices.  This is why Gazprom will have to cave in to Ukraine eventually.

The 3 large Russian natural gas reservoirs which currently provide most of the natural gas produced by Russia are now in steep production decline.  Keeping up production will require massive investments the like of which Gazprom hasn't had to make since Soviet times.  When the energy bubble burst, they were trying to borrow $300 billion for pipeline projects, an amount which obviously isn't going to happen in today's financial climate.  This included a pipeline to eastern Siberia in order to try to jack up prices for gas sent to Western Europe and China by getting them to bid against each other, but the amounts they need to spend are still huge even without this project.

The Yamal peninsula projects are expensive but not all that technically challenging, but the Shtokman field will be the world's first offshore oil platform in the Arctic pack ice, and additionally is out of helicopter range from shore, and isn't anywhere close to existing major pipelines.  They don't have the money to both keep production up and build new pipelines to get rid of Ukraine's cut as a transportation middleman.

I really wonder what the hell Russia is thinking by letting their annual spat with Ukraine turn into an energy supply crisis for Western Europe again.  Yes, they've been living up to the letter of their contracts, but the last thing they need is Western Europe thinking that they'll do the same thing to Western Europe that they did to Ukraine and, without giving advance notice, they'll just refuse to renew their energy contracts on anything close to the old terms.  Slowly raising both gas prices paid by Ukraine and transportation rates paid to Ukraine to something close to free market values would give them as much money as they're likely to get out of this dispute without spooking their golden goose.

Gazprom has rejected participation in the Nabucco pipeline because they would have been required by Austria to sell their gas on the open market (which has had much higher prices than what they've been getting for their gas under long-term contracts), which would have cut much of their ability to show political favoritism and to siphon cash away for graft within Western Europe.  They made it clear that this was a non-negotiable point.

The EU push towards natural-gas fueled electric power for environmental reasons is really unsustainable.  There's a lot of African LNG supply coming online by 2012, but after that there's a severe natural gas supply shortage for Europe without a major increase in Russian imports, a shift to another fuel for electricity generation, or a major pipeline to the Middle East or Turkmenistan.  Most observers agree that the major purpose of the Russian invasion of Georgia was to keep such a pipeline from being built.

Obviously not. Belgians wear bowlers. Canadians wear touks.

Maybe the artist just doesn't know the difference between Belgians and Danes? I've heard people from Canada and Denmark are interchangeable.