Graham Stack in Kyiv -

Ukraine is stuck between Europe and a hard place after a court found ex-prime minister Yulia Tymoshenko guilty of exceeding her powers when negotiating a natural gas agreement with Russia in 2009, and sentenced her to seven years in jail. Reaction from the EU was predictably hostile due to fears about democracy, but Russia also reacted with alarm at the threat posed to the 2009 gas agreements.

There's not many people who infuriate both the West and Russia at the same time. Belarus President Alexander Lukashenko has managed it, and now Ukrainian President Viktor Yanukovych is following in Lukashenko's footsteps after a court sentenced Tymoshenko to seven years in prison for exceeding her powers in signing a gas agreement with Russian in January 2009.

That agreement ended a dispute over prices for Russian gas imports to Ukraine that had interrupted Russian gas supplies to Europe, and at the time Tymoshenko was hailed in both Europe and Russia for the agreement, by which Gazprom agreed to remove opaque intermediaries linked to Ukrainian businessman Dmytro Firtash from the gas trade.

The concession Tymoshenko made was a European-level index price for Russian gas. But the European gas price is in turn indexed to the price of oil with a six-month lag: in January 2009, as the financial crisis swept the world, oil prices had plummeted to a five-year low of around $40 per barrel, a staggering $100-plus drop from its peak price less than a year before in 2008. Moreover Russia agreed to an initial one-year discount. So Tymoshenko felt safe to make concessions on price in return for the removal of her arch-enemy Firtash from the gas trade and brownie points for ending the dispute.

Until that is the oil price again started to soar and soar. In 2011, the oil price finally broke clean through the $100 per barrel level again. The price for Russian gas has grown with it, currently moving towards and past the $300 per 1,000 cubic metre mark. Even allowing for a 20% rebate agreed between the countries in 2010 in return for an extension to Russia's Black Sea Fleet lease of its Ukrainian naval base in Sevastopol, the price is looking increasingly unaffordable, especially to the energy-hungry industrialists who back Yanukovych's Party of Regions.

Democratic deficit

The European reaction to Tymoshenko's sentencing did not dwell on the gas question, but on the fate of democracy on this key swing country.

The timeline is damning: Tymoshenko narrowly lost presidential elections in a second round in February 2010 to Yanukovych. Now she has been sentenced to seven years jail for what is to a large extent a technical legal issue relating to the limits of her remit as prime minister. Judge Rodion Kireyev said the 50-year-old had exceeded her authority by avoiding a cabinet vote before requiring Ukraine's gas monopoly Naftogaz Ukrainy to sign the 2009 gas agreement with Russia. Kireyev said that the agreements had inflicted almost $200m of damaged on the state-owned company, which he ordered Tymoshenko to reimburse.

The Yanukovych administration has declared EU membership its goal and is engaged with the EU in hammering out the details of a deep free trade agreement. Now the future of the free trade agreement, not to mention EU membership, has been thrown into doubt.

High Representative of the EU for Foreign Affairs and Security Policy Catherine Ashton left no doubt as to where she stands on the matter, saying in a statement she was "deeply disappointed" with the verdict.

Ashton said the trial "did not respect international standards as regards fair, transparent and independent legal process"" which confirms that justice is being applied selectively in politically motivated prosecutions of the leaders of the opposition and members of the former government. She explicitly said the verdict would have "profound implications" for the conclusion of an EU-Ukraine Association Agreement, although she did not mention the free trade agreement in this context. National foreign ministries from across the EU echoed her words.

Russia's once-and-future president Vladimir Putin was meanwhile also objecting to the verdict, if in a different tenor. "Seven years - that's certainly quite a figure," PM Putin said to journalists in China, where he is on a state visit. "I to be sure don't quite understand what she got seven years for."

He pointed out that Tymoshenko herself had not signed any of the documents relating to the gas agreement since the agreements were concluded between the two national gas companies Gazprom and Naftogaz Ukrainy, and that these were commercial contracts concluded in full compliance with Russian, Ukrainian and international law. Putin said that it would be "dangerous and counterproductive" to cast doubt on the agreement's validity. The Russian foreign ministry in a statement noted "an obvious anti-Russian subtext to the entire saga."

Tymoshenko herself was, as ever, in fighting spirits. "This verdict and these repressions against citizens bring Ukraine back to 1937," Tymoshenko proclaimed in the courtroom after the verdict was announced, referring to the peak year of Soviet Stalinist purges. "No sentence can stop me. We will fight and defend my good name in the European Court, and I am convinced that the European Court of Human Rights will make a legitimate, lawful and fair decision."

Killing two birds?

Tymoshenko's conviction, if not overturned on appeal, bars her from political office even if the sentence is reduced or suspended. With parliamentary elections looming in 2012, she remains the most potent political threat to President Yanukovych's Party of Regions. However, her appeal has faded in recent years, and even the trial has not provided any real turnaround in support. Her party Batkyvshina has hovered at just over the 10% mark in polls, despite the fact that Party of Regions support has slumped from over 40% to around 14% since taking over the reins of government.

This means that international isolation for Ukraine could be an unnecessarily high price to pay for sidelining her, say analysts. "Considering Tymoshenko's sagging approval ratings, which this trial has failed to improve, it does not seem necessary or reasonable for the ruling party to go to the extreme of leaving Tymoshenko in jail and barring her from running for parliament," says Dragon Capital analyst Viktor Luhovyk in a note.

This keeps some hopes alive of a face-saving solution, such as an amnesty or legislative changes decriminalising the statutes the court found Tymoshenko to have violated.

With almost everyone believing the trial to have been politically motivated, the question remains what is more important to the current regime: putting Tymoshenko out of politics or strengthening its case to revise the 2009 gas agreements and get a lower gas price. If the latter, there may be room for compromise on Tymoshenko and making up with the EU, although the prospect of a new gas war with Russia looms.

But the pessimists believe that the regime won't pass up a chance to sideline Tymoshenko, who prevented many of the current government from taking power in 2004 by heading mass protests against rigged elections in the "Orange Revolution", and then in 2009 trying to destroy powerful government backer Firtash's gas business. The temptation to "kill two birds with one stone" - Tymoshenko's political career and the 2009 gas agreements - may be simply too great.