After collapse of the Soviet Union, oil import prices to Ukraine reached world market levels in 1993, but both Ukrainian gas import prices and transit fees for Russian exports to Europe were set in bilateral negotiations, below European levels to some degree. At the same time Ukraine remained the main transit corridor for Russia's gas export. In 2004–2005, About 80 % of Russian gas exports to the European Union were made through Ukraine. Ukraine's own annual gas consumption was in 2004–2005 around 80 billion cubic meters (bcm), of which around 20 bcm were Ukraine's own production, 36 bcm were bought from Turkmenistan, and 17 bcm were received from Russia as a payment for Russian gas transit. The remaining 6-8 bcm were purchased from Russia.
The gas trading system differed substantially from the gas sale to the European Union and caused problems in the form of large-scale deliveries of relatively cheap Russian gas causing increase of energy-intensive industries and supporting Ukraine's status as one of the world's least energy-efficient countries and largest gas importers; accumulation of Ukrainian debts and non-payment; unsanctioned diversion of gas and alleged theft from the transit system; and Russian pressure on Ukraine to hand over infrastructure in return for debts.
Gas trading were conducted under bilateral intergovernmental agreements providing a framework for sales, transit volumes and prices and sometimes other issues such as storage and establishment of production joint ventures. Commercial agreements were negotiated between the relevant companies in the framework of intergovernmental agreements, and supplemented by annual agreements specifying exact prices and volumes for the following year. Gas sales prices and transit tariffs were set in relationship to each other.
According to the contract on 21 June 2002, signed between Gazprom and Ukrainian state company Naftohaz Ukrainy, the payment for the transfer of Russian natural gas through Ukrainian pipeline system had been made in the form of barter exchange – up to 15% of gas pumped through the Ukrainian territory was taken by Ukraine instead of payments in cash. This contract was supposed to be valid until the end of 2013. On 9 August 2004, the two companies signed an addendum to the contract, according to which the amount of gas given as a payment was calculated based on the tariff of US$1.09 for transportation of 1,000 cubic meters over a distance of 100 kilometres (62 mi) and the price of the natural gas supplied for Ukraine was $50 per 1,000 cubic meters (approximately $1.40 per million Btu). The price also did not change, notwithstanding the gas prices in the European markets. According to the addendum the price was not subject to changes until the end of 2009.
Gazprom argued that this addendum was only applicable provided that the two countries sign an annual intergovernmental protocol that has higher legal status for specifying the terms of gas transit. According to Gazprom, the addendum becomes void as the annual protocol had not been signed for 2006 under the required terms. Russia claimed that Gazprom's subsidies to the Ukrainian economy amounted to billions of dollars.