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Just half an hour into 2007, the mood among Andrei Sannikov's guests is somber. They crowd around the television in his apartment in the Belarusan capital, Minsk, to watch a news bulletin that interrupts the usual festive programming. "We have signed a new natural gas supply contract on unfavorable terms," announces Belarusan Prime Minister Sergei Sidorsky. Sannikov, a former member of the government and now an opposition activist in the country memorably described by U.S. Secretary of State Condoleezza Rice as "the last true dictatorship" in Europe, interprets the statement for his guests. "Russia has given itself a New Year's present by making its grab of the Belarusan economy official," he says. "What the U.S.S.R. sought to do with tanks, Russia is now achieving with pipelines."

Gazprom, Russia's state-run gas company, says it is acting simply to bring Belarus' prices more closely in line with world market levels. It gave similar reasons exactly a year ago when it turned off gas supplies to Ukraine, ensuring Kiev's swift agreement to new, tougher terms. Another former Soviet republic, Georgia, confronted with steep increases to Gazprom prices, is urgently seeking alternative supplies. Both countries are at odds with the Kremlin over pro-Western policies. Belarus, by contrast, has been seen as Moscow's closest ally — so close, in fact, that in 1997, its President, Alexander Lukashenko, signed a pact with Russia that envisaged eventually replacing the Belarusan ruble with the Russian one and suggested a constitutional change that could allow the formal inclusion of Belarus in the Russian Federation. A decade later, both countries say they still intend to implement the agreement, but the dying days of 2006 saw their once cordial relations deteriorate into a battle of brinkmanship. Moscow warned it would turn off gas supplies unless Belarus agreed to hike the price it paid for the fuel. Belarus countered with a threat to block the pipeline through Belarus that transmits 20% of all Russia's gas exports to Europe.

The "unfavorable terms" to which Belarus finally agreed include prices only 5% less than Gazprom's initial demand, and more than double that which Belarus has paid since 2005. The country was also forced to sell 50% of its national gas pipeline operator Beltransgaz to the Russian gas company. The concessions will hurt. Lukashenko has propped up the Belarusan economy with Russian fuel and once was tipped to occupy the Kremlin himself. That seemed realistic as he cozied up to an ailing Boris Yeltsin. When Vladimir Putin took Russia's helm, Lukashenko's chances were dashed, and with them, one reason to expedite the alliance with Moscow.

The delay has angered Putin, believes Lilia Shevtsova, an analyst at the Carnegie Moscow Center. Putin's second and final term as Russian President ends in 2008, and a successful reabsorption of Belarus would ensure his legacy as the first reunifier of the Slavic lands lost by his predecessors Mikhail Gorbachev and Yeltsin. Shevtsova also cites a more colorful theory: "Annexing Belarus could also create a legal way for Putin to stay on in the Kremlin." The constitution of the Russian Federation restricts any incumbent to two consecutive terms as President, but a new, expanded Federation could start with a clean slate.

For now, the countries are far from united. In addition to the gas price hike, in late December Russia introduced a new export duty on its supplies of crude to Belarus. Belneftekhim, Belarus' state-run oil and chemical concern, immediately suspended all oil contracts with Russian companies. "We'll survive, but we're hard put now," Alexander Timoshenko, Belarus' government spokesman, told Time.

As the state television returned to scenes of seasonal revelry, Sannikov's guests swapped predictions of how the situation would play out. Most anticipated that Lukashenko will cut subsidies that have kept Belarus' decaying industries and Soviet-style collective farms afloat. Vladimir Khalip, a Belarusan writer and documentary filmmaker, didn't think this would be enough to save the regime. "Now, its collapse is inevitable, come May or June," he said. Such forecasts have proved wrong in the past, but on one point there was consensus: there wasn't much that was happy about this New Year in Belarus

• Yuri Zarakhovich / Minsk
• As Russia hikes up the cost of gas for Belarus, the mood turns gloomy