* Ukraine looks east instead of going west
* Mood changed after Putin-Yanukovich talks
* Putin wins battle but it may be a Pyrrhic victory
By Timothy Heritage and Richard Balmforth
MOSCOW/KIEV, Nov 22 (Reuters) - Ukraine's abrupt decision toreturn to Mother Russia's bear hug after a flirtation withwestern Europe can be traced back to a secretive meeting oftheir two presidents two weeks ago.
The country of 46 million, squeezed between the EuropeanUnion and Russia, on Thursday froze plans to sign a trade pactwith the EU which would have marked a historic shift away fromits former Soviet masters in Moscow.
Ukraine said on Friday the move was tactical and motivatedonly by economics. Russia denied using economic and politicalpressure to blackmail Ukraine into submission.
But Russian government sources said President ViktorYanukovich's decision had become all but inevitable after amysterious meeting with Russian President Vladimir Putin inMoscow on Nov. 9 about which almost nothing has been reported.
"It turned out beautifully - like stealing the bride at thealtar," an unnamed government official told the Russian businessdaily Vedomosti. "Everything changed after the meeting."
Another senior Russian official described the meeting toReuters as part of intensifying bilateral contacts as thesigning of the planned EU-Ukraine trade pact in the Lithuaniancapital Vilnius on Nov. 29 loomed.
At the one-on-one meeting, this person said, Putin's messageto Yanukovich was clear: join Russia in a Moscow-led customsunion and in return Ukraine will receive cheaper gas from Russiaand escape trade sanctions.
"We made clear to him that if he signs the agreement (withthe EU), he will lose a lot immediately, that we will blockRussian markets for Ukrainian goods, while the gains might notbe there for years to come."
But if he joins the Customs Union "he will have immediateadvantages, including gas discounts," the senior Russiangovernment official said.
Until the Moscow meeting - which Ukrainian media said wenton until 5 a.m. - Yanukovich and his team had stuck, publicly atleast, to their commitment to move their country out of Russia'ssphere towards the brave new world of Europe.
This was despite tense negotiations, almost daily, betweenthe EU and the Yanukovich leadership over the continuedimprisonment of opposition leader Yulia Tymoshenko, whom the EUsee as the victim of a political trial.
Officials said both the Russian and Ukrainian sides hadagreed not to discuss the Moscow meeting publicly.
Mykola Azarov, Ukraine's dour prime minister who is notgiven naturally to hyperbole, waxed lyrical last September aboutthe benefits that would come from association with the EU.
"We all want fresh air, quality water, safe food products, agood education for our children, contemporary medical service, areliable right to justice. These are not abstracts, but normsand rules which exist already in the European Union and which weneed in Ukraine," he said, announcing government approval tosign the agreement.
Undeterred as the Ukraine-EU romance blossomed, Moscow keptup niggling reminders to Ukraine of its economic clout. Russiancustoms officers conducted arbitrary border checks on truckscoming in from Ukraine, causing bottlenecks and economic losses.
In late October, Russian state gas monopoly Gazprom announced that Ukraine had failed to settle anoutstanding gas bill for $882 million.
A Kremlin aide at an international conference in theUkrainian resort of Yalta warned Ukraine it was heading forbankruptcy by teaming up with the EU.
Putin and Yanukovich met in the Black Sea resort of Sochi todiscuss "the concern" that the future EU-Ukraine pact wascausing to Russia, the Ukrainian Foreign Ministry said.
MOOD MUSIC CHANGED
But it was only after the two men met again in Moscow thismonth that the mood music suddenly changed in Kiev.
Oleksander Yefremov, parliamentary leader of Yanukovich'sRegions Party, suddenly began to speak of the impact Ukraine'sdealings with the EU would have on the economy in terms of losttrade with Russia and employment.
"Agreement should not be accepted at any price. If we don'tsign association with the EU ... it won't be the end of theworld. The sun won't stop coming up. But at least we'll have ourself-respect, knowing that we are a state and not somebody'spuppet," he said.
Yanukovich himself spoke of the huge cost that modernisingUkraine's industrial base to European standards would require.
And Azarov abruptly ceased to speak of Ukraine's prosperousfuture in the West. At a cabinet meeting on Nov. 13, he placedunusual emphasis instead on the need to repair relations withRussia to help Ukraine's heavily indebted economy.
"The closer we get to the summit, the clearer it becomesthat the authorities do not want to sign because the associationagreement means the introduction of European standards which isthe path that Yanukovich's authorities do not want," remarkedVitaly Klitschko, a world heavyweight boxing champion who hasbecome a politician and plans to run against Yanukovich in 2015.
A two-hour meeting between Azarov and Russian Prime MinisterDmitry Medvedev on Wednesday appears to have completed thediscussions bringing Ukraine and Russia together.
A signal that a deal was in the works had come with the newslast week that Ukrainian energy firm Naftogaz had resumedimports of Russian gas after a hiatus that had deprived Russiaof revenues, and talks had begun on settling its arrears.
Gazprom agreed to give Naftogaz more time to pay its $1.3billion debt and promised not to switch over to a system underwhich it would demand advance payments, Russian media reported.
Valentin Zemlyansky, an independent Ukrainian analyst, saidKiev would now hope for a big cut in the price of Russian gas onwhich it depends heavily.
"In the gas sector we could expect a revision of the currentcontract with Gazprom and a decrease in the price of gas forUkraine to no more than $250 per 1,000 cubic meters from thecurrent $400," he said.
But Ukrainian projects with Shell, Chevron and other companies to develop shale gas could, he said, "movefrom the category of absolutely necessary to the category ofjust possible."
TUG OF WAR
Brussels said the deal planned with Ukraine would haveboosted investment in the country, which has billions of dollarsin debt payments looming next year.
Russian leaders were appalled that Ukraine might move out ofits sphere of influence. The most populous of the states thatMoscow lost direct control of when the Soviet Union split in1991, it is closely bound to Russia historically and culturally.
The tug-of-war over Ukraine ended in a victory for Putinwhich he will use to burnish his image as a statesman andRussia's protector on the world stage as he tries to win backpopularity after street protests last year.
The Eurasian Union trading bloc which Putin is building isone of the main platforms of his third term as president, andincluding Ukraine's big market is vital for its credibility.
As former U.S. National Security Adviser Zbigniew Brzezinskionce put it: "Without Ukraine, Russia ceases to be an empire".
For the 28-nation EU, Ukraine's decision was a setback thatunderlined the difficulties of trying to do business incountries which Russia regards as its back yard.
Luring Ukraine westward has been a strategic objective forthe EU, trying to tear down the last remnants of the old IronCurtain. The EU also lost out to Russia in August when anotherformer Soviet republic, Armenia, suddenly dropped its bid tosign an association agreement with the Union.
But the EU may also have reason to breathe a sigh of relief,too. Not only is Ukraine highly indebted, it is stricken bycorruption, its politics are unpredictable and the new alliancecould have been a costly burden for the bloc in the short-term.
PYRRHIC VICTORY?
It may also be a Pyrrhic victory for Putin. Ukraine mustfind more than $17 billion next year to meet gas bills and debtrepayments, and has no loan agreement in place with theInternational Monetary Fund to help it through. Its economy isexpected to shrink by 1.5 percent in 2014.
Russia is also perilously close to recession and the burdenKiev puts on Moscow could be heavy, depending on the terms ofthe deal it has agreed with Ukraine.
There is also no guarantee Yanukovich intends to steerUkraine into the Russian-led Customs Union. Kiev has not closedthe door entirely on moving closer to Europe, even if the EU maynot see much chance of progress while Yanukovich is president.
An important aim for Yanukovich was to secure favourableeconomic and political conditions to weather economic troublesin the next two years and secure re-election in 2015.
Moscow-based foreign policy analyst Vladimir Frolovestimated that he would need from $15 billion to $25 billion tocover outstanding sovereign debt payments, avoid a default anddevaluation of the hryvnia currency, inject cash into theeconomy and ramp up social spending to keep voters happy.
The EU was unable to offer such financial backing, Frolovsaid. He added: "As someone from the EU observed, Brusselsentered the knife-fight with a baguette."
Arseny Yatsenyuk, a Ukrainian opposition leader and formereconomy minister, said that with the deal Yanukovich had secureda guarantee that he will win a second term in 2015.
For Putin, the battle over Ukraine is his second big foreignpolicy success in the last few weeks.
Russia helped broker a deal under which Syria agreed todestroy its chemical weapons, averting the imminent threat ofU.S. military strikes and allowing Putin to portray himself as apeacemaker in the civil war.
