* 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 to return to Mother Russia's bear hug after a flirtation with western Europe can be traced back to a secretive meeting of their two presidents two weeks ago.
The country of 46 million, squeezed between the European Union and Russia, on Thursday froze plans to sign a trade pact with the EU which would have marked a historic shift away from its former Soviet masters in Moscow.
Ukraine said on Friday the move was tactical and motivated only by economics. Russia denied using economic and political pressure to blackmail Ukraine into submission.
But Russian government sources said President Viktor Yanukovich's decision had become all but inevitable after a mysterious meeting with Russian President Vladimir Putin in Moscow on Nov. 9 about which almost nothing has been reported.
"It turned out beautifully - like stealing the bride at the altar," an unnamed government official told the Russian business daily Vedomosti. "Everything changed after the meeting."
Another senior Russian official described the meeting to Reuters as part of intensifying bilateral contacts as the signing of the planned EU-Ukraine trade pact in the Lithuanian capital Vilnius on Nov. 29 loomed.
At the one-on-one meeting, this person said, Putin's message to Yanukovich was clear: join Russia in a Moscow-led customs union and in return Ukraine will receive cheaper gas from Russia and escape trade sanctions.
"We made clear to him that if he signs the agreement (with the EU), he will lose a lot immediately, that we will block Russian markets for Ukrainian goods, while the gains might not be there for years to come."
But if he joins the Customs Union "he will have immediate advantages, including gas discounts," the senior Russian government official said.
Until the Moscow meeting - which Ukrainian media said went on until 5 a.m. - Yanukovich and his team had stuck, publicly at least, to their commitment to move their country out of Russia's sphere towards the brave new world of Europe.
This was despite tense negotiations, almost daily, between the EU and the Yanukovich leadership over the continued imprisonment of opposition leader Yulia Tymoshenko, whom the EU see as the victim of a political trial.
Officials said both the Russian and Ukrainian sides had agreed not to discuss the Moscow meeting publicly.
Mykola Azarov, Ukraine's dour prime minister who is not given naturally to hyperbole, waxed lyrical last September about the benefits that would come from association with the EU.
"We all want fresh air, quality water, safe food products, a good education for our children, contemporary medical service, a reliable right to justice. These are not abstracts, but norms and rules which exist already in the European Union and which we need in Ukraine," he said, announcing government approval to sign the agreement.
Undeterred as the Ukraine-EU romance blossomed, Moscow kept up niggling reminders to Ukraine of its economic clout. Russian customs officers conducted arbitrary border checks on trucks coming in from Ukraine, causing bottlenecks and economic losses.
In late October, Russian state gas monopoly Gazprom announced that Ukraine had failed to settle an outstanding gas bill for $882 million.
A Kremlin aide at an international conference in the Ukrainian resort of Yalta warned Ukraine it was heading for bankruptcy by teaming up with the EU.
Putin and Yanukovich met in the Black Sea resort of Sochi to discuss "the concern" that the future EU-Ukraine pact was causing to Russia, the Ukrainian Foreign Ministry said.
MOOD MUSIC CHANGED
But it was only after the two men met again in Moscow this month that the mood music suddenly changed in Kiev.
Oleksander Yefremov, parliamentary leader of Yanukovich's Regions Party, suddenly began to speak of the impact Ukraine's dealings with the EU would have on the economy in terms of lost trade with Russia and employment.
"Agreement should not be accepted at any price. If we don't sign association with the EU ... it won't be the end of the world. The sun won't stop coming up. But at least we'll have our self-respect, knowing that we are a state and not somebody's puppet," he said.
Yanukovich himself spoke of the huge cost that modernising Ukraine's industrial base to European standards would require.
And Azarov abruptly ceased to speak of Ukraine's prosperous future in the West. At a cabinet meeting on Nov. 13, he placed unusual emphasis instead on the need to repair relations with Russia to help Ukraine's heavily indebted economy.
"The closer we get to the summit, the clearer it becomes that the authorities do not want to sign because the association agreement means the introduction of European standards which is the path that Yanukovich's authorities do not want," remarked Vitaly Klitschko, a world heavyweight boxing champion who has become a politician and plans to run against Yanukovich in 2015.
A two-hour meeting between Azarov and Russian Prime Minister Dmitry Medvedev on Wednesday appears to have completed the discussions bringing Ukraine and Russia together.
A signal that a deal was in the works had come with the news last week that Ukrainian energy firm Naftogaz had resumed imports of Russian gas after a hiatus that had deprived Russia of revenues, and talks had begun on settling its arrears.
Gazprom agreed to give Naftogaz more time to pay its $1.3 billion debt and promised not to switch over to a system under which it would demand advance payments, Russian media reported.
Valentin Zemlyansky, an independent Ukrainian analyst, said Kiev would now hope for a big cut in the price of Russian gas on which it depends heavily.
"In the gas sector we could expect a revision of the current contract with Gazprom and a decrease in the price of gas for Ukraine to no more than $250 per 1,000 cubic meters from the current $400," he said.
But Ukrainian projects with Shell, Chevron and other companies to develop shale gas could, he said, "move from the category of absolutely necessary to the category of just possible."
TUG OF WAR
Brussels said the deal planned with Ukraine would have boosted investment in the country, which has billions of dollars in debt payments looming next year.
Russian leaders were appalled that Ukraine might move out of its sphere of influence. The most populous of the states that Moscow lost direct control of when the Soviet Union split in 1991, it is closely bound to Russia historically and culturally.
The tug-of-war over Ukraine ended in a victory for Putin which he will use to burnish his image as a statesman and Russia's protector on the world stage as he tries to win back popularity after street protests last year.
The Eurasian Union trading bloc which Putin is building is one of the main platforms of his third term as president, and including Ukraine's big market is vital for its credibility.
As former U.S. National Security Adviser Zbigniew Brzezinski once put it: "Without Ukraine, Russia ceases to be an empire".
For the 28-nation EU, Ukraine's decision was a setback that underlined the difficulties of trying to do business in countries which Russia regards as its back yard.
Luring Ukraine westward has been a strategic objective for the EU, trying to tear down the last remnants of the old Iron Curtain. The EU also lost out to Russia in August when another former Soviet republic, Armenia, suddenly dropped its bid to sign 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 by corruption, its politics are unpredictable and the new alliance could have been a costly burden for the bloc in the short-term.
PYRRHIC VICTORY?
It may also be a Pyrrhic victory for Putin. Ukraine must find more than $17 billion next year to meet gas bills and debt repayments, and has no loan agreement in place with the International Monetary Fund to help it through. Its economy is expected to shrink by 1.5 percent in 2014.
Russia is also perilously close to recession and the burden Kiev puts on Moscow could be heavy, depending on the terms of the deal it has agreed with Ukraine.
There is also no guarantee Yanukovich intends to steer Ukraine into the Russian-led Customs Union. Kiev has not closed the door entirely on moving closer to Europe, even if the EU may not see much chance of progress while Yanukovich is president.
An important aim for Yanukovich was to secure favourable economic and political conditions to weather economic troubles in the next two years and secure re-election in 2015.
Moscow-based foreign policy analyst Vladimir Frolov estimated that he would need from $15 billion to $25 billion to cover outstanding sovereign debt payments, avoid a default and devaluation of the hryvnia currency, inject cash into the economy and ramp up social spending to keep voters happy.
The EU was unable to offer such financial backing, Frolov said. He added: "As someone from the EU observed, Brussels entered the knife-fight with a baguette."
Arseny Yatsenyuk, a Ukrainian opposition leader and former economy minister, said that with the deal Yanukovich had secured a guarantee that he will win a second term in 2015.
For Putin, the battle over Ukraine is his second big foreign policy success in the last few weeks.
Russia helped broker a deal under which Syria agreed to destroy its chemical weapons, averting the imminent threat of U.S. military strikes and allowing Putin to portray himself as a peacemaker in the civil war.
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