Ukraine heads for clash with Russia over EU deal

Ukraine is preparing to take the first crucial step towards the European Union but is risking a historic deterioration in political and economic ties with its powerful neighbour Russia.

As the post-Soviet nation gears up to sign a landmark Association Agreement with the EU at a summit in Vilnius in late November, a tug-of-war is intensifying between Moscow and the West over Ukraine's moves to seek closer ties with the bloc.

As Brussels encourages the ex-Soviet nation to become part of Europe and embrace Western values, Kiev's former Soviet master Moscow threatens its already struggling neighbour with new economic hardships if it signs on the dotted line at the November 28-29 summit.

Dozens of high-profile guests including the US power couple Hillary and Bill Clinton and former British Prime Minister Tony Blair descended on the balmy shores of the Black Sea resort town of Yalta at a forum to discuss Ukraine's signing of the EU deal which includes a free-trade agreement.

Most Western guests at the annual forum made no secret of their desire to see Ukraine move closer towards the EU and away from Russia.

"We, the USA, are for Ukraine's integration into Europe. Closer relations between Ukraine and the European Union will be of benefit both for Ukraine and Europe, and the whole world," said Hillary Clinton, who is seen as an early Democratic frontrunner to succeed US President Barack Obama.

Referring to Ukraine's wealth of natural resources, Clinton also pointedly praised the country's "excellent chocolate sweets which could, and should, be exported to many countries all over the world."

The comment was seen as an anti-Kremlin dig after Russia banned chocolate imports from Ukraine over safety concerns in July.

The controversial ban came days after Russian President Vladimir Putin travelled to Ukraine for talks with his Ukrainian counterpart Viktor Yanukovych whose decision to favour EU membership over a Russian-led Customs Union infuriated the Kremlin.

With no progress apparently made, Russian customs later introduced a blanket ban on all Ukrainian imports in a move the Kremlin acknowledged was designed to give Ukraine a foretaste of things to come if Ukraine moves closer to Europe.

Putin has warned Kiev that Russia could not simply stand by if Ukraine opted for a political and trade tie-up with the EU that will open up European markets for Ukrainian exports.

'Who will pay for Ukraine's default?'

The Kremlin stepped up its campaign of intimidation at the Yalta conference, painting a doom and gloom vision of a Europe-aligned Ukraine struggling with crises and default.

"If Ukraine signs the agreement with the European Union and its trade balance worsens, who will pay for Ukraine's default which will be inevitable?" said Sergei Glazyev, a Putin economic aide and the Kremlin's sole representative at the forum.

"Ukraine's foreign exchange reserves will only last six months. Is Europe ready to take upon itself the burden of such a financial responsibility?" Glazyev said.

The war of words has already negatively affected Ukraine's financial standing.

Moody's on Friday lowered the country's Ukraine's bond rating by one notch to Caa1, saying government reserves were running dry and possible problems with Russia also clouded its future.

Even if Ukraine's economic future looks anything but certain, the country of 45 million is pressing ahead with its efforts to leave Moscow's sphere of influence.

The government last week approved a draft of the Association Agreement and Prime Minister Mykola Azarov laughed off Russia's threats.

"I can upset Russian experts a little: nothing will collapse," Azarov said, referring to the threat of default.

"We will work together and help you on the way," said British former prime minister Blair.

'Request on Tymoshenko is still on the table'

A key obstacle on the Ukraine's path to the EU deal remains the imprisonment of the ex-prime minister Yulia Tymoshenko, who was sentenced in October 2011 to seven years in jail on abuse of power charges.

Top European officials have repeatedly said that the Tymoshenko case remains the "number one" condition for the signing of the agreement.

"Requests from the EU on Tymoshenko's case are still on the table," Lithuanian President Dalia Gribauskaite said in Yalta.

An EU envoy and former Polish president Alexander Kwasniewski confirmed that if Tymoshenko is sent abroad for treatment it would directly open the way to sign the deal with EU.

But Yanukovych has repeatedly refused to give any ground over the Tymoshenko dispute.

He reiterated that it was only up to courts to decide whether to free Tymoshenko but noted that he had yet to make a final decision.

"We still have time," Yanukovych said. "We have not so far said 'yes' or 'no.'"

Tymoshenko has insisted her imprisonment was ordered by Yanukovych in a bid to eliminate a dangerous opponent from political life ahead of 2015 presidential polls.