Facing its most important economic crossroads since the collapse of the Soviet Union, Kiev has aligned itself closer to Russia, and has suspended preparations to sign an EU trade deal.

Ukraine will “restore an active dialogue” with the Customs Union and the CIS. Economic and foreign ministers have proposed that Ukraine, Russia, and the EU create a three-way commission to improve and strengthen trade relations. 

Putin's spokesman, Dmitry Peskov, said Russia welcomed Ukraine's desire to actively develop ties with Moscow, and Putin added he wasn't completely against Ukraine's association with EU.

Putin said he supports the idea of trilateral trade talks, but only up until Ukraine signs an association agreement with the EU. 

"We favor this, but only before decisions are made. How can we hold negotiations on issues that have already been agreed upon and endorsed? What is our role in such negotiations? It's equal to zero, but we are surely prepared for such a discussion if it is substantial," Putin said Thursday in Moscow. 

After the decision, thousands of Ukrainians took to the streets in protest, chanting ‘Ukraine is Europe’ and many have taken to social media, and are expressing their disappointment in the government's decision to pivot away from the EU.

Opposition parties are organizing a demonstration for November 24 in Kiev. The timing coincides with the ninth anniversary of the Orange Revolution of November 2004 to January 2005. Demonstrators then used the political cry of “westernize” Ukraine, and that eventually led to Yanukovych taking the presidency in an election many believe to have been rigged.

The EU called the landmark move away from Europe "a disappointment not just for the Union, but for the people of Ukraine." 

EU foreign policy chief Catherine Ashton said the signing of the pact "would have provided a unique opportunity to reverse the recent discouraging trend of decreasing foreign direct investment in Ukraine and would have given momentum to negotiations on a new standby arrangement with the IMF." 

Ukraine's president, Viktor Yanukovych, said he still had his eye on integration with the EU, and he plans to attend the Vilnius summit on November 28. 

“We still have a bit to go to the top. We do not fear difficulties and are confident that we will continue towards European integration,” Yanukovych said Thursday.

“If there is no deal in November, Putin will have won a resounding psychological victory – most everyone in the EU would want to prevent that, and Yanukovych counts on it,” Dmitry Trenin told RT ahead of the decision.

Yulia Tymoshenko (Reuters / Gleb Garanich)

Tymoshenko prison deadline

The deadline for Ukraine to meet all criteria necessary to join the EU trade association was initially set for November 18, and then was later moved to November 21. 

Initially, the signing of the Association Agreement between Ukraine and EU was scheduled to take place at the Vilnius summit on November 28, but on November 21 the parliament rejected a bill that would allow jailed former Prime Minister Yulia Tymoshenko to travel abroad for treatment. Europe is unlikely to approve the deal as long as she remains in prison. 

Experts say Ukraine hopes to act as a bridge between Russia and the EU, but Russia has made it clear there will be no bridge if Ukraine formalizes its relationship with the EU, and they would have to give up their "exclusive relationship" with Russia.

An EU envoy has been in Kiev all of November preparing conditions for Ukraine to enter the EU trade association at the Eastern Partnership Summit in Vilnius.

Tymoshenko was jailed in 2011 for a gas deal she brokered with Gazprom in 2009, a charge seen as politically motivated by the EU.

Putin’s Customs Union

Ukraine’s sizable economy (worth about $155 billion a year) and resource-rich land have both Moscow and Brussels eager to strike exclusive trade deals. 

If Kiev chooses to pursue EU membership, it will foil Putin’s long-term ambition to create a trade bloc to rival the EU, which so far includes Belarus and Kazakhstan. Armenia has also expressed its intentions to join Russia’s trade orbit. 

Russia has warned Ukraine that a step west toward joining the European Union would be "trade suicide" and result in billions in lost trade revenue - and that joining the Russia-led Customs Union is more beneficial. 

Both deals are appealing to Ukraine. On one hand, by siding with Russia, Ukraine continues to foster good relations with its neighbor, which imports nearly 25 percent of Ukraine’s exports. 

On the other hand, moving west to Europe would save Ukrainian exporters nearly $490 million over 10 years, as 95 percent of goods would have zero customs duties, according to the European Commission.

Europe has been courting Ukraine into an associate trade membership for the past four years, which has created a geopolitical battle with Russia.

All sides have employed much political brinkmanship in the period leading up to the trade deal. Ukraine threatened to stop buying Russian gas, and Moscow stoked speculation there would be another gas war between the two neighbors, which would leave Ukraine without enough heat to last the winter.

Reuters / Yuri Maltsev

Gas divorce?

Over the last decade Ukraine and Russia have both been trying to sever their complicated gas relationship. Gazprom has been building a maze of pipelines to circumvent Ukraine to deliver gas to Europe, and Ukraine has been wooing foreign companies in joint ventures in shale and offshore reserves.

After Naftogas, Ukraine’s state-owned oil and gas company, said it was cutting ties with Gazprom, Yanukovych contradicted the statement saying he “hoped for a compromise” with Russia.

Former Ukraine Prime Minister Yulia Timoshenko signed a ‘pre-pay’ contract with Gazprom in 2009 and was later jailed on charges of abuse of power.

Since the pre-pay contract was established, Ukraine has complained about expensive gas prices, which average around $400 per 1,000 cubic meters, one of the highest in Europe. Ukraine currently imports more than half of its gas from Russia, but both countries are making efforts to cut down on business. 

Russia and Ukraine waged two gas wars over prices in the winters of 2006 and 2009 (which lasted 3 weeks) over a claim that Ukraine was late in paying.

Debt and downgrades

Ukraine’s depreciating currency reserves and massive deficit have brought it close to economic collapse, and an IMF bailout of between $10 billion and $15 billion could be needed in the near future.

Russia holds a significant portion of Ukraine’s sovereign national debt. 

The at-risk currency has prompted the big three rating agencies to downgrade their outlook on Ukraine. Fitch downgraded Ukraine’s long-term foreign local currency issuer default rating to ‘B-‘ from ‘B’ following S&P’s downgrade of its debt rating  to ‘B-‘ - the same junk level as Greece and Cyprus. Moody’s cut its rating to Caa1 from B3 in September putting them at “very high default risk.” 

Ukraine’s government reserves are so depleted they may no longer be able to keep national energy company Naftogaz afloat, and may be forced to find a foreign buyer.

US money manager Franklin Templeton picked up $5 billion of Ukraine’s international debt, nearly a fifth, in August. 

• A Permanent Economic Emergency