CORRECTED-Russian bailout wins Ukraine economic respite but deepens political rift

Tue Dec 17, 2013 6:37pm EST

(Corrects day in third paragraph to Tuesday)

* Russia to buy Ukraine bonds, cut gas price

* Kiev needs to fund $17 bln foreign funding gap next year

* Anti-government protest planned in capital

* Merkel warns against "bidding competition" for Kiev

By Darya Korsunskaya and Timothy Heritage

MOSCOW, Dec 18 (Reuters) - Ukraine's President Viktor Yanukovich has secured a $15 billion bailout from Russia, offering respite for an economy heading ever closer to default but also drawing accusations he has sold his country out to its former Soviet master.

By grasping the lifeline thrown by Russian leader Vladimir Putin, Yanukovich reignited demands for his resignation by opponents at home already enraged by his decision to walk away from a trade and political deal with the European Union.

Tens of thousands of protesters gathered in Kiev after Yanukovich accepted Putin's offer on Tuesday to buy Ukrainian bonds and cut the price of Russian gas exports, a deal which keeps Kiev firmly in Moscow's orbit.

"We want to go towards Europe, not Russia, that's our choice," said Yulia, a student protester, after news of the agreement struck when the two presidents met in the Kremlin.

Opposition leaders have called for mass rallies over the holiday season on a central square occupied for weeks by protesters, who have pitched tents behind tall barricades.

"He has given up Ukraine's national interests, given up independence," Vitaly Klitschko, an opposition leader and heavyweight boxing champion, told the crowd on Tuesday.

Ukraine urgently needs money to cover an external funding gap of $17 billion next year - almost the level of the central bank's depleted currency reserves - and avoid defaulting on its debts.

Underlining the depth of the problem, Russian Finance Minister Anton Siluanov said Moscow would buy $3 billion worth of Ukrainian Eurobonds as early as the end of this week, marking the first installment in debt purchases that will total $15 billion.

However, the United States warned Kiev the deal would not satisfy the protesters and German Chancellor Angela Merkel said ties with Russia should not prevent Kiev from looking West.

"At the moment it seems to be an either-or proposition. ... We need to put an end to this," Merkel told ARD TV. "A bidding competition won't solve the problem."

Ukraine is caught between Western powers, keen to coax the country into an embrace on the EU's borders, and Moscow which has historically held sway over Kiev.

Putin seems determined to stop Ukraine, by far the most populous former Soviet republic after Russia, from building a new and close relationship with the EU.

Sitting side-by-side in a gilded Kremlin hall, Putin and Yanukovich rubbed shoulders and laughed while documents were signed on reducing trade barriers for Ukraine.

Moscow also offered relief on Kiev's gas bill. Russia's Gazprom has slashed the price Ukraine will pay for supplies to $268.5 per 1,000 cubic metres from about $400.

In an apparent dig at demands made by the EU under the deal it had offered Kiev, Putin said Russia's assistance was "not tied to any conditions" - including Ukraine's accession to a Russian-led customs union of former Soviet republics.

"Ukraine is our strategic partner and ally in every sense of the word," Putin said.

INVESTORS ENCOURAGED BUT SEE RISKS

The deal boosted the price of Ukraine's dollar debt. Investors said it would stave off the immediate threat of default or a currency crisis but would put a heavy burden on Russia, whose own economy is stuttering.

"This is a rescue. Without that money, Ukraine would have defaulted sometime before the middle of next year," said Chris Weafer, senior partner with consultancy Macro-Advisory.

Yanukovich has been seeking the best possible deal for his country of 46 million but has been criticised in the West after police used force against the protests in the heart of Kiev.

Moscow, accused by European officials of bullying Kiev into dropping the EU deal last month with the threat of economic retaliation, now has great financial leverage over Ukraine,

If it withdraws its money and alters the gas price, it could pull the plug on its neighbour. Putin appeared to stress this by saying the agreements on the gas price was temporary.

Putin wants to bring Ukraine's large, mineral-rich market into a Eurasian Union he plans to build with Kazakhstan, Belarus and other ex-Soviet republics to match the economic might of the United States and China.

For those Ukrainians who regard Moscow as their oppressor, close relations the EU offer a way to rid their country of corruption, civilise its political elite and move toward democracy and prosperity.

"Yanukovich made a massive mistake. He'd better not come back here, he'd better stay in Moscow," said Deni Deyak, a businessman at the pro-Europe protest in Kiev. (Additional reporting by Lidia Kelly in Moscow, Gabriela Bacynska in Kiev, Justyna Pawlak in Brussels and Noah Barkin in Berlin; Writing by Alissa de Carbonnel; editing by David Stamp)