* Ukraine aims to sign free trade deal with EU in Nov
* Russia says deal threatens to squeeze Russian goods
* Kremlin has warned of protective trade measures
By Richard Balmforth
KIEV, Aug 28 Ukraine's prime minister, seeking to ward off Russian pressure, urged Moscow on Wednesday to accept his country's drive towards a new trade relationship with the European Union as a "reality".
Clearly alluding to Kremlin threats of possible retaliatory trade moves, Mykola Azarov said: "The whole world is changing, the global system of economic relations. But to build a fence to protect yourself from changes using artifical barriers is simply pointless."
The former Soviet republic hopes to sign key agreements with the European Union in November, including one on free trade, which will mark a shift in its traditional close economic relationship with Russia, its biggest single trading partner.
The prospect of EU goods entering Ukraine, free of import duties, and then being re-exported to Russia and posing competition for Russian goods has caused alarm in the Kremlin and calls for Kiev to halt its drive towards Europe.
Firing a warning shot towards Kiev, Russia this month imposed laborious extra customs checks on Ukrainian imports over several days, causing delays at the border.
Russian President Vladimir Putin said the Russia-led Customs Union, which also includes Belarus and Kazakhstan, might take "protective measures" to defend its markets.
A Kremlin aide told Ukraine on Tuesday it would lose its "strategic partner" status if it signs association agreements with the 28-member EU bloc at Vilnius, Lithuania, in November.
The pressure has led to talk of a trade war in Kiev and injected new tension into Moscow's relationship with Ukraine, which has pleaded unsuccessfully for a lower price for strategic supplies of Russian gas to bring relief to its economy.
It comes at a time when Ukraine faces record payments to service foreign debt, including to the International Monetary Fund, and when foreign currency reserves are below the safety threshold of three months worth of imports, analysts say.
Ukraine's economy relies on exports of steel, chemicals and grain. More than 60 percent of its exports go to the former Soviet market, with Russia, Belarus and Kazakhstan the most important.
But Ukrainian big business sees greater prosperity in European markets and has resisted entreaties by Moscow to join the Customs Union - a move which would be incompatible with a free trade deal with Europe.
Azarov, who met Russian Prime Minister Dmitry Medvedev in Moscow on Monday to try to calm Russian concerns over trade, told his cabinet that no matter what the circumstances were, Ukraine wanted to increase the volume and quality of trade with Russia in the future.
For that reason, he said, "drawing up new dividing lines is not in the interests of our peoples."
He said a 10-year grace period after the signing of the Association Agreement with the EU would give Ukraine and Russia the chance to adjust to the new reality, according to the principles of the World Trade Organisation of which both are members.
He said Ukraine had accepted the formation of the Customs Union on its borders and the plans to upgrade it from January 2015.
"In the same way, after signing the Association Agreement with the EU, Ukraine will create a free trade zone with the EU - this also has to be inevitably accepted as a reality," he said.
It is by no means a foregone conclusion that the association and free trade agreements will be signed in Vilnius in November.
Many EU member states are disappointed at the pace of democratic reform in Ukraine since President Viktor Yanukovich was elected in February 2010 and are pressing particularly for the release from jail of former Prime Minister Yulia Tymoshenko, his fiercest political adversary.
Tymoshenko was jailed in late 2011 for seven years for abuse of office after what the EU says was a politically-motivated trial.
Speaking in Brussels on Tuesday after meeting Yanukovich's point man on European integration issues, EU enlargement commissioner Stefan Fuele indicated the Tymoshenko question had been broached as well as Ukraine's progress on democratic reform to meet specific criteria laid down by the EU.
These relate to reforming the judiciary, ending politically-motivated prosecutions and improving electoral legislation.
"I have emphasised ... the need to ensure determined action and tangible progress on all the benchmarks set out," Fuele told journalists. (Additional reporting by Justyna Pawlak in Brussels; Writing by Richard Balmforth, editing by Elizabeth Piper)