Following a year featuring a series of political and financial challenges, Ukraine is expected to fulfill its annual socioeconomic development tasks for 2013 and keep the economy out of recession. PLAYING TUG OF WAR WITH RUSSIA Ukraine, which won independence from the former Soviet Union in 1991, voiced its commitment at the beginning of 2013 to sign political-economic partnership agreement with the European Union (EU) by the end of the year, in a landmark move towards the country's integration into the 28-member bloc. Kiev's westward step aroused strong reaction from Russia, which banned imports from major Ukrainian candy maker Roshen and introduced rigorous checks of Ukrainian goods crossing its border. These actions, according to the Kremlin, were "preventative measures" in preparation for changes in customs procedures if Kiev signs the pact with the EU at a summit in Vilnius on Nov. 28-29, because of an existing free-trade regime between Ukraine and Russia. Analysts described Russia's move as part a "trade war", aimed at pressing Kiev to abandon plans for closer EU integration and instead join the Moscow-led Customs Union (CU) of Russia, Belarus and Kazakhstan. Some warned that the new customs regime may cost Ukraine billions in losses and may led to economy stagnation over falling exports. On the eve of signing the landmark agreement with the EU, Ukrainian Prime Minister Mykola Azarov said improving relations with Russia was Kiev's top priority. Meanwhile, President Viktor Yanukovych stated that upgrading Ukraine's industry to European standards, part of the bilateral deals, may become a burden to the public finances of the Eastern European economy. Analysts here were divided over the statements of the authorities. Some experts attributed Kiev's desire to improve relations with Russia to the deplorable state of the Ukrainian economy, while others tossed up speculations that Kremlin has offered advantageous compensation for refusing to sign the agreement with the EU. Just a week before the long-anticipated summit in Vilnius, the Ukrainian government decided to suspend preparations for the historic political and trade agreement with the 28-member bloc, citing the interests of "national security". Kiev said it needs time to fully analyze the impact of the agreement on Ukraine's economic relations with the Commonwealth of Independent States(CIS) members. CURBING POLITICAL UNREST Kiev's sharp eastward shift sparked mass protests in the capital city of Kiev and other major cities. Furious about the government's decision, thousands people ranging from students to pensioners, took to the streets to force Yanukovych to sign the long-awaited agreement with teh EU. While experts doubted the pact will deliver quick benefits to Ukraine, ordinary citizens had exaggerated expectations from the agreement, experts say. "Society has unrealistic expectations from the association with the EU, which resulted in protests," Vladislav Starinetz, an economist, said. The demonstrations in Ukraine started on Nov. 21, first as peaceful rallies, but later snowballed into violence. Tensions escalated on Nov. 30, when riot police broke up the protests in downtown Kiev. The confrontation between pro-EU demonstrators and riot police peaked on Dec.1, when some provocateurs threw fire flares and stones at officers and ordinary protesters, causing multiple injuries and resulting in arrest of dozens. Although the government promised to punish those responsible for the conflict, whether police or protesters, the rallies have not subsided. Another wave of clashes came on Dec.11, when riot police stormed protests camps in the Independence Square, causing a number of casualties. To ease the tensions, the president adopted a resolute decision to hold a roundtable between the authorities, public figures and opposition leaders. The dialogue resulted in moderate understanding between the sides. Analysts believe that the nationwide dialogue was crucial for Ukraine, which faced a risk of being divided, as the European integration is largely supported by people in western and central regions, while citizens from southern and eastern parts of the country focus on closer cooperation with Russia. SAVING ECONOMY FROM DEFAULT In early December, some local analysts sounded alarm over the state of the Ukrainian economy, warning that the huge spending commitments could force it into default. Ukraine, which has been in a recession since mid-2012, has to repay around 12 billion U.S. dollars to its foreign lenders in the coming year. Analysts warned that the country's shrinking foreign exchange reserves, which stood at their lowest level in eight years, and huge budget deficit, which accounted for 8 percent of its GDP, are also major threats to the financial system. To avoid a possible bankruptcy, Ukraine has asked the EU to offer 27.5 billion dollars in financial aid, but the 28-member bloc failed to grant the loan. As talks with the International Monetary Fund stalled over Kiev's unwillingness to fulfill the requirements to raise gas prices for households and to set up a floating exchange rate, Ukraine has no choice, but to turn to Russia for money, analysts say. Moscow agreed to buy 15 billion dollars worth of Ukrainian government bonds and slash the price of natural gas exports to Ukraine during a meeting between Yanukovych and his Russian counterpart Vladimir Putin in Moscow on Dec. 17. Local analysts and government officials were optimistic about the impact of the agreements with Russia on the Ukrainian economy. Prime Minister Mykola Azarov described the agreements with Russia as a "turning point" for his country's industrial and economic development. "With the agreements, we acquired a confidence that we can keep the country's social, economic and financial stability," Azarov said. Economists here have interpreted Russia's bailout as an opportunity for Ukraine to avoid a financial collapse. "Ukraine got a chance to avoid a default, improve the balance of payments and get out of the difficult economic situation," said Mikhail Pogrebinsky, head of the Kiev-based Center for Political Studies. Moscow's decision to cut the price of its gas supplies to Kiev by a third from the current cost of 410 dollars per 1,000 cubic meters will also have a positive impact on the Ukrainian economy, experts suggested. "Reducing the cost of gas for Ukraine is a very important economic factor, because our economy relies on Russian gas for its heavy energy-intensive industry," said Mykola Ivchenko, head of information-analytical center Forex Club. Analysts anticipated the agreements with Russia will also increase Ukraine's market liquidity and restore the confidence of foreign investors and, in turn, prevent an economic catastrophe that was hanging over Ukraine like the sword of Damocles.