UPDATE 1-EU loses out on Ukraine, but may have dodged a bullet
* Ukraine turns its back on EU deal, looks to Russia
* Decision a geopolitical blow, but a relief for EU too
* Ukraine economy in trouble, investors on edge
(Adds quotes from European Commission, paragraphs 10-12)
BRUSSELS, Nov 22 (Reuters) - In post-Soviet Europe, Russia looks to have won a decisive victory by convincing Ukraine to reject a trade deal with the European Union and deepen ties with Moscow instead.
But the EU has reason to breathe a sigh of relief, too.
Once any sense of rejection or thwarted ambition passes, the reality remains that taking Ukraine under its wing, a highly indebted country of 46 million people stricken by corruption and unpredictable politics, could have proven a costly and difficult burden for the EU, at least in the short term.
And in the longer term, it remains possible that Ukraine will turn its gaze back to the West and seek to reopen talks on deeper EU trade and political ties, although that is now unlikely to happen until after Ukrainian elections in 2015.
In explaining its decision to reject the deal, due to have been signed at a summit in Vilnius next Friday, Ukraine's prime minister put it down to economic pragmatism, and sought to keep alive the idea of strategic ties with the EU in the future.
"The decision the government has made is based on economic reasons," Mykola Azarov told parliament on Friday, a day after he stunned many by rejecting the deal. "It is of a tactical character and does not change our strategic objectives."
At the same time, the EU's foreign policy chief, Catherine Ashton, was careful to keep the hand of cooperation extended to Ukraine, in case Kiev changes its mind down the line.
"We believe that the future for Ukraine lies in a strong relationship with the EU," she said in a statement on Thursday acknowledging Ukraine's rejection and warning about the impact it's likely to have on foreign investment in Ukraine.
"We stand firm in our commitment to the people of Ukraine, who would have been the main beneficiaries of the agreement."
A spokeswoman for the European Commission, Maja Kocijancic, said: "Ukraine wasn't a prize to be won. It was a relationship we started to build a long time ago."
Since the launch of its Eastern Partnership programme in 2009, a plan to forge closer ties with six former Soviet states, the EU has expended a lot of time, money and diplomatic effort in trying to bring the countries closer into its fold.
Of the six, Ukraine, with its rich mineral resources, vast land mass bordering four EU member states and annual output of more than $300 billion, was always the biggest prize.
But being close to Russia, which regards Ukraine as culturally its own and maintains close links to the country, especially the Crimea region, it was also a risky prize.
For that reason, as much as the EU played up the economic, trade and socio-political advantages of an association agreement with Kiev, it was really about geopolitics.
"The EU always saw itself as someone that wasn't in to playing geopolitical games," said Ulrich Speck, a visiting scholar at Carnegie Europe, a think-tank.
"But the irony is that (Russian President Vladimir) Putin's new assertiveness forced the EU into playing power politics, so this has become largely a geopolitical game."
Had the EU won the game, it might have proven an uncomfortable victory, at least in the short-term.
Not only was Russia threatening to cut off gas supplies to Ukraine, which would have meant the EU having to find a solution, but Ukraine's currency is being artificially propped up, its debt is rated "junk" and it is battling to agree a financial aid package with the IMF.
What's more, the EU had set three "benchmarks" for Ukraine to meet before signing the deal, including putting an end to "selective justice", symbolised by the imprisonment of former prime minister, Yulia Tymoshenko.
Even if the EU and Ukraine had gone ahead and signed the deal in Vilnius next week, the likelihood is that Tymoshenko would have remained in custody, at least in the near term. That would have been a stain on the EU's conscience, a troubling issue many EU diplomats were struggling to ignore.
With the deal now off, the EU no longer has to worry about having to look away from gaps in Ukraine's justice system, its politics and corruption. Ukraine is now Moscow's problem. It still owes Russia's Gazprom nearly $1.3 billion in unpaid bills.
Still, on the EU side, there is a sense of having been outmanoeuvred by Moscow and of having been naive.
One EU foreign minister said the EU had been misled by politicians who had no interest in a European future but were playing Russia and Europe off against one other and selling Ukraine to the highest bidder.
With Tymoshenko - Ukrainian President Viktor Yanukovich's personal nemesis and potential challenger in 2015 - remaining behind bars and no obligation to clean up politics and corruption in the way the EU deal would have demanded, Yanukovich's re-election may be more likely.
Russia, too, may feel more inclined to throw its weight - and that of Russian-speaking voters in Ukraine - behind the president, securing him another five-year term.
At that point, after 2015, he may turn his focus back to Europe and see what options there are for re-opening talks, especially if he is to satisfy the majority of voters, who say they want Ukraine to have closer ties to the EU.
"Ukraine may continue to balance Russia and the EU, and both may continue to try to bring Ukraine into their sphere, the Kremlin with threats, and the EU with attraction," said Speck.
"Both integration paths have strings attached that may be simply unacceptable to Yanukovich. But both are unlikely to compromise on what they consider their core interests."
(Writing by Luke Baker; additional reporting by Paul Taylor; editing by Janet McBride and Will Waterman)