Russian President Dmitry Medvedev ruled out a compromise deal with Ukraine which would have allowed Kiev to pursue free trade pacts with the European Union and a Russian-led regional bloc.

Medvedev said that to secure access to Russia's market and a much-needed gas price discount, Ukraine would have to become a full member of the customs union that Moscow has set up with other former Soviet republics Belarus and Kazakhstan.

The government of Ukrainian President Viktor Yanukovich has rejected similar proposals because joining the Russian bloc is incompatible with Kiev's plans to negotiate a free trade deal with the EU.

"The Customs Union is the highest form of integration and we are really interested in Ukraine joining it as a large, friendly and brotherly European nation," Medvedev told reporters at a military base in the Siberian town of Sosnovy Bor, where he held talks with North Korean leader Kim Dong-il.

"But we cannot agree to Ukraine joining (the union) on some special 'formulas' such as '3+1', saying 'We will sign 20 documents but leave 30 out'."

Medvedev, who met Yanukovich on Aug. 11, was referring to the compromise proposed by Ukraine, under which Kiev wanted to sign a trade pact with the customs union instead of joining it.

He said Ukraine could either become a member of the trade bloc launched in 2010 or follow "a different path".

"But in this case, it will set the background for our future relations and in some cases we will have to use different customs regimes with regards to Ukraine," Medvedev said.

GAS LEVER
Ukraine has been holding separate discussions with Moscow for more than a year on the price of Russian gas, on which it relies heavily.

Under a deal agreed by Ukraine's previous government in 2009, the price of gas is linked to prices of oil and oil products. As a result, Ukraine's gas bill has been steadily rising and is set to increase further this year.

Moscow has repeatedly said it could give Kiev a discount only if it joined the customs union or allowed Russia's Gazprom

to take over Ukrainian state energy firm Naftogaz which tranships about 80 percent of Russian gas sold to Europe.

Medvedev urged Ukraine on Wednesday to do both, citing neighbouring Belarus as an example.

Struggling to overcome a deep financial crisis, Belarus, one of the founding members of the customs union, agreed this year to sell a 50 percent stake in its gas pipeline network to Gazprom which already owns the other 50 percent.

In return the Kremlin promised to give Belarus a gas price discount the size of which has yet to be determined.

"This, I think, is the path our Ukrainian friends should follow," Medvedev said.

Ukraine has rejected all earlier proposals to merge Naftogaz with Gazprom. (Reuters)