The European Union told Ukraine it was risking its economic future by rejecting a free-trade deal in favour of closer ties with Russia, hours before a frosty encounter last night between EU leaders and President Viktor Yanukovich.

Yanukovich flew into the Lithuanian capital Vilnius in time for a dinner in honour of the Eastern Partnership, the EU’s four-year-old outreach programme for former Soviet republics, including Ukraine.

He had been expected to sign a far-reaching free-trade and political association deal with the EU at the Vilnius summit, the result of years of negotiation.

But last week, following intense pressure from Moscow and growing concerns about Ukraine’s dire economic situation, Yanukovich announced he was not ready to sign the EU deal yet and would instead focus on reviving economic dialogue with Russia.

EU enlargement commissioner Stefan Fuele yesterday said Ukraine’s decision to walk away from the agreement could imperil its future.

Disputing Ukraine’s estimates that upgrading its economic base to European standards would cost $20 billion a year, Fuele said: “The Ukrainian economy needs huge investments, but these are not costs. They represent future income, more growth, more jobs and more wealth.”

“The only costs that I can see are the costs of inaction allowing more stagnation of the economy and risking the economic future and health of the country,” he told a business forum in Vilnius, adding the EU offer remained on the table.

Yanukovich himself set the scene for a chilly reception by dismissing the EU’s trade offer as “humiliating”. The €600 million, or so, of support on offer was “candy in a pretty wrapper”, he said.

But his presence at the EU gathering – without signing the agreement – indicates he does not want to burn his bridges with the EU and leave his country’s economic future solely to Russia, which wants Kiev to join a Moscow-led trade bloc. His government says the suspension of the EU deal marks only a “pause” in moves to integrate Ukraine into Europe’s mainstream.

The EU side, however, said there was no readiness to enter into a geo-political bargaining game over Ukraine, likely a reference to possible increased financial aid.

“It was never a bazaar for billions. It was a question of giving Ukraine and the Ukrainian economy access to the largest integrated economic market in the world,” said Swedish Foreign Minister Carl Bildt, who warned that Yanukovich’s decision to abandon the EU deal left it vulnerable to pressure. Yanukovich has already accepted short-term support from Moscow.