By Natalia Zinets and Elizabeth Piper
KIEV/MOSCOW, March 27 (Reuters) - Ukraine won a $27-billion international financial lifeline on Thursday, rushed through in the wake of Russia's annexation of Crimea, as Moscow's economy minister spoke of the cost of military action in its former Soviet neighbour.
The International Monetary Fund announced agreement on a $14-18 billion standby credit for Kiev in return for tough economic reforms that will unlock further aid from the European Union, the United States and other lenders over two years.
The IMF deal, to be approved by the global agency's board next month, was a political boost for the pro-Western government that replaced ousted Russian-backed President Viktor Yanukovich last month, prompting Moscow to seize the Black Sea peninsula.
"The financial support from the broader international community that the programme will unlock amounts to $27 billion over the next two years," an IMF statement said.
The Ukraine crisis has triggered the most serious East-West confrontation since the end of the Cold War a quarter-century ago, deepening the slump in Ukraine's battered economy, centred on coal and steel production, gas transit and grain exports.
Without IMF-mandated austerity measures, the economy could contract by up to 10 percent this year, Prime Minister Arseny Yatseniuk told parliament, explaining why his government had bowed to the Fund's conditions.
"Ukraine is on the edge of economic and financial bankruptcy," he said.
Kiev opened the way for the IMF deal by announcing on Wednesday a radical 50-percent hike in the price of domestic gas from May 1 and promising to phase out remaining energy subsidies by 2016, an unpopular step Yanukovich had refused to take.
It also accepted a flexible exchange rate that is fuelling inflation, set to hit 12-14 percent this year, according to Yatseniuk, and a central bank monetary policy based on inflation targeting.
The prime minister, who took on the job a month ago saying his government was on a "kamikaze" mission to take painful decisions, said the price of Russian gas on which the nation depends may rise 79 percent - a recipe for popular discontent.
The IMF statement said a key element of the programme would focus on cleaning up Ukraine's opaque energy giant Naftogaz, which imports gas from Russia's Gazprom. Naftogaz's chief executive was arrested last week in a corruption probe.
"The programme will focus on improving the transparency of Naftogaz's accounts and restructuring of the company to reduce its costs and raise efficiency," it said.
UKRAINE AIDED, RUSSIA ISOLATED
The international rescue for Ukraine was in sharp contrast to Western measures to isolate Russia diplomatically and charge it an economic price for the annexation of Crimea, home to Moscow's Black Sea fleet and a majority of ethnic Russians.
Targeted U.S. and EU visa bans and asset freezes against senior Russian and Crimean officials, with the threat of tougher economic sanctions to come if President Vladimir Putin goes any further, have accelerated capital flight.
Russian Economy Minister Alexei Ulyukayev said on Thursday capital outflow could be around $100 billion this year, and would slow economic growth to about 0.6 percent.
"If we assume in the first quarter capital outflow was $60 billion ... then (it) will reach around $100 billion for the whole year," Ulyukayev told an investment conference.
"Under this scenario, we estimate that economic growth will slow down to 0.6 percent." The Economy Ministry forecast in January that GDP growth this year would be about 2.5 percent.
The World Bank gave a gloomier forecast for the Russian economy, saying that in a high-risk scenario of persistent tension over Ukraine, Moscow's economy could shrink by up to 1.8 percent, even without Western trade sanctions.
Ukraine's dollar bonds jumped on news of the IMF bailout while Russian stocks were down about 1.5 percent on economic pessimism there.
U.S. President Barack Obama, in the main policy speech of his European tour, warned Russia on Wednesday that it faced growing isolation, incremental sanctions and more severe economic consequences unless it changed course.
In a statement after Ukraine's IMF deal, the White House said: "This represents a powerful sign of support from the international community for the Ukrainian government.
"The IMF programme will be a central component of a package of assistance to support Ukraine as it implements reforms and conducts free and fair elections that will allow all the Ukrainian people to determine the future of their country."
Russian leaders have already said that Ukraine's discount from Gazprom will come to an end next week. Yatseniuk said he expected Moscow to charge Kiev as much as $480 per 1,000 cubic metres of gas from April 1 instead of the current $268.50.
That could exacerbate the country's economic woes and cause political instability in the run-up to a May 25 presidential election.
The European Union signed a political association agreement with Ukraine last week but is holding off from signing a far-reaching trade and economic cooperation pact until a new elected government is in place. (Additional reporting by Pavel Polityuk in Kiev and Lidia Kelly and Jason Bush in Moscow; Writing by Paul Taylor; Editing by Alastair Macdonald)
Our Standards: The Thomson Reuters Trust Principles.