Ukrainian prime minister Arseniy Yatsenyuk has said his country will not repay a £2 billion debt owed to Russia by this weekend.
Mr Yatsenyuk announced at a televised government session a "moratorium" on any debt repayments to Russia, which effectively means Kiev is defaulting on the debt.
He did not indicate when Ukraine would be ready to repay the debt.
Relations between the two neighbours soured after Russia annexed the Crimean peninsula in March last year and threw its backing behind separatist rebels in eastern Ukraine.
Ukrainian leaders have accused Moscow of sending troops and weapons to the east, a claim the Kremlin has vehemently denied.
Moscow has said it will take Ukraine to court if it fails to pay on time.