Ukraine will be excluded from Russia's free trade zone with former Soviet Union countries from the start of 2016.
Russian President Vladimir Putin signed a decree that will suspend Ukraine from the pact from 1 January. On that date, Ukraine will join the European Union's free trade zone.
Relations between Russia and Ukraine has plummeted since Russia annexed the Crimean region of Ukraine last year. Western nations have accused Russia of supporting pro-Russian separatists fighting government forces in the east of Ukraine, something the Russian government has consistently denied.
Mr Putin said the suspension of Ukraine from the pact was as a result of "extraordinary circumstances affecting the interests and economic security" of Russia.
Ukraine President Petro Poroshenko said: "Ukraine is aware of these restrictions and the expected damage to the Ukrainian economy. But we are ready to pay this price for our freedom and our European choice."
Separately, the Ukrainian government has said that it will ban trade with Crimea in 30 days time.