Harriet Salem in Sloviansk -

The Geneva accord signed by Russia, Ukraine, the US and the EU on April 17 was supposed to calm tensions in eastern Ukraine, but within two weeks the agreement has crumbled to dust. The US and Europe have imposed a fresh round of sanctions that target Russian President Vladimir Putin "inner circle" and their companies, while a further descent into chaos came April 28 as the pro-Ukrainian mayor of the eastern town of Kharkiv was shot in the back.

Despite a multilateral commitment to deescalate the ethnic tensions that have shaken east Ukraine since the new pro-EU administration took power in Kyiv in February, violence in the region has increased dramatically in the last weeks of April, with a series of building seizures, shootouts and hostage snatches. Commentators worry Ukraine is sliding towards an open military confrontation.

Diplomatic barbs have flown backwards and forwards and are becoming increasingly acerbic. In the most serious superpower standoff since the Cold War, US President Barack Obama accused Russia of “destabilising actions” in east Ukraine, whilst Russian Foreign Minister Sergey Lavrov struck back by accusing the US of irresponsibility over the government it helped bring to power in Kyiv. The US has done “nothing do address the underlying causes of the problem,” claimed Lavrov.

On April 28, the US announced a new wave of sanctions targeting high-profile individuals, the biggest beast being Igor Sechin, the so-called "scariest man in Russia" who is currently head of state oil company Rosneft, as well as some murky companies and banks linked to Putin's inner circle. These include a range of Stroygazmontazh group entities, a company owned by Putin's judo buddy that supplies Gazprom with pipes, and lenders Sobinbank and Investcapitalbank.

The Kremlin has further raised the stakes by announcing that it is conducting military exercises over the border from Ukraine's eastern region, at the same time as ramping up its aggressive rhetoric about intervening to protect “Russians” in Ukraine. Timothy Snyder, professor of history at Yale University, asks who these Russians are? "There are speakers of Russian in Ukraine, but they are not Russian citizens any more than I, a speaker of English, am a British subject. There are people who identify as Russian – about a seventh of the population – but they are no more Russian citizens than Quebecois are citizens of France. Dual citizenship in Ukraine is not permitted."

With more than 40,000 Russian troops massed on Ukraine’s border for the past six weeks, US Secretary of State John Kerry has called Moscow’s military moves “provocative”. But perhaps more worrying is the increasing chaos and lawlessness on the ground.

Shot in the back

On the morning of April 28, the mayor of the eastern Ukrainian city of Kharkiv, Hennadiy Kernes, was shot and critically wounded by unknown gunmen while out jogging, and is undergoing emergency surgery in hospital. Kernes used to be a supporter of the ousted pro-Moscow president Viktor Yanukovych, but had since switched his support in favour of a united Ukraine.

Pro-Russian separatists have also begun kidnapping people to use as "bargaining chips." Separatists in Sloviansk, the heartland of the pro-Russian rebels’ support, on April 25 snatched seven European military officers, five members of the Ukrainian armed forces and a civilian. The mission was working under of the auspices of the Organization for Security and Co-operation in Europe (OSCE) in the eastern region of Donetsk, currently epicentre of the country’s protracted crisis, when they were taken.

In another disturbing turn of events on April 25, the rebels invited Russian media to a basement building in Sloviansk where they showed four badly beaten and blindfolded men stripped of their trousers. According to the separatists the men are Ukrainian secret service officials.

The snatch of OSCE observers – four German citizens, a Pole, a Dane, a Czech and a Swede – incensed European politicians. On April 28, the captives, under obvious psychological duress, were paraded in front of the media at a press conference. The mission’s commander, Axel Schneider, denied the separatists’ accusation that the group were spies. The rebels’ local leader, self-styled gold-toothed Vyacheslav Ponomarev, said the diplomats are “hostages of circumstance” in a “situation of war”. The German foreign minister responded to the brazen display of impunity as, “repulsive and blatantly violating the dignity of those affected”.

These random acts of low-level terrorism will only strain relations further and make the imposition of stringent sanctions more likely. “We will be looking to designate people who are in his inner circle, who have a significant impact on the Russian economy,” US Deputy National Security Adviser Tony Blinken said on CBS’ “Face the Nation” programme ahead of the new sanctions being announced. “We’ll be looking to designate companies that they and other inner-circle people control. We’ll be looking at taking steps as well with regard to high-technology exports to their defence industry. All of this together is going to have an impact”.

The new sanctions represent a ratcheting up of tensions, but European leaders are still trying to avoid using the more ballistic options on the table. German Chancellor Angela Merkel said on April 25 that any extra European measures would likely fall within the scope of “second stage” sanctions, which will target specific Russian banks/corporates close to the government, rather than the “third stage” sanctions that would target key sectors and companies and do real economic damage to Russia. "The third stage [sanctions] will be the nuclear option, with significant risk of 'back-draft' or retaliation from Russia on the West - a ‘lose-lose’ for both sides," says Tim Ash, chief strategist at Standard Bank. "The US and West is still reluctant to go down the sectorial (akin to Iran-style sanctions) route. The trigger for this would be a clear cut Russian invasion of Ukraine – tanks/APC’s on the ground, rather than the mere appearance of little “green men” which seems to be the current 'battle order' for Moscow."

Foreign and portfolio investors have until remained relatively sanguine about the crisis. While little new portfolio investment is flowing into Russia after the initial selloff following the annexation of Crimea, most of the long-term investors in Russia are still there, fund managers tell bne. However, that could change if a major bank (and banks are thought to be in the front line now) is hit with damaging sanctions. "The market is not prepared for significant Russian institutions being sanctioned," says Standard Bank's Ash. "It would force selling of debt/equity in these institutions held by many foreign institutional investors."

Still, most analysts do not expect any overt military action because that would clearly trigger a "sanctions war" that would hurt Russia badly. It would also undermine any remaining support Russia has in western Europe; several countries, including Greece, Spain, Italy and the Netherlands, have all been reticent about imposing a new round of serious sanctions, as they all have major investments in Russia. The base-case assumption is that stage one and two sanctions will be deepened, even if Russia does not move to a formal invasion, but continues with its disruptive approach towards Ukraine.

Bleak short term

The outlook for a quick and orderly resolution to the clash is looking increasingly bleak. The Geneva accord was the last chance in the near term to start the process of unwinding the conflict, but the failure of the deal necessitates an increase of tensions as both sides try to bludgeon each other into submission. "I think a really important point to make now is that all sides in this conflict appear entrenched, with no easy solutions, given that the positions of the various sides are diametrically opposed – the administration in Kyiv wants European orientation, which Russia is determined to stop, Moscow wants a Federalist solution in Ukraine, which the bulk of the Ukrainian population appears to oppose, while they also oppose any solution involving the break-up of Ukraine, and further bits joining Russia. Where is the room for compromise?" asks Ash.

Indeed, with Victory Day that celebrates the end of World War II looming, it means tensions will probably rise further. And Russia will play on nationalistic sentiments in Ukraine, as it has done at home in the last year, to keep the situation unstable in the run-up to the May 25 presidential elections there.