It has been over a year since the market cared about potential military developments and escalation in the ongoing proxy war between Russia and Ukraine in the Donbass region, however as reported overnight, tensions are again rising rapidly. Two members of Russian government forces were killed last weekend in what President Vladimir Putin said were "stupid" and "criminal" incursions by Ukraine into the territory annexed by Moscow two years ago. Additionally, Putin on Wednesday accused the Ukrainian military of launching the incursions into Crimea as part of repeated efforts to reclaim the land.
As the FT noted yesterday, Russia’s secret service, the Federal Security Service, said on Wednesday that it had foiled “terrorist acts” prepared by Ukrainian military intelligence against infrastructure in the territory, with the aim of disrupting Russia’s parliamentary elections due on 18 September. Kiev has denied the allegations. In response to the alleged operation, Putin said he was pulling out of international peace talks on the conflict in eastern Ukraine. He said he was no longer ready to meet his Ukrainian counterpart, Petro Poroshenko, and German and French leaders in the so-called Normandy format, which has been used for negotiations. Mr Putin hinted at a possible meeting on the sidelines of the G20 summit in China early next month.
“Under these conditions, meeting in the Normandy format, especially in China, is meaningless,” Mr Putin said at a press conference. “Apparently, the people who seized power in Kiev and continue to hold on to it, instead of seeking compromise, instead of searching ways of a peaceful settlement, have moved on to the practice of terror.”
The FSB, the successor organisation to the KGB, claimed that one of its officers and a Russian soldier had been killed while taking down the Ukrainian plot last weekend. The FSB said the soldier died in an exchange of fire with the Ukrainian army across the border that now separates Crimea from the rest of Ukraine — a level of fighting between the two militaries not seen even during the annexation. Moscow said it had arrested several people, including an Ukrainian military intelligence officer.
Ukrainian intelligence denied an officer was detained, and officials said Russian claims of a plot were unfounded. The Ukrainian defence ministry described the Russian claims, which could not be independently verified, as “an attempt to justify redeployment and aggressive actions by military units of the Russian Federation on territory of the temporarily occupied peninsula.”
To be sure, Ukraine promptly denied all accusations, when president Petro Poroshenko and Ministry of Foreign Affairs sternly rejected Putin's accusations that Kiev is committing terrorist acts in the disputed peninsula.
"Accusations against Ukraine of terrorism in occupied Crimea sound as preposterous and cynical as the statements of the Russian leadership about the absence of Russian troops in [eastern Ukraine's rebel-controlled] Donbass [region]," Poroshenko said.
"Ukraine condemns in the strongest terms yet another Kremlin-manufactured provocation and rejects all accusations, which are completely groundless," the Foreign Affairs Ministry said in a statement. "Under a made up pretext, the Kremlin is undertaking another hybrid special operation with the aim to justify its future aggressive actions against Ukraine."
It did not end there, and in what may be the biggest rise in military tensions between the two nations, moments ago Ukraine's president announced he has put all forces forces on the border with Crimea and eastern Ukraine at the highest combat readiness.
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Bloomberg adds that the order came a day after Russian President Vladimir Putin said Ukrainian agents had engaged in “terror tactics” on the Black Sea peninsula, which he seized in 2014. He vowed to respond with “very serious” measures. “To further escalate the conflict, Putin couldn’t imagine anything better than a cheap theater performance,” Oleksandr Turchynov, chairman of Ukraine’s National Security and Defense Council, said in a statement. Dmytro Kuleba, Ukraine’s ambassador to the European Union, added in a Facebook post Thursday: “This is not a casus belli yet, but Russia is actively accumulating stories for casus belli.”
The confrontation coincides with a surge in violence in Ukraine’s easternmost regions and torpedoed plans to revive four-way peace talks at the September G-20 meeting in China, with Putin reversing earlier support and calling the negotiations “pointless.” The yield on Ukraine’s dollar-denominated note maturing in 2019 jumped 40 basis points from a record low to 7.87 percent at 3:06 p.m. in Kiev.
“The events are developing according to a pretty negative scenario,” Alexei Makarkin, deputy head of the Moscow-based Center for Political Technologies, said by phone. “There may be escalation in eastern Ukraine and that is very dangerous.”
We expect Russia to respond in kind very shortly, at which point we will update this story.