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Putin, Poroshenko meet as Ukraine rebels regain ground

Ukriane President Petro Poroshenko sits down with the E.U.'s foreign policy head Catherine Ashton as a warm-up to talks with Vladimir Putin later.MYKOLA LAZARENKO/AFP--Getty Images

The presidents of Russia and Ukraine will meet in the Belarusian capital of Minsk Tuesday for the first time in two and a half months, but expectations for a quick diplomatic breakthrough to end the fighting in eastern Ukraine are low.

With Ukraine’s economy in free-fall and Russia’s already showing strains from a drop in investment and the imposition of western sanctions, both sides need a deal, but the fighting has only increased in intensity in recent days, making that look increasingly unlikely.

Ukraine’s president Petro Poroshenko Tuesday dissolved parliament and called elections for Oct. 26, in an effort to shore up his position as he prepares for what many observers believe is an inevitable request to the E.U. and International Monetary Fund for more aid.

Evidence of direct and widespread involvement by Russia’s armed forces in Ukraine has mounted, with Ukrainian TV showing video footage Monday of 10 captured paratroopers from the Russian 98th Airborne Division. The news agency Interfax reported Russian military sources as saying that they had “accidentally” strayed over the border, while Foreign Minister Sergey Lavrov said the footage was part of a disinformation campaign by Ukraine. In addition, Ukrainian officials said they had repulsed an armored column from Russia heading towards the government-controlled port city of Mariupol.

U.S. national security advisor Susan Rice said on Twitter that “Russia’s military incursions into Ukraine–artillery, air (defense) systems, dozens of tanks & military personnel–represent significant escalation” of the conflict–language that prompted speculation over the possibility of yet another round of U.S. sanctions.

Whatever the reason, Ukrainian forces have been pushed back by rebels in recent days, after coming close to recapturing Luhansk, one of two key rebel holdouts, last week. The government of the self-styled Donetsk People’s Republic claimed Tuesday that it had trapped over 7,000 Ukrainian troops and militia in three separate encirclements.

The economic losses for both sides are mounting even more steeply. The Ukrainian hryvnia fell to a new record low of 13.5995 to the dollar Tuesday, while the Russian Economy Ministry cut its forecast for growth next year to a mere 1% from 2% previously, and kept its forecast for this year at an even more meager 0.5%. In addition, the Ministry said inflation may hit 7.5% this year due to Russia’s ban on food imports from the U.S. and Europe.

European stock markets, including Russia’s were cautious ahead of the meetings Tuesday, after big gains on Monday after the French government effectively purged a bloc of left-wing ministers who had resisted a raft of business-friendly reforms.

However, the euro has weakened and bond markets have been well supported, suggesting that the real impetus for this week’s gains has been European Central Bank President Mario Draghi’s apparent support for more stimulus for the Eurozone economy, both monetary and fiscal.

The euro fell to a new 11-month low of $1.3178 in Asia, while the yield on Germany’s 10-year bond fell to a new record low of 0.93% in early trading Tuesday.