Ukraine is edging closer to a return to full civil war following recent attacks on Kiev-controlled areas that have violated the ceasefire agreement with pro-Russia rebels in the east of the country, the European Union has warned.
A statement released by the European External Action Service (EEAS) says attacks since Monday took a number of casualties and specifically targeted peacekeeping forces — setting fire to vehicles and catching neutral observers in the cross-fire.
"The renewed escalation of the conflict...violates the spirit and the letter of the Minsk Agreements," the EEAS said in an official statement released Tuesday.
Fighting has been concentrated in the government-controlled areas in the south-east including Shchastya, Shyrokyne and Donetsk.
"The Minsk Agreements must be implemented in good faith, starting with full observation of the ceasefire and genuine withdrawal of heavy weapons," the EEAS statement said, urging further talks between Ukraine, Russia and the Organization for Security and Co-operation in Europe — the European Union's regional security organization.
The latest ceasefire agreements were forged in February following the collapse of a 2014 peace deal known as the Minsk Protocol. Minsk II was hammered out by the leaders of Germany, France, Ukraine and Russia. It outlined an immediate ceasefire and withdrawal of heavy weapons.
Complete implementation of Minsk II, which also requires constitutional reform and special status for rebel-held regions including Donetsk and Luhansk, is expected by year-end.
But rebels are unhappy with concessions delivered by Ukraine so far, Otilia Dhand, Vice President of Teneo Intelligence told CNBC's Squawk Box Europe on Wednesday. Rebel groups want swift constitutional changes regarding the decentralization of power from Kiev, as required by Minsk II, on top of existing legislation that gives their areas special status.
But there are also calls for further governing powers, Dhand explained. "The free trade zone is good for them but they aren't getting powers in decision making in, say, defense or foreign policy."
It has resulted in the highest violence in the region since February, Dhand said.
Conflict stalls Ukraine’s economic reboot
The conflict has left Ukraine's economy hard-hit. The IMF's latest forecasts expect economy to contract 9 percent and inflation to hit 46 percent by year-end.
It doesn't help that the south-east region, which has been the conflict's flashpoint, was a former economic engine for Ukraine, Dhand explained.
"This is definitely having a negative impact for the outlook for the Ukrainian economy."
It paints a bleak picture for debt renegotiations that could help Ukraine manage its growing debt pile. Dhand said a 40 percent debt haircut is a popular target, but with private bondholders involved, it's hard to tell how negotiations will pan out.
Ukraine's Ministry of Finance explained in a press release that talks with an ad-hoc group of creditors in San Francisco Wednesday will be the last chance to clinch an agreement ahead of a September deadline that will see $500 million worth of bonds mature.
A failure to secure funds would also force Kiev to find 'alternative options' for financing its $17.5 billion IMF support program, a ministry press release explained.
"If there is no deal, there will be a default," Dhand said. "Nobody is going to put the money on the table to close this gap in whatever is expected to come."
A ‘disturbing’ escalation
Russian President Vladimir Putin reportedly discussed the situation in Ukraine with the Russian Security Council Wednesday afternoon, according to Russian news agency Interfax.
The president's press office declined to comment.
A statement by the Russian Ministry of Foreign Affairs placed the blame firmly on Ukraine, accusing Kiev of refusing to promise artillery withdrawals intended to defuse regional tensions and instead making threats to retake combat positions.
"Regrettably, Kiev has sharply stepped up its militant rhetoric," the statement said.
Meanwhile, a statement released by Ukraine's Ministry of Foreign Affairs on Monday called the escalation "disturbing."
"Shelling, aggressiveness of Russian-terrorist forces, intimidation of the OSCE Special Monitoring Mission observers − all this is a part of deliberately chosen dangerous line aiming to stall Minsk agreements."
"The Russian side has to take immediate steps to stop any actions that bring destruction and death to Ukraine and threaten the security and stability on the whole European continent."