Emerging Europe

Why you need to watch for a Ukraine 'flashpoint'

Newedge: Short-term volatility to hit markets

As tensions over Ukraine continue to build, the risk of a flashpoint that could trigger conflict between Russia and the West may be growing.

Read More U.S. President Barack Obama imposed new sanctions on Russia on Monday, and these were followed closely by new penalties from the European Union. Washington accused pro-Russian separatists, who have occupied state buildings across Ukraine and are holding a number of hostages, as working for Kremlin agents.

The rising geopolitical tensions weighed on stocks on Monday. Asian equities closing mostly lower, with Japanese and Shanghai shares underperforming. In Europe, mergers and acquisitions activity boosted shares, which closed higher, but the bullish sentiment was capped by events in Ukraine.

Analysts told CNBC they were concerned the crisis was reaching a "flashpoint" – a trigger point that could suddenly lead to full-blown violence.

Read More Asia shares fall on Ukraine worries; Nikkei drops 1%

"Russia is almost poking the West, trying to look for a flashpoint to try and pursue Eastern Ukraine and try to make that a little bit more of a push from what they were previously doing in Crimea," Toby Lawson, managing director at Newedge told CNBC's "Rundown".

"I do think markets need to be aware that this could be a flashpoint at any time," he added.

Tensions between Russia and the Ukraine moved into the international spotlight in early March when Russia carried out a bloodless invasion of Ukrainian annex Crimea.

Global financial markets sold off in response at the time and the Russian and Ukrainian currencies have taken a particularly harsh battering year-to-date. However, the wave of panic selling seemed to have subside in the following weeks as most market watchers expected tensions to cool.

Read More Ukraine crisis escalates: What this means for investors

But recent weeks have seen a resurgence of aggression between the two countries. On Monday, Interfax Ukraina news agency reported that the mayor of Ukraine's second-biggest city, Kharkiv, was undergoing surgery after being shot in the back.

Pro-Russian separatists continue to occupy government buildings across the east of Ukraine, and in Donetsk, armed rebels have seized the regional television station's headquarters and ordered it to start broadcasting a Russian state TV channel, according to Reuters.

Violence escalated at the end of last week, and Russia warned Ukraine it would face justice for killing up to five of the separatists.

"In the east-west standoff over Ukraine, it's one escalatory step after another," said Nicholas Spiro, managing director at Spiro Sovereign Strategy.

"This is a crisis which is taking a dramatic turn for the worse - partly because it's becoming more complex and murkier with each passing day."

Read More Ukraine rebels free Swedish hostage

Pro-Russian activists prepare to break through the gate in front of TRK Donbass television station on April 27, 2014 in Donetsk, Ukraine.
Getty Images

According to Spiro, Russia is using the same tactics in Eastern Ukraine as they used in their annexation of Crimea but in a more insidious and menacing manner.

He added that conditions in Eastern Ukraine were also making it difficult for Western powers to intervene.

"Long-standing regional and local grievances, economic hardship, endemic corruption and outright criminality are all fuelling the crisis and muddying the waters," he said.

"It's difficult enough for the U.S. and the E.U. to know what's going on in eastern Ukraine, let alone make headway in 'de-escalating' the crisis," added Spiro.

Read More Russia 'Wants To Start World War III': Ukrainian PM Yatsenyuk

The U.S. and E.U. are expected to up sanctions on Russia as early as Monday, but analysts told CNBC they doubt the sanctions would have much effect. So far the EU and U.S. have imposed travel bans and asset freezes on several officials from Russia and Ukraine.

"They are looking at sanctions again against Russian officials. Will that be enough to stop the Russians? I don't think so. They are pretty much on a track here to push this brinkmanship even closer," said Newedge's Lawson.

"Russia appears more emboldened to intervene in eastern Ukraine and believes EU countries, in particular Germany, lack the resolve to impose meaningful economic and energy sanctions," added Spiro.

Russia's MICEX index is down around 14 percent year-to-date, and the rouble has declined 9.5 percent against the dollar in the same period, while Ukraine's currency has fallen around 38 percent against the dollar year-to-date.

Read More As Ukraine ends truce, is Russian invasion next?