Stepping back from the brink of war, Vladimir Putin talked tough but cooled tensions in the Ukraine crisis, saying Russia has no intention "to fight the Ukrainian people" but reserves the right to use force.
As the Russian president held court in his personal residence, US Secretary of State John Kerry met with Kiev's fledgling government and urged Putin to stand down.
"It is not appropriate to invade a country, and at the end of a barrel of a gun dictate what you are trying to achieve," Kerry said. "That is not 21st-century, G-8, major nation behavior."
Although nerves remained on edge in the Crimean Peninsula, with Russian troops firing warning shots to ward off Ukrainian soldiers, global markets jumped higher on tentative signals that the Kremlin was not seeking to escalate the conflict. Kerry brought moral support and a $1 billion aid package to a Ukraine fighting to fend off bankruptcy.
Lounging in an arm-chair before Russian tricolor flags, Putin made his first public comments since the Ukrainian president fled a week and a half ago. It was a signature Putin performance, filled with earthy language, macho swagger and sarcastic jibes, accusing the West of promoting an "unconstitutional coup" in Ukraine.
At one point he compared the US role to an experiment with "lab rats."
But the overall message appeared to be one of de-escalation. "It seems to me (Ukraine) is gradually stabilising," Putin said. "We have no enemies in Ukraine. Ukraine is a friendly state."
Still, he tempered those comments by warning that Russia was willing to use "all means at our disposal" to protect ethnic Russians in the country.
Significantly, Russia agreed to a NATO request to hold a special meeting to discuss Ukraine in Brussels this week, opening up a possible diplomatic channel in a conflict that still holds monumental hazards and uncertainties.
At the same time, the US and 14 other nations formed a military observer mission to monitor the tense Crimea region, and the team was headed there in 24 hours.
Military feud cools, economic feud heats up
While the threat of military confrontation retreated somewhat, both sides ramped up economic feuding. Russia hit its nearly broke neighbor with a termination of discounts on natural gas, while the US announced a $1 billion aid package in energy subsidies to Ukraine.
"We are going to do our best. We are going to try very hard," Kerry said upon arriving in Kiev. "We hope Russia will respect the election that you are going to have."
Kerry also made a pointed distinction between the Ukrainian government and Putin's.
"The contrast really could not be clearer: determined Ukrainians demonstrating strength through unity, and the Russian government out of excuses, hiding its hand behind falsehoods, intimidation and provocations. In the hearts of Ukrainians and the eyes of the world, there is nothing strong about what Russia is doing."
The penalties proposed against Russia, he added, are "not something we are seeking to do. It is something Russia is pushing us to do."
World markets, which slumped the previous day, clawed back a large chunk of their losses on signs that Russia was backpedaling. Gold, the Japanese yen and US treasuries all seen as safe havens returned some of their gains. Russia's RTS index, which fell 12 per cent on Monday, rose 6.2 per cent Tuesday. In the U.S., the Dow Jones industrial average closed up 1.4 per cent.
"Confidence in equity markets has been restored as the standoff between Ukraine and Russia is no longer on red alert," said David Madden, market analyst at IG.
'Radical scenario set aside'
"Putin made clear that they will not be an extensive war - at least such a radical scenario has been set aside," said Alexei Makarkin of the Centre for Political Technology in Moscow.
"But he will not leave Crimea and he is going to preserve real control there."
The Russian strongman said Russia would use force as a "last resort" and there was no current necessity to send troops in.
Putin strongly denied that Russian troops were already in Crimea and said that it was "local self defence forces" who were in control of the Black Sea peninsula.
It appears Putin wants to keep Crimea part of Moscow's sphere, even if the rest of Ukraine is not set to drift to the West after the ousting of Yanukovych.
Formal annexation to Russia may not be on the cards but Putin will make sure the writ of the Kiev authorities has little value on the peninsula.
A pro-Kremlin prime minister has already been named in Crimea and a referendum set for March 30 is set to seal its status as a Moscow satellite.
Makarkin said Crimea may become a region like the impoverished Russian-speaking Transdniestr breakaway region of Moldova which is kept functioning by Moscow. Another, more extreme option, would be recognising its independence in the future, as Moscow did with the Georgian breakaway region of Abkhazia.
'Putin wants Crimea as souvenir'
For a man who famously described the break-up of the USSR as the greatest geopolitical tragedy of the 20th century, there is a huge attraction in grabbing Crimea, a region which many Russians regard as part of their nation.
Putin is also eyeing the situation in the largely Russian-speaking east of Ukraine but that region would prove a far bigger - and more dangerous - mouthful for the Kremlin.
"He wants to show that we are not going to give up Crimea but we don't want a rupture with the international community," said Makarkin.
Putin a week ago was soaking up praise for Russia's smooth organisation of the Sochi Olympics but showed remarkably little concern about the international repercussions, shrugging off Western threats not to show up to the G8 summit Russia is due to host in Sochi.
"If they don't want to come, they don't need to," he said.
"The reaction of the West is currently weak, it does not bother him," said Nikolai Petrov, professor at the Higher School of Economics. "He is not worried by the declarations and sanctions of the United States."
"If Ukraine has decided to leave the Russian embrace, then Putin is going to want to keep a piece of Ukraine as a souvenir - at least Crimea or maybe the east."
The Crimean takeover
Russia took over the strategic Crimean Peninsula on Saturday, placing its troops around its ferry, military bases and border posts. Two Ukrainian warships remained anchored in the Crimean port of Sevastopol, blocked from leaving by Russian ships.
"Those unknown people without insignia who have seized administrative buildings and airports ... what we are seeing is a kind of velvet invasion," said Russian military analyst Alexander Golts.
The territory's enduring volatility was put in stark relief Tuesday morning: Russian troops, who had taken control of the Belbek air base, fired warning shots into the air as some 300 Ukrainian soldiers, who previously manned the airfield, demanded their jobs back.
As the Ukrainians marched unarmed toward the base, about a dozen Russian soldiers told them not to approach, then fired several shots into the air and said they would shoot the Ukrainians if they continued toward them.
The Ukrainian troops vowed to hold whatever ground they had left on the Belbek base.
"We are worried, but we will not give up our base," said Capt. Nikolai Syomko, an air force radio electrician holding an AK-47.
Amid the tensions, the Russian military test-fired a Topol intercontinental ballistic missile. Fired from a launch pad in southern Russia, it hit a designated target on a range leased by Russia from Kazakhstan.
The new Ukrainian leadership in Kiev, which Putin does not recognize, has accused Moscow of a military invasion in Crimea, which the Russian leader denied.
Ukraine's prime minister expressed hope that a negotiated solution could be found. Arseniy Yatsenyuk told a news conference that both governments were gradually beginning to talk again.
"We hope that Russia will understand its responsibility in destabilising the security situation in Europe, that Russia will realise that Ukraine is an independent state and that Russian troops will leave the territory of Ukraine," he said.
In his hour-long meeting with reporters, Putin said Russia had no intention of annexing Crimea, while insisting its residents have the right to determine the region's status in a referendum later this month. Tensions "have been settled," he declared.
He said massive military maneuvers Russia has conducted involving 150,000 troops near Ukraine's border were previously planned and unrelated to the current situation in Ukraine. Russia announced that Putin had ordered the troops back to their bases.
Putin hammered away at his message that the West was to blame for Ukraine's turmoil, saying its actions were driving Ukraine into anarchy. He warned that any sanctions the United States and European Union place on Russia will backfire.
American threats of punitive measures are "failure to enforce its will and its vision of the right and wrong side of history," Russia's Foreign Ministry said a swipe at President Barack Obama's statement a day earlier that Russia was "on the wrong side of history."
In Washington, Obama shot back. Moves to punish Putin put the US on "the side of history that, I think, more and more people around the world deeply believe in, the principle that a sovereign people, an independent people, are able to make their own decisions about their own lives."
"And, you know, Mr. Putin can throw a lot of words out there, but the facts on the ground indicate that right now he is not abiding by that principle," Obama said.
The EU was to hold an emergency summit Thursday on whether to impose sanctions.
Moscow has insisted that the Russian military deployment in Crimea has remained within the limits set by a bilateral agreement concerning Russia's Black Sea Fleet military base there. At the United Nations, Russia's ambassador to the U.N., Vitaly Churkin, said Russia was entitled to deploy up to 25,000 troops in Crimea under that agreement.
- AP, AFP