Putin's dream of a New Russia is fading in Ukraine

Is Vladimir Putin mounting a charm offensive, a military offensive or both? Last month, Russia's president greeted US secretary of state John Kerry with conspicuous warmth at a newly built palace in Sochi for their first meeting since the beginning of the Ukraine crisis. They talked about Eastern Ukraine's future not as a piece of Russia, nor as a Kremlin-backed breakaway republic, but under the rule of Kiev.

Summoning his friendliest smile, the Russian president proclaimed, at his annual spring press conference, that his country "has no enemies". And, as if on cue, the Russian-backed leaders of Ukraine's breakaway regions announced that the idea of Novorossiya – a Tsarist-era term for the swathe of southern Ukraine that Putin had hinted belonged under Moscow's control – is officially dead.

"The Kremlin has effectively admitted defeat, no matter how it tries to spin it," wrote Andrei Kolesnikov of the Carnegie Moscow Centre. "Moscow seems to have come to the realisation that Ukraine has been lost."

Early June also saw the first major breakdown of a fragile ceasefire in Ukraine, as separatist forces battled with tanks and rocket launchers for control of Krasnohorivka and Marinka in the Donetsk region. That might signal the start of a major rebel push for the strategic port of Mariupol.

Observers from the Organisation for Security and Co-operation in Europe (OSCE) as well as Western embassies have reported that, since early May, Russia has been sending the rebels the kind of hardware they would need for a major assault on Ukrainian lines. On 17 May, Ukrainian troops intercepted a reconnaissance team that had surreptitiously crossed the Seversky Donets River, north of Luhansk, and captured two Russians after a firefight. Both admitted to being soldiers in Russia's Spetsnaz brigade, probing weaknesses in Ukrainian defences.

A few days later, Ukrainians downed a Russian-made Forpost drone, the most sophisticated in Moscow's armoury, which had been scanning Ukrainian positions near Mariupol.

"If they break through in Marinka, our forces could be encircled," Valentin Manko, deputy commander of an oligarch-financed battalion of Ukrainian volunteers known as Dnipro-1, told Ukrainian television on 2 June, warning that the offensive could become "a new Debaltsevo", a reference to an important Kiev-held rail junction that fell to Russian-backed rebels in mid-February.

Russia's Spetsnaz special forces call concealing your true intentions to confuse the enemy maskirovka. But is Putin's diplomacy just maskirovka – or is he truly looking for a face-saving way to terminate his Ukrainian adventure?

In one sense, the war is in its endgame, whether the Kremlin likes it or not. The rebels may yet expand their territory a little but the dream of many Russian imperial nostalgists that great swathes of Russian-speaking Ukraine would flock to join Moscow has faded.

Many major cities in central Ukraine, such as Kharkiv, Odessa and Dnipropetrovsk, are home to majority Russian-speaking populations and yet they support Kiev. "Ukraine's population is only 17% ethnically Russian," says Steven Pifer, a senior fellow at the Brookings Institution and former US ambassador to Ukraine. "Putin always mangled this fact, claiming that 17 million Ukrainians were ethnic Russians, which would equate to 37% of the population."

If anything, Pifer says, "Russia's aggression appears to be erasing the dividing line ... One unintended consequence of the conflict is [a new] sense of Ukrainian unity."

Kerry's visit signalled that the West is ready to begin a delicate diplomatic dance to reach a lasting political settlement in Ukraine. Everyone – even, it seems, the Kremlin – agrees that the rebel areas of Donetsk and Luhansk will remain inside Ukraine. The question is, with what degree of autonomy? If the recent fate of Yugoslavia is anything to go by, it's a vital one.

The Kremlin is pressing for Ukraine to become a federation like Bosnia, which was divided at the 1995 Dayton Accords into a pro-Western Bosnian-Croat area and the Republika Srpska, backed by neighbouring Serbia. Both are de facto autonomous states within a state with their presidents, parliaments and courts. Bosnia's "central government, with its tripartite presidency and ethnically fractured parliament, [is] largely impotent", says Brian Whitmore, author of influential blog The Power Vertical.

"Bosnia remains a dysfunctional state. And nearly a decade after [Slobodan] Milosevic's death, Serbia continues to use Republika Srpska to paralyse and manipulate the country and cripple its efforts to join mainstream Europe."

Kiev would prefer to see an arrangement akin to that of Srpska Krajina, an ethnic Serbian slice of Croatia given some initial autonomy after the war but quickly re-absorbed into a united Croatia – which joined the EU in 2012.

Some Ukrainians are suspicious that the US is keen to do a deal with Russia to carve up their country behind Kiev's back. Both Washington and Moscow say the fate of the annexed Crimean Peninsula was not mentioned in the Sochi talks (nor is Crimea spoken of in either of the ceasefire agreements signed in Minsk by the EU, US and Russia). Kerry had bigger concerns, such as securing Russian co-operation on an Iran deal and Syria.

"In diplomacy you are in the business of the possible – and returning Crimea to Ukraine clearly isn't remotely in the realm of the possible," says one senior European diplomat who has worked in Ukraine since the conflict began.

"Some American colleagues may be thinking in terms of a grand bargain – to exchange recognition of Crimea [as part of Russia] for full [Russian] withdrawal, and co-operation in the Middle East ... But for Europeans, that is a hard thing to ask."

Even after massive lobbying in Germany, Putin has failed to get sympathy for his Crimean land grab. For most Europeans, who suffered under Nazi Germany, Soviet Russia or both, legitimising aggression is a red line.

The best-case scenario is that the separatist territories agree to hold Ukraine's local elections, due on 25 October. The likely winner in Donbass will be President Yanukovych's one-time chief of staff, Sergei Levochkin, a leader of the Ukrainian Opposition Bloc. That could be a face-saving solution acceptable to Kiev, Moscow and Washington. But Putin has a long track record of establishing the facts on the ground first and negotiating later.

That's what the current rebel offensive is about – a show of strength to discredit Poroshenko and boost the rebels' negotiating position. Russia cannot really win this war but Ukraine could still lose it.