Russian president Vladimir Putin has been obsessed with an imaginary threat from an ageing, pacifist Europe in slow decline, while throwing his country at the feet of a greater threat - China

The world faces a moment of maximum danger in Ukraine. Vladimir Putin has perhaps 72 hours to decide whether to launch a full invasion of the Donbass, or accept defeat and let the Ukrainian military crush his proxy forces.

Nato officials say Russia has massed 20,000 troops in battle-readiness near the border, backed by Spetsnaz commandos, tanks and aircraft. Vehicles have been marked with peace-keeper labels already. Nato sees every sign that the Kremlin intends to disguise an attack as a "humanitarian mission".

This is more serious than the Russian invasion of Afghanistan in 1980. That was a "colonial war". The Soviet Union was a careful, status quo power in its final decades. It held captive nations but did not overrun new borders in Europe. Mr Putin is expansionist, and far less predictable. He is, in any case, captive to the chauvinist fever that he has so successfully stoked.

He has been clear from the outset that he will deploy any means necessary to bring Ukraine back into Russia's orbit. Only war can now achieve this, since all else has failed, and since he has turned a friendly Ukraine into an enemy by his actions. The awful implications of this are at last starting to hit the markets.

"People thought that Russia was just playing a game of brinkmanship,and that pragmatism would prevail in the end. There is real fear now that this will spin out of control. Nothing cannot be excluded at this point, even a cut-off in oil and gas," said Chris Weafer, from Macro Advisory in Moscow.

Yields on 10-year rouble bonds have jumped to 9.7pc, up 130 basis points since June. The sanctioned bank VTB is up 180 points in a month. A liquidity crunch is rapidly taking hold across the financial system. "The market is shut. Not a single Russian entity has been able to borrow anything in dollars, euro or yen since early July," said Mr Weafer.

The Kremlin's gamble has gone horribly wrong. The eastern regions of Ukraine have failed to rise in mass support for Putin's front organisations, led by political operatives from Moscow, and patently run by the Russian security apparatus (FSB/GRU) as even Russian newspapers admit. The latest report by the United Nations accuses these units of "eggregious abuses", carrying out systematic intimidation through torture and execution.

Mr Putin has failed equally to drive a wedge between America and Europe, or to paralyse the EU by playing off one country against another. Germany has not cut a special deal, though its 6,000 companies in Russia are on the frontline. It has gone beyond the EU measures, blocking a €100m export of combat training kit by Rheinmetall.

David Fuller's view

While I do not think “the world faces a moment of maximum danger in Ukraine”, there is an important question global investors are now asking: How long will these sanctions last?  This is impossible to answer with any certainty because it depends on what the participants decide to do, and they are likely to be uncertain, in addition to having varying views on the subject. 

There is also an element of bluff with sanctions and the inevitable counter sanctions that are now in place.  To Europe’s credit, it finally faced reality after the MH17 massacre.  To the USA’s credit, it has been willing to increase incrementally its sanctions against Russia.  Predictably, Russia has responded with tough sanctions of its own.  Both sides are in a position to increase their sanctions, although not without additional self-inflicted pain. 

Needless to say, this is a concern for global investors, who are accustomed to voting with their feet.  They know that sanctions are bad for GDP growth and corporate profits.  Moreover, they do not like the additional uncertainty resulting from these sanctions, which could easily be increased before they are eventually removed.  There are other stock markets which are unaffected by Russia and the sanctions against it, although they would catch some of the fallout from deteriorating sentiment while sanctions continue. 

You probably saw the Euro STOXX 50 Index above so here are some of the individual indices which have also eroded support and broken beneath their 200-day moving averages: Austria, France, Germany, Ireland, Italy, Netherlands and Spain.  Belgium and the main Scandinavian indices of Denmark, Norway and Sweden have held up better but they have also lost uptrend consistency and therefore seen highs of at least near-term significance.  The UK FTSE 100 has also deteriorated although it has yet to break its progression of higher reaction lows.  Eastern European indices continue to underperform. 

The light at the end of this tunnel is that sanctions will eventually end and the ECB will remain accommodative for the lengthy medium term.  The BoE is very unlikely to raise rates this year.  Meanwhile, valuations are becoming cheaper and further falls in share prices will create attractive buying opportunities.  However, I would not rush in just yet, unless Russia capitulates.  I think this will eventually happen.  After all, it is one rogue leader with a $2tn economy against a $40tn block consisting of most of the world’s developed economies.  Russia’s resolve may or may not be strong but its economy, stock market and currency remain weak.  Russia’s inflation is 7.8% and rising as the currency declines.