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Muscovites attend a rally called "We are together" to support the annexation of Ukraine's Crimea to Russia in Red Square in central Moscow, March 18, 2014. Russian President Vladimir Putin, defying Ukrainian protests and Western sanctions, signed a treaty on Tuesday making Crimea part of Russia but said he did not plan to seize any other regions of Ukraine.MAXIM SHEMETOV/Reuters

Under glittering chandeliers in a Kremlin hall – and with his audience chanting "Russia! Russia!" – Russian President Vladimir Putin ignored sanctions imposed by the West and went ahead Tuesday with the annexation of the Crimean Peninsula.

Hours later, the first shots were fired. A gun battle broke out in Crimea when pro-Russian gunmen attacked a Ukrainian military building, leaving a Ukrainian soldier and one of the attackers dead and three others injured. The shooting in Crimea, which the Kremlin now considers Russian soil and the West insists is part of Ukraine, underscored how volatile the situation remains.

The question of what Mr. Putin will do next hangs in the air in Moscow, Kiev and far beyond. Many fear a new and more dangerous phase to this conflict is about to begin in eastern Ukraine, and perhaps even other parts of Eastern Europe.

The signs are worrying. After his speech, capped by the quick signing of a bill incorporating Crimea into the Russian Federation, Mr. Putin proceeded to a stage just outside the Kremlin walls. "Together we have done a lot, but a lot more remains to be done, more tasks to resolve!" he told a cheering crowd of several thousand that didn't quite fill Red Square. The crowd waved Soviet-era banners, as well as newly printed flags with Mr. Putin's face on them.

"Past Crimea's acceptance into Russia, we are into a new stage of the game," said Pavel Andreev, executive director of the Valdai Discussion Club, a foreign-policy think tank which last year hosted a keynote speech by Mr. Putin.

Mr. Putin's extraordinary speech to both houses of the Russian parliament bounced between celebration at gaining Crimea and bitter recriminations aimed at Washington and Brussels.

Following initial sanctions announced Monday by Western powers – including the United States, the European Union and Canada – on Tuesday, they reiterated their rebukes and considered next steps.

On a visit to Poland, U.S. Vice-President Joe Biden called Moscow's action a "land grab" and stressed Washington's commitment to defending NATO allies on Russian borders. U.S. Secretary of State John Kerry warned Moscow against any incursion into eastern Ukraine.

Britain suspended military co-operation with Russia.

And German Chancellor Angela Merkel, who spoke Tuesday with U.S. President Barack Obama, said Russia was guilty of repeatedly breaking international law.

However, Mr. Putin extended no olive branch. Instead, he accused the West of having crossed a "red line" by supporting the uprising in Kiev that ousted the Moscow-backed government of Viktor Yanukovych.

Laying out a list of Moscow's grievances with the West including U.S.-led military actions in Yugoslavia, Afghanistan, Iraq and Libya, Mr. Putin said the West had finally gone too far by backing the revolt in Ukraine. He suggested its sole aim had been to keep Ukraine from joining his proposed Eurasian Union of former Soviet states.

"They've deployed a well-trained army of gunmen [and] we do understand the reason. These were actions against Ukraine, Russia, against the integration processes in Eurasia," he said, reading from a prepared text.

"Everything has its limits. In the case of Ukraine, our Western partners have crossed a line, a red line. They've been unprofessional, they've been irresponsible," he said, pausing for applause.

"They knew perfectly well that there were millions of Russians in Crimea and Ukraine [but] they were shortsighted. They didn't think of the consequences. And Russia found itself at the stage where it couldn't give up. If you press the spring too hard, it will recoil."

Mr. Putin also hinted, ominously, that he believed the same circumstances that necessitated Russian intervention in Crimea now existed in parts of eastern Ukraine as well. "Residents of Crimea and Sevastopol turned to Russia for help in defending their rights and lives, in preventing the events that were unfolding and are still under way in Kiev, Donetsk, Kharkov and other Ukrainian cities."

Donetsk and Kharkov are predominantly Russian-speaking cities that last week saw bloody clashes between rival crowds of pro-Moscow and pro-Kiev protesters.

On Tuesday, the president of Moldova, which borders Ukraine and hosts the pro-Russian breakaway region of Trans-Dniester, warned of "a repeat of the Ukrainian scenario" in his country. And Paddy Ashdown, the British diplomat who oversaw the peace process in Bosnia-Herzegovina, accused Russia of stoking separatism among ethnic Serbs there.

Mr. Putin, for his part, is stoking patriotism and nostalgia at home. He is at his most popular when he's standing up to the West, according to Lev Gudkov, director of the Levada Centre, Russia's country's lone independent polling agency. Mr. Putin's approval ratings, he said, last week hit a three-year high of 72 per cent following the success of the Sochi Olympics and the intervention in Crimea.

Mr. Gudkov said Mr. Putin's move to annex Crimea is popular among Russians who saw it as only an accident of history that left the peninsula outside Russia when the Soviet Union fell apart. (Crimea was part of Russia until Soviet leader Nikita Khrushchev gifted it to Ukraine in 1954.)

But while Mr. Putin was dismissive of Western sanctions in his speech – and the Duma passed a unanimous resolution asking that all 436 deputies present be added to the list of those targeted by the U.S. and the EU (which currently includes only a handful of Russians and Crimeans, including members of Mr. Putin's inner circle) – Mr. Gudkov said his popularity would quickly tumble if sanctions led to economic suffering at home.

"His support will weaken if there are economic problems," Mr. Gudkov said. "People are tired of waiting for Mr. Putin to deliver. It isn't yet noticeable, but the level of economic health is already starting to fall. Inflation will soon be a major concern."

In his speech, Mr. Putin again denied that there were any Russian soldiers in Crimea beyond the 25,000 previously permitted by agreement between Russia and Ukraine. But he acknowledged that Russia did "enhance" its forces in the peninsula to defend the rights of Russian-speakers who felt threatened by the "nationalists, neo-Nazis, Russophobes and anti-Semites" he said had taken power in Kiev.

There is little doubt, in the West and among many Ukrainians, that most of the uniformed men who flooded into Crimea last month are Russian soldiers, and not local "self-defence" forces as Moscow has described them. The Ukrainian defence ministry, in describing the deadly shootout Tuesday in Simferopol, said "attackers [who] were dressed in military uniforms of the Armed Forces of the Russian Federation" had stormed its base.

According to the Ukrainian army, the base was completely overtaken by pro-Russian forces and the Ukrainian troops were placed under "arrest." Acting Ukrainian prime minister Arseniy Yatsenyuk called the attack a "war crime" and warned that "the conflict is moving from a political one to a military one because of Russian soldiers."

Mr. Andreev, the think-tank director, said Russia had made what it considers a bid for peace in the form of a document that Foreign Minister Sergei Lavrov presented last week to U.S. Secretary of State John Kerry. The proposal calls for a government of national unity in Ukraine, which would usher in a new constitution making Ukraine a decentralized federation with powerful regions – akin to Bosnia-Herzegovina – and Russian elevated alongside Ukrainian as an official language.

Moscow was hoping the West would convince the Ukrainian government that it needed to make concessions in order to avoid bloodshed, he added. "The other path might go very nasty," he warned. "It's very much a Plan B for Russia. If it happens, it would go very bad, most of all for Ukraine and Kiev."

Mr. Lavrov's proposal was rejected on Monday as "absolutely unacceptable" by Kiev, but on Tuesday there were signs Ukraine was prepared to meet some of the conditions.

In his own televised address, Mr. Yatsenyuk spoke directly to those living in eastern Ukraine, promised a new constitution that would include added powers for the regions. He said the central government would do more to protect the Russian language and would give additional responsibilities to locally elected mayors and councillors, allowing them to run regional affairs instead of officials appointed by Kiev. "All changes associated with the decentralization of the administration will be reflected in the new constitution. We should write the constitution together," he said.

On the streets of Kiev, there is real fear about Russia's intentions and the possibility of more Russian military action. Many people believe an invasion is only days away.

"I'm not so sure about Kiev, but in the south, there is definitely going to be some sort of war. … Not only in the south but also in the east, [Mr. Putin] is looking at those provinces and he is very interested in those provinces," said Sasha Radchenko, a chef who was walking through central Kiev with his wife. "He sees us as not a nation and he needs to have influence on us."

With a report from Reuters

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