Major Prisoner Swap in Ukraine Bolsters Shaky Truce

Ukrainian forces and rebel separatists traded dozens of prisoners in a frontline eastern town on Saturday, the first clear sign of progress for an otherwise shaky truce signed a week ago.

The rare glint of optimism came on the heels of a pro-Russian rebel offensive in the east, capturing a major town from loyalists and drawing threats of new sanctions against Moscow from US Secretary of State John Kerry.

AFP journalists in the town of Zholobok saw 139 Ukrainian soldiers traded for 52 separatist fighters late Saturday, in rare compliance with the otherwise much-violated agreement which came into effect on February 15.

Some of the released soldiers were wounded. A few had to walk on crutches for many miles (kilometres) through countryside scarred and cratered by months of fighting.

Under the truce, both sides were to withdraw their heavy weapons from the frontline by March 3, carry out a prisoner exchange, conduct negotiations on greater autonomy in rebel-held areas, and eventually restore Ukraine's control over its entire border with Russia.

The rebels have claimed to have pulled back weapons in some areas, although there was no confirmation from the Organization for Security and Cooperation in Europe (OSCE), which is monitoring the truce.

The insurgents said the prisoners included some troops seized this week when they overran the strategic town of Debaltseve, located between Lugansk and the other rebel stronghold of Donetsk.

That bloody offensive, which killed 179 soldiers over the past month, according to one Ukrainian presidential aide, was the most egregious breach of the UN-backed ceasefire. Some 2,500 Ukrainian troops had to flee Debaltseve under heavy rebel fire, and at least 112 were taken prisoner.

The Debaltseve assault and more than 250 ceasefire violations attributed to pro-Moscow fighters prompted a furious reaction from the United States, which blames Russia for the 10-month conflict. Russia denies the accusation.

"If this failure continues, make no mistake, there will be further consequences including consequences that will place added strains on Russia's already troubled economy," Kerry stormed during a press conference in London.

He believed President Barack Obama will "in the next few days" decide on "additional steps (which) will be taken in response to the breach of this ceasefire". He predicted "serious sanctions" could be imposed.

'No Illusions' Over Truce

Germany and France, which brokered the Ukraine truce, admit they "don't have any illusions" about the difficulty in getting the agreement to take hold, but say it is the only hope of calming the conflict enough to find a lasting solution.

The UN estimates 5,700 people have died in the conflict, and Kiev and the rebels continue to trade accusations of shelling, mortar rounds and rocket strikes targeting their positions.

Ukrainian defence officials allege Russia has deployed 20 tanks towards the port city of Mariupol and said a dozen enemy reconnaissance drones have been shot down.

OSCE observers have been barred from entering Debaltseve to assess the situation, but the rebels had promised they would finally be allowed in on Sunday.

Moscow is already labouring under several rounds of US and EU sanctions over the crisis. But while they have accelerated Russia's slide towards recession, they have thus far failed to change President Vladimir Putin's stance.

In one sign of the effects on Russia's economy, rating agency Moody's cut Moscow's debt note by one notch into "junk" territory, just a month after its last downgrade.

Meanwhile, several European leaders were expected at a "dignity march" today morning in Kiev, following a sombre ceremony held on Friday marking a year since scores of people were gunned down in demonstrations that toppled Kremlin-backed president Viktor Yanukovych.

European Council president Donald Tusk and German President Joachim Gauck were among the likely participants.

Yanukovych, whose ouster early last year led to the insurgency raging in east Ukraine, said in a Russian TV interview excerpt released Saturday: "I'll be back."

The ex-leader has little support left in his home country, however, after it was discovered following his escape to Russia that he had been living in a sumptuous palace with a private zoo, a replica pirate ship and pure gold fittings, while the country sank further into debt.