By James Mackenzie and Natalia Zinets

KYIV/LVIV, Ukraine (Reuters) – New talk of compromise from both Moscow and Kyiv on a status for Ukraine outside of NATO lifted hope on Wednesday for a potential breakthrough after three weeks of war.

Ukraine’s President Volodymyr Zelenskiy said negotiations were becoming “more realistic”, while Russian Foreign Minister Sergei Lavrov said there was “some hope for compromise”.

The Kremlin said the sides were discussing status for Ukraine similar to that of Austria or Sweden, both members of the European Union that are outside the NATO military alliance. Ukraine’s chief negotiator said it would give Kyiv binding international security guarantees to prevent future attacks.

Though the war still ground on with Ukrainian civilians trapped in cities under Russian bombardment, the signs of compromise sent relief through global financial markets. Shares in Germany – Russia’s biggest energy market – were up 3.4%.

Three weeks into the invasion, Russian troops have been halted at the gates of Kyiv, having taken heavy losses and failed to seize any of Ukraine’s biggest cities in a war Western officials say Moscow thought it would win within days.

Ukrainian officials had expressed hope this week that the war could end sooner than expected. Talks were due to resume on Wednesday by video link for a third straight day, the first time they have lasted more than a single day.

“The meetings continue, and, I am informed, the positions during the negotiations already sound more realistic. But time is still needed for the decisions to be in the interests of Ukraine,” Zelenskiy said in a video address overnight.

Later on Wednesday, he said Ukrainians must fight to “defend our state, our life, our Ukrainian life,” but he also emphasised negotiations for “a just but fair peace for Ukraine, real security guarantees that will work.”

UKRAINE SHIFTS

On Tuesday, Zelenskiy said Ukraine could accept international security guarantees that stopped short of its longstanding aim to join NATO, seen as a major shift.

Keeping Ukraine out of the Western military alliance was one of Russia’s main demands in the months before it launched what it calls a “special operation” to disarm and “denazify” Ukraine.

“The negotiations are not easy for obvious reasons,” Russia’s Lavrov told media outlet RBC news. “But nevertheless, there is some hope of reaching a compromise.”

“Neutral status is now being seriously discussed along, of course, with security guarantees,” Lavrov said. “There are absolutely specific formulations which in my view are close to agreement.”

Both sides painted only broad outlines in public of a proposed compromise.

Vladimir Medinsky, Russia’s chief negotiator, told state TV: “Ukraine is offering an Austrian or Swedish version of a neutral demilitarised state, but at the same time a state with its own army and navy.”

Kremlin spokesman Dmitry Peskov said of that idea: “This is a variant that is currently being discussed and which could really be seen as a compromise.”

Austria and Sweden both have small militaries equipped to cooperate with NATO armies. They are the biggest of six EU members outside NATO which include Russia’s neighbour Finland, whose Cold War-era non-aligned status has been rejected as a model by Kyiv as offering insufficient protection.

Ukraine’s chief peace negotiator, Zelenskiy aide Mykhailo Podolyak, described the model as “A rigid agreement with a number of guarantor states undertaking clear legal obligations to actively prevent attacks.”

HOPE

Ukraine’s staunch resistance on the battlefield and Western sanctions that have isolated Russia from the world economy have raised Kyiv’s hopes that Moscow would make concessions.

Though Russia has long been calling for Ukraine to be kept out of NATO, Kyiv and its allies have said Moscow’s true aim was to overthrow the pro-Western, elected leaders of a country President Vladimir Putin dismisses as an artificial state.

Podlolyak tweeted before Wednesday’s talks that Ukrainian military counteroffensives had “radically changed the parties’ dispositions”.

Britain said Russian forces were trapped on roads, struggling to cope with Ukrainian terrain and suffering from a failure to gain control of the air.

“The tactics of the Ukrainian Armed Forces have adeptly exploited Russia’s lack of manoeuvre, frustrating the Russian advance and inflicting heavy losses on the invading forces,” it said.

THREE MILLION REFUGEES

Europe’s biggest invasion since World War Two has destroyed some Ukrainian cities and sent more than 3 million refugees fleeing abroad.

The streets of the capital Kyiv were largely empty on Wednesday after authorities imposed a curfew overnight. Several buildings in a residential area were badly damaged after what appeared to be a Russian missile was shot down in the early hours of Wednesday, residents and emergency workers said.

There was no immediate word on casualties as a rescue team searched for signs of life amid the rubble. Surrounding streets were covered with broken glass from hundreds of windows and what appeared to be a motor from the missile lay twisted on the roadside.

Still, Ukrainian forces have withstood an assault by a much larger army. Zelenskiy said Ukrainian troops had killed a fourth Russian major general in the latest fighting. Reuters was not immediately able to verify this.

“The occupiers were not successful today, although they threw thousands of their people into battle, in the north, in the east, in the south of our state. The enemy lost equipment, hundreds more soldiers. A lot of dead Russian conscripts, dozens of officers.”

Ukraine said about 20,000 people had escaped the besieged port of Mariupol in cars, but hundreds of thousands remain trapped under bombardment without heat, power or water.

Deputy Prime Minister Iryna Vereshchuk said it was not clear whether the corridor to the city would open on Wednesday. She said 400 staff and patients hostage were being held hostage at a hospital Russian forces had captured in Mariupol on Tuesday.

Russia was due to pay $117 million in interest on dollar-denominated sovereign bonds, but could be forced to pay in roubles instead, amounting to its first default on foreign debt since the Bolshevik revolution. Moscow said it has the money, and Washington would be to blame if it cannot pay.

 

(Reporting by Reuters bureaus; Writing by Peter Graff, Michael Perry; Editing by Lincoln Feast, Raju Gopalakrishnan, Alex Richardson and Philippa Fletcher)