I think what is happening overall is brinkmanship by a number of parties, which is not uncommon in geopolitics, and it is unlikely anything significant happens.
But lets discuss the interests of different parties in each state:
There are interest groups in Ukraine that want Nord Stream 2 sanctioned as it going live in June 2022 would end $3bn of transit revenues that the Ukraine government gets. The oligarchs in the Ukraine owe a lot of their wealth to milking the state budgets. Then there are Neo-Nazi militias that were folded into the military without much ‘re-eduction’ who dream of taking Donbass region back and like to wear WWII Galician division insignia.
So we had a Ukraine forces build up last Feb/ March then a climb down (NS2 was supposed to go live last summer but a German court said the legal structure was not compliant and needed to be changed and then reapproved) now is the last gamble before it goes live. Ukraine built up forces in Oct and used newly received Nato weapons, such as a TB2 drone to strike 15kms behind the ceasefire line. (https://ukdefencejournal.org.uk/ukraine-uses-bayraktar-tb2-drone-in-combat-for-first-time/) They also crossed the ceasefire line and attacked two small villages with an armoured column. There are daily ceasefire violations of 100-1000 events that the OSCE record in a daily report published on the OSCE website. Here is a video of a Ukraine journalist firing a howitzer towards the area. They generally try and shell utilities to make the area as unliveable as possible but also routinely injure and kill civilians.
Meanwhile the BBC Kiev correspondent notes little frontline expectation of an invasion:
President Zelensky is a former slap stick comedian who was pushed forwards to power by an Oligarch. He won on a reform mandate with pro-western alignment, but has failed to challenge the oligarchs who can easily bribe officials, so has become dependent on the support of the nationalists. He has not implemented the Minsk agreement.
The Minsk agreement is a treaty that Ukraine, Russia, Germany and France negotiated. It would deliver a federal Ukraine and MPs from Donbass would go to Kiev. But the nationalists want to defeat the Donbass fighters and don’t want pro-Russian MPs in Kiev. So it has never been implemented.
So Russia responded to the events in Oct by increasing their troops near the border from circa 90k to 120-130k. Also there was evidence of more equipment rail way shipped into Donbass. So they were definitely trying to menace Ukraine into stopping the heavy weapons attacks with the implicit threat of a bigger conflict. But they only did the build up after Ukraine provocations.
Then the western media reports the Russian activities and is encouraged to conclude that Putin is about to invade.
Russia has repeatedly called for the Minsk treaty to be implemented. If it is not implemented this year there are calls in the Russian parliament for the Donbass region to have a referendum on joining Russia. Most of the residents have Russian citizenship now.
Russia recently seems to have decided to push back and use the reporting of their invasion threat in the western media to try and push for long term extra-territorial security guarantees, which the US/ UK have blown off, but there seems to be a serious discussion starting with France and Italy and by inference the EU in general.
A low probability event is a conflagration happens/ is engineered and Putin then annexes the sea front from Mariupol to Crimea and possibly the area around the Dnieper river/ canal to secure the fresh water supply. That operation might take a week or so, it is flat land and his tanks would literally just roll across it. Our understanding is that Putin, Medvedev, Lavrov and other centrists in Moscow see the sanctions fall out from that as not worth it, but there are hardliners who dream of doing this.
An invasion would also give the hardliners in the Washington ample excuse to impose much tougher sanctions and trade embargoes on Russia. I don’t see a broader invasion of western Ukraine as likely.
In the last few weeks various Russian officials have alluded to what they see is little more than a UK/ US intelligence operation aimed at misleading their respective political leaders and bouncing said leaders into further anti-Russian sanctions.
“West cooked up ‘Russian threat’ to save face after Afghan flop, diplomat says”
America and the UK are unlikely to agree to any Russian security guarantees and are more likely to try and periodically antagonise Putin and his security people, as part of the old ‘great game’. Although this week it seems France and Italy are willing to negotiate security with Russia.
Apparently, an MI6 dossier, no doubt drawing on Ukrainian sources, has been rubber stamped by the CIA/ State Dept and is the basis for the UK/ US claiming that Putin ‘could/ almost certainly will’ invade. Ie the deep state is bouncing the politicians to try and get more sanctions imposed on Putin and Russia. The Russians are aware of this and have alluded to it several times.
By claiming Putin might invade imminently they justify sending more arms (Germany would block a NATO MAP) and can provide NATO training to an Army that has neo-Nazi elements within it
Then when Putin does not invade they will be able to claim diplomatic victory and claim that they stared down the Russian threat. But it is almost certainly built on a series of false narratives and manipulated analysis and conclusions.
Later this year/ Resolution
Once NS2 is up and running in June and Ukraine has lost the >$3bn in transit revenues, it will be easier for Germany to pressure them to implement the Minsk agreement to make Ukraine a federal state as Ukraine will still want a closer EU relationship. If Kiev refuses to implement Minsk, which is quite likely, then perhaps Donbass would then join Russia, and having the Russian military directly in the disputed areas would necessarily end the low intensity conflict.
Germany and Russia don’t want anything to happen that would sanction NS2, Biden has accepted that without NS2 gas prices in Europe would be too high and that affects global gas prices, hence the administration blocked a sanction attempt in the Senate recently on NS2. German industry don’t want high gas prices or their investments in Russia to be affected, hence the US has given up on the idea of disconnecting Russia from Swift.
So for now, there are multiple groups within each country that have competing agendas and some brinkmanship has suited a lot of them.
It is possible that there is a sizable ‘border incident’ but I think it would likely be contained quickly.
Then a permanent resolution is likely to be pushed for in H2 this year.
Update 8th Feb
With Putin now negotiating directly with Macron, Draghi and Scholz, this sidelines US-led NATO and is likely to force the US/ UK to also negotiate inorder for them to avoid a Russia-European security treaty that makes NATO effectively irrelevant and supports Macron's vision of an EU security organisation.
So having started this operation with an objective of humiliating or sanctioning Putin, it is now in the process of backfiring on the deep state and is possibly leading to a long term security pact principally between Europe and Russia.
Update 22nd Feb
It is possible that Putin concluded that for a Finland style deal for the Ukraine (EU membership, no NATO membership) they had to permanently settle the Donbass issue. But Ukraine would not/ could not agree to settle it, so Putin has settled it via an effective annexation and now a Finland style deal can be implemented, hence the limited sanctions being announced.