* 'Diplomacy is only way,' Germany says of Ukraine conflict fears
* Russian troops arrive in ally Belarus for joint exercises
* Cyber attack on Ukraine also raises alarm (Adds Scholz, Russia-Belarus drills, markets)
By Alexander Ratz and Pavel Polityuk
KYIV, Jan 17 (Reuters) - Germany's foreign minister said on Monday she hoped tensions with Russia over Ukraine could be solved by diplomacy, but she warned that Moscow would suffer if it does attack its neighbour.
Minister Annalena Baerbock was speaking in Kyiv on a tour that next takes her to Moscow after talks between Russia and Western states on the Kremlin's deployment of tens of thousands of troops along Ukraine's border ended with no breakthrough last week.
The United States https://www.reuters.com/world/europe/us-concerned-russia-prepping-ukraine-invasion-if-diplomacy-fails-official-2022-01-14 said last week it feared Russia was preparing a pretext to invade Ukraine, which Moscow denies. A cyber attack against Ukraine has heightened alarm.
"Each further aggressive act will have a high price for Russia, economically, strategically, politically," Baerbock told a joint news conference with her Ukrainian counterpart Dmytro Kuleba. "Diplomacy is the only way."
German Chancellor Olaf Scholz, visiting Madrid, said everything must be done to avoid military intervention in Ukraine.
As they spoke, Russian military forces and hardware were arriving in Belarus after Minsk announced the neighbours would stage joint manoeuvres next month, state news agency Belta reported.
The "Allied Resolve" exercises will be held near Belarus's western rim, the borders of NATO military alliance members Poland and Lithuania, and its southern flank with Ukraine, Belarusian leader Alexander Lukashenko said.
Ukraine's Kuleba said Kyiv and Berlin were united in pushing to revive four-way peace talks on ending the war in eastern Ukraine in the so-called "Normandy" format, which includes Germany, France, Ukraine and Russia.
Excluded from much of last week's talks, Ukraine has sought and received reassurances from allies that no decisions would be taken about its future without its involvement and assent.
"It is important for us now that neither Berlin nor Paris makes any decisions about Ukraine without Ukraine, and does not play any game behind our backs in relations with Russia. This is the key now," Kuleba said at the briefing.
PIPELINE POLITICS
Germany has supported Ukraine with aid and diplomatic backing in its standoff with Moscow since Russia seized the Crimean peninsula and backed separatists in the Donbass region in 2014.
But there are points of contention.
Ukraine opposes Nord Stream 2, a pipeline, yet to open, that would ship Russian gas to Germany, circumventing transit through Ukraine. Baerbock said the pipeline was on hold and did not comply with European energy law.
Kyiv has also bristled at Berlin's refusal to sell weapons to Ukraine. Ukraine's ambassador to Germany Andrij Melnyk called the decision "very frustrating and bitter" in an interview with German media ahead of Baerbock's visit.
The friction between Russia and Ukraine also hit markets on Monday, with Ukrainian sovereign dollar bonds slipping into distressed territory and Russian bonds suffering sharp falls.
"The market has to price in some kind of probability of Russia invading," said Viktor Szabo at asset manager abrdn.
Despite the border deployment, Moscow denies it plans to attack Ukraine and has demanded NATO stop its eastward expansion.
Ukraine's cyber police said on Monday that last week's hacking of government systems appeared to have destroyed "external information resources", suggesting the attack went beyond temporarily defacing government websites.
The cyber attack warned Ukrainians to "be afraid and expect the worst".
Ukrainian officials say it hit around 70 internet sites of government bodies including the security and defence council, the cabinet of ministers and several ministries.
"It can already be argued that the attack is more complex than modifying the homepage of websites," the cyber police said in a statement.
(Reporting by Alexander Ratz, Pavel Polityuk, Natalia Zinets, Emma Thomasson, Anton Kolodyazhnyy, Tom Balmforth; Writing by Matthias Williams, Editing by Peter Graff and Angus MacSwan)
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