It is part Soviet theme park, part wacky anti-western wonderland. Stuck to the barricades outside the "Donetsk People's Republic" are several caricatures of Barack Obama. There is Obama as Hitler, complete with moustache. There is Obama, Bonaparte and the Führer, and the words: "They all thought their nations were superior." And there is Obama as a monkey (the monkey-Obama, visible on Friday, had disappeared by Saturday).

Further inside, past a serpentine wall of tyres, activist Vitaly Akulov stood beneath a flag of Stalin. The Soviet leader had a Kalashnikov. Wasn't he responsible for the deaths of millions of Soviet citizens? "Without a tough tsar who uses harsh methods you can't build an imperium," Akulov observed. Other banners read: "Fuck EU and USA", "Donbass with Russia" and "Russians should be together!"

Two weeks ago pro-Kremlin separatists seized Donetsk's regional administration building. They have been there ever since, transforming the 11-storey block overlooking the green Pushkin boulevard into an improvised youth hostel and counter-revolutionary HQ. They are a bizarre group, including teenagers in balaclavas, some just 15 or 16, and bearded men in military jackets. But if Vladimir Putin has his way they will soon become the east's new "government".

On Thursday, Russia, Ukraine, the United States and the EU hammered out a deal in Geneva to de-escalate the six-month-old Ukraine crisis. It was agreed that all illegal groups would end their occupation of official buildings and give up their weapons. Some 48 hours later, however, the separatists who have grabbed a string of municipal premises across the Donbass region, with the capital in Donetsk, had not budged.

"Of course we're not leaving," said Alexey Kirolov, a 24-year-old activist, munching his breakfast in the "republic's" pop-up ground-floor cafeteria. A table was laid out with sandwiches – salami and pork fat – biscuits, tea and coffee. Donated bottles of pickled gherkins were piled up nearby. But what about Geneva? "Russia signed a bit of paper. Everybody knows they didn't mean it," Kirolov said. "Putin's not going to give up on us. We're his people."

On the 11th floor – reached via a lot of stairs, since the lifts don't work – the "republic" leadership was planning its next move. In what used to be the economics and legal departments, exhausted activists lolled on chairs listening to the radio. On Friday "people's governor" Denis Pushilin, a neatly dressed local businessman apparently handpicked for the role, denounced the Geneva deal. He told journalists that his supporters wouldn't leave buildings before the "illegal" government in Kiev quit. A leaflet bearing his name had been dumped outside Donetsk's Jewish synagogue. It said that all Jews in the city had to register, warning that if they did not they would face a fine. Pushilin has denounced the leaflet as a hoax and a "complete lie". Its provenance remains a mystery.

Speaking to the Observer, Vladimir Markovich, Pushilin's close colleague, said the usurping government in Kiev didn't have the right to sign anything: "They are not legitimate." Ukraine's democratically elected parliament, at least, had voted in the new government. Even members of Viktor Yanukovych's Party of Regions had supported it. Had anyone actually voted for him? "No, but local people from my area back me."

Markovich described himself as the "republic's" speaker. He said his activists had barricaded the building with tyres and razorwire because "fascists" might storm their camp at any moment. "We have no weapons, we've never had them," he said. The protesters would continue their sit-and-sleep-in until a referendum was held on the region's future status, he said. The separatists want this by 11 May.

With the Geneva agreement already dead, two scenarios were now likely, according to Igor Todorov, a professor at Donetsk's university. The first was that Russia would annex the east of Ukraine, as it did last month with Crimea. The second was that Moscow would install a puppet regime analogous to the one in Trans-Dniester, the breakaway Moldovan region next to western Ukraine, he said. "The Kremlin will decide at the last minute."

Certainly Russia is treating the "Donbass People's Republic" as a dignified government-in-waiting. The separatists make no secret of wanting to join Moscow. In the lobby of the occupied building is a large map of Donbass, with "Russia" scrawled on it.

The US, EU and Kiev say there is overwhelming proof that the Kremlin is co-ordinating the armed uprising using undercover soldiers and FSB agents. Moscow denies this.

Todorov – a supporter of Ukrainian statehood – said he was deeply pessimistic about his country's future. He said he doubted presidential elections due to be held on 25 May would take place, at least not in the east. And in Kiev, he suggested, there was a growing feeling that Ukraine would be better off dumping its troublesome eastern provinces and creating a modern European country without them.

Last week, meanwhile, the Russian media reported that Yanukovych was planning to return to Ukraine on Easter Sunday. He would reappear in his hometown of Donetsk, it said, citing Russian sources (traditionally, Yanukovych visits the grave of his mother Olga over Easter in nearby Yenakiyevo). Yanukovych's imminent resurrection seems unlikely. But it is possible the Kremlin may deploy him at some point. "I can see a scenario where Russia brings back Yanukovych and puts him on a tank in Kiev," Todorov said gloomily.

Guarding the foyer of the "republic" HQ, a volunteer called Andrei said Yanukovych still enjoyed some local support: "I don't see why he couldn't come back, if the people create a 'living corridor' for him." Andrei declined to give his surname, but said he was a 27-year-old security guard from the nearby town of Gorlovka. He had a weapon of sorts – a metallic baseball bat with the word "bat" written on it, and was wearing a flak-jacket. What were living conditions like inside the occupied building? "Well, it's not home, obviously. But we have food. And there's even a basic shower." Andrei was sitting with a young female doctor dispensing medicines. On the wall were black-and-white photographs of Soviet war veterans. Next to the bathrooms was a sign in pink highlighter which read: "Make provocateurs clean the toilets."

Wouldn't it be difficult to organise a referendum in a couple of weeks? "It's all in hand. Look at how quickly it happened in Crimea," Andrei pointed out. "We already have people on the ground, in towns and villages, preparing for it. We are getting ready for a return to autonomy. Russia is helping us."

The theme of Soviet pride is ubiquitous, with the separatists casting their battle against Kiev as a re-run of the second world war, of Moscow against the Nazis. One portrait on the wall is of Konstantin Simonov, the distinguished writer and Soviet war reporter. A cruder poster contrasts a row of Russian soldiers with a European gay pride rally. It asks bluntly: "In which parade would you want your son to take part?"

Outside, beneath a balcony of Russian and Donbass flags, a sound system pumped out a string of schmaltzy Russian disco numbers. The occupiers may have powerful friends in Moscow, but the crowds in front of the building have often been sparse in a city of a million people. There is overwhelming support in eastern Ukraine for greater autonomy from Kiev, as well as for Russian to be given the status of an official state language. According to an opinion poll in February, though, the separatists are in the minority – with only 26% in the east supporting union with Russia.

Underneath the Stalin flag, Akulov meanwhile said he wanted a federal republic: "I don't care if we end up with Kiev or Moscow. The main thing is we are on our own." Akulov said he was a lifetime member of the Communist party – "the USSR one, not today's one" – and a decorated retired miner, now aged 68. What had driven him to protest, he said, was the destruction of Soviet war memorials in the west of Ukraine.

"My father died very early. I was nine. He was injured several times while fighting in the Red Army. When they call Soviet troops occupiers I find that profoundly insulting." He disappeared into his red Communist party booth and returned with a notebook. He then read aloud a poem that was written to commemorate the 80,000 Soviet soldiers who died while storming Berlin in 1945 – a moving work addressed to young German women. "That's why we should win here," he said.