The town of Lyman, Kyiv said, had been entered by Ukrainian forces.
This moment was posted on social media by the Ukrainian president's chief of staff Andriy Yermak.
"Lyman will be Ukraine," a Ukrainian soldier said before taping a flag on a welcome sign on the way into town.
The statement from Moscow ended hours of silence after Ukraine first said it had surrounded thousands of Russian troops in the area.
The Russian defense ministry's statement made no mention of its troops being encircled at Lyman, diverging starkly from Ukraine's version of events.
Neither side's battlefield assertions could be independently verified.
It would be a stinging defeat for Moscow and come just one day after Russian President Vladimir Putin proclaimed the annexation of four Ukrainian regions - including Donetsk, where Lyman is located.
Russia moved to annex these regions after holding what it called referendums - votes that were denounced by Kyiv and Western governments as illegal and coercive.
Ramzan Kadyrov, the leader of Chechnya who describes himself as a foot soldier of Putin, said he was unable to remain silent amid the defeat.
He wrote in a Telegram post that drastic measures like the use of low-yield nuclear weapons should be considered.
About 30 miles from Lyman, volunteers scrambled to evacuate residents from Bakhmut.
Daniel Taylor is an American volunteer working with the Ukrainian evacuation team:
"We're here to evacuate civilians from Bakhmut, which is coming under Russian fire."
"And how many civilians today?"
"So far, three and then we're picking up another."
One resident told Reuters that with the shelling it was "impossible" to stay.