Robert Kahn, Steven A. Tananbaum Senior Fellow for International Economics
Bottom Line: Given Russia's economic and financial links to world markets, sanction decisions need to consider the realistic possibility of contagion.
Conventional wisdom has it that sanctions will impose a cost on Russia, but that absent a major intensification of the conflict the effects will be concentrated in the region with limited global impact. To date, sanctions have been modest, targeting a limited number of individuals, their companies, and small banks. But a set of tougher industry-wide sanctions affecting finance, energy, and defense are reportedly under consideration.
In part, this belief in limited, regional contagion reflects a relatively sanguine view among investors about the prospects of an escalation of tensions, a position many in the foreign policy community do not share. If the probabilities and the implications are hard to measure, it is not surprising that many in the markets choose not to give much weight to severe downside scenarios. That optimism could prove untenable if the darker views of Russian president Vladimir Putin's plans prove accurate.
In addition, it is often argued that Russia simply is not critical to the global markets. For example, Goldman Sachs Research argues that despite contributing 3 percent of global gross domestic product (GDP) and significant energy exports, Russia's limited integration in global supply chains and international financial markets means "repercussions for the global economy of current tensions might be relatively small." Their firm's greater concern is that Russia may respond to sanctions by turning inward. From that perspective, the long-term isolation of the Russian economy is the primary legacy from sanctions.
Figure 1: Costs of Sanctions in the Financial Arena
Sources: Bank for International Settlements, International Monetary Fund Read more »
Looking Ahead: Kahn's take on the news on the horizon
Extension of economic sanctions toward Gazprombank and Vnesheconombank introduces a new era in the use of economic sanctions. The measures have the potential to achieve their goal of punishing the Russian state. Read more »