Council on Foreign Relations Global Economics Monthly
Issue 12 | May 2014

Global Economics Monthly

Russia Contagion: Local or Global?

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

Japanese Quantitative Easing

Faltering growth and inflation prospects will increase pressure on the Bank of Japan to double down on quantitative easing.

Emerging Market Growth

Evidence grows that the emerging market slowdown will persist. How will markets adjust to emerging markets growing more slowly than industrial countries?

Federal Reserve Meetings

The May meeting could be the first with new members Stanley Fischer and Lael Brainard, and markets may be extra sensitive to hints of future policy directions.

From the Macro and Markets Blog

Changing Course: Financial Sanctions on Russia

Robert Kahn

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 »

IMF/World Bank Spring Meetings: Three Questions

Robert Kahn

Have we lost confidence in our global growth story? How do we reform the IMF? Is low inflation a major global risk? Read more »

The Sanctions Dilemma

Robert Kahn

A forced, rapid deleveraging would be a hard hit on an already-weakened Russian economy. However, sanctions may well be recessionary for the West as well. Read more »

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