F’d Up: Even so…Why Western Europe Hesitates in its Sanctioning of Russia

Actions by the U.S. and its European allies in last two week to financially sanction Russia seem even more justifiable in light of the increasingly clear evidence that a Russian surface to air missile shot down a commercial airliner over Ukraine.

But Western European reaction remains muted despite intercepted radio communication wherein separatists and Russians seem to admit that they “F’d up” in the use of the weapons thinking they had mistakenly targeted a civilian plane, satellite imagining, and photos of Russian missile transports in the region from which the attack took place.

President Obama has placed additional restrictions on the financing of state-owned companies such as Russian oil giant Rosneft. European leaders having just completed a meeting of foreign and finance ministers have also announced that they would restrict new funding from the European Investment Bank and would pressure the European Bank for Reconstruction and Development to do the same.

Beginning with specific individuals, and expanding to specific companies, sanctions are now seeking to target entire sectors of the Russian economy.

World stock market reaction was well justified since such sanctions will  reduce available financing, and supplies and will further destabilize the operating  environment of a number of international ventures. BUT the knife cuts in both directions…..all of Europe has strong ties to the economy of Russia especially in the production of fossil fuels. An impaired Russian economy will have spillover effects on major trading partners in Europe, which will in turn weigh on the global economy.

Another question is how close Russia is to setting its own counter-sanctions on energy supplies to central and western Europe. Such an escalation, which would certainly trigger even tougher sanctions from the West would tip both Russia and Europe into recession, and would likely drag down the global economy.

Up to now the world markets have discounted the possibility that rational politicians will do their utmost to keep this from happening. They’ve tended to focus on other factors supporting stability including central bank policies, merger-and-acquisition activity and the gradual healing of Western economies. But events like the one where a single incident, the shooting down of a plane by Ukrainian separatists with a Russian Weapon (certainly supplied by the Russians), could introduce a level of brinkmanship which has been largely avoided by the major powers until now.

We are learning that Putin, facing more and more opposition from Western European powers, outright hostility from former Warsaw Pact nations, and surprising resistance with even more surprising success from Ukrainian armed forces, is doubling down on Russian support for the separatists.

All of this demonstrates that it is not beyond the realm of possibility that politicians will take the conflict over Ukraine to the tipping point.