The Obama administration is poised to enact tougher sanctions in order to mitigate Russian aggression in Ukraine, says Robert Kahn, CFR's Steven A. Tananbaum Senior Fellow for International Economics. He offers three things to know about the strategy behind sanctions and how they could affect the Russian economy:
0:30 Targeted Sanctions Work Best: In issuing sanctions, past cases like North Korea, Iran, and Libya show that globally backed, well-defined sanctions targeting "economic objectives rather than a broad geopolitical agenda" are most effective, says Kahn. Targeted and backed sanctions are more powerful and harder to evade for Russia, since its economy has "deep involvement in global markets," he adds.
1:02 Modest Sanctions So Far: Current sanctions only freeze assets and target travel capabilities for a sliver of the Russian economy, including a number of businesspeople and officials, and a bank. The G7, which excludes Russia, and suspended trade talks also play a role in the West's strategy to ramp up measures that "would send a clear signal without causing unnecessary damage," Kahn says.
2:00 Risk of Russian 'Lehman Moment' - Russia's integrated, highly leveraged, and opaque relationship to global financial markets means that sanctions could exploit a vulnerability to produce what Kahn calls a "Lehman moment: a sharp, rapid deleveraging of the sort that global markets saw after Lehman Brothers collapsed and AIG was bailed out in September 2008." The resulting lack of financing and trust could severely compromise Russian trade and investment capabilities, he adds. But Kahn notes that sanctions alone cannot mitigate the crisis; they must be supplemented with positive measures, such as financial support for Ukraine, to be effective, and the cost of sanctions must be weighed against the costs of inaction and the risk of protracted instability.
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