Sanctions Blowback

With the crisis in Ukraine intensifying, the US and the EU are locked in a battle of wills – and sanctions. The real threat to the West does not lie in Russia's retaliatory sanctions, but rather in the potential impact of a financial crisis sparked by its own restrictions on Russian banks.

BERLIN – With the crisis in Ukraine intensifying, the United States and the European Union are locked in a battle of wills – and sanctions – with Russia. Indeed, in retaliation for the intensification of Western financial sanctions, Russia has announced a ban on food and agricultural imports from the US and the EU. But the real threat to the West lies in the potential impact of a financial crisis sparked by its own sanctions against Russia.

Consider Russia’s 1998 financial crisis. In August of that year, then-President Boris Yeltsin declared, “There will be no devaluation – that is firm and definite.” Three days later, the ruble was devalued, and Russian financial markets went into a tailspin. With capital pouring out of the country, the Russian government was forced to restructure its debt, and the economy entered a deep recession.

Though Russia was relatively insignificant financially, its crisis had far-reaching consequences. Among the worst affected was Argentina; the Russian crisis exacerbated a decline in investors’ confidence in emerging markets that culminated in Argentina’s sovereign default less than four years later. Even the US and Europe were not immune, with the collapse of the major hedge fund Long-Term Capital Management (LTCM) fueling anxiety about the viability of many other financial institutions.

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