Russia’s invasion of Ukraine (“incursion” is far too polite a term) represents a major intensification of the conflict and should cross all red lines the West has established. The logic of the earlier, incremental approach—put modest sanctions in place, and let the threat of worse create a chilling effect on investment and trade—has reached a dead end. Whether President Putin seeks a stalemate within Ukraine or something more menacing, full sectoral sanctions (including, importantly, Russia’s access to payments systems) should now be put in place as a firm signal of western resolve. The real cost-benefit to be done is not the costs on the West compared to Russia. Rather it is those relative costs contrasted against doing nothing and risking a situation that brings us closer to either armed conflict or acceptance of a new rule that states can redraw boundaries by force. German President Merkel has signaled that further sanctions are on the agenda for the September 30 EU leaders summit, and I expect the Obama Administration will move with them if not before.
A deal that would end the violence in Ukraine appears to be holding. It would produce early elections, a return to the 2004 constitution, and a national unity government. It would also set the stage for an urgent western effort to provide financing supported by an IMF program. Good news on the politics, though, does not equate to good news on the economy.