Russian government officials and businessmen are readying for sanctions resembling those applied to Iran after what they see as the inevitable annexation of Ukraine’s Crimea region, according to four people with knowledge of the preparations.

Iran-style retaliation from the West, which would include freezing Russia’s foreign reserves, banking assets and halting lending to companies, is being treated as an unlikely worst-case scenario, according to the people who asked not to be identified as the talks are under way. Officials are calculating the cost to the economy, the people said.

Some political leaders are hoping that President Vladimir Putin will moderate his response to the crisis, the people said. A sanctions war, with Russia retaliating against the West, could wipe out 10 years of achievements in financial and monetary policy, one of them said. Such escalation could erase as much as a third of the ruble’s value, another said.

Dmitry Peskov, Putin’s spokesman, declined to comment.

The Ukraine crisis triggered the worst standoff between Russia and the West since the end of the Cold War after Russian forces seized the Crimean peninsula. German Chancellor Angela Merkel yesterday said a round of European Union sanctions is “unavoidable” if Putin’s government fails to take steps to ease tensions.

In Washington, U.S. Secretary of State John Kerry yesterday said at a congressional hearing that sanctions on Russia could “get ugly fast” if events justified them. Group of Seven countries called on Putin to “immediately halt” efforts to pry Crimea away from Ukraine, to reduce Russian forces to pre-crisis numbers and to allow international monitors and mediation.

David Fuller's view

Vladimir Putin’s gamble has been that he could seize Crimea and bundle it into Russia following this Sunday’s vote in the region, without any fear of military opposition from Western European countries or the USA.  Putin has calculated correctly in this respect and he knows that he can easily brush aside any Ukraine military opposition to the annexation of Crimea, not least as a majority of the region’s residents are Russian.   

Recalling Soviet Union era tensions, Putin may have also assumed that he could fund his current aggression with higher oil prices.  That option may be less reliable.  Yes, Europe has so far spurned its opportunity to develop its own shale oil and gas reserves, while also closing nuclear power plants.  The European Union’s dependence on Russian oil and gas has reduced its opposition to gentle rebukes and perhaps temporary travel restrictions on Russian citizens.  

Nevertheless, increased tensions in Crimea and Eastern Ukraine could lead to a temporary freeze of Russian assets in Europe.  The UK could effectively do this, albeit at some temporary cost, because an increasing number of wealthy Russians now have assets in the UK, including financial reserves and property. 

Meanwhile, the 21^st Century financial markets continue to pull money out of Russia’s stock market (weekly & daily), weakening the Ruble in the process, following Putin’s 18^th & early 19^th Century military takeover tactic.  Additionally, the USA has just announced its first sale of crude oil from its strategic reserves since 1990, as this article from Reuters explains: US surprises oil market with a sale from strategic reserve.  

An interesting and previously unmentioned side effect of Russia’s strongman aggression is that Putin is now susceptible to a coup d’état.  Currently, polls suggest that the authoritarian Putin is favoured more than he is feared in Russia.  However, this would change if a takeover of Crimea results in a further withdrawal of capital from Russia, plus travel and financial sanctions in European and possibly other countries.  Russia’s oligarchs and even its military may decide that he has become a too expensive liability for their 21^st Century multinational opportunities.

(See also, “punished by the 21^st century financial markets”, in my assessment on March 4^th.)