The Kremlin is unlikely to cut off Europe’s gas supplies in retaliation since this would further cripple the Russian economy but it may try to pick off the smaller states one by one.
The apparent shooting down of a Malaysian Airlines jet over eastern Ukraine with 295 people on board is a dramatic turn in the region’s simmering crisis.
Any proof that the passenger aircraft was blown out of the sky at 32,000 feet by a Russian fighter jet by mistake or by Russian missiles supplied to separatist rebels in the Donbass region may have huge political consequences, risking Cold War sanctions of such severity that Russia would be shut out of the global financial system.
Both Russia and Ukraine deny responsibility.
The incident comes a day after sweeping US sanctions against Russia’s top oil producer and key energy companies had already shattered the illusory summer calm on Moscow’s markets, raising fears of an investment freeze and a protracted crisis that could last for years.
Yields on Russian 10-year rouble bonds surged 34 points to a two-month high of 8.9pc even before news of the disaster. Markets are waking up to the cold reality that the geo-strategic stand-off between Russia and the West over the fate of Ukraine cannot easily be finessed or covered up with fudges.
The new measures unveiled by the US Treasury move up the gears to the next level and target pillars of the Russian economy. They are intended to choke access to long-term Western finance and raise the cost for Russian companies and banks as they roll over $710bn (£415bn) of foreign currency debt, mostly in dollars.
“The latest US sanctions package risks setting off a vicious downwards spiral,” said Christopher Granville, from Trusted Sources. The measures directly target capital flows to Rosneft, the world’s biggest traded oil company, producing 4m barrels a day and generating $75bn of tax revenues for the Kremlin. The company’s share price fell 5.7pc in London.
The US also targeted Russia’s second-largest gas group, Novatek, as well as Gazprombank, the Russian development bank, VEB and leading arms companies. Russian premier Dmitry Medvedev called the measures “evil”, while the Russian foreign ministry vowed retaliation that will be “painfully and keenly felt in Washington”.
Mr Granville said the Treasury has deliberately left the door open for “even fiercer measures” unless Russian president Vladimir Putin halts support for the rebels in Ukraine, which is almost impossible for him to do. Russian bedrock demand is that Ukraine must remain a non-aligned state. It cannot be absorbed into the Western military and diplomatic camp, as implied by its EU association deal. Mr Putin is so deeply embroiled in the Donbass revolt that his own political survival might be in jeopardy if he were to capitulate.
Tim Ash, from Standard Bank, said new sanctions are “a seismic hit” for Russia’s economy. “The fact that such prominent companies are being sanctioned suggests the US is deadly serious,” he said. “Questions will now be asked which other companies will be next, and what assets and financing will be subject to further sanctions. Risk management teams are likely to dump Russian assets first, rather than be caught down the line with sanctioned Russian assets on their balance sheets.”
Mr Ash said it makes little difference whether the EU follows suit since any European company with business interests in the US will “ultimately be forced to comply”. Few dare risk the wrath of US regulators.
The sanctions do not prohibit US citizens and firms from operating in Russia, or holding shares and bonds in companies on the list. Nor do they stop Rosneft or Novatek delivering oil and gas to global markets. But they do prevent Americans lending fresh money beyond 90 days maturity, which threatens slow suffocation.
Rosneft has to repay or roll over $32bn in the next 18 months, mostly in dollars. Sberbank analysts said the oil group may have to run down its cash reserves of $20bn and ultimately rely on “anti-crisis” funding from the government.
Russia can weather the crisis for a while with foreign reserves above $480bn. The risk is a return to the slow decline of the early 1980s as companies are forced to shelve investment. The country is counting on Western joint ventures and technology to launch a wave of oil and gas exploration as output stagnates and reserves run low in the West Siberian fields.