As the West struggles to respond to Vladimir Putin's version of The Empire Strikes Back, its options remain limited.
When Russia invaded Afghanistan in 1979, U.S. president Jimmy Carter sent a strongly worded letter, imposed some trade sanctions, including an embargo on wheat sales, and launched what would become a broad Western boycott of the 1980 Olympics in Moscow. We all know how well that worked.
This time around, Western leaders are contemplating penalties that could inflict considerable damage on a Russian economy that is far more connected to global financial, trade and investment flows. But any heavy sanctions or wide-scale asset freezes are bound to be contentious. Though Mr. Putin has painted himself into a political corner, this renewed economic weakness may open a door, both for him and for European governments dependent on Russian oil and gas exports.
The good news is that the mere threats and counter-threats, coupled with growing investor fears that the Kremlin will extend its high-risk strategy to other parts of Ukraine and even other former Soviet satellites, could be enough to tip an already struggling Russian economy into a deep recession. And if there is anything that could rein in Mr. Putin's grandiose geopolitical ambitions, it's a full-scale economic collapse at home.
"The economic situation shows clear signs of a crisis," is the way deputy economy minister Sergei Belyakov phrased it Monday in a speech to a domestic business audience.
Growth slipped to 1.3 per cent last year, the fourth consecutive decline and the weakest expansion since the 2009 recession. Economy watchers forecast that contraction will be under way by the second quarter.
Falling commodity prices have hit hard, corruption remains a huge economic drag, and the Sochi Olympics and ramped-up military expenses have depleted the Kremlin's coffers. Public debt is low, which provides some capacity for stimulus spending. But foreign capital is rushing for the exits, putting added pressure on the battered ruble. Billions of dollars in international financings for Russian companies are at risk. And lenders are likely to demand higher rates and collateral to roll over debt.
Capital Economics estimates that $50-billion (U.S.) in net private capital has been pulled out of Russia so far this year and that, at the current pace, the total will hit $70-billion by the end of this quarter – most of it by nervous foreign investors. That amounts to a hefty 3.2 per cent of GDP. If anything, that estimate may be on the low side.
European Union foreign ministers have talked about taking "targeted measures," although initial moves are easy ones such as travel bans and freezes on assets held by 21 Russian and Crimean officials. Washington is taking similar action against seven Russians, including two Putin aides and a deputy prime minister responsible for military-related industry. Four Ukrainians, including deposed president Viktor Yanukovych, already had their assets frozen.
President Barack Obama insists that this is only the beginning: "Continued Russian military intervention in Ukraine will only deepen Russia's diplomatic isolation and exact a greater toll on the Russian economy."
EU foreign ministers will meet later this week to discuss "additional and far-reaching consequences" for the Russians. And German Chancellor Angela Merkel, whose country has the most to lose if Mr. Putin retaliates by seizing Western business assets or restricting natural gas exports to the West, insists her government will cope with any retaliation.
But when push comes to shove, it's hard to see the Europeans lining up behind serious penalties that could endanger their access to critical Russian energy. The threat of mutually assured destruction, at least economically, might just prompt the beginning of a much-needed detente.