High Stakes Limit Bid to Cow Putin

Moves to Isolate Moscow Risk Economic Damage Across Range of European Sectors.

Threats by the U.S. and European powers to impose tough sanctions on Russia over its incursion into Ukraine have run into a difficult economic reality: The West has as much at stake as Moscow.

While sanctions were central to international efforts to exert pressure on countries such as Iran and Myanmar in recent years, Russia’s sheer size and economic entanglement with the West make it much harder to isolate.

Russian President Vladimir Putin seized the point at a news conference on Tuesday in Moscow, warning that all sides would suffer if sanctions were imposed.

“Those who are thinking of imposing the sanctions should be the ones first of all to think about their consequences,” he said. “I think in the modern world, when everything is so interconnected and everyone depends on everyone else in one way or another, it’s of course possible to do some damage to one another, but it will be mutual damage.”

President Barack Obama and other Western leaders have warned Russia of severe consequences if it doesn’t reverse course in Ukraine.

Yet Russia has become so deeply embedded into the European economy since the Soviet Union’s collapse that any move to substantially curtail its commercial and economic ties with the West would risk major economic damage to both sides across a range of sectors—from energy to transportation and finance.

Despite the tough rhetoric out of many European capitals, the region’s continued economic stagnation makes it unlikely that leaders will endorse measures that would further dent the region’s prospects.

A spokesman for Russia’s foreign ministry said late Tuesday that Moscow was prepared to retaliate if Washington followed through with the sanctions threat, according to Russia’s Interfax news agency.

Russia’s trade and investment ties with the U.S. are quite small. Russian trade accounted for just 1% of U.S. trade in 2013, with $27 billion of imports, mostly fuel oil, and $11.2 billion of exports, led by aircraft, cars and parts, according to the U.S. Census Bureau. The imported fuel oil is of small significance to the U.S., which actually exported $64 billion of the commodity last year.

“The U.S. sanctions won’t have much bite because they would primarily be unilateral,” given Europe’s apparent reluctance to censure Moscow, says Marc Chandler, head of Brown Brothers Harriman’s global currency strategy team in New York. Mr. Chandler estimates U.S. bank loans to Russia at about $20 billion to $30 billion.

Still, Russia’s own economic woes may weaken its position. Data released Monday showed its manufacturing sector contracted in February, for the fourth-straight month, and new export orders for the sixth-straight month. A swift rate increase by Russia’s central bank Monday in response to a falling ruble will likely only drag growth down even more.

That weakness could give Europe an opening to put pressure on Mr. Putin. “I think a set of targeted economic measures and limited economic sanctions might give Putin pause for thought, given the rather precarious economic situation in Russia,” says Charles Grant, director of the Centre for European Reform, a London-based think tank.

For now, at least, Moscow shows little sign it is willing to back down.

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