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Putin's Lehman Moment

Why Sanctions Will Work in Russia

Icicles hang in front of a VTB Bank office in central Moscow, January 21, 2013. Sergei Karpukhin / Courtesy Reuters

As tensions rise in eastern Ukraine and Russia talks ominously of a civil war in which it might have to intervene, observers from Washington to Brussels have started questioning whether sanctions -- the West’s current preferred method for dealing with Russia -- can hold the country at bay.

In fact, although sanctions have only a spotty record of achieving political objectives, they could be unusually powerful in this case. Russia’s relationship to global financial markets -- integrated, highly leveraged, and opaque -- creates vulnerability, which sanctions could exploit to produce a Russian “Lehman moment”: a sharp, rapid deleveraging with major consequences for Russia’s ability to trade and invest.

So, even as the West combines lesser sanctions with measures to support economic stability in Ukraine, lessen its long-term dependence on Russian energy, and otherwise signal that there will be costs to further aggression, it should hold the threat

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