3 risks from the Ukraine crisis
President of the U.S. Barack Obama Obama discussed the crisis with the leaders of Germany, France, the U.K, and Italy on Friday.
The agreement has unraveled quickly. Washington and Moscow are now accusing each other of failing to use their influence to implement the agreement in Ukraine, where violence between government forces and pro-Russian militants is escalating.
As tension rises, investors are again taking note, and events in Ukraine could have far reaching consequences. Here are 3 things to watch:
Western sanctions
The U.S. and Europe have already imposed sanctions over Russia's annexation of Crimea. The focus has been on freezing the personal assets and disrupting the travel plans of powerful figures close to President Vladimir Putin. Officials directly implicated in separating Crimea from Ukraine have also been targeted, and the U.S. has sanctioned one Russian bank.
Washington has signaled what will happen next if Russia escalates the crisis. President Obama signed an executive order in March giving the U.S. the power to sanction Russian companies in sectors such as financial services, energy, metals and mining, defense and engineering.
On their own, U.S. sanctions are likely to have little direct effect, and Europe is reluctant to take tougher measures because it has much more to lose in terms of trade, investment and financial exposure at a time of economic recovery.
President Obama discussed the crisis with the leaders of Germany, France, the U.K, and Italy on Friday.
They agreed to work closely together on additional steps to impose costs on Russia, the White House said in a statement, adding that the U.S. was prepared to impose targeted sanctions in response to Russia's latest actions.
Russia is already suffering, however. Investors at home and abroad are dumping ruble assets in fear of an escalation in the crisis. As a result, its $2 trillion economy is stalling and inflation is accelerating. It's becoming more expensive for the government and businesses to borrow -- the central bank hiked interest rates for a second consecutive month -- and the risks of a recession are rising rapidly.
Russian gas
Moscow could retaliate against new Western sanctions by cutting gas exports to Ukraine. Russian gas exporter Gazprom meets a third of Europe's gas needs, and about half of that is piped through Ukraine.
Russia has turned off the gas before, most recently in January 2009. But most analysts see a shutoff as a last resort given the impact it would have on the economy. Energy accounts for 70% of Russia's exports.
Still, Russia is increasing the pressure. Gazprom has jacked up the price it charges Ukraine by about 80% this month, and Putin has warned that supplies could take a hit unless Kiev starts making regular payments for gas and coughs up $2.2 billion in arrears.
Europe is looking at ways to pump gas to Ukraine through Poland and Slovakia, and prioritizing efforts to reduce imports of Russian energy. Many of those -- such as shale gas investment -- won't bear fruit for years, leaving countries such as Germany leaning heavily on Gazprom.
German Chancellor Angela Merkel and Putin discussed the Ukraine crisis Friday. Talks between Russia, Europe and Ukraine on gas supply could take place within days, Itar-Tass quoted a Russian official as saying.
European economy
Energy is the single biggest risk for European growth. But car makers, brewers and oil companies also stand to lose from a trade war. Exports to Russia are worth about $170 billion a year, and 75% of all foreign direct investment in Russia originates in EU states.
Germany is most exposed. It is Russia's largest trading partner in Europe, and more than 6,000 German companies do business in the emerging market.
Some companies, such as German software group SAP, have already noticed slower business in Russia, but so far it has failed to put a lasting dent in business or investor confidence in Europe's biggest economy. That could change.
"More than actual trade losses, a consequent confidence shock could halt the recovery, especially in Germany, at least temporarily," wrote Berenberg economists.
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