LONDON: Russia is becoming the country Vladimir Putin has long said it is — isolated by a hostile West intent on weakening its power.

The United States and Europe hold the Russian president responsible for what is happening in Ukraine.

The downing of flight MH17 changes the debate about how to force Moscow to adopt a more reasonable attitude in the region.

The West’s existing strategy of gradually esca­­lating economic sanc­­­­tions following Rus­sia’s annexation of Crimea will now intensify.

The prospect of a long-drawn economic conflict looms. The diplomatic challenge is to leave Putin a way out of the corner he has backed himself into.

But as sanctions bite, companies operating in Russia and investors still bullish on its prospects should prepare to pay a price for their enthusiasm.

The sanctions introduced so far have created a general climate that makes companies reluctant to invest in Russia and banks wary of funding them. That will only worsen after the new round of measures Washington ann­ounced last week, just before the Malaysia Airlines crash. The European Union had already planned a stricter set of sanctions of its own. It cannot back down now.

The traditional Russia apologists — mostly European energy companies such as BP or Total — may, as ever, push for business as usual. But they will operate under a “trading with the enemy” syndrome, and find it harder to finance their multi-decade projects in Siberia or the Arctic.

For everyone, maintaining Russian ties will carry a cost that could only be justified in the long term if Putin comes back to the negotiating table and leaves Ukraine alone.

The EU can hurt Russia where it is most vulnerable: the ruling elites’ dependence on Western finance and markets. Europe would also pay high a price itself, less in the direct impact of sanctions than in the climate of heightened uncertainty and gloom.

The reward would be a Russia that could one day be economically embraced once again. —Reuters

Published in Dawn, July 22nd, 2014

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