Is this the woman who will rock Vladimir Putin's world? Photographer: Adam Berry/Getty Images
Is this the woman who will rock Vladimir Putin's world? Photographer: Adam Berry/Getty Images

The rapidly unfolding crisis in Ukraine will be decided primarily by two people: Russian President Vladimir Putin and German Chancellor Angela Merkel. So it was encouraging to hear Merkel say today that if Russia goes further in destabilizing its neighbor, it will face "massive economic and political harm."

What precisely that harm would be, she did not specify (though one can assume, or at least hope, that she is providing Putin with more details). Nevertheless, Merkel deserves credit for her warning, and the European Union and the U.S. should support her efforts to spell out the consequences to Putin for Russia's aggression.

Standoff in Ukraine

Merkel has become the central player in Ukraine because her country has the strongest trade and investment ties with Russia of any Western country and because, although she is a deeply cautious politician, she is also deeply credible. Germany has the most to lose from an economic showdown with Russia and, by the same token, the greatest capacity to influence and punish Putin.

Germany gets 35 percent of its oil and natural gas supplies from Russia, and its annual exports to Russia are worth 38 billion euros ($53 billion). More than 6,000 German companies have investments in the country, and German business leaders say trade between the two countries is good for about 300,000 German jobs.

All this, plus public support for decades of German policies of engagement with Russia, helps to explain Germany's reticence until now in spelling out serious consequences to Russia for its actions in Ukraine. Merkel's restraint has weakened the West's response, giving other countries with much to lose from sanctions -- such as the U.K. and the Netherlands -- a place to hide.

Russia's formal annexation of Crimea, which seems all but certain to follow a phony referendum on the peninsula on Sunday, would obliterate the 1994 treaty that the U.S. and Russia signed to guarantee Ukraine's sovereign borders in exchange for relinquishing its nuclear deterrent. Honoring that guarantee is fundamental to nonproliferation efforts around the world, including with Iran.

Merkel stopped short in her speech of tying tougher sanctions to any Russian annexation of Crimea, making it likely that effective measures would be rolled out only if Putin moved troops into other parts of Ukraine. With Russia mobilizing troops on Ukraine's eastern border today, that pledge is a vital step forward, but it should apply to Crimea's annexation, too. The response that Merkel and the EU have promised for Monday if the referendum goes forward -- visa bans and asset freezes for the Russian officials responsible -- is relatively feeble.

Merkel should commit to the stronger response she described now, in private to Putin if necessary, before the first Russian soldier has crossed into eastern Ukraine. She should make clear to him exactly what collective sanctions he would face from the EU, Russia's biggest trading partner and the provider of an estimated 75 percent of its foreign direct investment.

Those measures should include financial sanctions that would severely hit the Russian elite (and the City of London) as well as the ability of Russian banks to process transactions, including for the export of oil and gas. Russia is preparing for the potential imposition of Iran-style sanctions by the U.S. that would cut off Russian banks from U.S. dollar transactions, and she should commit to do the same in Europe.

"None of us wishes it will come to such measures," Merkel said today. "But we would all be ready for them and resolved if they become unavoidable." Only the German chancellor can deliver that message, because only she can credibly convince Putin that Germany, and therefore the EU, is ready to pay the cost of stopping him.

To contact the senior editor responsible for Bloomberg View's editorials: David Shipley at davidshipley@bloomberg.net.