A man reads a free newspaper with the headline "Crimea chooses Russia" on a street in Simferopol March 17, 2014.SERGEI KARPUKHIN/Reuters
Early Monday, the United States unleashed an array of sanctions against Russian officials, the most dramatic such move since the end of the Cold War.
The reaction from financial markets: Yawn.
Benchmark stock indexes in the United States and Europe rose. Investors showed no appetite for traditional safe havens, sending the price of gold lower, together with the price of U.S. government bonds.
In Russia, stocks jumped and the ruble, which had been wallowing at a record low versus the U.S. dollar, strengthened.
The sanguine response from markets is made of equal parts hope and relief – hope that the crisis in Ukraine will not escalate, and relief that the sanctions imposed by the U.S. and its allies were not as extensive as they could have been.
Monday's announcements are "seen as sanctions with a light touch," said Alan Ruskin, a currency strategist for Deutsche Bank in New York.
"The way the market is pricing things is to take a view that by far the highest probability is that things don't get dramatically worse."
The calm may be short-lived. The sanctions imposed Monday by the United States, Europe and Canada initially target a limited number of individuals, freezing their assets and banning them from travel.
But the targets could expand quickly to include companies in Russia's arms sector and some of the Kremlin's favourite oligarchs (a provision that one senior Obama administration official dubbed the "so-called crony capacity").
If Russia formally moves to annex Crimea this week – after holding a referendum that Western powers consider illegitimate – then sanctions will almost certainly deepen. And that's a possibility that has some market-watchers unnerved, given the way Russia is enmeshed in the global financial system, whether through cross-border loans or international investments.
If tensions were to increase dramatically, the United States and its allies might be forced to consider more debilitating sanctions aimed at key areas of the Russian economy such as banking or energy, though there appears to be little eagerness to implement such moves thus far.
"The scale of financial disruption, should events descend into tit-for-tat financial sanctions, should not be underestimated," wrote Mr. Ruskin in a note to clients on Monday.
Other economists also underlined potential risks ahead. "The limited sanctions imposed to date … are unlikely to be the last word," said Mark Williams, an economist at Capital Economics in London. "The possibility of Russian retaliation in respect of energy supply needs to be taken seriously too."
For now, however, the sanctions don't meet the threshold that would rattle investors. In the words of Marc Chandler, the global head of currency strategy at Brown Brothers Harriman in New York, "they don't bite enough."
Meanwhile, "there's a possibility this thing can settle down the way Georgia settled down," he said. "Markets are saying it's probably not going to escalate and, in the meantime, we're going to be focused on fundamentals."
As the United States knows from experience, building a consensus for robust, widespread sanctions is no easy task. The type of sanctions that inflict true economic damage – such as the kind now leveled against Iran – target not just individuals but critical industries. Such sanctions also exact some cost on the countries imposing them. And it's not at all clear that the United States or its European allies are ready to take those types of steps.
Europe in particular has close trade and economic ties with Russia. Earlier this month, for instance, France said that it planned to follow through with a deal to provide Russia with warships this year and next in a transaction worth €1.2-billion ($1.8-billion).
Trade in goods between Russia and the European Union hit a record level in 2012, according to the latest figures available from Eurostat. Russia is the third-largest trading partner for the European bloc after the U.S. and China, it said. Among European nations, Germany has the deepest trade ties with Russia, importing natural gas and oil and exporting a host of manufactured goods.
By contrast, U.S. trade with Russia is modest. Last year, it was ranked 28th in the list of destinations for U.S. exports, with sales worth $11-billion (Canada absorbed $300-billion worth of American exports). However, a number of large U.S. multinationals have significant investments in Russia and would be leery of intensified sanctions.