What does it mean? Let's start with default. Western sanctions have already dealt a significant blow to the Russian economy, but defaulting on its debt would bring long-term consequences that Russia has been intent on avoiding ever since the financial crisis of 1998, the last time it defaulted. "The U.S. Treasury has realized that they have leverage, because the Russians don't want to default," said Tim Ash, senior sovereign strategist at BlueBay Asset Management in London. "It's a message to the Russians: If you want to avoid default, which will have long-term ramifications on your economy, get out of Ukraine." A Russian default would be unlikely to trigger a global financial crisis, experts have said, given the total exposure of banks to Russia is relatively modest. But it could create a decades-long overhang for Russia, said Josh Lipsky, director of the Atlantic Council's GeoEconomics Center. Restructuring its debt could prove extremely difficult as long as sanctions are in place, and it won't be able to turn to the International Monetary Fund for help. "It will affect their credit rating, it will affect their ability to access debt for years. When they do borrow, it will be at a much higher rate," Lipsky siad. A default threat could also have an important psychological effect, Lipsky added. Russia has prided itself on running a tight economic ship, and has limited debt compared to other G-20 economies. "They have always said, 'We do not want to repeat 1998,' the Russian financial crisis," he said. What about sanctions? The U.S. is making the latest moves in coordination with the European Union and G-7 countries. In Europe, a sanctions package proposed to member countries by the EU on Tuesday would phase out Russian coal deliveries from the bloc's energy imports, ban Russian vessels and trucks from entering the EU and impose tougher sanctions on four key Russian banks, which would be totally cut off from the markets. However, the European plan stops short of a full ban on Russian oil imports, amid resistance from countries led by Germany. The problem: Russia is "making money hand over fist" from its sales of oil and gas, helping it generate a massive current account surplus, said Robin Brooks, chief economist for the Institute of International Finance. Last year, Russia's surplus was roughly 6 percent of gross domestic product — It could be roughly double that this year, given how much energy prices have risen, Brooks said. That has allowed the Russian central bank to support the ruble, and taken some of the sting out of Western sanctions. "Sanctions in a current account surplus country generally have less bite," he said. "What you really want is you want to target the current account surplus. You want to go where the money is being generated." After the atrocities uncovered in Bucha, Brooks said it seems Europe is grudgingly moving toward measures that would do just that, starting with limits on coal imports. "But I think the political discussion in Europe is far from over," he said. "My best guess is that we will see a fairly comprehensive energy embargo in the coming weeks. And conceptually that has much more bite than financial sanctions." IT'S WEDNESDAY — Brace yourselves: We've got Janet Yellen testifying in the morning, Fed minutes in the afternoon and a new sanctions announcement from the White House. Go ahead, have that extra cup of coffee. And while you're at it, send us those tips, story ideas and feedback: kdavidson@politico.com or @katedavidson, or aweaver@politico.com or @aubreeeweaver.
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