The crisis in Ukraine still has the potential to have a significant impact on the European economy and global financial markets. Nonetheless, the most likely outcome appears to be a limited exchange of sanctions and a diplomatic settlement that results in the crisis dropping out of the headlines again. Even if tensions do escalate the balance of economic and financial power favors the West rather than Russia.

Admittedly it is far from certain what will happen next. But it is clear that all sides want to prevent the crisis from spiraling out of control. Russia has achieved its main aim of annexing Crimea and it is unrealistic to expect the peninsula to be handed back. The West may therefore settle for a negotiated solution that guarantees the security of the rest of Ukraine and that of the other former Soviet satellites.

In the meantime, the sanctions imposed by the United States and European Union have been limited to visa restrictions and asset freezes targeted at a small number of Russian officials. Crucially, there seems to be little appetite for broader economic sanctions. Nonetheless, the threat of a further escalation has already undermined Russia's financial markets and prompted rating agencies to downgrade the country's outlook. We expect Russia's GDP to grow by just 1 percent this year, and it would not take much to tip the economy into recession.