Until the last moment, the West and especially the EU believed that diplomacy would prevail over aggression in the Russia-Ukraine conflict. But this hope has been abruptly dashed. With the attack on Ukraine on 24 February going well beyond some skirmishes in Eastern Ukraine, Europe has been caught at a geopolitical turning point and the consequences for economic life will be long lasting. Russia no longer opts for calculable policy steps but all-in risk scenarios.

Harsh sanctions, with strong signalling effects, are now unavoidable. The US will be determined to put Russia on a par with Iran, North Korea or Syria in the medium term – but no one in this illustrious group of countries is as embedded in the international economy as Russia is. Russia may end up as the largest comprehensively sanctioned economy in the modern economic history of globalised financial and commodity markets, and these financial sanctions will hamper global commodity trade.

A SWIFT exclusion or close to similar measures with regards to USD and EUR usage could also come sooner or later, perhaps graduated for all banks or selective banks. We think that the Western sanctions – despite the supportive oil and energy price effect – will be noticeable in Russia and also on the street. Russia's economic output could slump between on aggregate minus 6% in 2022 and 2023 (ultra-tough sanctions immediately) or minus 3% (close to -2% in 2022 and -1% in 2023), with more gradual tightening of sanctions. So, two years of stagnation or stagflation are possibly looming in Russia – less so in Europe.

The GDP drops indicated for the Russian economy sound moderate, and the Russian economy is prepared for sanctions. However, even in a more moderate sanctions scenario, the USD/RUB rate could be in the 100-150 range this year, with 150-200 for the toughest sanctions, followed by a moderate recovery in 2023. Either way, inflation should be 15-20% in 2022, with policy rates at 20%+ or at least 15%+ depending on the level of sanctions.

For Ukraine, the picture is even more challenging. It is not clear whether the country and the currency can continue to exist like this. Looking back at the Yugoslavia or Georgia wars, economic output could collapse by 15-20%+ this year and the national currency USD/UAH could exceed 50. But such figures are not the issue at the moment. Ukraine, or hopefully what remains of Ukraine, needs massive financial support multilaterally and from bilateral donors.

A return to relations with Russia to the status quo ante bellum is unthinkable now. This holds true regardless of the scale of the military operations unfolding in the coming days.

Russia's recent escalations suggest the following:

- There will be some return to the "Cold War". There will still be some opportunistic economic ties between Russia and the West with self-interest for both sides. But deep economic ties – based on trust – are no longer conceivable because Russia will have to be countered with military strength and comprehensive export restrictions in the future.

- Economic analyses in dealing with Russia will count less than military analyses going forward. In any case, the recent escalation complicates any rational economic calculations in dealing with Russia, and in our opinion, recent developments as well as Russia's deliberate acceptance of extreme risk scenarios are likely to induce recognisable and necessary changes in the attitude of foreigners dealing with Russia in the medium and long term.

- The Western sanctions will sooner or later trigger substantial Russian counter-sanctions on an institutional and personal level, which will make it more difficult for foreign companies to pursue business models geared to the mass market in Russia; not to forget that such business strategies may not fly anymore.

As a side note, the active use of territory in Belarus in current military operations suggests that Belarus will also be hit with the most severe sanctions. How long the current rulers in Belarus can survive in the Russian orbit is another question.

As a long-time Russia observer, one can only say such a development that is happening now was just a risk scenario in the longer term and one for a post-Putin era. But apparently the president has allowed himself to be completely taken over by the hardliners due to his (deliberate) isolation in recent years.

In retrospect, Europe's policy towards Russia in recent years will go down in history as a massive misjudgement of the situation (particularly in comparison to the USA). In addition, we believe that domestic political changes in Russia were underestimated for too long.

Two trends of an economic and political nature in particular should be noted and emphasised in the light of recent developments. Economically, Russia has already withdrawn from economic globalisation since the 2010s (in contrast to China) and especially from deeper interdependence beyond foreign trade linkages. Foreign direct investment into and out of Russia has stagnated since the 2010s. This retreat has certainly fostered a certain "laager" mentality and has been accompanied by an increasing lack of economic development.

We currently see all the signs in Russia pointing to further years of economic stagnation, i.e. more of what characterised the last decade. It seems unlikely that the emerging partnership with China will provide decisive growth impulses in the short and medium term – with perhaps only a slight upward potential after years of further degradation of existing economic relations with the West.

We think that in some areas China will use the current confrontation between Russia and the West to selectively pursue its own mercantilist economic interests and/or also to further promote the international/global role of its own currency.

Supporting Russia in some economic areas is certainly likely in the light of the emerging strategic partnership – without accepting too great (reputational) risks for China. However, we do not think that China will engage in active and unlimited support for Russia in the sense of active and comprehensible support. In our opinion, this is due to China's own interests resulting from its global real economic integration with the West and especially the EU.

At the same time, China's extensive financial interconnections with the global financial system should be emphasised (especially considering the interconnections also via Hong Kong). Smaller Chinese banks and companies may break Western sanctions, but not the Chinese heavyweights. Certainly, (barter) trade will be able to take place in the raw materials sector but that is no way to modernise.

Welcome Russia to a black decade or stagnation like at the end of the Soviet Union. Even the Soviet Union had better access to resources via the CMEA than Russia will have in the coming months/years.

Gunter Deuber is head of research at Raiffeisen Bank International in Vienna. As a long-standing Russia & Ukraine watcher, with active professional contact with colleagues in Russia and Ukraine as well as personal contacts, he is deeply concerned about the division and radicalisation that Russia is currently wilfully bringing about.