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The one key to solving Ukraine-Russia standoff: Jim O'Neill

Germany needs to take a leadership position in negotiating an economic solution to the rapidly escalating standoff on the Crimean peninsula, said Jim O'Neill, a former Goldman Sachs asset management chairman and expert on emerging economies.

Heavily dependent on Russian gas for energy, Germany has the closest trade relationship with Russia among Western leaders, O'Neill said Monday during an interview on CNBC's "Squawk on the Street." That gives it the most to lose if its allies decide to pursue economic sanctions against Russia, O'Neill said.

(Read more: Ukraine: Russia gives ultimatum to surrender 2 ships)

"Economic sanctions are really only going to work if the countries that get hurt the most themselves stick to them," O'Neill said.

A Ukrainian soldier stands inside the gate of a Ukrainian military base as unidentified heavily armed soldiers stand outside, March 3, 2014, in Perevalne, Ukraine.
Getty Images
A Ukrainian soldier stands inside the gate of a Ukrainian military base as unidentified heavily armed soldiers stand outside, March 3, 2014, in Perevalne, Ukraine.

Fears over the global imbroglio caused by Russian troops seizing control of Ukraine's Crimean peninsula last week sent stocks into a tailspin across global financial markets on Monday.

If Germany can not only sign on to an economic package designed to end the standoff, but also play a large role in its development, that would give O'Neill "a little more comfort" about geopolitical tensions, he said.

(Read more: Why Crimea matters)

"It's going to be made messy, but I think we have to look at the economic versus the military, and if I saw Germany taking the lead on an economic approach that would give me a little bit more comfort, because they're the ones that are most likely to be more logical," O'Neill said.

Any kind of military development would deepen and lengthen the wide selloff that sent the Dow Jones industrial average more than 200 points lower Monday morning, O'Neill said. The question remains whether the Russian military wants an excuse to escalate the standoff to outright hostility, said Richard Haass, president of the Council on Foreign Relations.

"Odds are that at some point some individuals are going to take some shots at Russian troops," Haass told CNBC on "Squawk on the Street."

Veteran trader Art Cashin, UBS' director of floor operation at the NYSE, told CNBC that fighting of a different sort has already begun—on currency exchanges.

(Read more: Cramer sees buying opportunities in Ukraine upheaval)

"While we've all been looking at troop movements and what not, the real battle is in things like currencies," Cashin said on "Squawk on the Street."

"The ruble has plunged. They've had to consider raising rates over there. [That] can't make Mr. Putin too comfortable. There is no quick and easy diplomatic solution to this. There's going to be a little bit of lagging and nagging concern."

Peter Boockvar, a CNBC contributor and managing director at The Lindsey Group, said on Monday that the market's drastic reaction to the Ukraine-Russia tensions stemmed from the potential ripple effects from Russia's status as a huge energy exporter to Europe.

"If Russia has a problem, Europe has a problem," Boockvar said. "If Europe has a problem, it's going to impact the rest of the world because obviously Europe is such a huge economic trading partner."

Traders have a short attention span, however. Calling Monday's selloff on Wall Street a "knee-jerk geopolitical mess," Boockvar said he wouldn't be surprised if by week's end investors are more concerned with U.S. employment data released on Friday.

—By CNBC's Jeff Morganteen. Follow him on Twitter at @jmorganteen and get the latest stories from "Squawk on the Street." Reuters contributed to this report.

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