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Backfire? How Russia sanctions could hit Europe

There were strong signals Tuesday that the European Union is preparing to step up its economic sanctions against Russia in the wake of the downing of Malaysia Airlines Flight MH17.

During Tuesday trading in Europe, the euro was below $1.3491, its lowest level since February 6, as fears of the economic impact of sanctions in Russia grew.

Read MoreRussia sanctions may get 'much worse' after crash

Here we examine the potential impacts of escalating sanctions.

Mikhail Klimentyev | AFP | Getty Images

Warning for vulnerable countries

Italian Economy Minister Pier Carlo Padoan warned on Tuesday that further economic sanctions would be a "problem both for who is subjected to them and who imposes them."

There is a growing divergence between European Union governments over how tough further sanctions should be.

Italy has previously resisted further sanctions, and France is planning to continue with a key warship deal with Russia, despite consternation about its role in the Ukraine crisis.

Read MoreUK's Cameron calls for EU to toughen up on Russia

Germany, one of the countries most dependent on Russian energy and exports, has continued trying to keep lines of communication open with Russian President Vladimir Putin's government. The Committee on Eastern European Economic Relations, a German industrial group, has said that the crisis could endanger up to 25,000 German jobs, and recent German data suggests it may have already been hit by the cooling in relationships with Russia.

Some European companies, including banks and manufacturers, have already been operating self-imposed sanctions on deals with Russian businesses by delaying work or deals until the outcome of the Ukrainian crisis is clearer. Further sanctions may force this trend out into the open.

UK gets tough

Sweden, the U.K., and some of the former Soviet states have been most vocal in their support for stronger punitive measures this week.

The U.K. in particular has strengthened its stance from earlier in the crisis, when concerns about the importance to London's financial services of Russian business may have contributed to a cautious tone. Indeed, U.K. Chancellor George Osborne has warned that Britain must prepare for an economic hit from sanctions against Russia.

The announcement on Tuesday that the U.K. will make an official inquiry into the death of former KGB spy Alexander Litvinenko, in London in 2006, also indicates a hardening in diplomatic attitudes towards Russia.

In this, the government appears to be reflecting public opinion in the U.K. Almost two-thirds of U.K. citizens polled by agency YouGov support imposing trade sanctions against Russia, up from half in March, and 53 percent support freezing Russian assets held in Western banks, up from 42 percent when the crisis first unfolded in March.


Where now?

The EU foreign ministers meeting today can't approve "phase three" level sanctions - the next level of penalties against Russian businesses – only country leaders can do that. However, they can discuss what form these sanctions might take.

This level of sanctions, which could affect entire industry sectors, could now be introduced as early as September, according to analysts at Citi.

The "last resort for the West", according to Robert Burgess at Deutsche Bank, would be restrictions on energy trading with Russia – which could seriously swing the cost of oil and gas.

As the threat of further sanctions lingers, Alexey Kulichenko, CFO of Russian steel and mining company Severstal, said a diplomatic resolution to the ongoing tensions would be welcomed by business.

"It's not about Putin's next move, it's really about everybody's intention for us to bring (this) situation back to a resolution and stop what is happening there," he told CNBC on Tuesday.

"That should be the intention of all involved stakeholders. Business will welcome the solution of the situation, the sooner the better."

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