The new sanctions against Russia agreed by the EU on Tuesday are described by European officials as “level three”. This implies higher levels still to come if Russia’s approach to Ukraine fails to satisfy the US and EU – the logical end point being, as in some computer game, a final confrontation with the supreme adversary: President Vladimir Putin. All such talk of levels obscures the reality that there are only two types of sanctions.

The impact of the lesser type of sanction works through sentiment. The actual measures in this category have targeted individuals and economically insignificant businesses owned by those individuals. Such measures have created an atmosphere in which Russian companies have found it increasingly difficult and expensive to refinance their foreign debt (totalling $650bn at the end of 2013) and the collapse of Russian issuance in the capital market. This has intensified capital outflow, rouble weakness (resuming now, after a bounce in May-June) and declining domestic investment. Real gross domestic product growth fell below 1 per cent in the first half of 2014 compared to the same period last year and 1.3 per cent last year as a whole.

The US already moved up to the second broad category of sanctions on July 16 (the day before the downing of Malaysia Airlines Flight MH17). This type of sanctions is designed to squeeze the financial lifeblood out of the Russian economy by banning credit and capital flows to major Russian banks and corporations, starting with Rosneft, Novatek, Vnesheconombank and Gazprombank. The EU is set to follow the US across this Rubicon – with the focus, judging by the European Commission’s consultation paper, on cutting off Sberbank, VTB and other state-controlled banks from external funding markets.