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European diplomats reached a deal on “tier 3” sanctions aimed at shutting Russian banks out of global capital markets and slowly suffocating the Russian economy, though the original plan to limit technology for oil and gas exploration has been diluted. Creditors have already frozen a $1.5bn loan for VTB bank due to be agreed last week.  The European Commission said the measures are likely to cut 0.3pc of GDP off EU economic growth this year, and 0.4pc next year, even if the crisis is contained without a serious disruption of energy supplies. “This is a significant hit to growth. It implies such low growth in parts of southern Europe that it makes it almost impossible to arrest the rise in debt ratios,” said Mr Tilford.  The Moscow newspaper Izvestia said Russia’s parliament is already drawing up legislation to blacklist “aggressor countries”, specifically targeting auditors and consultants. These include Deloitte, KPMG, EY (formerly known as Ernst & Young), Boston Consulting and McKinsey.  Tim Ash, from Standard Bank, said this would trigger clauses on bond covenants that rely on external audits. “If they go down this path they could provoke a brutal market reaction,” he said.  David Owen, from Jefferies, said a lack of genuine economic recovery is what lies behind Europe’s falling yields, already replicating the pattern seen in Japan in the 1990s. “A third of all countries in the eurozone are already in deflation once you strip away taxes, and another four have no inflation, including France and Spain,” he said.   “Corporate profits fell in the first quarter, and so did household disposable income, if you exclude Germany. We are seeing no growth at all in world trade, which is highly unusual. The CPB trade index rolled over in May and fell 0.6pc,” he said.  Mr Owen said investors are starting to price in quantitative easing by the ECB, which would entail sovereign bond purchases and potentially push yields lower. The Bundesbank would be the biggest buyer on a pro-rata basis under the ECB’s “key”, but German debt is relatively scarce. “Investors know this and it is driving Bund yields even lower,” he said. 

For Russia, deep recession looks inevitable. The commission said sanctions will cut Russia’s growth by 1.5pc in 2014, and by 4.8pc in 2015. A return to the Soviet stagnation of the early 1980s is becoming all too likely.