Russian President Vladimir Putin and President Barack Obama were reportedly engaged in a heated telephone conversation last Thursday when Putin noted in passing that an aircraft had gone down in Ukraine. The tragic crash of the Malaysian airliner in rebel-held eastern Ukraine continues to dominate the headlines, but it is important to remember what agitated Putin and prompted the phone call in the first place — sanctions.

Sanctions against Russia have been the centerpiece of the U.S. response to Putin’s interference in Ukraine. While they primarily have been directed against prominent friends of Putin and their businesses, the underlying target has been a weak Russian economy. The sanctions have definitely found Russia’s Achilles’ heel, and with harsher sanctions looming in the aftermath of flight MA17, Putin is finding it increasingly difficult to craft an effective reply.

Obama had raised the ante for Russia the day before the Malaysian airliner disaster by unexpectedly announcing a new round of sanctions. The designated enterprises included several major Russian banks (Gazprombank, VEB), energy companies (Rosneft, Novatek) and arms manufacturers. They were not, however, the full sectoral sanctions that Putin dreads the most. These would essentially exclude Russia from the international financial system and restrict major technological transfers. Though key Russian banks and energy companies are now prohibited from receiving medium or long-term dollar financing, U.S. companies are not otherwise prohibited from conducting business with them.

But even by hinting as to what sectoral sanctions might look like, Obama has upset Russia’s economic calculations. Obama is often criticized for not backing up the “red lines” that he draws. But in Ukraine, Obama essentially has drawn a “gray line” — demanding Russia take certain actions to end the crisis. No one knows when this gray line is crossed, however. So these new sanctions only heighten the uncertainty — and risk — of doing business in Russia.

The market responded immediately, with dramatic declines in the Russian ruble and the Moscow stock market. In addition, the sanctions only exacerbated an already difficult situation for Russian companies. Syndicated loans for Russian commodities producers are down more than 80 percent over the past six months. The appetite for Russian bonds has also decreased considerably in the aftermath of the Ukraine crisis. So the current round of sanctions made a bad situation worse.

Not surprisingly, Russia responded to these new sanctions with tough rhetoric of its own. Igor Sechin, the chairman of Rosneft, called them illegal, while the deputy foreign minister, Sergei A. Ryabkov, vowed there would be harsh countermeasures.

But how can Putin retaliate? These sanctions hit at a time when the Russian economy is especially vulnerable to outside pressure. Budget projections point to significant declines in revenue — so much so that the Finance Ministry is considering the reintroduction of a sales tax.

Russia is also is trying to reform how it taxes domestic oil revenues, the prime source of income for the state treasury. This “tax maneuver,” however, has produced loud protests, particularly from Sechin and other Russian crude producers, who would have to pay more in taxes to make up for the proposed lost revenue from export duties. There is no consensus on how the Russian government should generate income going forward.

Moscow possesses significant hard-currency reserves and has promised to help VEB and other Russian companies if Western financing dries up. Yet the Russian state has already committed to several mega-projects, including the reconstruction of Crimea. Meanwhile, the U.S. administration will likely attribute any sudden drop in Russia’s hard-currency reserves as an indirect benefit of the sanctions program.

Putin has often pursued a divide-and-conquer strategy with his European partners. He may try this now since several European Union members are still reluctant to match U.S. sanctions. That being said, on the same day that Washington imposed the new round of sanctions, the EU announced its intention to stop all new loans to Russia from the European Investment Bank and the European Bank for Reconstruction and Development.

The EU is expected to announce additional sanctions on specific individuals and companies soon, but words will have to be followed by concrete actions before the European sanctions are felt — and taken seriously — by Russia.

Putin also wants his BRICS allies — Brazil, India, China and South Africa — to rally to Russia’s defense, but this group is largely focused on common economic issues. It has no reason to speak out jointly about the dispute in Ukraine. Indeed, China abstained in the U.N Security Council vote on the legality of the March independence referendum in Crimea — in large part because such acts of self-determination violate China’s longstanding notions of territorial integrity.

Putin cannot even rely on the support of his Eurasian neighbors in this crisis. Russia specifically wants to punish Ukraine for pursuing a free-trade agreement with the European Union by placing increased tariffs on Ukrainian goods coming into Russia. Russia first approached its Eurasian Union partners — Kazakhstan and Belarus — to impose union-wide sanctions, yet both refused. This forced Moscow to impose sanctions unilaterally.

Even if Russia raises tariffs on Ukrainian products, they can still ship duty free into Belarus and Kazakhstan and from there have direct access to the Russian market. So a potential bypass already exists to this attempt by Moscow to punish Ukraine.

Russia’s Economic Development Minister Aleksei Ulyukayev has already admitted that increased Western sanctions will have negative ramifications for Russian economic growth. Russia’s deepest fear is that Washington introduces sanctions that are targeted to sectors of the economy — particularly the banking sector.

Indeed, Russia went through all sorts of legal hoops — including amending its privacy law — just so individual Russian banks could remain in compliance with the U.S. Foreign Account Tax Compliance Act. This extraterritorial law essentially requires foreign banks to provide information to the Internal Revenue Service about accounts held by U.S. citizens, or be forced to pay major penalties. Moscow ultimately complied with the law because it did not want to face the financial consequences of being labelled non-FATCA compliant.

Sanctions may not be enough to persuade Putin to change course in Ukraine, nor, unfortunately, will the tragic downing of the Malaysian airliner. Yet the sanctions are slowly inflicting serious damage on the Russian economy and no one knows when the next gray line will be crossed.

The risk premium for Russia is rising.

PHOTO (TOP): Russia’s President Vladimir Putin gestures as he chairs a government meeting at the Novo-Ogaryovo state residence outside Moscow, June 25, 2014. REUTERS/Alexei Druzhinin/RIA Novosti/Kremlin

PHOTO (INSERT 1): Russian President Vladimir Putin (R) and German Chancellor Angela Merkel walk during a meeting in Rio de Janeiro, July 13, 2014. REUTERS/Alexey Nikolsky/RIA Novosti/Kremlin

PHOTO (INSERT 2): (L-R) Russian President Vladimir Putin, Indian Prime Minister Narendra Modi, Brazilian President Dilma Rousseff, Chinese President Xi Jinping and South African President Jacob Zuma join their hands at a group photo session during the 6th BRICS summit in Fortaleza, July 15, 2014. REUTERS/Nacho Doce