George Osborne said the UK government is considering more sanctions against Russia following the shooting down of a passenger airliner over eastern Ukraine.
Russia has already been hit with economic sanctions by the US and European Union (EU) over its annexation of Crimea, a region of Ukraine, following the ousting of the corrupt Kremlin-allied president Viktor Yanukovich by protesters.
Malaysian Airlines flight MH17 from Amsterdam to Kuala Lumpur was allegedly shot down on 17 July near the city of Donetsk in Ukraine by Russian separatists, killing all 298 people on board.
There are reports that the BUK surface-to-air missile system thought to have been used was supplied over the border by Russia, as ethnic Russians battle for independence from the Ukrainian government. Several Ukrainian military planes have been downed in recent months by pro-Russian rebels.
"Russia of course controls access to this part of Ukraine. I think that is an open secret," said Osborne on ITV's Good Morning Britain programme.
"It matters for our security and our economy. We've got to live in a world where international borders are respected, where commercial airlines aren't at risk of being shot down.
"When you do sanctions of course there's always a potential for that to have an economic impact on you, but you've got to consider the much bigger economic impact if you don't act."
Investigation workers are at the scene of the crash attempting to work out exactly what happened to MH17.
But there are reports of the Russian rebels making it difficult for them to access the crash site and surrounding areas, as well as the flight's black box recorder having already been removed.