Ukraine Russia
Ukrainian servicemen ride on a military truck near the eastern Ukrainian town of Pervomaysk. Reuters

The ongoing political and economic crisis in Ukraine could lead to another recession in Europe, says one of the world's most famous investors.

Mohamed El-Erian, the chief economic adviser at Allianz SE and former right-hand man to Pimco's Bill Gross, said the Ukrainian crisis is risky for global markets, especially for Europe, which is emerging from the 2008 crisis at a weaker pace.

El-Erian, a high-profile investor who earlier ran Harvard University's endowment, resigned from $2tn investment powerhouse Pimco, a unit of German insurer Allianz, in January as CEO.

In an interview with Reuters, El-Erian said "one or at most two" more rounds of sanctions and counter sanctions between Russia and the West would likely push Europe into recession. That's especially true if Russia cuts energy supplies during the coming winter heating season.

He added that there are few options to de-escalate tensions between Ukraine, its Western supporters and Russia, which has been accused of supporting rebels in eastern Ukraine.

"I think markets are underestimating Ukraine," the news agency quoted El-Erian as saying.

"It is very hard to find a solution that reconciles the three parties involved – Ukraine, the West and Russia."

El-Erian noted the global market has "enormous faith" in the world's largest central banks, the US Federal Reserve and the European Central Bank. They engaged in the "business of divorcing" asset valuations from fundamentals through a series of experimental policy actions since the 2008 financial crisis, he claimed.

The crisis in Ukraine could lead to a rapid collapse at global market, given the loose policies by the central bank, according to El-Erian.

"I worry that the marketplace is paying very little attention to geopolitical issues, but they've done so for good reasons so far," he said. To date, investors have largely succeeded in navigating numerous brief bouts of market choppiness in the face of "geopolitical shock."

The US and European Union have come up with fresh sanctions on Russia, targeting more Russian citizens and companies which are allegedly assisting rebels in Ukraine.

In counter measures, Russia also imposed sanctions on the West.

The International Monetary Fund earlier said that an economic slowdown in Russia due to the rising Western sanctions would affect Europe directly and indirectly.

The IMF noted that east European countries have the closest links with Russia and some of them could be seriously affected by a sharp slowdown in the Russian economy.