What are sanctions?
They are simply Diplomatic actions, taken by countries or multi-lateral organizations (Like WHO, WTO, etc ) against other countries or organizations to protect international law & order mostly. There are a few kinds of sanctions like diplomatic sanctions, Military sanctions, Sports Sanctions, and Economic sanctions.
As the headline of this article hints at economics, let’s see what economic sanctions are in general. Economic sanctions– These are Outright bans on the trade, currency flow, or corporate governance or investments.
Not all sanctions are absolute, some are target-specific or industry-specific. For instance, Russia can sell energy to the rest of the world but nothing else. So, what’s the difference between Sanctions and trade restrictions?
Australia has sanctions against western cars coming into the country to protect their domestic car industry, even though the domestic car industry has more or less been wiped out already, the government still wants to “protect” it, so much for living in denial. It all depends on motivation, If the motivation to restrict trade is political and Military based then it becomes sanctions, not even WTO can intervene then, for all other reasons it is called trade restrictions. During the recent trade war between China & US, these were called trade restrictions.
So do they even work, when the motivation is political or military? My answer is No. The US and the European Unions have forced sanctioned Russia, hoping that it will stop Russian tanks in Ukraine. The sanctions namely are
1. Block from buying hit-tech goods from the US
2. Block the purchase of military equipment from Russia.
3. Froze Assets of individuals in other countries ( Chelsea Football club might ring a bell)
4. Block major Russian banks from the rest of the world. ( SWIFT is the internet of banking )
What has gone wrong with these sanctions?
- Grain export has stopped, Ukraine and Russia export 50% of world grain, this has led to Supply-side shocks for north African countries and other parts of Europe.
- Europe has billions of Dollars of Russian Debt, and now Russia has an excuse not to pay that money, they are out of the financial system.
- The biggest Airline Company in the world, Aercap is Russian, they lease planes to almost every airline in the world, Russia has frozen planes of airlines in Russia using these planes, therefore no lease revenue for the biggest airline leaser in the world. This will impact the global airline industry.
- Oil prices have spiked after sanctions even US imports crude to refine, and Russian oil runs the most of world.
- Although Russia can still sell oil and gas, there is massive pressure on oil companies to not use Russian oil in the future, this will increase the cost even more.
So, sanctions are a double edge sword, in the long term countries will resist free trade and will go for self-reliance in the future( AtmaNirbhar). The sole reason why Trade exists is that being Atmanirbhar is not cost-efficient for countries. In India, PLI schemes are there, if we look at the bigger picture, they are just trying to make industries financially viable so that they are competitive globally. Somewhere, these subsidies will dry out.
Will these sanctions work?
Sanctions are used for
- To Stop international crimes ( Like Human rights abuse in China)
- To stop weapons of mass destruction( Like in Iran, and North Korea)
- Cause a Change in regime( Like Zimbabwe & Iraq)
More isolated countries, that have more time to prepare and are less democratic are NEVER hurt by sanctions.
In 2014, Russia invaded Crimea, but nothing happened. Sanctions are better used as a threat than a weapon, some countries have been sanctioned for years and have powerful military ( Iran and North Korea), if Russia continues this way, it will spend more on its military, and citizens will suffer.
Iraq was a big failure of time, In 1990, Saddam Hussain invaded Kuwait, Nothing worked against Saddam, and Iraq suffered, but the regime didn’t change until 9/11 happened. If dictators, can isolate their country and starve their people sanctions can be ignored.
Written By: Ankur Kushwaha, Consultant, Invest Punjab | Govt of Punjab