Analysis

Economic sanctions as a Foreign policy tool

• Economic sanctions are prominently being used in today’s foreign policy. Their expanse as a foreign policy tool appears to be growing at a relentless pace, in terms of scale, scope and complexity.
• Military action isn't the only option for countries that are in the midst of a political dispute. Instead, economic sanctions provide an immediate way for the U.S. to crack down on rogue countries without putting lives on the line.
• As a tool of foreign policy, they are being vastly preferred over military action or quiet diplomacy.

Countries facing sanctions and why

Iran

• Trade embargo: Following the Iranian Revolution of 1979, the Western-friendly Shah of Iran was deposed in favour of a theocratic government.
  • The Iranian Hostage Crisis and other ensuing events pushed the U.S. to levy a trade embargo on Iran.
• Reason: Sanctions on Iran continue as political relations with the US get more strenuous, the sponsoring of terrorism, and debates over-enrichment of uranium.
• Industries affected: US targets sources of revenue used by the Iranian regime. Among others, they target the metals industry, including the largest steel, aluminium, and iron manufacturers in Iran.

Cuba

• Longest-standing: One of the U.S.'s longest-standing and most well-known sanctions is against Cuba. In February 1959, Fidel Castro became Prime Minister of Cuba, unseating a post-revolution Cuban government that was favoured by the US.
  • Ironically, the previous Batista regime was defeated in part because of a U.S. imposed an arms embargo.
• Reason: Since Castro took power, the U.S. has had trade embargoes in place as a punishment for impediments to democratic rule.
  • While Americans aren't generally allowed to trade or travel with Cuban interests, the close geographic proximity—and large Cuban-American population—have ensured that a number of exemptions exist for humanitarian work and visiting relatives.

Syria

• Most comprehensive sanctions: The sanctions campaign applied to Syria by OFAC, HM Treasury, EU, UN, and several other regulatory entities is one of the most comprehensive ever implemented.
• Reason: Sanctions were imposed in response to the Syrian government’s support of international terrorism and violations against democratic and human rights in the country.
• Affected areas: Since first being implemented, the sanctions have been strengthened several times due to escalating violence in the region.
  • Currently imposed sanctions include trade restrictions, travel bans and asset freezes on certain Syrian officials, as well as a ban on Syrian investment by US persons.

North Korea

• Most affected country: North Korea is arguably the country most brutally affected by U.S. economic sanctions. The U.S. imposed sanctions on North Korea began under President George W. Bush to impose trade and financial embargos. The UN also sanctioned the nation.
• Reason: North Korea's battles with the U.S. started in the 1950s with the US’s entry into the Korean War—a move designed to counter the USSR's support for a unified, communist Korea.
  • North and South Korea continue to technically be at war—albeit under a ceasefire since 1953—and the S. maintains stringent trade restrictions on the country.
• Panmunjom Declaration: In 2018, tensions eased between the two Korean nations, and the respective leaders signed the Panmunjom Declaration agreeing to greater cooperation between the two nations.

Venezuela

• Sanctions: For more than a decade, the US have imposed sanctions in response to activities of the Venezuelan government and Venezuelan individuals. Recently, the US State Department revoked visas of hundreds of Venezuelan individuals and their families.
  • Sanctions were also imposed on Venezuela’s state oil company, government, and central bank.
• Reasons: Since 2006, US Secretary of State has made an annual determination that Venezuela is not “cooperating fully with US anti-terrorism efforts.” It has imposed varied sanctions related to drug trafficking, financial sector, anti-democratic actions, human rights violations, and corruption.
  • Sanctions have increased economic pressure on the Venezuelan government, accelerating a decline in oil production.

Russia

• Sanctions: Recently, sanctions were imposed in 2014 by the US, EU and other countries and international organisations against individuals, businesses and officials from Russia and Ukraine
• Reason: International sanctions were imposed on Russia during the Ukrainian crisis by a large number of countries following the Russian military intervention in Ukraine.
• Russia’s response: Russia responded with sanctions against a number of countries, including a total ban on food imports from the EU, United States, Norway, Canada and Australia.

Turkey

• Threat to impose sanctions: Recently, US Congress threatened to impose sanctions on Turkey, a NATO ally, in order to punish the government for a military assault on Kurdish regions in northern Syria. Delivery of state-of-art F-35 stealth fighter jet has been stopped because Turkey acquired S-400 missile defence system from NATO adversary Russia.
  • In addition, US arms embargo on the Republic of Cyprus, which has been in conflict with Turkey since 1974, would be
  • Companies involved in the Turkish Stream pipeline project are to be sanctioned.
  • US House of Representatives passed a resolution to recognize the mass murder and displacement of Armenians at the end of the Ottoman Empire as genocide.
• Turkey’s response: Turkish President threatened to close down the Incirlik Air Base, where US troops are deployed, andKurecik Radar Station, which is used by NATO, should the United States impose sanctions.

Why do countries impose Economic sanctions?

• Way to express disapproval: Economic sanctions are a popular way for large governments to exert their disapproval over one another.
  • The US sanctions countries that sponsor terrorism or perpetrate human rights violations on their people.
• Less costly and tangible for the country imposing it: While wars are costly—both economically and politically—economic sanctions tend to be somewhat less tangible, at least for the country doing the sanctioning.
• Intensive impact on the receiving country: For the country being sanctioned, results can be enormous and long-lasting. This instrument of foreign policy and economic pressure is preferred over military action and can hit worse.

Implication on sanctioned countries

• The economic cost for businesses: Doing business is not easy under a sanctions regime. There are many examples of companies being fined severely for engaging in business with economically sanctioned countries.
  • Recently, a company was fined nearly $1 million for violation by its third-party suppliers who sourced some materials from North Korea.
  • Hence, sanctions can have adverse economic effects on businesses.
  • Sanction violation by a company can cause public embarrassment, reputational damage and loss of its loyal customer base.
• Economic cost for the country: Being the wealthiest country in the world, economic and trade sanctions laid by the US can have far-reaching repercussions on the receiving country. Following are a few of them:
  • Negative impact on the growth of the economy.
  • Reduce foreign investments flowing into the country.
  • Reduce the availability of necessary products and services.
  • Adversely affect the market mechanism.
  • Lead to the outflow of labour and capital.
  • Reputational damage at a global level.
  • Loss of foreign trade and income etc.

Issues around the imposition of Economic sanctions

• Lack of clarity: Complexity, lack of clarity, and conflicting laws that accompany sanctions question the effectiveness of unilateral sanctions.
• Impact on global markets: In today’s globalised world, international trade plays a significant role for every country. Imposition of sanction can cut global supply chains. Imposition of sanctions on oil-producing nations has graver consequences as it causes energy supply disruptions throughout.
  • Rising importance of global value chains (GVCs) is also threatened.
• Overuse of sanctions: There is a possible threat of overuse of sanctions anytime a country is irked by the actions of another country.
• Questions legal sovereignty: Resorting to sanctions by a richer and bigger nation can be viewed as a bully, and raises the question on legal sovereignty of nations on which sanctions are being imposed upon.
• Secondary sanctions: Recent secondary sanctions added to North Korea as part of the National Defence Authorization Act 2020 could impact Asian businesses without a US footprint.
• Reactionary threat: On one hand, recent US sanctions are intended to intensify pressure on Iran. On the other, it is increasingly making difficult for the so-called E3 (UK, Germany, and France) to preserve the Iran nuclear deal in its current form.
  • In response to US back-out, Iran announced that it would no longer observe certain commitments of the 2015 deal, in which it had agreed to limit its sensitive nuclear activities.
  • Such reactionary threats can have serious consequences and start a never-ending war of sanction impositions.
• Unintended consequences: Sanctions, though directed at governments or certain groups, end up affecting the general population of the country, who have to bear the final cost of sanction imposition.

Way forward

• Compliance: To be successful in today’s economic environment, every industry must pursue rigorous sanctions compliance programmes and invest in the development of compliance officers.
• Following with rigour: If companies avoid loopholes and follow the sanctions with rigour, they can help deprive those who are subject to sanctions—in some cases, terrorists, organized crime groups, and those carrying out human rights abuses—of the resources that keep them in business.
• Clarity: Countries must devise sanctions with clarity, and not make them complex. Complexity can lead to loopholes. The clarity in sanctions will hit those for whom the sanctions are intended without having unintended consequences.
• Justified exemptions: Sanction protocols must have justified exemptions such that supply of basic products and facilities is not denied to the larger population; like food products, medical supplies etc.