Economic Sanctions

Last Updated :

21 Aug, 2024

Blog Author :

Wallstreetmojo Team

Edited by :

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Reviewed by :

Dheeraj Vaidya

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What Are Economic Sanctions?

Economic sanctions are the withdrawal or suspension of the usual trade and financial relations with a country, a company, a group, or an individual. These are often political interventions to convince the government to change its stance on certain issue.

Economic Sanctions

These sanctions result in alienation and a reduction in trade. A decline in trading and investment flows, as well as their general economic welfare for the targeted countries, can usually be observed along with them. The restrictions aim to reduce trade and pressure the targeted government to change its political behavior.

  • Economic sanctions are the withdrawal or suspension of the usual trade and financial relations with a country, a company, a group, or an individual.
  • Economic sanctions are mainly used to lower a country's trade activity directly or indirectly.
  • These sanctions are often used as a foreign policy tool for various reasons, such as counterterrorism, anti-drug use, nonproliferation, promoting democracy and human rights, resolving conflicts, and cyber security.
  • Numerous variables, including each country's size, economy, kind of commerce, worldwide demand, economic structure, geographic advantage, etc., influence the impact of economic sanctions.

Economic Sanction Explained

Economic sanctions are restrictions on trading, investment, and commercial activities. Sanctions on trade and economics aim to lower a country's trade activity directly or indirectly. It is also executed to coerce the target nation to change its political, economic, religious, or military stances. It is one of the major international strategies, including trade wars and economic warfare, to induce economic pressure. The world is globalized and is seeing growing economic interdependence among all countries. Hence, international economic sanctions have become increasingly seen as an alternative to military conflict since the end of the Cold War. 

These sanctions are often used as a foreign policy tool for various reasons, such as counterterrorism, anti-drug use, nonproliferation, promoting democracy and human rights, resolving conflicts, and cybersecurity. They could be planned and implemented quickly; the consequences of actions are visible and revealed immediately. In addition, they provide an opportunity to respond to undesirable actions by other countries. However, the biggest reason for all is that they act as an impactful response that is non-military.

Objectives

Furthermore, economic sanctions help in achieving certain goals, such as:

  • Changing stance: Countries lay economic sanctions against foreign governments, sometimes for a certain period, to push countries into adopting a favorable outcome desired by the imposing country.
  • Acts as a warning: When one country sanctions another for a specific reason, other countries observe the situation. It helps them understand where the line has to be drawn and when not to cross boundary lines.
  • Denying access: Sanctions can be used to force biased legislation upon other countries by cutting their necessary resources or blocking their financial options.
  • Isolation: The imposition of sanctions on one country by others signals other countries to join with the imposing country.
  • Dominance or assertion: In a way, sanctions are generally a test of dominance, and the one that falls will have no power over political or legislative changes. Hence, economic sanctions against foreign governments sometimes serve as a symbol of dominance.

Types

Sanctions can take different forms, and they are listed below:

(a)Trade sanctions limit exports and imports to and from the target nation.

(b) Monetary sanctions that solve financial problems.

(c) Sanctions against the movement of particular individuals or groups and restrictions on specific types of air travel.

(d) Military sanctions, such as arms embargoes and military support or training suspension.

(e) Diplomatic sanctions that result in the cancellation of diplomats' and political leaders' visas.

(f) Cultural sanctions bar participants from international sporting events and artists from participating in international competitions.

Asset freezes, capital limits, and cuts to foreign are other examples of the several types of sanctions.

Impact

Economic sanctions' primary objective is to try and prevent the sanctioned countries from accessing markets, trade, and financing to inflict enough financial losses to force a policy change. It is often assumed that citizens or "civilians bear the pressure" and will be transferred into suffering for the government. However, they may not be true in all cases, especially in those countries that are not democratic. Civilians will have to suffer in silence in such cases without being able to voice their concerns. 

The economic loss brought by sanctions depends on a lot of factors: the size of each country, the size of its economy, the types of trade it conducts, whether goods or services, its global demand, economic structure, geographical advantage, etc. most markets are interconnected even if one country issues sanctions, they can trade with other countries openly or otherwise. Similarly, investments also can be roped in more than often illegally; such activities leave behind corruption in the system.

Examples

Example #1 - Economic Sanctions on Russia

In 2022, Russia invaded Ukraine, and the world's countries announced sanctions to prevent further escalation of the situation. 

Various countries came up with various restrictions that include financial measures: The U.S. has restricted Russia from making debt payments from the money it holds within financial institutions in the U.S.; this makes it difficult for Russia to repay its loans internationally. In addition, the international financial messaging system has removed Russian banks from SWIFT (Society for Worldwide Interbank Financial Telecommunication). This measure was employed to delay payments to Russia for its exports (oil and gas).

Apart from the above, Economic sanctions on Russia include banning Russian flights from entering E.U., U.K., U.S., and Canadian airspace. Furthermore, big companies such as McDonald's and Coca-Cola have suspended indulging in trade in Russia. In addition, there have been bans on exports of dual-use goods for civilian and military purposes and luxury items. Similarly, imports of Russian gold were banned, and the import of vodka was heavily taxed.

Example #2

The USA imposed economic sanctions on India in 1998 as was required by U.S. law; when an unrecognized nuclear state detonates a nuclear device. The U.S. announced restrictions to be put in place as India had refused to sign the UN's global test ban treaty in 1996. The country also announced a successful underground nuclear test to help them develop a nuclear weapons defense system. 

The USA imposed economic sanctions on India on various factors that included; ending all forms of assistance, including credit and credit guarantees, to India except those that are humanitarian. Furthermore, a ban on the export of defense and specialized materials was also included.

Pros And Cons

Let us look at the pros first:

  • Prevention is better than cure: Restrictions on biochemical weapons, atomic energy, etc., are critical as they can create havoc when left unregulated.
  • Unity: When a country chooses violence and destruction, other countries can oppose it. It can impact the nation and divert it from its intended path.
  • Keeps everything in check: Economic sanctions are mainly used to deter other countries from using unethical tactics. 

Now, let us look at the cons:

  • They are not always successful: Situations and their contributing factors differ with each sanction. Sanctions with limited objectives have historically had higher success rates than major political agendas.
  • No desired behavioral change: Economic restrictions may make countries succumb to pressure; however, they may not see desired behavioral change and are likely to re-occur.
  • No guarantees: Constraints may have been imposed with several factors in mind. On the other hand, countries desperate to move over them do the most critical thing and get off the hook. The restrictions often may only be able to reduce the damage but not prevent it or eliminate it together. Sanctions on Russia had not stopped the war; however, inaction could have caused much more damage.

Frequently Asked Questions (FAQs)

Do economic sanctions work?

They may or may not, but it depends on several factors that include the country's economic scale, size, the nature of goods and services, etc. generally, it is observed that sanctions with a limited objective have worked.

Are economic sanctions ethical?

It depends on the situation; if the sanctions are put in place to stop one country from going to war with another country, then it can be termed ethical.

How do economic sanctions hurt a country?

Sanctions have drawn criticism on human rights grounds since they have a detrimental effect on a country's economy and may also harm common people. Furthermore, sanctions, according to its critics, can lead to a decline in human rights in the targeted nation.

This article has been a guide to what are Economic Sanctions. Here, we explain it with its types, examples, impact, pros, and cons. You may also find some useful articles here -