From UPSC perspective, the following things are important :
Prelims level : SWIFT
Mains level : Paper 2- Sanctions and their implications
A shift is taking place in the business of global dominance and hegemony, from the model of expressing force through troop presence to financial sanctions. It is led by the US and has become recently visible in the US and EU sanctions on Russia.
How sanctions works
- Sanctions are designed by the government and implemented by both profit-making and non-profit private enterprises, domestic and international NGOs (including the United Nations).
- From rule-bound globalism, there is a move to an understanding of the management of individual economies, bound together by multiple networks of investment and trade.
- This is a global economy of individual rivalries between countries and corporations, continually shifting alliances, and contingencies overtaking assumed structural certainties.
- A system of licencing: In Afghanistan, financial manipulations from afar in the form of sanctions may result in subjecting trading activities and investment ventures to the approval of the US Treasury through a system of licencing.
- This may give the US a say in who trades with whom, but already China has found ways of working with or around US sanctions in several countries, including Iran.
- Confiscation of foreign exchange reserves: Another way of exerting control from afar is through the confiscation of foreign exchange reserves in American banks.
- Following the withdrawal of the American troops on August 15, the US froze Afghanistan’s foreign exchange reserves of $7 billion deposited in the New York Federal Bank.
Issues with sanctions
- An economic lever to China: Sanctions offer economic lever to China in its dealings with the Taliban, to the Chinese state-owned enterprises and private corporations with an opportunity to invest in Afghanistan’s infrastructure, linking it to the Belt and Road project, and in its rich mineral resources of copper, cobalt, and lithium.
- Implications for India: China could also use this as an opportunity to unite investments in Afghanistan and Pakistan, isolating India.
- Evading the sanction: China and Russia, in concert, may provide a way out of the sanctions regime.
- Possibility for China in Middle Eurasia: Russian military and political escalation to re-institute control over former Soviet regions, including Ukraine, Belarus, and Kazakhstan, and the rapprochement between China and Russia against the West, may open up new possibilities for China in Middle Eurasia.
- Banning Russia from SWIFT is not effective: Banning Russia from the SWIFT system of international payments is a problem for the global financial system.
- The Russian economy is more isolated, protected and less reliant on international funding than was the Afghan economy.
- The impact of any disruption in Russian exports of oil, gas, palladium, wheat and fertiliser at a time when those prices are barely recovering from inflationary pressures caused by Covid-19 disruptions, is likely to offset any leverage the Western sanctions may hope to gain.
In the new game, the Western alliance led by the US seems lost in a maze of sanctions, largely ineffective in a global economy, the control of which is eluding its grip.