From UPSC perspective, the following things are important :
Prelims level : SWIFT
Mains level : Paper 2- Effectiveness of sanctions
Economic measures to cut Russia off from the world’s financial arteries are the most powerful implements a West unwilling to meet a nuclear adversary on the battlefield has dared wield in response to the invasion of Ukraine.
Use of sanctions
- The use of sanction has boomed over the past few decades.
- Since 2000 the number of individuals and entities on America’s sanctions list has risen more than tenfold to 10,000.
- Ever more governments, keen to punish military aggression or human-rights abuses but reluctant to go to war over them, have embraced the tactic.
Sanctions against Russia
- After debating whether to make it much harder for Russian banks to process international payments by shutting them out of SWIFT—some European countries feared it would hurt their own banks, too—Western allies agreed to try targeting seven of them, though it has steered clear of Sberbank, Russia’s largest by assets, which plays a big role in processing energy payments.
- The most potent financial sanctions, though, have been aimed not at Russia’s commercial banks but at its central bank.
- In the eight years since annexing Crimea made Russia the target of a first wave of sanctions, Russia has built up reserves (they now total $630bn) and shifted their composition away from dollars to help insulate the economy from further punishment.
- But reserves become moot, whatever the currency in which they are held, if they cannot be used.
- America, acting with Europe, has banned a range of parties from transactions with Russia’s central bank.
- The West has also frozen most of the bank’s assets outside Russia.
How it will affect Russian economy
- Within hours of the sanctions taking effect, Russia’s central bank raised its main interest rate from 9.5% to 20% in an attempt to shore up the currency.
- Export controls will limit the components Russia can buy for its military and high-tech sectors, denying it goodies ranging from cutting-edge machinery to microchips.
- The measures apply not just to goods made in America, but to those containing American technology that are made in and shipped from third countries, such as China.
- For now, consumer goods dear to ordinary Russians like smartphones and home appliances are exempted from such measures.
- But Apple is no longer selling iPhones or other kit in Russia. It is one of a fast-growing number of Western companies getting out.
Effectiveness of sanctions
- Measuring sanctions’ success is hard, not least because of the difficulty of disentangling their effects from other economic, and on occasion military, forces, but there have been few outright successes.
- A recent success was the squeeze on Libya by America and allies in the 1990s and early 2000s.
- A mix of sanctions and financial inducements persuaded Muammar Qaddafi to end his wmd programme and stop funding terrorism.
- The apparent failures of sanctions are many.
- Sometimes this is because they are fundamentally symbolic, or weakened by interest groups in the countries imposing them.
- Though the point of sanctions is to exploit asymmetries, doing much more harm to the adversary than to yourself, there are always burdens to be borne by some.
- There is also a loss to the economy as a whole.
- The cost of compliance with sanctions for banks and companies has rocketed over the past decade.
- Financial institutions alone spent over $50bn worldwide in 2020 on screening clients for sanctions risks, according to LexisNexis, a data firm.
- One thing which weakens sanctions is leakiness. Despite America’s maximum-pressure measures, Iran manages to export an estimated 1m barrels of oil per day as middlemen find ways to disguise the origin of shipments.
Risks associated with sanctions
- Collateral damage: The more powerful sanctions are, the greater the risk of collateral damage, particularly when targeted regimes are indifferent to the suffering of citizens.
- Work in favour of regime: Increasing the harm done can work at least in part in the government’s favour.
- In Venezuela, a significant number of those opposed to President Nicolás Maduro and his henchmen also oppose the American sanctions putatively aimed at dislodging them.
- Increase the closeness between countries: Sanctions can also push countries they target into each other’s arms.
- Russia and China—hit with American sanctions over its mistreatment of Uyghurs as well as its suspected tech-spying—are enjoying their friendliest relations for decades.
- Alternative infrastructure: It encourages those who fear them to develop alternative financial and technological infrastructures.
- China is pushing hard in that direction.
- As well as trying to boost its chip-making, it is creating its own version of swift, called cips, which simplifies cross-border payments in yuan, and developing a digital currency.
- It has a long way to go.
- Though usage of the yuan as a currency for international payments is at an all-time high, at just over 3% of the total it still pales beside the dollar, at 40%.
- As the world economy reels from financial crises, nationalism, trade wars and a global pandemic, sanctions are aggravating existing tensions within globalisation.
When used in earnest, sanctions can inflict heavy economic costs on both sides on top of the deprivation inflicted in targeted countries. Even then, they do not always work.