Do economic sanctions work as a deterrent?

Thu Feb 3, 2022

The economic sanctions imposed by the US, UK, and the EU on Russia for going to war against Ukraine could prove to be detrimental to the country. These sanctions can range from export restrictions to trade embargos and seizure of assets.

What do economic sanctions mean?

Economic sanctions are penalties or bans that are levied against a country to push it to modify its strategic decisions. They include withdrawal of customary trade and financial relations for security and foreign policy purposes. Sanctions could result in cutting economic ties in every respect such as terms of trade, financial assistance, transit support, travel bans, asset freezes, and trade restrictions. The curbs could also be targeted, thus restricting transactions with certain businesses, groups, or individuals. Amid increased global and economic interdependence, they could prove to be detrimental for the targeted country.

How do sanctions impact an economy?

No country can afford to be a closed economy. The affected country’s supply chain gets disrupted in terms of inflow of goods and services and for reaching out to the export markets. In the former, there is a risk of the internal economy being crippled, especially if it depends on imports of critical raw material. The domestic economy could also be deprived of external market support. The risk element is high especially in case of economic curbs being imposed collectively, such as by the Organisation for Economic Co-operation and Development (OECD) or the North Atlantic Treaty Organization (Nato).

What are the economic sanctions against Russia?

Major Russian banks have been banned from the SWIFT financial messaging service and their assets have been frozen. Sanctions have been levied on the Russian Direct Investment Fund and against some of Russia’s wealthiest people. Access to air-space has been denied and export controls introduced. The countries imposing curbs on Russia account for 34% of world GDP.

What is the cost of such restrictions?

This depends on the economic strength of the country being targeted. Russia cannot be brushed aside as an ordinary economy. The country is important to the global economy because of its oil reserves and access to nuclear power. Russia is also a supplier of sophisticated defence products and is an important supplier of crucial defence products to India. Given the long-term strategic nature of the relationship, India is abstaining from voting on resolutions to condemn Russia.

How did India manage curbs after Pokhran-II?

India’s dependence on external assistance was more than $100 billion. The government appealed to non-resident Indians (NRIs) whose annual savings were more than $400 billion. NRIs’ subscription to government bonds was more than double the annual foreign assistance. India could also showcase its scientific strength as none of the scientists involved were trained abroad. This helped India display confidence, especially to investors.

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