What are Economic Sanctions?
What are Economic Sanctions?
Economic sanctions are a foreign policy tool that countries use to prohibit customary trade and financial relations with another country, group of nations, or individuals. Sanctions are imposed to coerce, deter or punish the nations that threaten their interest or violate international norms. The imposed trade barriers may be comprehensive and affect the entire country or targeted to block economic trade with particular businesses, groups, or individuals. The customary trade is withdrawn to protect the foreign and security policy.
What is a sanction?
A sanction is defined as a penalty that one country imposes on another country or a foreign country, groups of governments, or individuals. The sanctions are commercial and financial penalties are applied by one or more countries on targeted countries, groups of nations, or individuals barring them from international trade. It is a weapon used to exert economic pressures to coerce them to comply with global trade and practices regulations.
Sanctions can be defined based on the number of countries issuing them. If a single government has imposed the embargo, it is a unilateral sanction. If a group of nations has imposed the sanction, it is a multilateral sanction. The former has much more severe consequences if the sanctions imposing country is more powerful, so the sanction will be highly effective and yield the desired results. The latter has less severe consequences as they implement multilateral sanctions, which do not hold one single country solely responsible for the sanction’s results.
Different Types of Sanctions
Export sanctions are imposed to prevent the entry of products into a country. The export sanctions will change consumer behaviour, and customers will opt for substitute products when the products are not available. Similarly, import sanctions put restrictions on the goods to leave the country.
What Are Economic Sanctions?
Economic sanctions prohibit ordinary trade and financial transactions regarding foreign- and security policy objectives. The sanctions might come with a blanket approach that prohibits the nation on the whole, or sanctions may be narrow, restricting trade between and among specific countries, groups of governments, or individuals. Sanctions are implemented in the form of travel bans, arms embargoes, trade restrictions, asset freezes, etc. After 9/ 11, sanctions have become more intelligent, which prevents innocent citizens from being at the receiving end of the boycott.
When are sanctions implemented?
National governments and international organizations impose economic sanctions to coerce, discourage or impose fines or even shame businesses that break the international forms of behaviour or risk their interests. But sanctions have been considered a lower-risk alternative to diplomacy. It is a foreign policy tool used to successfully achieve several objectives, such as counter-terrorism and implementing anti-money laundering laws. It helps in promoting democracy and retaining human rights and resolving conflicts.
What is the effect of sanctions?
The country witnesses an immediate impact of import sanctions as the target country cannot export goods, and the sales go down. The country that has imposed sanctions will not purchase the goods, affecting the trade between the two countries. The target country will face hardships if it depends on exports to a large extent to boost its economy. It can result in economic and political unrest.
The political and economic state of affairs will deteriorate and affect the public. The sanctions will strongly influence public opinion, and the citizens would want the ruling government to leave office. They would hold the ruling government responsible for the deteriorating state of affairs as they would bear the brunt of inflation and political unrest. Extremism may be followed, and the whole country can come on the verge of collapsing. The countries which issue the sanctions will witness a rise in the cost of the products.
The issuing nation will not be able to provide a wide variety of products to its citizens, and the consumers would have to meet their requirements with a limited range of products. The cost of operations for firms will increase as they need to source supply overseas. In the case of unilateral sanctions, the target country might depend on a third-party nation to lessen the embargo’s impact. It is crucial to follow the global AML regulations, considering the sanctions’ consequences.
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About the Author
FCA, CAMS, CISA, CS, DISA (ICAI), FAFP (ICAI)
Pathik is a Chartered Accountant with more than 22 years of experience in compliance management, Anti-Money Laundering, tax consultancy, risk management, accounting, system audits, IT consultancy, and digital marketing.
He has extensive knowledge of local and international Anti-Money Laundering rules and regulations. He helps companies with end-to-end AML compliance services, from understanding the AML business-specific risk to implementing the robust AML Compliance framework.