What Are Financial Sanctions – Russia and Beyond

In this article, we look at what types of Financial Sanctions can be imposed, how they have been used, and their impact on civilians. Politics defined as ‘the art of compromise’ uses sanctions to encourage behavioural change in what is deemed to be a rogue state.

What are Financial Sanctions?

Sanctions are restrictions on the ability of a country, its officials, and private citizens to trade. Civilisations are dependent on trade to survive and prosper. Most species trade food for favours but homo sapiens go further by monetising food, water and shelter. If you restrict the ability to trade, at one level or another there is a threat to collective existence. To paraphrase Captain Spock the needs of the many are deemed to outweigh the needs of the few. Nuclear weapon development or human rights abuses are commonly sighted as justification for imposing sanctions. History will ultimately be the judge of whether sanctions are a) appropriate, b) fair and c) effective. Approximately 30% of sanctions raised since 1958 have achieved the intended outcome.

There are four kinds of financial sanctions. 1) Tariffs – trade agreements between nations invariably contain tariffs as taxation on imports. Used disproportionately or in response to political developments, tariffs quickly become sanctions. China and the USA have a history of tic-for-tac tariffs. 2) Trade Sanctions and Prohibitions – places limits on what goods, services or financial products can be exchanged with the sanctioned country. This can include prohibiting trade with named organisations. 3) Asset Freeze and Seizures – these prevent access to bank accounts and currency reserves. The sale of foreign-owned physical assets can be blocked. Freezing of foreign exchange reserves opens the floodgates to domestic inflation and currency devaluation. 4) Trade Embargo – this is the most severe form of sanction. It places an outright ban on a particular type of trade with the sanctioned country, for example, an arms embargo. Non-financial sanctions can also be imposed, typically through travel restrictions on foreign nationals, expelling diplomatic staff, and closure of airspace.

A Brief History Financial Sanctions

Size matters when it comes to sanctions. A single sanction from a lone wolf country won’t shake the world. When imposed by a G7 member or collectively such as the EC or UN, it quickly becomes an earthquake. We don’t have enough column inches to summarise all the sanctions imposed over the last decade, let alone all of history, so instead, we’ll look at some higher profile cases:

1958-date Cuba: the USA initially imposed an arms embargo against Fulgencio Batista’s regime in 1958. Its purpose was to force the replacement of his dictatorship with democracy. In 1960 Batista was replaced, but with another dictator. Since then, countless prohibitions, asset freezes and embargos have been introduced. Another long term set of sanctions has been imposed on North Korea since 1992. NK reneged on the denuclearisation for aid agreement and remains politically isolated.

1965 Rhodesia: prohibition sanctions were imposed against Ian Smith’s breakaway white supremacist British colony state in the African subcontinent. The UK (and later UN) imposed an asset freeze and oil embargo on what became Zimbabwe; a country since rid of white minority rule. Rhodesia’s sanctions were a precursor to the South Africa arms embargo of 1977 and oil embargo of 1987. It showed the world could unite against the injustice of apartheid and human rights abuses.

1982 Argentina: trade sanctions and prohibitions were imposed by the UK and EC in response to Argentina’s invasion of the Falkland Islands. This was insufficient to prevent a 10-week war. Both sides still lay claim to the islands and for one side the matter remains unresolved.

The 1990s and 2000s Iraq: subject to trade embargos throughout both decades in response to perceived nuclear and terrorist threats. An existing (albeit understated) humanitarian crisis pre-sanctions continued. On both occasions war ensued. When the UN saw a terrorism threat in Afghanistan and imposed the 1999 sanctions, war was not avoided despite the trade prohibitions, asset freeze and arms embargo.

2006 Ukraine: shortly after Viktor Yushchenko was elected president in 2005 on a mandate to seek EU and NATO admission, his country found itself subject to higher Russian gas tariffs. The quadrupled price brought Ukraine in line with EU supplies. Russia issued a gas embargo against Ukraine in 2006 before resuming supply at EU rates. Tariffs were reduced in 2010 when pro-Russia president Viktor Yanukovych superseded Yushchenko.

Picking up on the ‘history will be the judge’ theme from earlier – it is worth noting that prohibitions, asset freezes and embargos can and does encourage the sanctioned state to trade with other like-minded sympathising nations. After all, the enemy of an enemy is my friend. In the same way, democracies hang out with each other in the global playground; socialist states, dictatorships, (dare we say) communist governments find common ground with their like-minded counterparts. As recent history has shown, sanctions can be a precursor to war itself.

The Impacts of Sanctions

When the politician wearing an oversized ill-fitting suit announces sanctions, the impacts aren’t just felt by the super-rich or enraged elected dictator. There are inevitable consequences for civilians. After the Cold War, the UN could no longer underplay the humanitarian cost of sanctions. It was the dawn of targeted (also known as smart) sanctions on individuals and companies within a rogue state. The events of 9/11 saw a flurry of smart sanctions. Let’s be honest – even in the face of food and medical embargos, an incumbent dictator will want for nothing whilst civilians are left on the precipice of survival.

Raw Materials: when sanctions prevent the import of coal, oil and gas, civilians see the cost of energy and fuel skyrocket. Preventing the export of raw materials can turn off the money taps for a government banking on its revenue. Civilians are seemingly collateral damage. Diverting or commandeering enriched uranium from power stations to foster nuclear capabilities has been noted by the global community.

Subsistence and Existence: prior to the first Iraq war, the Middle East desert state imported two-thirds of its foodstuffs. Prohibitions and embargoes dealt a hammer blow to cross border trade causing food price inflation of 1,000%. History is littered with similar refugee crises fuelled by sanctions and lit up by war.

Deglobalisation: the 20th century saw globalisation and the rise of interdependent economies. Sanctioned states can and have sought deglobalisation (or self-reliance) to negate their vulnerabilities. South Africa proved history to be the mother of invention when the 1977 arms embargo gave birth to what is now SA’s multi-billion-dollar weapons industry. North Korea did a similar bringing intercontinental ballistic missile development in-house. Reverse engineering in pariah states is helping mitigate the impact of sanctions. Some consumer goods and military hardware have an uncanny resemblance to the IP of behemoth brands!

Recession: sanctions slow down or even reverse economic growth through recession. With that comes a reduction in living standards, increased poverty and less access to education. Chances are the next $1 billion tech startup won’t come from a crashed economy and its impoverished civilians. Recession, inflation and unemployment can motivate individuals and organisations to commit lawless behaviours which they would otherwise not be able to justify. Debt recovery from a sanctioned state is highly unpredictable. Debt recovery between businesses within a sanctioned state is fraught with additional challenges over and above the recession.

Cybercrime and Money Laundering: is it a coincidence that cyber-attacks on government departments or banks tend to originate from sanctioned countries? Money laundering and virtual looting happens in even the most ‘democratic’ of nation-states east and west. Sanctions arguably encourage cybercrime as an alternative revenue stream for isolated economies.

Russia and Beyond

The February 2022 financial sanctions against Russian banks, businesses and oligarchs included asset freezes and seizures and detainments (bank accounts, yachts, cargo ships etc); exclusion from global banking; technology and manufacturing embargos, and export controls. They were designed to destabilise the Russian economy and starve it of the funds required to bankroll a war. By the start of March 2022, the world had already witnessed a run on Russian banks, inflation and a currency crash. In contrast, a state under invasion endures more extreme humanitarian and economic hardships. Whether you think sanctions are poorly conceived or a vital foreign policy tool, it’s hard to argue they are not without consequence for all echelons of society. From the peasant merely trying to survive, to the ruling class banking on elitism to rule. As George Orwell aptly wrote in his USSR inspired novel Animal Farm ‘all are equal, but some are more equal than others’.

It is inherently difficult to determine exactly why a behaviour or regime changes (be it Cuba, Iraq, USSR et.al); whether it is the destiny of cultural evolution or response to sanctions. Since inception, sanctions have been the last resort for non-hostile diplomacy; an escalation tool to highlight undesired behaviour to the wider world perhaps; peer pressure even. When diplomacy fails, sanctions and war become enshrined in a predicament. Sanctions can be a motive for war, and an intent to war can be a motive for sanctions. History will be the judge of this also.