Context:

The United States imposed sanctions on organizations and individuals from more than a dozen countries, including India.

Background

The United States (US) and western allies have imposed sanctions on Russia in 2022 following its invasion of Ukraine. Now the US has imposed sanctions on nearly 400 organizations and individuals from more than a dozen different countries, who were violating sanctions

The US State Department has sanctioned 19 Indian firms and two Indian nationals for providing critical components to Russian defense companies.

What are Sanctions?

Sanctions are financial and trade penalties imposed by one country on another entity (a nation, corporation, or individual). This is done to apply economic, trade, political, and other diplomatic pressure on the sanctioned entity in order to persuade them to change a specific behavior (or set of behaviors).

Sanctions are imposed on a case-by-case basis and may last as long as the imposing party thinks appropriate. Sanctions are normally lifted only if the targeted party agrees to meet the requirements and accept the terms and conditions of the sanctioning party (or parties). Failure to comply could result in additional, more severe sanctions.

Sanctions are an essential component of international relations, and they are also used to combat money laundering, terrorist financing, and other financial crimes, as well as the individuals, groups, and even countries responsible.

How Do Sanctions Work?

When a nation imposes sanctions on another country, organization, or individual. The sanctioning country, its citizens, and any organizations operating under its jurisdiction must comply with the sanctions in place.

When an international body, such as the United Nations, issues a sanction, all member states must honor, comply with, and enforce the sanction.

Sanctions can be imposed by any country, but they are most effective when an international agreement governs their application. Sanctions are fundamentally connected to international relations and commitments, so the more nations agree and enforce them, the greater their impact.

Types of Sanctions

Economic sanctions involve trade barriers, import and export restrictions, prohibitions, tariffs, and other financial restrictions.
‍Diplomatic sanctions include limiting high-level government visits, recalling domestic ambassadors, and expelling foreign diplomats.
Military sanctions include prohibitions on arms and other trade restrictions related to the military.
‍Sports sanctions are diplomatic, political, and reputational penalties that limit a country's, group's, or individual's ability to participate in sporting events. For Example; No Pakistani players are allowed to play in the Indian Premier League.

About US imposed Sanctions

The Countering America's Adversaries Through Sanctions Act (CAATSA) is a US federal law that imposes sanctions on Iran, North Korea, and Russia. Many US sanctions regimes include exemptions for humanitarian goods like food, medicine, and medical equipment.

The US is the major global economy and richest country, with a GDP of over $28.78 trillion as of 2024. The US dollar is the primary global reserve currency for about 60% of global foreign exchange reserves. This dominance gives the US a significant advantage over the global financial system.

U.S. sanctions are supported by its allies, including the European Union, Canada, Australia and Japan. This coalition ensures effective implementation of the sanctions. With its large economy and strong military, the US has the ability to influence other countries to impose sanctions.

The United States (US) and its allies, the European Union (EU), New Zealand, Japan, and Singapore, have imposed sanctions on Russia's central bank and sovereign wealth funds, reportedly freezing assets invested abroad. The sanctions also targeted Russia's oil fields and military exports.

Challenges for Indian Economy

Sanctions have influenced India's trade relations with Russia, Iran, and China. For example, trade with Iran fell after the United States reimposed sanctions in 2018, affecting oil imports and other goods.

India is a major exporter of pharmaceuticals. Sanctions against major markets such as Russia can disrupt supply chains, but they also create opportunities in markets where competitors are sanctioned. For example, if Western countries stop trading with Russia, India may discover new opportunities to export goods to Western countries.

India imports more than 85% of its oil consumption, and Sanctions against major oil suppliers such as Iran and Russia may result in higher energy prices and supply disruptions. For example, after the US imposed sanctions on Iran, India had to find alternative suppliers, which increased costs.

Sanctions can disrupt international payment systems networks such as Society for Worldwide Interbank Financial Telecommunications (SWIFT), making it difficult for Indian businesses to conduct trade payments. It may also have an impact on foreign direct investment inflows to India.

Sanctions can cause an increase in the prices of essential commodities such as oil, gas, and metals, affecting inflation. Increased costs in transportation, food, and other essential goods can affect everyday life.

Way Forward

India is trying to expand its trade partnerships with the Middle East, Central Asia, and ASEAN region to mitigate the impact of sanctions by reducing dependency on any one country or region.

India is strengthening bilateral ties with sanctioned countries while maintaining a balanced relationship with the West. This strategy allows India to maintain strategic partnerships and trade with countries such as Russia and Iran in spite of sanctions.

India is developing payment mechanisms, such as local currency trading. For example; The rupee-ruble trade with Russia to avoid the need for US dollars and mitigating the effects of sanctions.

Under the Atmanirbhar Bharat initiative, India is increasing domestic production in the defense, energy, and technology sectors to reduce dependence on foreign supplies.

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Source:

Hindustan Times

Gateway House

Center for Economic and Policy Research