Sanctions impact. In particular economic sanctions is a word of caution upfront, there are great debates going on whether or not sanctions are an effective tool of foreign policy, and you are asked to build your own opinion on the usefulness of sanctions in this regard. One thing is for sure though, sanctions are an ever-important factor of today’s risk management and compliance environment.
The immediate impact of an import sanction on the target country is that the country’s exports are not purchased abroad. Depending on the target country’s economic reliance on the exported goods or services, this could have a crippling effect.
The sanction might cause the sort of political and economic instability that results in a more totalitarian regime, or it can create a failed state due to a power vacuum. The target country’s suffering is ultimately borne by its citizens, who in times of crisis may solidify the regime in charge rather than overthrow it. A crippled country can be a breeding ground for extremism, which is a scenario that the initiating country would probably prefer not to deal with.
Sanctions may follow the law of unintended consequences. For example, the Organization of Arab Petroleum-Exporting Countries, or OAPEC, issued an embargo on oil shipments to the United States in 1973 as a punishment for re-supplying Israel with arms. OAPEC was using the embargo as a tool of foreign policy, but the effects spilled over and exacerbated the worldwide stock market crash of 1973-74.
The inflow of capital from higher oil prices resulted in an arms race in Middle Eastern countries – a destabilizing problem – and did not result in the policy change envisioned by OAPEC. In addition, many embargoed countries cut back on oil consumption and required the more efficient use of petroleum products, further cutting demand.
Sanctions can increase costs to consumers and businesses in the countries that issue them because the target country is unable to purchase goods, resulting in economic loss through unemployment, as well as production loss. In addition, the issuing country will reduce the choice of goods and services that domestic consumers have and may increase the cost of doing business for companies that must look elsewhere for supplies. If a sanction is made unilaterally, the target country can use a third-party country to circumvent the effect of blocked imports or exports.
A wide range of countries have imposed sanctions on Vladimir Putin and his supporters in response to Russia’s invasion of Ukraine. However, the future effectiveness of sanctions in deterring Russian aggression is unknown, and despite being targeted, they may harm ordinary Russians and have an impact on global prices.
Sanctions were originally conceived as a siege or total economic blockade. Economic isolation can put a lot of pressure on a country, but it also has a lot of human costs because access to nutritious food, medicine, and health care is often harmed3. Citizens in countries like North Korea and Iraq, among many others, have struggled to overcome the scarcity imposed by total economic blockade.
Economic sanctions are being used more frequently to advance the full range of American foreign policy objectives. All too often, however, sanctions are little more than expressions of US preferences that harm American economic interests while doing little to change the target’s behavior. Sanctions should, in general, be less unilateral and more focused on the issue at hand. Congress and the executive branch must implement far more stringent sanctions oversight, both before and after they are enacted, to ensure that the expected benefits outweigh the likely costs and that sanctions achieve more than other foreign policy tools.