International Sanctions & their Impact on Business

The Lusaka Manifesto of 1969 enforced Trade Sanctions which resulted in Sri Lanka losing close to 90 million British Pounds in foreign exchange from 1969 to 1971. At the same time, Pakistan was supplying the West with 70 million pounds of tea a year, of which 65 million pounds was cultivated in Bangladesh. However, during Bangladesh’s struggle for freedom in 1971, Pakistan had to procure 15 million pounds of tea from Sri Lanka, having lost the cooperation of Bangladesh. Prices for Ceylon tea increased by 20% (per pound), in the weeks that followed, reducing the impact of the Lusaka Manifesto, multifold. Today, Ceylon Tea accounts for more than 11% of the island nation’s total exports for a valuation of more than $1.37 billion.

Why the history lesson? To emphasize the importance of sanctions, embargoes, why and how they are effective, and likely to affect you. When President Biden travels to India, it isn’t a vacation trip;  it’s a strategic move in International relations & economics that could very well affect you, and the business you’re operating.

First and foremost, what are sanctions and embargoes? Is there a difference?

What are Sanctions?

Sanctions are decisions, impositions, and occasionally, bans/penalties levied on a country (or individuals belonging to a country). They have added weightage with the increasing focus on Anti-Money Laundering – companies that engage in international business are required to comply with global Sanctions Lists and are required to check for any people/organisations related to any Politically exposed Persons. Sanctions are levied by the UN, international regulatory bodies (OFAC, HMT) or countries (multilaterally or regionally) to protect international and national peace and security. A deterrent to free trade, sanctions serve as effective economic tools to safeguard international law and peace. As with anything with weight, it casts a shadow (the shadow being the multiple parallels drawn between sanctions & economic coercion especially when levied unilaterally, often a precursor to economic turmoil).

Sanctions are of various types, such as –

a. Economic Sanctions

If going to war with a nation that “funds and harbours terrorism” is too extreme, economic sanctions are a subtle (maybe not quite so subtle) way to combat undemocratic principles, autocratic regimes, breach of human rights. Economic sanctions are singular amongst sanctions in that they may be tiered by the severity of restriction.

1. For example, a tariff is a kind of economic sanction that adds a surplus tax on the goods imported from a particular country or corporate entity. So, when there is a political or diplomatic skirmish of sorts between US and China, the tariff rates go up on the imported/exported goods to and from these countries. Or, when the United Kingdom shows solidarity towards Hong Kong’s pro-democracy movement, it raises its tariffs for China-based communication companies with offices and market share in the UK.
2. Non-tariff Barriers or NTBs are restrictions on imported goods pertaining to licensing, manufacturing, packaging standards. It isn’t a tax, as much as a quality check requirement. When the Rana Plaza collapsed in the capital city of Bangladesh, exposing the poor living-working conditions of workers in the fast-fashion industry, NTBs were an effective tool. Fast-fashion brands like H&M, Uniqlo, Zara, etc., now have to account for standards in production, packaging, and manufacturing. They can’t import their goods from their suppliers in developing nations, unless they abide by these restrictions and operational standards.
3. Asset seizures or freezes are the prevention of the transaction of assets owned by either an individual or a country. When reports surface that Sadam Hussein has pilfered UN funds intended for humanitarian relief and funneled them into his personal coffers, building lavish palaces, his assets get seized or frozen. There is no money coming in or out of Iraq. The President now has an X amount of money (liquid assets), little to no cooperation from his neighbouring nations or the UN, and an impoverished, unemployed, hostile population. History bears witness to how that story ended.
4. Embargoes are a blanket prohibition on specific trade items with one or more countries, usually in aid of protecting international peace and security. For example, in an attempt to control violence and war, the European Commission has an embargo on the trade of arms and military technology to the Central African Republic.

b. Diplomatic Sanctions

Diplomatic sanctions are marked by systematic withdrawal or removal of embassies or cessation of diplomatic relations with a country. The impact of diplomatic sanctions can be immediate or the national representative recall can be phased over a period of time.

c. Military Sanctions

A more open, pro-active intervention of armed forces against the sanctioned country, military sanctions can be seen in 2 main forms –

1. Targeted military strikes on specific regions to disarm impending conflict
2. Arms embargoes, which allow milder actions such as limitations on arms procurement for a particular nation (eg. Iran, North Korea)

d. Sports Sanctions

These sanctions are marked by the refusal or prevention of a country’s teams from competing in international events. India hasn’t played a cricket match in Pakistan since the 26/11 attacks in 2008. Moreover, no cricket-playing nation has played in Pakistan since 2009. Pakistan, as a nation, has played cricket since its inception in 1947. However, there haven’t been any cricket matches played in Pakistan since 2009. Every “home-match” Pakistan has played has taken place in the UAE. Why is that? A terrorist attack on the visiting Sri. Lankan cricket team in 2009, made international teams put a blanket ban against playing in Pakistan. When the 2011 World Cup was hosted by the sub-continent, matches were not hosted in Pakistan. How does this matter? Pakistan lost millions in revenue and GDP as a fallout of the 2009 incident,  which it earlier generated via hosting cricket matches, the ensuing tourism, and sponsorship for its national team.

e. Sanctions on Environment

While relatively new, Trade sanctions and regulations against an entity (corporate, individual, or government) that doesn’t comply with ESG regulations are the talk of the town with the EU’s new mandate on ESG Compliance.

What, then, is an embargo?

An Embargo is a method of enforcing a sanction. Like two tightly connected dominos, if one falls, the other isn’t far behind. Sanctions are imposed on specific transactions on specific goods/services with regards to specific entities. Embargoes, however, are a blanket prohibition on trade for anything with a country. So, when the UN restricted the trade of weapons and military technology with Iran in 2010, that was a sanction. While, when the UN restricted trade by land, air, and naval routes with Iraq in 1990, that was an embargo.

Every country either buys or sells arms, military technology, drugs (medicinal), food grains, supplies for armed forces, research, and a myriad other reasons. A trade sanction on any such country would mean that they won’t be able to buy or sell these (for lack of a better word) products. These products are essential in many ways to the protection of its territory, its GDP, its technological and economic advancement. If evidence surfaces that goods, services or money from trade is being used to facilitate undemocratic, criminal, or terrorist regimes, trade sanctions are an effective tool to bring such behavior to check.

A country that has been sanctioned can’t buy or sell arms, which in itself doesn’t sound too drastic. What’s the worst-case scenario? It can’t protect its territory, its GDP suffers, the regime changes because it can’t defend itself. A country that is under embargo, can’t buy or sell anything, including but not limited to food grains. What’s the worst-case scenario? Famine, food shortage & civil unrest are all plausible outcomes that we have seen before.

A sanction is like a benign slap on the wrist, albeit on a world stage. An embargo is like cutting someone off at the knees and crippling them. Seems too far-fetched?! The Soviet Union did crumble onto itself. Ceylon tea is world-renowned, Bangladeshi tea, not quite.