Sanctions Simplified and Strategically Considered

An explainer of sanctions, its brief history, issues in global, regional and country level sanctions and complying with sanctions regime, and what India can think of and do about sanctions strategically.

Even as Russia has invaded Ukraine, sanctions have been imposed by many countries — the United States, Canada, European Union, the United Kingdom – either on individuals (including President Putin) or on dealings with Russia.

 

What are Sanctions?

Simply expressed, sanctions are akin to boycotts. Sanctions can also be described as trade embargoes or bans on dealing in specific goods, commodities or services with the sanctioned individuals, entities or nation State.

In case of boycott, one refrains from (or is urged to refrain from) buying or dealing with someone being subjected to the boycott.

Similarly, when nation States or multilateral organisations (such as the United Nations) impose sanctions, such nation States or organisations are in essence asking their own nationals, members or those subject to its jurisdiction to refrain from dealing with the notified individuals or entities or the proscribed nation State.

 

Historic evolution, the League of Nations and the United Nations

Sanctions can trace their origins to naval blockades1 when countries were at war or to even earlier examples of castles or forts being under siege. Such a siege or blockade prevented the delivery of supplies to or the exports[1] from the nation State (or castle or fort) that was subjected to a siege or blockade.

Sieges or blockades could coerce or pressure the nation State or the castle or forts into surrender even as it would inevitably run out of essential supplies including food. Such siege or blockades also meant huge tolls and adverse impact on the civilian population. Hence, where a war could have only placed the soldiers in harm’s way, siege or blockade escalated the costs and impact to a broader swath of society[2].

 

Blockades were deployed in World War 1 including by the allied and associated powers. After the great war, with the formation of the League of Nations, and a desire to ensure peaceable resolution of disputes among nation States (including by means of arbitration, judicial settlement, enquiry, settle by means of diplomacy or being referred to the Council for its determination) and hence abiding by rule of law, also meant that if there was non-adherence, there could be consequences. One such consequence was envisaged in Article 16 of the Covenants of the League of Nations[3]. It elevated blockades to the level of financial, economic and special measures against a warring nation or one which did not adhere to the rule of law.

 

Nicholas Mulder in his book The Economic Weapon: The Rise of Sanctions as a Tool of Modern War examines this particular period and logic, rationale and theoretical underpinnings of sanctions[4] and is highly recommended for those interested in the subject. He also observed: “When the victors of World War I incorporated the economic weapon into Article 16 of the Covenant of the League of Nations, they transformed it from a wartime to a peacetime institution.”

 

A further observation that he makes would appeal to the legal community: “The history of sanctions is a prime example of how legal institutions shaped material outcomes and affected the tissue of globalisation and the everyday lives of civilians. Law was no mere abstraction or scrap of paper but a core domain for the elaboration of statecraft and strategy.”

The league did apply sanctions in many situations, and which appears to have bolstered the idea of sanctions in general.

 

It is no surprise then that the United Nations Charter also features the ability to adopt measures and actions with respect to threats to peace, breaches of peace or for acts of aggression under Chapter VII of the Charter[5] (and specifically, Article 41).

 

It is noteworthy that from its inception until 1990[6], the United Nations had imposed sanctions only twice – in form of voluntary sanctions on the apartheid regimes in South Africa in 1963 and in Southern Rhodesia in 1965, and which became mandatory in 1968 for Rhodesia and in 1977 for South Africa.

 

The pace of imposing sanctions increased in the immediate aftermath of the Cold War. To date[7], the United Nations Security Council established 30 sanctions regimes in total, concerning: Southern Rhodesia, South Africa, the former Yugoslavia (2), Haiti, Angola, Liberia (3), Eritrea/Ethiopia[8], Rwanda, Sierra Leone, Côte d’Ivoire, Iran, Somalia/Eritrea, ISIL (Da’esh) and Al-Qaida, Iraq (2), DRC, Sudan, Lebanon, DPRK, Libya (2), the Taliban, Guinea-Bissau, CAR, Yemen, South Sudan and Mali. As on date, there are fourteen active regimes – with the oldest concerning Somalia (established in 1992) and the newest concerning Mali.

 

Limitations of UN sanctions

Imposition of sanctions by the United Nations takes place in certain defined situations (itself an expanded set of situations from what the League of Nations contemplated).

The United Nations has applied sanctions to:

  • support peaceful transitions;
  • deter non-constitutional changes;
  • constrain terrorism;
  • protect human rights; and
  • promote non-proliferation.

 

The measures have ranged from comprehensive economic and trade sanctions to more targeted measures such as arms embargoes, travel bans, and financial or commodity restrictions. Each set of sanctions are administered by a sanctions committee chaired by a non-permanent member of the Security Council. Member States are expected to give full force and effect to the sanctions regime.

However, imposition of sanctions itself requires unanimity among the permanent members of the Security Council of the United Nations viz. China, France, Russia, the UK and the US.

 

If any of these countries vetos or blocks the placing of sanctions, then no UN sanctions can be imposed. The reasons for a veto could be geopolitical conflict or ideological differences or it plainly being against the interests of the concerned permanent member.

It also means that none of the permanent members of the Security Council would ever be in a position of facing the United Nations sanctions no matter the provocation.

 

Sanctions imposed by regional groupings or countries

Sanctions can also be placed at a regional grouping level (e.g. by the European Union) or by individual countries (the UK or the US). This is especially utilised when no UN sanctions can be imposed due to opposition by any permanent member of the Security Council, or when the issue is of particular concern to that regional grouping or country. These sanctions can also supplement the sanctions if any imposed by the United Nations.

 

Such measures can range from comprehensive economic and trade embargoes to restrictions on exports or imports of arms or specified commodities, or financial dealings or logistics support, or any dealings with notified entities or individuals.

 

These apply to those that are the subject of such regional groupings or countries. The subjects themselves could be:

  • Citizens or permanent residents of the country, wherever located.
  • Individuals physically located in that country (irrespective of their nationality).
  • Companies incorporated in the country, or having offices, operations or other nexus with the country.
  • Transactions through the country’s financial system (including transactions in the country’s currency).

 

Consider especially that the US does utilise sanctions as part of its statecraft and strategy, and combined with the fact of the US dollar being a reserve currency as well used the most in international commercial transactions (and hence clearing and settlement necessarily involves US banks), sanctions imposed by the US can have far-reaching consequences.

 

Complying with sanctions

Member States of the UN have enabling legal frameworks to ensure compliance by their country, citizenry or corporates with the sanctions imposed by the UN. India does so vide the United Nations (Security Council) Act, 1947, orders issued thereunder, the Unlawful Activities (Prevention) Act, 1967 and to a lesser extent, vide notifications under the Foreign Trade (Development and Regulation) Act, 1992 and Foreign Exchange Management Act, 1999.

Member States by and large ensure compliance by harnessing the banking and payment systems, and logistics providers (shipping lines, airlines).

 

Logically, every (international) commercial transaction requires payment or settlement system being harnessed, and hence requiring the banking system to scrutinise and block and report the transactions with proscribed countries, entities, persons or commodities is an easy call. Where there are physical goods involved, then logistics providers become a strong staging ground for ensuring non-shipment to or non-delivery from a sanctioned country, entity, person or commodity.

 

Sanctions that are may also have exceptions that are specified. For instance, delivery of food and medicines, and receipt of payment for the same, or export/import basis waivers, special licence or permit issued by the agency administering the sanctions (issued especially to comply with pre-existing obligations) could be exceptions to the sanctions imposed.

 

Equally, when sanctions are imposed by individual countries or regional groupings (and not the UN), there can be different choices and consequences. For instance, completely avoiding involvement of any individual or corporate who has nexus with the country imposing the sanctions for conducting the transactions or utilising a different currency or mode of payment or settlement (as opposed to using the currency of the country which imposed the sanctions) for the transactions would bypass the sanctions without violating the same[9].

 

In an earlier not so recent past, on account of the historic trade ties between India and Iran and India’s oil imports from Iran, even as Iran faced US sanctions, India used Euros (instead of US dollars) for settling the payment obligations[10]. When the EU also imposed sanctions on Iran, India even considered utilising gold as an intermediate solution for making payments[11] and finally, settled upon instituting a rupee-rial trade, whereby India would pay for the Iranian imports in rupees and Iran could spend the rupees in India to make necessary purchases[12]. The US/EU sanctions also meant that no bank having operations in the US or EU could be engaged in the Indo-Iran trade transactions.

 

Similar approaches or workarounds can be expected to be instituted when India differs with the sanctions placed by regional groupings or individual countries, including in respect of the Russian Federation (as arising from its action in Crimea and now in Ukraine).

A simple manner to ascertain the applicability of sanctions is to imagine a venn diagram:

  • If the citizen or the corporate has overlap of interest with the country imposing the sanctions and the country facing the sanctions, she/it needs to abide by the sanctions.
  • If the venn diagram has no overlap, then the sanctions may not apply[13].

 

What is different this time?

Russia faced limited US sanctions for its conquest of Crimea[14]. In respect of the conflict of 2022 involving Ukraine, Russia faces far more stronger sanctions[15].

Certain unprecedented measures merit a callout:

  • Coordinated and swift action by major countries including the US, UK, EU, Japan, Australia and Canada[16].
    • The coordinated action done so speedily speaks to the angst at the actions of Russia.
  • Disconnecting certain Russian and Belarusian Banks (and their subsidiaries) from Society for Worlwide Interbank Financial Telecommunication (SWIFT)[17].
    • SWIFT, a Belgium based global cooperative of banks and financial institutions, operates a secure financial messaging system, and is critical for cross-border interbank settlements and which supports cross-border trade.
  • Prohibition on the financing of the Russian Government and Central Bank as well as banning all those transactions related to the management of the Central Bank’s reserves and assets[18] including its gold reserves[19].
    • A Central Bank facing sanctions is unprecedented.

 

In an interconnected, globalised world, where cross-border trade and finance are a reality, these measures are indeed quite strong.

These measures could also be a very strong message against adventurism by any other country coveting territory or sovereignty of another country.

 

Considering sanctions strategically

There needs to be a recognition that sanctions, whether imposed by the United Nations, a regional grouping such as the EU or by individual countries such as the US is a reality and here to stay. If at all, the last century has elevated the significance of sanctions in statecraft and its implications will be felt far more so in the highly globalised and interconnected and highly interdependent world.

Considering sanctions strategically within India

India appears to only have a legislative framework to implement the UN Sanctions, and which also appears to be only against terrorist organisations (observable in terms of linkage and usage of the Unlawful Activities Prevention Act). It also utilises the framework under the Foreign Trade (Development and Regulation) Act or the Foreign Exchange Management Act infrequently. Hence, implementation via the foreign trade policy[20] is sketchy.

Accordingly, there is a need to develop a specific legislation that outlines how and to what extent Indian citizens, residents and corporates would comply with the sanctions process. This would serve to both inform and also reduce or eliminate any angst, confusion or doubt that may arise when measures for implementing sanctions are undertaken.

 

The legislation should also deal with insulating Indian citizens, residents and corporations when sanctions are placed by regional groupings or countries against other countries and counterparties in such countries. This should cover a scenario when India supports such sanctions and a scenario when India does not support or endorse such sanctions. Expressing support or lack of support is a sovereign entitlement of each nation, and which takes into account its own interests, that of its trade partners or the ancient, historic or strategic partners, the public reactions and so on.

 

In the latter scenario, as observed in a major Indian law firm’s blog post[21]:

“India may consider protecting its companies by using countermeasures such as blocking statutes, non-recognition of foreign judgments, clawback rights, reporting requirements – which all aim at preventing citizens or national entities from complying with the sanctions. A blocking statute is a mechanism used by countries to reduce or mitigate the impact of sanctions on their citizens and businesses. It essentially includes passing of a local law that makes it illegal for any national to abide by the terms of the sanction imposed.”

Such measures exist in very many countries, including the US.

 

Finally in such a legislation, given the crucial role that the sanctions regime plays in international geopolitics and diplomacy, the legislation should also empower the Indian Government to institute sanctions, embargoes or bans, and constitute a due administrative machinery to implement such sanctions, modeled on the US’s Office of Foreign Assets Control (OFAC). Such an office can undertake due enforcement including imposing civil penalties or criminal prosecutions depending on the gravity of the breach.

 

Many will recall the reaction of the Indian public to certain social media messages by MNC operating in Pakistan, which resulted in official protests being expressed by India to Korea (as many of such MNCs were Korean in origin)[22]. This was merely prompted by social media messages that were deemed inappropriate. Consider situations when India has armed conflict or serious hostilities with a country, and an MNC supports or contributes to the war effort of such a hostile nation (including providing it war supplies or war materials). A legislative measure that such an MNC can face sanctions, will ensure curbing or curtailing of any support or contribution to the war efforts of such a nation upfront, especially if it wants to continue to do business with India or in India.

 

Finally, in case of situations where the UN Security Council refuses to act, or cannot act due to any permanent member vetoing or blocking imposition of sanctions, and India desires to act, such a legislation would be of value. Similarly, if India is in an armed conflict with any nation, it could institute sanctions to ensure that the warring nation faces economic and trade pressures by common counterparties suspending or withdrawing from such nations.

Considering Sanctions Strategically Globally

On a broader perspective, India and other like thinking nations should seek that SWIFT as well as other global payments infrastructure (such as VISA, MasterCard) are immunised from being coerced or pressured by individual countries or regional groupings or being subject to regional or local level sanctions. Similar protections need to extend to organisations in the global logistics and telecommunications sector.

 

Similarly, imposing sanctions on a Central Bank can also spell breakdown of trust amongst nations as their foreign exchange reserves and assets become hostage to ebbs and flows of international geopolitics and diplomacy. It could contribute to countries becoming more insular and insistent on localisation of assets and reserves, and will reduce international peace and cooperation.

 

Imposition of sanctions for such organisations should be only when the Security Council of the United Nations so authorises the same. These global payments, logistics and telecommunications infrastructure and the Central Banks underpin international trade and commerce in a major way, and their weaponisation (abuse or misuse) at a regional or local level should be curbed or rolled back.

 

Finally, and more for the international scholars and diplomats, is considering a deep reform of the Security Council[23] in finding a balance between the veto powers of the permanent members’ and holding permanent members accountable when their own actions require a coordinated response.


Pramod Rao, Group General Counsel at ICICI Bank. Views are personal.

1 See HERE

[1] Critical to earn foreign exchange to pay for essential supplies and imports.

[2] See HERE

[3] See HERE .

[4] See HERE .

[5] See HERE .

[6] See HERE.

[7] See HERE .

[8] The shortest sanctions regime to date, concerning Eritrea/Ethiopia, was implemented from 17-5-2000 to 15-5-2001, id.

[9] See HERE  and See HERE

[10] See HERE

[11] See HERE

[12] See HERE and See HERE

[13] Terms and conditions apply: do study the fine print of the sanctions, and obtain definitive legal advise.

[14] There are four primary prohibitions vide US sanctions related to Crimea region:

  • A prohibition against new investment in the Crimea region of Ukraine by a United States person, wherever located.
  • A prohibition against the importation into the United States, directly or indirectly, of any goods, services, or technology from the Crimea region of Ukraine.
  • A prohibition against the exportation, re-exportation, sale, or supply, directly or indirectly, from the United States, or by a United States person, wherever located, of any goods, services, or technology to the Crimea region of Ukraine.
  • A prohibition against any approval, financing, facilitation, or guarantee by a United States person, wherever located, of a transaction by a foreign person where the transaction by that foreign person would be prohibited by this section if performed by a United States person or within the United States.

Cited HERE

[15] See HERE

[16] See HERE

[17] See HERE

[18] See HERE

[19] See HERE

[20] See HERE

[21] See HERE

[22] See HERE

[23] Which should extend to expanding the Security Council permanent members (and honouring India’s long-standing claim).

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