TIOL - COB( WEB) - 946
NOVEMBER 14, 2024

By Shailendra Kumar, Founder Editor

LAST fortnight, New Delhi was achingly perturbed by the news that Washington had imposed sanctions on 19 Indian entities and two individuals for allegedly supporting Moscow's military-industrial base amid the intensifying Ukraine War. Many of the entities were perplexed as they have been doing nothing-unusual kinda trading business with Russia. And it was unfathomable to them how such innocuous line of business supports the war machine of Russia? The MEA, on its part, meekly or, obsequiously, said that the sanctioned firms were not in violation of any Indian laws. The MEA spokesperson stated that regular export control outreach events for Indian industries and stakeholders are being organised by the agencies of Government of India and the MEA is in touch with the US authorities to clarify issues. Along with the Indian entities, hundreds of companies and individuals from China, Thailand, Turkiye and Switzerland have also been sanctioned for supplying allegedly dual-use goods to Russian importers. To throw sands in the Russian war machine, the US and even the EU keep giving Russia-tethered businesses a hairy eyeball in the form of economic sanctions.

Before I recommend a sorta silver bullet to deal with such sanctions imposed under the laws of a foreign country and not a multilateral body, let me explain what this creature called sanctions is, and how it has evolved as a tool-kit for foreign policy of the rich world. Since outright war is a risky venture a la Iran, Afghanistan and Iraq, sanctions of different variants have emerged as a powerful foreign policy instrument to dissuade and weaken a country's resolve from doing something unilaterally. It is necessarily resorted to by the economically and militarily powerful nations besides a multilateral body like the UN Security Council a la sanctions against North Korea. The doctrine of sanction which began with a simple embargo on trading of goods, has acquired many Octopus-like tentacles such as financial, economic, trade and technology controls. With the US dollar dominating the international payments settlement mode called SWIFT, America while imposing sanctions, simply ostracises a country or a company or an individual from its financial network and imposes the onus of compliance on banks, companies and its citizens. There are indeed many bizarre facets of spillover effects of such sanctions but before I take a dive to discuss that let me take you on a safari to understand the evolution of such a tool-kit.

Going by the recorded history, it all began in ancient Athens. It was first used in 423 BC, when the Athenian Empire banned traders from Megara from accessing its marketplace, thereby corroding the inimical city-state's economy. However, the modern framework of international sanctions emerged only in the 20th century. It became a punishing tool to enforce global order by a collective denial of economic access to a rougish state. The League of Nations used it in two instances and also succeeded. It was used in 1921 when Yugoslavia and Albania were about to launch into border wars and in 1925, against Greece and Bulgaria. Another success story is the invocation of financial sanctions by America against Sterling, which compelled Britain to abandon its Egyptian military expeditions in the Suez War of 1956. In total, 19 attempts were made in the 20th Century and 16 of them failed. One prominent example of its failure was its imposition on Mussolini's Italy in 1935 for invading Ethiopia. Since Italy was the world's seventh largest economy, sanctions by the League of Nations did not work. Here is the catch, much relevant for the 21st century 'big fishes'! Before I talk about how big economies today respond to sanctions imposed by the rich world, let me take you to the UN which used it against white-supremacist Rhodesia to Iraq in the past. America got emboldened to use it unilaterally post-WW II and it set up its Office of Foreign Assets Control in 1950. And it was only during the Cold War, the US Congress transferred the powers to the Oval Office to impose sanctions and Cuba was a lame duck to be targeted frequently.

Its application multiplied in the 1990s, with the US furiously eyeballing Iran as it romanticised with nuclear-bomb-making. A seismic shift in the US approach popped up after the 9/11 terror attacks in 2001. The Congress passed the Patriot Act and America began targeting coffers of international terror groups. Thus began a new era of polished and sophisticated sanctions to stymie dictators, terrorists and rogue companies from accessing the US-controlled financial plumbing a la SWIFT. The dollar-dominated global financial order immensely enhanced the efficacy of modern sanctions. Having assessed the efficacy of sanctions as an efficient tool to put foreign powers under pressure, the new era of 'secondary sanctions' emerged on the geopolitical horizon around 2010. What is it? It is one special variant which allows a powerful country to sprinkle 'noxious protein' on not only the perceived bad actors but also threaten anyone fostering a business nexus with them by declaring them financial pariah. It also transforms a private player into sanction-enforcer. The Indian entities are live examples of this variant. Its deadly effectiveness was seen in the case of Iran. After the nuclear deal was sealed, European companies in droves had landed in Tehran to cash in on golden opportunities to do business. However, after Mr Donald Trump tossed out the deal, they backed away in droves in 2018.

Interestingly, the creature of sanctions underwent another round of mutation in 2014 when the US and its European allies used it after Russia's annexation of Crimea. For the first time it was used against a big fish - hordes of Russian companies, state-controlled agencies, banks and individuals were subjected to sanctions. It was a bold experiment to take on an economy more than twice the size of any other previously punched economy. Soon popped up another variant when Donald Trump used it against Chinese telecom and technology firms. Such a move was devoid of any diplomacy and was aimed at smacking their ability to design chips and sources of their components. This variant was later polished and used against China by the Biden Administration when it imposed exports control on supply of semiconductors and other advanced chips to China. The White House also involved other G7 members and many of them blacklisted Chinese firms from sourcing chips and chip-making equipment from Western Europe. Japan is under duress to implement the US sanctions. Post-Covid, one may find dozens of instances of such imposition of sanctions against Chinese individuals, Generals and companies by America and other Western economies. However, one may also find quick retaliatory imposition of sanctions by the muscled economies like China and Russia, which are quick to ban entry of US defence officials and companies from doing any business with them. One spillover effect has been the framing of common citizens in serious offences like drug-peddling and espionage. Both, China and Russia, do it quite often to put pressure on the Western bloc to secure release of their own citizens. Another side-effect of the reckless imposition of sanctions is that it has emerged as an immensely lucrative business sector in the power corridors of Washington, which I will discuss next week.

Before I conclude this Column, let me go back to the silver bullet to cork this problem. There are instances of sanctions which were imposed by the US against the entities located in the territories of its allies in Europe. One prominent example is the French bank BNP Paribas, which had pleaded guilty of clearing payments of blacklisted countries in 2014. And it paid a fine of USD 8.9 billion and its dollar-clearing operations were suspended for a year in New York. Though the allies also hit back with their own set of sanctions but they have also enacted sanctions blocking legislations to protect domestic companies by restricting them from complying with another country's sanctions. The EU enacted a law in 1990s. It was strengthened after Trump exited from Iranian Nuclear Deal and fresh sanctions were imposed. Such a move ignited litigation in Germany, Britain and the Netherlands and dozens of cases have piled up before the European Court of Justice. Some Iranian entities have sued Metro Bank in Britain after their accounts were blocked but they have sought shelter under the blocking legislation. China has also enacted a similar law but it is yet to be applied effectively. In fact, China has, for the first time, framed a bunch of regulations and licences to control export of certain minerals and metal sectors in which it cripplingly dominates the global market. As an integral part of its blowback strategy, it has also created what is known as 'unreliable entities' list on which it recently put two of the US largest defence goods manufacturers such as Raytheon and Lockheed Martin.

Taking a cue from such precedents, India should also enact such a law to block compliance with sanctions imposed by a foreign country unilaterally. The world is turning multi-polar and India has emerged as one of the key pillars of the new world order in the making. Rather than haplessly responding to such sanctions originating from extraterrestrial powers of some countries and promising to clarify issues, a time has come for India to shield its domestic firms and ought to behave like a rising power. In any case, the days of sanctions appear to be numbered as it worked well for the US only because it was the lone power in the marketplace. With many Global South countries wielding economic muscles and joining the geopolitical race, compliance with unilaterally-imposed sanctions is going to be a rare event like in the case of Russia or China or even Iran. Secondly, when large economies eyeball one another, it is going to be not so uncommon to see a barrage of retaliatory sanctions in the near future like the one China imposed on American arms dealers for supplying goods to Taiwan. And that would have massive disruptive effect on the global supply chains! With the UNSC being reduced as a mere spectator, I see only utter chaos in the future! Ciao!