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Michael Moore

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Sanctions

Published Date

November 13, 2023

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Blog / How Sanctions Reverberate Through Uninvolved Countries

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How Sanctions Reverberate Through Uninvolved Countries

The Security Council uses sanctions as a non-military measure to maintain or restore international peace in accordance with Article 41 of the United Nations Charter. 31 different sanctions regimes, ranging from broad economic limitations to targeted actions like travel bans or financial restraints, have been implemented over the years, targeting a variety of global issues and regions. Although these penalties are essential for fostering peace and thwarting threats, they frequently have a “ripple effect,” which has unforeseen, broader effects in addition to their intended targets. Sanctions screening may affect certain companies or people directly, but they can also have an impact on markets, industries, or areas that are linked to the parties that are subjected to sanctions. Unexpected political, social, or economic repercussions may arise from the interconnection of the world’s economy and relationships.

Many sanctions, despite a punitive image, seek to support countries through peaceful transitions; yet, their wider consequences highlight the notion that their effect may radiate, much to ripples in water following the hurling of a stone.

To understand this phenomenon deeply, let’s go through some examples related to sanctions and their effects on uninvolved countries.

Historical Context of Sanctions

  • Firstly, Iran has been subject to U.S. and EU sanctions since 2006, which are mostly focused on the country’s nuclear program. This move targeted Iran’s oil, banking, and economic sectors and was a direct reaction to its nuclear ambitions. With the launch of the Joint Comprehensive Plan of Action (JCPOA) in 2015, a major change took place and many sanctions were lifted. But in 2018, the United States chose to reinstate some of the sanctions. Now, these measures inadvertently impacted uninvolved countries, as global businesses with interests in Iran faced challenges, and countries dependent on Iranian oil, like India, had to seek alternatives.
  • Simultaneously, as a result of its nuclear testing and missile launches, North Korea was subject to sanctions starting in 2006 from organizations such as the UN, US, EU, and other countries. The main targets of these sanctions were those connected to the North Korean dictatorship, commerce, and finance. As a result, neighboring countries, such as China, experienced disruptions in trade.
  • Finally, Russia has been subject to sanctions from the United States, the European Union, and other countries since 2014. This resulted from Russia’s annexation of Crimea and its involvement in the crisis in Ukraine; crucial areas of the Russian economy, such as its energy, banking, and defense sectors, were particularly targeted by the sanctions. These sanctions had a knock-on effect on European nations, particularly those that depended on Russian gas, which raised issues with winter energy supplies.

To understand various outlooks on sanctions reverberating through uninvolved countries, we need to look at this conundrum from economic, geopolitical, and humanitarian lenses.

Economic Chain Reactions

The term “economic chain reaction” describes the domino consequences that occur in the global economy because of its interconnectedness. According to the International Monetary Fund’s Spillover’ research, sustained global GDP growth of about 3% may be achieved by coordinated policies across the world’s five main economies. Because of this interdependence, developments in one area—such as the recovery of Europe or the supply chains in Asia—can have a big influence on other areas, like the United States, and vice versa.

In terms of sanctions, the U.S.-China trade war in 2018 disrupted global supply chains, leading to manufacturing shifts to countries like Vietnam. Meanwhile, U.S. soybean exports declined as China turned to Brazil, showcasing how bilateral disputes can ripple through the global economy, impacting third countries in varied ways.

Now moving onto a geopolitical perspective.

Geopolitical Implications

The interconnectedness of the political landscape means that actions taken by one or a group of countries can have far-reaching implications, even for nations not directly involved. Here’s a concise breakdown of the geopolitical implications:

Diplomatic Strain:

Nations that are not directly embroiled in conflicts or sanctions compliance may come under external pressure to support a certain side, endangering current diplomatic relations and raising tensions across borders. Take the 2017 Qatari Diplomatic Crisis, for instance. A number of Arab nations, spearheaded by Saudi Arabia, cut diplomatic ties with Qatar on the grounds that it provides support to terrorism. Although the conflict was essentially regional in nature, pressure to take sides or intervene came from outside the area, including the United States, which complicated matters diplomatically.

Proxy Conflicts:

Uninvolved or neutral countries may unintentionally be dragged into proxy conflicts, turned into front lines in larger powers’ battles, or employed as pawns in geopolitical chess games. Take the Syrian Civil War, for example. What started out as a personal dispute turned into a multifaceted warfare involving many international countries. While other opposition organizations were backed by the United States, the Assad administration was supported by Russia and Iran. Syria became the ground for many complex geographical injustices.

A Turn in Geographical Grouping

With changing dynamics, nations are now seeking new partners to protect their interests, leading to the formation of new alliances and reshaping the status quo. This is depicted through an example when the Philippines had a strong relationship with the US, however, with the change in president-ship, there was a clear depiction of a higher inclination towards China. This increase in inclination towards China was backed by increased economic cooperation with China rather than the US, reflecting a change in global grouping priorities.

Diplomatic strains, proxy wars, and shifting alliances mark global politics; seen in Qatar's 2017 crisis, Syria's war, and Philippines' pivot

These types of dynamic changes have a great influence on the humanitarian aspect as well.

Humanitarian Influence of Sanctions

As part of humanitarian implications, sanctions have a direct impact on the shortage of necessities including food, and medication, directly hampering the quality of life all across the nation. The influence extends far onto infrastructure which puts a strain on societal development leading to migration and displacement issues.

The Syrian Civil War is a renowned example of how deeply sanctions can accelerate global tensions, exacerbating humanitarian crises, and leaving people to deal with adjustment and accommodation on their own.

Business and Industry Ramifications

Re-routing of Business:

In response to the application of sanctions, many European businesses with economic ties with Iran had to migrate somewhere else when the United States imposed sanctions on Iran.

As a result, trade channels are greatly disrupted by sanctions, causing businesses to look for alternate suppliers or markets. This results in more costly compliance pathways, and complex routes of logistics as compared to when nations were not sanctioned.

If we look at it from an AML screening point of view, such a complex and multi-layered structure of ties makes it even more difficult to conduct due diligence and enhanced screening measures.

Furthermore, from an AML standpoint, because of the complex and multi-layered structure of business ties, this may also make it more difficult for companies to perform due diligence.

Global Uncertainty:

The percentage of global investments failed due to increasing uncertainty around countries regarding tariffs and relational biases in times of global war such as US-China trade war.

Despite not being directly involved in the trade conflict, countries in Southeast Asia experienced a slowdown in foreign direct investment as firms grew cautious about the wider economic consequences. This exemplifies how the use of penalties results in an unpredictable economic climate. Even in nations that are not immediately affected by the sanctions, businesses may become reluctant to invest due to uncertainty about future policy changes or possible secondary sanctions. This fear of taking risks may impede world economic expansion.

Technology and IP Concerns:

Last but not least, the worldwide IT industry was impacted by the U.S. penalties imposed on the Chinese tech firm Huawei due to worries about intellectual property theft and national security. Businesses in developing nations, such as Taiwan and South Korea, encountered difficulties while supplying Huawei with parts. Furthermore, there was fragmentation in the development of 5G technology, with several areas adopting different equipment and standards. Sanctions therefore have the potential to obstruct the transfer of intellectual property and limit the flow of technology. Businesses in nations not immediately affected by the sanctions may encounter difficulties obtaining technology or become embroiled in intellectual property rights conflicts.

U.S. policies reshape global trade, from Iran’s sanctions, to investment hesitancy amid U.S.-China tensions, to Huawei's 5G disruption.

As it is noticed that sanctions can have serious implications on uninvolved countries. The responsibility to counter these adverse ripple-effects then lies on global institutions. Lets see what roles these institutions are playing to subside the unfavorable outcomes of sanctions.

The Role of Global Institutions

Humanitarian Exemptions:

UN: In order to guarantee that necessities like food and medication reach the civilian population, the United Nations frequently include provisions for humanitarian exemptions when implementing sanctions. This maintains the international norm that penalties shouldn’t cause undue harm to innocent bystanders. For instance, the UN’s “Oil-for-Food Programme” in the 1990s helped to lessen the negative impacts of sanctions on Iraq’s civilian population by enabling the country to sell oil in return for necessities like food and medicine.

Economic Assessments and Assistance:

IMF: The International Monetary Fund regularly evaluates each of its member nations’ economies. The IMF can offer financial support, policy recommendations, or both to a country experiencing economic hardship as a result of sanctions.

World Bank: Similar to this, nations impacted by the knock-on effects of sanctions may be eligible for financial help as well as technical assistance from the World Bank. For example, the World Bank gave Myanmar financial backing and technical help to maintain both its smooth economic transition and regional stability once the sanctions were relaxed in the 2010s.

Trade Rules and Dispute Resolution:

UN and WTO: If nations feel that sanctions or counter-sanctions are against international trade regulations, they can use the World Trade Organization’s (WTO) dispute settlement procedure. For instance, to resolve their trade disputes over levied tariffs, the United States and China employed the WTO’s dispute settlement procedure. In addition, the UN mediates trade disputes through a number of its agencies.

Wrapping Up

In conclusion, sanctions, despite being targeted, have wide-ranging effects on economics, geopolitics, the humanitarian sector, and the companies of non-involved states in today’s interconnected global landscape. The historical sanctions on nations like North Korea, Iran, and Russia underscore the extensive repercussions that can arise. International organizations such as the World Bank, UN, and IMF play a pivotal role in counteracting these negative outcomes. Before resorting to sanctions, states must exercise prudence, conduct thorough impact assessments, and recognize the broader global implications, given the profound worldwide ramifications of such decisions. Moreover, it is important to notice that different regulators must impose sanctions on different individuals and entities. To keep strong AML controls in place, the sanctions screening services of AML Watcher must be explored to know more about it.

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