Economic Sanctions and their deterrent effect

Q Why is it in News ?

A The economic sanctions imposed by the US, UK, and the EU on Russia for going to war against Ukraine could prove to be detrimental to the country.

Q What do economic sanctions mean?

A 

• Economic sanctions are penalties or bans that are levied against a country to push it to modify its strategic decisions.
• They include withdrawal of customary trade and financial relations for security and foreign policy purposes.
• Sanctions could result in cutting economic ties in every respect such as terms of trade, financial assistance, transit support, travel bans, asset freezes, and trade restrictions.
• The curbs could also be targeted, thus restricting transactions with certain businesses, groups, or individuals.
• Amid increased global and economic interdependence, they could prove to be detrimental for the targeted country.

Q How do sanctions impact an economy?

A 

• No country can afford to be a closed economy.
• The affected country’s supply chain gets disrupted in terms of the inflow of goods and services and for reaching out to the export markets.
• In the former, there is a risk of the internal economy being crippled, especially if it depends on imports of critical raw materials.
• The domestic economy could also be deprived of external market support.
• The risk element is high especially in case of economic curbs being imposed collectively, such as by the Organisation for Economic Co-operation and Development (OECD) or the North Atlantic Treaty Organization (NATO).

Q What are the economic sanctions against Russia?

A 

• Major Russian banks have been banned from the SWIFT financial messaging service and their assets have been frozen.
• Sanctions have been levied on the Russian Direct Investment Fund and against some of Russia’s wealthiest people.
• Access to air-space has been denied and export controls introduced.
• The countries imposing curbs on Russia account for 34% of world GDP.

Q What is the cost of such restrictions?

A 

• This depends on the economic strength of the country being targeted.
• Russia cannot be brushed aside as an ordinary economy.
• The country is important to the global economy because of its oil reserves and access to nuclear power.
• Russia is also a supplier of sophisticated defence products and is an important supplier of crucial defence products to India.
• Given the long-term strategic nature of the relationship, India is abstaining from voting on resolutions to condemn Russia.

Q How did India manage curbs after Pokhran-II?

A 

• India’s dependence on external assistance was more than $100 billion.
• The government appealed to non-resident Indians (NRIs) whose annual savings were more than $400 billion.
• NRIs’ subscription to government bonds was more than double the annual foreign assistance.
• India could also showcase its scientific strength as none of the scientists involved were trained abroad.
• This helped India display confidence, especially to investors.