Economic sanctions are a favourite non-lethal instrument in policymakers’ toolbox when they seek to respond to international issues or affect a desired outcome. The effectiveness of sanctions, as a whole, has been tested time and time again, from the US embargo on Cuba to sanctions on Russia for its invasion of Ukraine. So, what are they exactly?
Economic sanctions are fines imposed on a country, its authorities, or individual residents as a form of punishment or to offer disincentives for specific policies and acts.
Following Russia’s annexation of Crimea in 2014 and again in 2022, when Russia started a full-scale invasion of Ukraine, the United States and the European Union has levied multiple sanctions against Russian leaders, industries, and companies.
Sanctions are applied in a variety of ways based on the desired results, similar to how a carrot and stick technique is used in talks. These sanctions include targeted acts like as arms embargoes, travel bans, asset freezes, and commodities limitations, in addition to economic and trade sanctions. Sanctions can be applied unilaterally or multilaterally, by like-minded nations or international organisations such as the United Nations and the European Union. The UN Security Council has imposed 30 sanctions regimes to date, the shortest of which was an arms embargo on Eritrea and Ethiopia in 2001, and the longest of which is still in effect, dating back to 1992 on Somalia. [1]
Sanctions can be broad or narrow in scope. Wide-ranging sanctions, also known as comprehensive sanctions, prohibit all transactions with a given country, whereas targeted sanctions target specific individuals or businesses, reducing the impact on the broader public. Policymakers are increasingly understanding the unintended repercussions of broad-based penalties and preferring to use targeted measures instead. The UN Security Council acknowledged in 1995 that its broad sanctions had “adverse side consequences on the most vulnerable elements of targeted countries.” [2] Since 2004, all UN Security Council sanctions have been aimed against specific individuals or businesses associated with or operating in a target country.
So, how do economic sanctions affect businesses that operate in sanctioned countries?
In the instance of the most recent sanction, within a week following Russia’s invasion of Ukraine, governments all over the world enacted some of the most severe and coordinated sanctions in modern history.
Dealings with the Russian Central Bank[3] and Russian travel to and through the airspace of 33 countries[4]were banned at breakneck speed, billion-dollar projects were halted, many Russian banks were barred from using SWIFT[5], and powerful members of Vladimir Putin’s inner circle were sanctioned individually.
Regardless of the outcome of the invasion, the immediate ramifications for corporations working and investing in Russia have irreversibly altered Russia’s future business environment. Companies are already making significant strategic decisions at a rapid rate. Many of them chose to completely terminate connections with Russia and the Russian government – multi-decade partners — within days of suspending operations in Russia.
The scenario in Russia may be the first time sanctions have resulted in company self-sanctioning, but it is highly unlikely to be the last. While the situation is rapidly changing, we have already seen a number of early trends that will continue to play out in future conflicts and crises. Even if a company isn’t involved in the conflict, these sanctions will have a global, long-term impact on not only the company’s duties in crisis situations, but also their capacity to make a good influence.
These actions go much beyond what the government has sanctioned. But, perhaps more importantly, these responses demonstrate a new operational approach for corporations doing business in nations where human rights violations are rampant. Companies that are exiting Russia and its markets are listening to their stakeholders and attempting to match their business operations with their consumers’ perspectives and beliefs.
Many forward-thinking companies re-examined their political risk and valuation assessments in depth and breadth in the run-up to this point, preparing for crises that necessitate immediate decisions about whether to divorce or separate from a specific country as well as building in more sophisticated knowledge of the political world and its consequences, while others went with “business as usual.”
While the line between business and politics has never been as clear as many would like to believe, managers now must defend not only their own company’s ethical positions, but also the politics of their partners (or partner countries). And those who are late in moving will pay the price. McDonald’s restaurants, for example, are run by franchisees in the United States, but not in Russia and Ukraine, where the bulk of outlets are controlled by corporations. For the first two weeks, McDonald’s was nearly absolutely mute about the invasion. The company was then compelled to respond to overwhelming calls for a boycott by suspending sales in Russia.[6] As more businesses left, the public and political pressure that once applied to dozens of businesses concentrated on the few that remained, aggravating their reputational risk.
The role of business in responding to sanctions has evolved as a result of Russia’s invasion of Ukraine. In a ‘brave new world,’ where admittance into a country is viewed as tacit support of that country’s political conduct, investors and firms will need to reconsider their strategies and models. Managers must be prepared not only for the impact from Russia, but also for developing a strong, responsible strategy for the next country to flout international order and engage in conflicts. Identifying this and possibly intervening before it reaches a point of no return might mean the difference between being praised as a socially reputable organization or facing a total write-off.
[1] https://www.securitycouncilreport.org/atf/cf/%7B65BFCF9B-6D27-4E9C-8CD3-CF6E4FF96FF9%7D/special_research_report_sanctions_2013.pdf
[2] https://www.un.org/securitycouncil/sanctions/information
[3] https://www.bbc.com/news/business-60553362
[4] https://www.reuters.com/business/airspace-closures-after-ukraine-invasion-stretch-global-supply-chains-2022-03-01/
