What are Sanctions?

Sanctions are an important tool of governance in the global financial industry. Most countries have used sanctions or had sanctions placed against either them or their citizens. States increasingly use sanctions to fight economically, rather than physically, and as such, sanctions have become a common tool in foreign relations, peacekeeping and conflict resolution. Given their prevalence, everybody in the financial industry should have a good understanding of what sanctions are, how they work, and why they are used.

What is an economic sanction?

An economic sanction is a ban, barrier, or restriction on trade for a specific country or (group of) individual(s). Although their immediate effects economic, they are imposed for political reasons and sometimes regarded as a non-violent way to achieve a political or economic goal, such as policy or regime change. They may also be imposed (more typically against individuals) as a form of punishment.

All firms and individuals under a country’s jurisdiction must follow the sanctions imposed by that country. Failure to comply with sanctions can lead to severe penalties, including substantial fines and prison sentences.

Sanctions against trade are the most common form of sanction. In their most extreme form, trade sanctions place a blanket ban on exports and/or imports from a certain country. Trade sanctions also come in several different forms, including tariffs and regulations. Countries may also impose trade sanctions against particular industries, companies, or people, rather than an entire state. This strategy is usually adopted when the sanctioning country wishes to avoid causing extensive damage to the sanctioned country’s economy and has a specific political goal in mind.

Sanctions policies are not without their critics. Some people believe sanctions to be detrimental to the wider world economy. They might also seem inequitable; less developed countries are often especially vulnerable to the negative effects of sanctions, as their economies are usually less resistant to shocks. In these instances, selective trade sanctions should be preferred, because subject uninvolved civilians to less collateral damage.

There is also controversy about whether sanctions are effective at all. In many cases, sanctions have not proved effective at encouraging regime and policy change. Even if sanctions have the ability to hurt the economy and average citizens of a country, they often do not directly affect the people who are in power. In other words, some sanctions might cause more harm than good. This can be damaging to the international reputation of sanctioning countries and reduces the legitimacy of other diplomatic/foreign policy interventions.

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