What are Economic Sanctions and their impact on an economy?

Since the Russian invasion of Ukraine in February 2022, we have heard news of sanctions being imposed by countries and international organisations on Russia. This has negatively impacted the imports, exports, and financial transactions of Russia. However, what are sanctions and how do they impact an economy?

Economic sanctions are penalties imposed against a country, its officials, or citizens to discourage certain behaviours. Economic sanctions are imposed by national governments, such as the US Government, and international bodies, such as the UN, to punish or discourage the behaviour of other countries that go against international norms. This strategy is considered to be a low-cost strategy and is usually adopted when the use of military power is not feasible.

The impact of sanctions on the target country is huge. Let us take the example of Russia to understand this better.

Sanctions are typically imposed on the major exports of the target country. This leads to a significant decline in the exports and GDP (Gross Domestic Product) of the target country. Since Russia was a major exporter of crude oil, refined oil, petroleum products, coal, gold, timber, and steel products, sanctions were imposed on the exports of these products. As a result, in the first year of the war (2022), Russia’s economy shrank by 2.1 %, according to the IMF (International Monetary Fund). 

Similarly, sanctions can be imposed on the major imports of the target country. Sanctions imposed on Russia have restricted the import of high-technology goods into Russia, affecting its military production. Russia has tried to substitute the imports of high-technology goods with domestic production. However, Russia’s dependence on imports of high-technology goods remains significant, impacting various industries.

Furthermore, sanctions can also freeze assets and limit access to international financing, placing immense pressure on the targeted country's financial sector. According to the BBC, Russia’s foreign currency reserves worth $350 billion and 70% of the assets of Russian banks have been frozen. This has put Russia under a significant financial burden.

The impact of economic sanctions is not restricted to the economy of a country. Economic sanctions can also lead to a country facing social challenges, such as rise in unemployment and inability to invest in public services such as education. 

Therefore, economic sanctions can bring about a change to the social and economic landscape of a country. It could lead to a country facing significant financial problems and social obstacles that threaten the well-being of its citizens. However, does this provoke a country to change its policies or actions? That is a question that remains a matter of debate.