International Sanctions. Macroeconomic effects and retaliation

Table of Contents

1. Introduction
1.1 What are sanctions?
1.2 Different types of sanctions
1.3 Why do we need sanctions?

2. Methodology

3. Case study: Russian Federation
3.1 Background
3.1.1 Pro-Russian unrest and Russian military intervention in Ukraine
3.1.2 Crimea and Russian military intervention
3.2 Sanctions and their extent
3.2.1 Russian political response
3.3 Analysis
3.4 Falling Ruble and Central Bank intervention
3.5 Housing market
3.6 Retaliation and Conclusion

4. Case study: Islamic Republic of Iran
4.1 Background
4.2 EU-UN led sanctions: Background
4.3 Aftermath and impact
4.4 The Oil Economy
4.5 Economic Growth amidst sanctions
4.6 Currency fluctuations
4.7 Conclusion

5. Case study: Republic of Cuba
5.1 Background
5.2 Impact
5.3 Current scenario

6. Conclusion
6.1 Arguments for effectiveness of sanctions
6.2 Survey: Domestic perception on effect of sanctions
6.3 Final words

7. Bibliography

Abstract

In various instances, countries, regional organizations, and the United Nations have resorted to use of sanctions as a foreign policy, as a tool for geopolitics, in order to influence the behavior of targeted states. Numerous researches and analyses have been conducted to observe and understand the effectiveness and impact of sanctions, and subsequently dismiss them as either effective, ineffective, or counterproductive to their intended objectives.

This dissertation seeks to address the aforementioned question; in particular, whether sanctions remain to be an option as a geopolitical tool to influence the behavior of targeted states? The core of this dissertation consists of three case studies: first, sanctions on Russian Federation (2014-present); sanctions on Iran (1979 – present, 2006, 2012 – 2016); and, US trade embargo on Cuba (1960 – present). These case studies have been analyzed from the structural point of view to understand its specifics, background, and plausible retaliation by the state. Then, the technical results achieved by the sanctions are reviewed, and their weaknesses are highlighted. Lastly, numerous relevant arguments are provided to reinforce the conclusion.

As a result, this dissertation concludes that economic sanctions are not very practical and feasible as a geopolitical tool. While they may serve as an initial shock to the targeted country’s economy, mostly, they do not succeed in fulfilling the objective of influencing the behavior of targeted states.

Key words:Sanctions, trade, embargo, economics, geopolitics, international

Subject area code in “Erasmus+” program:04300

1. Introduction

Sanctions: Definition, types, and reasons for placing sanctions

1.1 What are sanctions?

Individuals and entities within a country are expected and obliged to follow the set of rules and regulations within the country. These rules and regulations are usually enshrined and encoded in the form of text, and form the national law of that country. All individuals and entities resident in a particular state, unless exempted, are bound by these set of laws that well defined, and are supposed to work for running the country and for the common interests of its people.

Countries and States, on the other hand, are bound by certain obligations to each other under an umbrella term - international law. International law, as according to the United Nations, defines the legal responsibilities of States in their conduct with each other, and their treatment of the individuals within the State boundaries.^[1]States might be bounded to follow these laws by signing or being part of treaties, conventions, and universally accepted human rights, that majority of the world agrees upon.

In case oferga omnes(applying to all) international obligations, breaching a certain obligation attracts the independent appliance of certain penalties and subsequently the obligation to repair the material prejudices that have been caused.^[2]However, unlike national law - where those who violate domestic laws receive a punishment deemed appropriate by the court - international law has no explicitly defined enforcement mechanism for violations or misconduct. Nonetheless, United Nations charter, or more specifically, Article 41 under Chapter VII, covers enforcement measures not including the use of armed force that form the basis of international law.

Like many other topics and terms that fall under public international law, definition of sanctions is labyrinthine at best, and while Article 41 does not explicitly uses the termsanctions, it does provide us with a list of punitive measures that can be taken while making it clear that the list is not exhaustive:

The Security Council may decide what measures not involving the use of armed force are to be employed to give effect to its decisions, and it may call upon the Members of the United Nations to apply such measures. These may include complete or partial interruption of economic relations and of rail, sea, air, postal, telegraphic, radio, and other means of communication, and the severance of diplomatic relations.^[3]

Hence, sanctions can be succinctly defined as penalties imposed on State and non-State actors for misconduct and/or violation of their international obligations toward other States and have breached international law regulations.

1.2 Different types of sanctions

How these aforementioned penalties may be applied, and to what extent they could be exercised depends upon myriad factors –reasonandpurposebeing two critical factors. These penalties can take a number of forms, scope, and extent.

These penalties can be unilateral – exercised by one state, or bilateral, where several states wage sanctions against one or more nations.

Accordingly, sanctions can be diplomatic, juridical, military, cultural/sport, economic and restriction in free circulation.^[4]

i. Diplomatic: Breaking the diplomatic relations, expulsion of staff, suspending official visits etc.

ii. Juridical: Suspending or nullifying preexisting treaties, or preferential partnership

iii. Military: Enforcement of embargo on armaments (selling, supplying, transferring etc.)

iv. Cultural: Obstruction in participation in cultural or sport events

v. Economic: Restrictions imposed by a country in international commerce, in order to convince the targeted government to change its policy; they can in the forms of, among others:

- Tariffs: Imposing taxes on goods imported from the target country
- Quotas: Limiting the quantity of goods that can be imported or exported into the other country
- Embargoes: Restricting trade with the target country^[5]
- Non-Tariff Barriers (NTBs): Restrictions on imported goods, more rigorous licensing and packaging requirements, product standards etc.
- Asset freeze or seizures: Preventing assets owned by the country or its individual to be sold or moved

vi. Restriction on free circulation: Interdiction for citizens of a state to enter in the other state’s territory, landing or take-off of airplanes/ships belonging to the target state

Recently, there has been a growing trend towards using targeted sanctions for other purposes as well, namely: non-proliferation, counter-terrorism, democratization, and human rights.^[6]

1.3 Why do we need sanctions?

While the scope and reason of exercising sanctions on another state is mentioned already, one needs to assess why we need sanctions; whether they are an effective tool in achieving our (geopolitical) objectives.

United Nations Security Council first applied voluntary sanctions on the apartheid regime in South Africa in 1963, that later became mandatory sanctions with Resolution 418 in 1977. By mid 1980s, South African growth rate had halved, and the state changed its course on Apartheid within next decade.^[7]

Market value of Iranian currency, Rial, crumbled after the newly imposed United Nations Resolution 1984 in June 2011. There were not any significant impact on official currency rates that were kept artificially low, however the effect on market exchange rate of USD/IRR was immediately visible. (Figure 1)

Figure 1: Iranian Real: USDIRR Official vs Market Rate (Jan’10 – Jan’12)

Abbildung in dieser Leseprobe nicht enthalten

Source: OANDA Historical Rates USDIRR; Market rate data from NPR’sIran Currency Tumbles

European Union embargo against Iran in July 2012 had an immediate effect on crude oil exports that make up for a significant portion of Iranian exports. It would be noteworthy that before the EU placed its embargo, one in every five barrels of Iranian crude oil went to European refineries.^[8](Figure 2)

Figure 2: Effect of EU sanctions on Iranian crude oil exports

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Source: OPEC

Similarly, sanctions also seemed to have impact on Russia as well. (Figure 3) However, it is noteworthy that the countries targeted by the sanctions have retaliated in a number of ways: noticeably by placing their own counter-sanctions, and/or aligning themselves with other countries.

Figure 3: Russian imports fell significantly following the EU sanctions

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Source: Central Bank of Russia database (2015)

It is hard to delineate whether economic cost in terms of lost exports and potential jobs are always significant due to sanctions. In 2015, Russian GDP shrank by ~ 3,7%;prima facie,it appears that the sanctions led by the United States and European Union have had a strong impact on the economy of the country.^[9]However, that also collided with more than 70% fall in oil prices around the world, which made up for a significant amount of Russian exports as a whole.

A number of economists and policy analysts also believe that economic sanctions are not an effective tool to attain intended objectives, that they merely hurt ordinary citizens and correlation between sanctions and effect on economy is indistinguishable in most of the cases.

The following cases on Russia, Iran, and Cuba, extrapolate and analyze the effect of economic sanctions on respective countries, and the macroeconomic effects that they have had on their economy as a whole. We shall dwell into each country, the background – that is, the political factors that ultimately led to sanctions being imposed on them -, and assess the impact on their respective economies and any subsequent analysis that we can draw from it.

2. Methodology

This dissertation utilizes primarily quantitative method in order to assess the impact on respective economies and arrive at the conclusion. It also uses surveys to help understand perception of the people living in the country regarding the impact of the sanctions on their country, and their perception. All publicly available data has been interpreted accordingly, and cited accordingly. We have also cited work and drawn inferences, as deemed necessary, from research and publications published in eminent journals in order to draw a coherent picture and further reinforce our arguments used in this dissertation.

3. Case study: Russian Federation

Impact of economic sanctions led by United States, European Union, Ukraine, Norway, Canada, Japan, South Korea, Australia, etc. on Russian Federation (March 2014 – present)

3.1 Background

On November 21, 2013, Ukraine witnessed its second major political turmoil since its independence in 1991. President Viktor Yanukovych cancelled the preparations for implantation of Association agreement with the European Union, resulting in massive protests in Kiev, the country’s capital. Subsequently, a wave of demonstration swept across the country demanding integration with European Union; however, violent dispersal of protestors by the Special police on November 30th fueled this demonstration even further. These demonstrations garnered a wide support from the international community. European Union, United Nations, NATO, OSCE, along with representatives from Australia, Canada, Germany, and Poland etc. also showed their solidarity with the growing protests after the events on November 30. Russian Foreign Minister Sergey Lavrov stated, “other nations should not interfere in Ukraine’s political turmoil.”

Latter events saw protests against abuse of power, corruption, and a demand for change in life and political structure in Ukraine,^[10]eventually resulting in ousting of the President in February 2014. Amidst a pro-EU rally, these protests – aptly named Euromaidan – took a form of social and political movement. They were further fueled by numerous demonstrations across the country, internet activism, political support by opposition parties, leading up to civil resistance and disobedience in hopes for a political revamp. However, Euromaidan also paved the way for further events that were to highlight significant social, cultural, ethnic, and linguistic divide, taking a completely different course in the country’s 20-year-old post-Soviet history.

Since its independence in 1991 from Soviet Union, Ukraine struggled with a strong, uniform Ukrainian national identity.

This is especially visible in the ethnic and linguistic division of the country. According to a 2001 census (which is the only census conducted so far in independent Ukraine), 8.3 Million people – nearly 17.3% of the population - identify themselves as (ethnic) Russians.^[11]Similar data suggests that more than 29.3% of the population considers Russian to be their first language (Figure 4); however, despite a massive support, Russian-speaking minority in Ukraine forms the largest language group in Europe with its language having no official status at all. A survey conducted by Institute of Sociology, National Academy of Science of Ukraine, found that around 36.7% respondents speak Russian at home, while 25.8% speak both Russian and Ukrainian.

Figure 4: Percentage of people speaking Russian as their sole mother tongue

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Source: Census of Ukraine (2001)

There is a clear division in the country when it comes to economic well-being. (Figure 5) It, possibly, has to do with the fact that Eastern Ukraine has major mechanical, agricultural, and metallurgical industries, while Southeastern Ukraine and Crimea are one of the most tourist destinations.

Figure 5: Average monthly salary (in UAH) in Ukraine by region (FY 2013)

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Source: State Statistics Services of Ukraine (2013)

Aforementioned economic, ethnic, cultural, and linguistic divide also translate into a major political divide within the country, According to a poll by Research & Branding Group, while more than 84% Western Ukrainians supported Euromaidan, compares to less than 33% in South Ukraine and 13% in Eastern Ukraine. Plausible reasons cited for not supporting/opposing the Euromaidan were that its consequences sooner could be negative, along with further ties with Russia.^[12]

3.1.1 Pro-Russian unrest and Russian military intervention in Ukraine

Euromaidan, that started as a social and political movement and as a hope for change soon met opposition in Eastern and Southern Ukraine in the form of aptly named – Antimaidan. Yanukovych’s part – Party of Regions – had a heavy political base in country’s east. (Figure 6) It did not help that by now, Euromaidan itself was marred with several political alliances and extremist groups that were viewed with suspicion in Eastern and Southern Ukraine and gathered mild international criticism as well.

Figure 6: Party of Regions, 2012 elections results

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Source: Ukrainian Parliamentary election results (2012)

In a poll conducted by Kyiv International Institute of Sociology in February 2014, more than 41% of respondents from Crimea, 33.2% from Donetsk Oblast, 24.1% of Lugansk Oblast and 13-16% respondents in Dnipropetrovsk, Kharkiv, and Odessa supported a union between Ukraine and Russia.^[13]Another poll led by International Republican Institute found that 26-27% of respondents in southern and eastern Ukraine viewed Euromaidan as coup d’état; more than 67% in eastern Ukraine and 52% in southern Ukraine opposed joining NATO, and 72% answered that they thought the country was heading into the wrong direction.^[14]

Political turmoil worsened in January-March 2014, beginning primarily with Odessa and Lugansk. On January 26, 2014, up to 2000 Euromaidan protestors marched on Regional State Administration building in an attempt to capture it, however were soon met with municipal barricades and pro-government supporters.^[15]Later on in May, Odessa witnessed its worst civil conflict since 1918, where clashes and arson resulted in death of numerous pro-Russian supporters.^[16]

On March 1st, council of Luhansk Oblast voted to demand giving Russian the status of second official language, disarm Euromaidan self-defense units, and ban extremist political organizations like Svoboda.^[17]On March 4th, pro-Russian protestors took control of the local Regional Administration in Donetsk, elected a governor, and proclaimed more freedom to the city and structuring a new administration.^[18]

On March 16, 2014, Crimea held a referendum to (re-) join Russia.^[19]On March 17th, United States, European Union, and Canada placed first-round of targeted sanctions on Russia.

3.1.2 Crimea and Russian military intervention

Ukraine is divided into 27 administrative divisions: 24 oblasts (provinces), Autonomous Republic of Crimea, and Kiev and Sevastopol – both having a special legal status.

Primarily since 17th century onward, Crimea was a part of Russian empire. Eventually with the rise of Soviet Union, it became a part of Russian Soviet Federative Socialist Republic (RSFSR), until it changed hands and was transferred to Ukrainian Soviet Socialist Republic in 1954 as an administrative measure. In January 1991, Crimea held its referendum titled – Referendum on sovereignty. Voters were asked whether they wanted to re-establish the Crimean Autonomous Soviet Socialist Republic (Crimea ASSR), and the proposal was approved by 94% of voters.^[20]In 1992, Crimean Parliament renamed ASSR to the Republic of Crimea, proclaimed self-government, and passed the first Crimean constitution. Eventually, it agreed to remain part of Ukraine^[21]; however, 1995 saw Ukrainian parliament abolishing the Crimean Constitution, and cancelling majority of laws and decrees passed earlier. Black Sea Fleet – established in 1783 – stayed loyal to Russia after the fall of Soviet Union, and Ukraine agreed to lease the naval base to Russia until 2017, which was eventually extended up to 2042.

Beginning March 2014, amidst political turmoil and civic unrest and with Crimea being an important geopolitical asset, Russian soldiers without insignia took control of strategic positions in the region. Crimean leadership announced a referendum on secession from Ukraine, which was struck immediately by the Ukrainian parliament as illegal and unconstitutional.^[22]On March 16, a referendum took place that was deemed as illegal by the international community, with Russia defending it as complying with right to self-determination of people. On March 18, Republic of Crimea and City of Sevastopol were fully annexed as Crimean federal district of Russian Federation.

Referendum results posted that 96.7% voters in Autonomous Republic of Crimea and 95.6% in Sevastopol voted to join Russian Federation.^[23]

Pew Research Center surveyed opinions in Ukraine and Crimea on unrest and referendum; despite international criticism and skepticism on referendum, 91% of the Crimean respondents believed that the vote was free and fair, with 88% asking the Ukrainian government to recognize the results.^[24]

Donetsk and Lugansk Oblasts – together known as Donbass region – witnessed pro-government protests escalating into an armed conflict with secessionist tendencies from March 2014 onward. Self-declared Donetsk People’s Republic (DPR) and Lugansk People’s Republic (LPR), they were backed by Russian citizens, ultranationalists, along with heavily debated role of Russian state.^[25]Insurgency and armed conflict continues to this day.

3.2 Sanctions and their extent

On March 17, a day after the Crimean referendum and in response to Russian military intervention, United States, European Union, and Canada launched first round of sanctions against certain Russian individuals and entities. Japan quickly followed, along with Australia on March 19th. Albania, Iceland, Montenegro, Moldova, and Ukraine also followed the EU and imposed travel bans on few individuals and trade restrictions. In response, Russian State Duma – the parliament – unanimously passed a resolution asking for all parliamentary members to be included in the sanctions list.^[26]

In April 2014, United States and European Union further expanded their sanctions – termed as second round of sanctions.

From July 2014 onward, following the insurgency in Donbass region, US, EU, Japan, Australia, Norway, Switzerland, Canada, and Ukraine, and G7 expanded their sanctions to include major entities, more individuals, and total freeze of assets.^[27]This third round of sanctions continue to this day.

To give some perspective, EU sanctions comprise of^[28]:

- Diplomatic measures: EU-Russia summit cancelled; no bilateral summits to be held regularly.
- Restrictive measures: Asset freeze on more than 37 entities and 149 people, including visa bans.
- Restriction for Crimea and Sevastopol: Ban on Crimean imports; investment in Crimea prohibited; ban on providing tourism services; complete ban on providing goods and technical and brokerage services
- Economic sanctions: Restrictions on targeted cooperation and exchanges with Russia; EU nationals and companies can no longer buy/sell financial instruments in Russia; complete trade ban on numerous Russian entities; embargo on import/export of any arms and other related products and services, etc.

Based on latest announcement made in March ‘16, Council of the European Union planned to extend its restrictive measures until at least September 15, 2016.^[29]

3.2.1 Russian political response

On March 20 2014, Russian Foreign Ministry published sanctions against certain American politicians. List later on expanded to include 13 Canadian officials as well.^[30]

On August 6 2014, President of Russian Federation Vladimir Putin signed a decree mandating an embargo on agricultural products originating from countries that adopted or joined introduction of sanctions against Russia.^[31]

Eventually, Russia announced a ban on use of airspace by Ukrainian airplanes, along with entry ban on more than 89 EU politicians.

Currently, Russian embargo on products originating from countries that participated in sanctions against Russia extends until August 5, 2016.^[32]

3.3 Analysis

Sanctions from both ends significantly altered the political and economic dynamics. US-EU-led sanctions targeted major Russian companies, affecting investments and trade. Russia also launched sanctions against aforementioned countries; being a major trade partner, it has had arguably a noticeable effect on their economies – or so does the rhetoric from both sides say.

For the purpose of our analysis, we shall divide our analysis into two major parts: Effect of sanctions on Russia led by US-EU, observing major macroeconomic indicators and taking into account any other factors that could have had impact on it. Next, we shall also touch on retaliation efforts by Russia, and whether it minimized the impact of US-EU led sanctions.

Political commentary aside, it is difficult to analyze the impact on economy of Russia that US-EU led sanctions have had so far. Russian economy is heavily dependent upon export of minerals and oils, and oil based products. (Figure 7) In 2014 alone, it accounted for around 70% of total exports, valued at US$ 382 Billion.

Figure 7: Russian exports in 2014

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Source: The Atlas of Economic Complexity, Center for International Development, Harvard University

Subsequently, massive drop in crude oil prices from June 2014 onward had a significant impact on Russian economy. However, because the sanctions were placed not so long back in March 2014 itself, it leads to a question whether it were sanctions or global oil prices that led to a slowdown and ultimately a recession in Russian economy. Following table (Figure 8) shows an immediate slowdown in GDP growth rate Q3 2014 onward.

Figure 8: Quarterly GDP Growth Rate – Russian Federation (2013Q1 – 2015Q4)

(Numbers in red indicate period of sanctions)

Abbildung in dieser Leseprobe nicht enthalten

Source: OECD Data

Thus, it becomes critical to observe the change in GDP growth rate over a smaller period, and change in crude oil prices – main constituent of Russian exports. For this, we shall compare the Quarterly GDP growth rate with Global crude oil prices (measured in US$/Barrel), and trend lines indicating the changes. (Figure 9)

[...]

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