In response to the hostile invasion of Ukraine by Russian armed forces, European and other Developed Nations have sought to financially cripple the Putin political regime through a barrage of international sanctions.
What are sanctions, how are they enforced and how could they impact UK businesses?
What are sanctions?
A sanction is a rule adopted by a country that restricts what its government, business and citizens can do when interacting with a sanction target. Sanctions are often levied on individuals who have committed serious white-collar or political crimes, yet remain outside the jurisdiction of the justice system of the country that is convinced of the guilt of the individual or company.
Sanctions are seen as one of the few tools available to still ‘punish’ the offending party in the absence of being able to bring the responsible party to trial in a traditional fashion.
Sanctions come in many shapes and sizes.
- They may take the form of a punitive import tariff (i.e. import duty or tax) that will make goods exported from the target to the sanction-maker more expensive for consumers to purchase. This will deter a country’s citizens from buying products from the sanctioned country, hitting its export revenue.
- They could be even more restrictive, such as a rule preventing any business or individual from trading with a specific business or individual entirely.
- They could be specific to network or market institutions; forcing the network or marketplace to exclude the sanctioned country from their mechanism.
Sanctions have the effect of reducing the ability of the sanctioned target to buy and sell the goods they need to continue as normal. They cause financial pain as the sanctioned country is forced to use the next-best alternative.
This is why sanctions are highly effective when adopted by a group or bloc of countries. If country A prevents imports of commodity X from the sanctioned regime, the regime may simply sell to country B instead. But if 50 countries block imports then this stops becoming an inconvenience and begins to threaten the survival of the industry at hand. Without most of its export market, the industry may be forced to lay off workers and shut down production facilities.
How do sanctions impact UK businesses?
The sanctions issued by the UK government will certainly have repercussions for UK businesses. Sanctions aren’t a one-sided blow for the target. They don’t provide financial impacts in a vacuum.
That’s because there are two parties to any transaction, and both will have felt they were getting something good out of the deal. When a transaction is blocked, the companies on each side of the transaction will lose out on the economic benefits of the trade.
If Russia is prevented from exporting Russian-produced natural gas to the UK, then energy suppliers will need to find an alternative (and more expensive) supply of gas. Russia loses export revenue, and UK energy firms will see their direct costs increase as a result.
This doesn’t mean that the impact on both sides is equal, however. Because sanctions are often adopted by a bloc of countries at a time, the target will have far fewer choices when seeking to find an alternative party to a transaction.
For example, as of writing, the European Union has adopted sanctions that prevent member states from transacting with the Russian Central Bank.
This will prevent some favourable lending from occurring between the Russian Central Bank and commercial banks of the European member states. But unlike the Russian Central Bank, all EU banks are still able to trade with one another – mitigating the impact.
Acting beyond the mandate
Amid the turbulent situation in wartime Ukraine, many British companies are actually taking additional steps beyond the official sanctions. They are voluntarily boycotting Russian businesses or cut-off supplies and services to the Russian people of their own volition.
While this is in accordance with the spirit of the EU, US and UK sanctions recently announced, it is entirely their own decision as a business.
Examples include Disney ceasing new releases of films, Eurovision banning Russian entrants to their annual song contest, and BP plc deciding to divest from their stake in the Russian state-owned energy firm Rosneft.
These acts of self-exclusion will surely cause losses to the corporations who enact them, but they view these boycotts as an act of good governance consistent with an ethically run company.