Economic sanctions

Also called: Sanctions · Topic: International Trade Policy, WTO and Intellectual Property · NCERT: Beyond NCERT

Meaning

Economic sanctions are limits on trade, finance or investment with a country, firm or person, imposed for political or security reasons rather than economic ones.

They matter because most world trade is paid in US dollars and passes through US banks. That lets the US reach far beyond its own borders. For India, sanctions on Russia and Iran decide whether it can buy oil cheaply, buy weapons, or build ports such as Chabahar.

Explanation

Two kinds, by who imposes them

• UNSC sanctions
• They are adopted under Chapter VII of the UN Charter.

• They bind all UN members, including India.

• Unilateral sanctions

• One country or bloc imposes them on its own. Other countries are not legally bound.
• OFAC (Office of Foreign Assets Control, part of the US Treasury) keeps lists of blocked persons and firms. US firms cannot deal with anyone on these lists.
• CAATSA (2017), the Countering America's Adversaries Through Sanctions Act, threatens penalties on any country that buys major defence equipment from Russia.

Primary vs secondary sanctions

• Primary sanction: it stops the imposing country's own firms from dealing with the target.

• Example: a US primary sanction stops US firms from trading with Iran.

• Secondary sanction: it punishes third-country firms that deal with the target.

• Example: an Indian firm that trades with Iran can be cut off from US banks and the dollar.

• Why secondary sanctions work

• Most world trade is paid in dollars → the payments pass through US banks → if the US blocks a firm, that firm loses access to world trade.

The toolkit, using the Russia package from 2022

• SWIFT exclusion of some Russian banks
• SWIFT is a Belgium-based messaging network. Banks use it to send international payment instructions.

• A bank cut off from SWIFT finds cross-border payments slow and hard.

• Asset freeze: about US$300 bn of Russian central-bank reserves frozen (2022).

• G7 oil price cap of $60 per barrel (December 2022)
• Western shippers and insurers may serve a Russian oil cargo only if it is sold at or below $60.
• The aim is to keep Russian oil flowing, so world prices do not jump, while cutting Russia's revenue.
• It does not ban Russian oil. It denies Western shipping and insurance services to oil sold above the cap.

Worked example: how the price cap cuts revenue

• Urals crude (Russia's main export crude) trades at $75 a barrel.
• A buyer who wants EU/G7 insurance can pay no more than $60.
• Loss to Russia = 75 − 60 = $15 per barrel.
• Russia's choice:
• accept $15 less per barrel, or
• ship through a "shadow fleet" of tankers without Western insurance. This costs more and carries more risk.

In India

• India's stated position: India follows only UN sanctions. It does not accept unilateral sanctions as binding.
• S-400 and CAATSA: CAATSA (2017) put India's purchase of the Russian S-400 air-defence system at risk.
• Chabahar (Iran)
• India signed a 10-year port deal for Chabahar in May 2024.
• The port gives India a route to Afghanistan and Central Asia that avoids Pakistan. It links to the INSTC (International North–South Transport Corridor).

• The US waiver from Iran sanctions was revoked in 2025 (verify current).

• Russian crude

• October 2025 US sanctions on Rosneft and Lukoil (two large Russian oil companies) put Indian refiners that were buying Russian crude at risk (verify current).

• The US also added a 25% "Russia-oil penalty" tariff from 27 August 2025, on top of a 25% reciprocal tariff from 7 August 2025. That made 50% in total on Indian goods.

• Post-Pokhran-II (1998): after India's nuclear tests, the US and Japan imposed sanctions and put Indian scientific bodies on entity lists (lists of blocked organisations).

• India's own controls: India runs SCOMET (its national list of dual-use items, munitions and nuclear-related items), licensed by DGFT [3]. This is an export control, not a sanction. But it builds India's image as a trusted partner for sensitive technology.

Don't confuse with

• Export controls: these limit exports of sensitive goods or technology (for example dual-use items) to anyone. Sanctions target a specific country, firm or person to change its behaviour.
• Tariffs / trade war: tariffs are taxes on imports and are usually raised for trade reasons. For example, the s.301 tariffs (2018) on China targeted "unfair" practices. Sanctions pursue political or security aims and can go as far as freezing assets or cutting a country off from payments.
• Economic coercion (for example China's export controls on critical minerals, 2023–25): coercion is a broader term for any economic pressure used to force a policy change. Formal sanctions are one kind of it. The EU Anti-Coercion Instrument (December 2023) exists to hit back at coercion.
• Technology denial: technology holders refuse to share a sensitive technology, as with the cryogenic engine in 1992–93. It is a narrower tool than sanctions, which can cover all trade and finance.

Prelims Hooks

• UNSC sanctions are adopted under Chapter VII of the UN Charter and bind all UN members. Unilateral sanctions (OFAC, CAATSA) do not. India follows only UN sanctions.
• Secondary sanctions target third-country firms that deal with a sanctioned state, not the sanctioned state itself.
• G7 oil price cap = $60 per barrel, from December 2022. It works by denying Western shipping and insurance services, not by banning oil. Trap: "it bans import of Russian oil" is wrong.
• SWIFT is a Belgium-based messaging network for payment instructions. It does not transfer money itself.
• CAATSA (2017) is a US law. It threatened India over the S-400 deal.
• About US$300 bn of Russian central-bank reserves were frozen from 2022.

Mains Points

• Strategic autonomy vs sanctions exposure
• Russian crude, the S-400 purchase and Chabahar show that the reach of the dollar lets US secondary sanctions override India's own choices.

• India's options: settle trade in rupees, spread purchases across more suppliers, and seek waivers through diplomacy.

• Sanctions and the WTO security exception

• Countries justify sanctions-linked trade measures under GATT Article XXI, which lets a member protect its "essential security interests".
• Russia – Traffic in Transit (DS512, 2019) held that Art. XXI is not fully self-judging (a panel can review it) and must be used in good faith [1][2].

• But the Appellate Body (the WTO's appeals court) has had no quorum since December 2019. A losing country can appeal "into the void", so the ruling never becomes binding. This weakens rules-based trade, which India needs.

• Sanctions as a push for self-reliance

• After the 1998 sanctions and the cryogenic-engine denial (1992–93), India built its own capacity in space, missiles and nuclear technology.
• Today the same logic drives India's semiconductor mission and critical-mineral diplomacy. It also drives friend-shoring, meaning buying key inputs from trusted, friendly countries.

Related concepts

• Weaponisation of trade
• Economic coercion
• Secondary sanctions
• Export controls
• Dual-use goods
• Technology denial
• Security exception
• Trade war
• Retaliatory tariff
• Reciprocal tariff

Read more

• The geoeconomic turn: sanctions, export controls, trade wars and CBAM