Sanctions and Economic Security

GS-II : International Relations

The Next Sanctions Crisis

• Sanctions Chain: A common sanctions checklist issued in Washington can ignite a sanctions crisis that winds up impacting an Indian household, passing through banks, insurers, shipping routes and government Ministries.
• Fragmented Response: Diplomacy, law, banking, trade, shipping and fuel supplies are covered by separate parts of government, and no single Ministry watches the entire chain.
• U.S. Sanctions: Washington sanctioned four Indian companies and three Indian nationals allegedly involved in trading Iranian oil and petrochemicals.
• Iranian Action: Iran had listed an LNG carrier working for India and a bulk carrier with an Indian flag to be potentially fined, detained or seized in the Strait of Hormuz.
• Different Channels: One sanction operates through the banking channel, while the other creates risk at sea.

‘Weaponised Interdependence’

• External Reliance: An Indian firm may rely on an American bank for payment, a foreign insurance company for shipping and safe passage through the Strait of Hormuz.
• Dependence and Control: The greater the control of critical networks, the greater the leverage the controller has over States and corporations that depend on those networks.
• Weaponised Interdependence: The ability to leverage global networks of interdependence as a source of pressure is termed weaponised interdependence.
• Secondary Sanctions: Foreign companies may be pressured to drop targeted transactions or risk losing access to American finance.
• Operation Economic Outcast: On August 24, the U.S. expanded this threat to five Iranian sectors: digital assets, technology, gold, aviation and shipping.
• VTB Bank: On September 14, Washington announced sanctions against Russia’s VTB Bank, whose Delhi branch has been involved in working with Iran.
• Banking Risk: Even where the transaction is permitted under Indian law, banks dealing with VTB Bank will also face sanctions risks.

Sanctions and Global Trade

• European Response: American laws passed in the 1990s that attempted to subject foreign companies to U.S. law for acts and conduct overseas spurred Europe to issue a Blocking Statute.
• Iran Sanctions in 2018: After secondary sanctions against Iran returned, many European companies pulled out despite having domestic legal support.
• Dollar and Banking Dependence: The threat of losing access to banking and dollar payments was enough to discourage trade that was legal within Europe.
• Russia Sanctions: Sanctions expanded in 2022, including export controls on suppliers of chips and machine tools.
• Oil Restrictions: Restrictions continued to cover tankers, insurers, ship managers and traders.
• Focus on the Transaction: Sanctions increasingly focused on the transaction itself, rather than only the actions of those selling.

U.S. Tariff Threat

• September 16: The U.S. Congress approved a sanctions bill to give the President power to use tariffs as leverage for economic coercion.
• India-U.S. Trade: India sought to spare Indian exports from 100% tariffs over its Russian oil purchases.
• Indian Response: The Indian government is monitoring the situation and has said it would coordinate with industry to safeguard India’s trade and economic interests.

Iran and the Strait of Hormuz

• Maritime Pressure Point: Iran is also using the Strait of Hormuz as a pressure point.
• August 23: Its Persian Gulf Strait Authority listed 45 ships as non-compliant.
• Indian Vessels: The list included Disha, a vessel chartered by Petronet LNG and managed by the Shipping Corporation of India (SCI), and Maha Roos, an Indian-flagged bulk carrier.
• Unexplained Breaches: The alleged breaches were never explained by the authority.
• Update: As of September 14, the list grew to a total of 77 vessels.
• Insurance: The agency also warned insurers not to insure any of the listed ships.
• Sanctions Risk: Washington imposed sanctions on the authority and stated that seeking passage guarantees from it would pose a sanctions risk even without payment.

The Domestic Consequences

• Economic Impact: Economic coercion connects overseas pressure with the domestic economic environment.
• Impact: It affects households, farmers and seafarers.
• Ongoing West Asia Crisis: The Union government liaised with Ministries, tracked vessels and supplies, ramped up LPG production and located substitute freight.
• Domestic Supply: This integration helped keep pumps and kitchens open.
• Policy Continuity: This kind of coordination should scale up beyond the crisis and be embraced through policy continuity.

Economic Security and Sanctions Office

• Permanent War Room: An Economic Security and Sanctions Office under the Cabinet Secretariat should be India’s permanent war room for economic coercion.
• Inter-Ministerial Coordination: It should bring relevant officials dealing with foreign policy, finance, commerce, energy, shipping and logistics, law and defence, together with the RBI and market regulators.
• Monitor the Full Chain: Its personnel should identify where transactions can fail, from payment to insurance to shipping and delivery.
• Foreign Listings: It should ask for proof behind foreign listings and support justifiable requests for removal.
• Exemptions: It should negotiate written exemptions and transition periods.
• Clear Indian Guidance: The top management should provide clear Indian guidance.
• Banks: Banks should separate legal prohibitions from their own business prudence.
• Companies: Companies should be alerted in advance when a payment channel, insurer or port is likely to face disruption.

Strengthening Domestic Resilience

• LPG Storage Requirement: There is not enough LPG storage in India.
• Tanker Fleet: India needs a larger fleet of Indian-owned tankers.
• Maritime Insurance: India needs a robust Bharat Maritime Insurance Pool.
• LNG: India should finalise long-term LNG contracts outside Hormuz.
• Rupee Settlement: Rupee settlement can support normal commercial trade if sellers are not too affected by indirect sanctions and accept it as appropriate payment for legitimate products, but nothing could save a bank remaining unpaid when New York was still powerful over it.

Why India Cannot Take the Same Stand as China

• China’s Stance: China has said American actions are groundless in international law and the UNSC.
• Chinese Businesses: In early May, Beijing instructed Chinese enterprises not to acknowledge, enforce or comply with United States sanctions on five Chinese refining firms.
• India’s Position: India has explained that it abides by sanctions imposed by the UN Security Council but rejects unilateral sanctions.
• Difference in Strength: China’s economic strength, ability to direct its economy and leverage over essential supply chains give it greater scope to resist external pressure.
• India’s Challenges: India would find it costly for its financial and commercial relations with the U.S. to adopt what Beijing recommends.
• Challenge in Practice: A legal challenge alone is of little solace if Indian firms still shoulder the burden.

India’s Challenge

• Balancing Interests: India is required to protect household energy, seafarers, fertilizer supplies and lawful trade, while preserving relationships with the U.S., Russia, Iran and the Gulf.
• Whole Picture: Delhi needs to see the entire picture before taking action.
• Chokepoints: India cannot displace global chokepoints such as those represented by New York banking and the Strait of Hormuz.
• Strategic Response: India can ensure that every decision is made with a focus on the entire journey.

Conclusion

• Economic Security: The sanctions challenge highlights the interrelationship of foreign policy, financial systems and trade with domestic economic security.
• Resilience: India is neither home to financial nor maritime chokepoints, but it can mitigate its exposure through coordination, global supply-chain diversification and greater domestic resilience.
• Whole-of-Government Approach: A coordinated approach should cover the entire chain, from payment and insurance to shipping, energy supplies and the household.
• Strategic Sovereignty: Protecting India’s legitimate economic interests will increasingly depend not only on its diplomatic choices, but also on its ability to anticipate and manage external economic coercion.

UPSC Mains Practice Question

Q.  “In the age of sanctions, India cannot move global chokepoints but can build resilience against economic coercion.” Discuss the challenges posed by sanctions and the measures suggested for India.