Sanctioned Countries and Their Impact on Business

Understanding Economic Sanctions

Definition and purpose of economic sanctions

Economic sanctions are intentional limitations on trade or other economic dealings that are imposed by countries or international organizations upon various countries, groups of people, or persons/entities alone to force them to change certain policies or actions. Sanctions focus on keeping nations from violating international law or human rights.

How do Economic Sanctions Work?

Sanctions are usually used to prevent the export as well as the import of goods, services, and capital from or to a sanctioned state, entity, or individual. They could be either comprehensive sanctions, covering the whole country, or targeted sanctions, concerning only chosen companies and/or individuals.

Types of sanctions (trade, financial, travel)

Trade sanctions are prohibitions on the export or import of certain goods or services. 

Financial sanctions, on the other hand, can include the freezing or seizure of bank accounts, assets, and properties, restrictions on financial transactions, and the prohibition of access to international capital markets. 

Travel sanctions are used to restrict border crossings by individuals from sanction lists and to limit the issuance of visas.

International Sanctions and Business Restrictions

International sanctions are strong instruments that directly influence global markets. Not only do they limit access to trade and capital, but they also reshape the strategy of companies that do business beyond borders.

How sanctions affect global trade

Sanctions limit the access of countries and companies to international markets, perturb their supply chains, and compel businesses to seek new partners. This eventually manifests as increased expenses and a degree of instability in the global economy.

Compliance requirements for businesses

Companies must have sanctions compliance programs in place: screening of counterparties, forbearance from doing business with sanctioned parties, and regulatory reporting. Noncompliance can result in fines and criminal exposure.

Risks of doing business with sanctioned countries

The risks include blocked payments, loss of business reputation, and legal compensation. The company involved in indirect cooperation with the sanctioned entities can receive sanctions.

Economic Trade Sanctions in Practice

Economic trade sanctions impact both governments and companies, forcing them to change their supply chains, funding, and international partnerships.

Examples of sanctioned countries

Notable examples include Russia (subjected to broad sanctions since 2014 and increased in 2022), Iran, for its nuclear and ballistic missile programmes and alleged support of terrorism, North Korea, where the sanctions are being imposed for its nuclear weapons and related activities, Cuba, and Venezuela, mainly involving restrictions on trade, finance, and access to international markets.

Case studies of business impact

Sanctions regimes push various companies to exit sanctioned markets. For example, global brands carried out a massive withdrawal of assets and cessation of business activities from Russia in 2022, while European energy companies also lost contracts due to sanctions against Iran. Economic sanctions impact companies through the loss of their own assets.

McDonald’s, for example, recorded a loss of about $1.2 billion after leaving the Russian market.

Mitigation strategies for companies

Companies lower their exposures by implementing sanctions compliance processes (among them counterparty screening and due diligence) as well as by diversifying their markets and suppliers. Companies also communicate with lawyers in an effort to fully comply with international trade law.

Legal and Regulatory Considerations

Companies need to understand that collaboration with sanctioned countries or counterparties places them under the scope of relevant national and international regimes. In some instances, the law will strictly forbid collaboration, but not every time. In certain cases, companies will have to obtain special authorizations for them to do business that way.

Penalties for non-compliance

Non-cooperation with sanctions could result in penalties for companies, freezing of assets, as well as criminal liability for company representatives in extreme cases. For example, in the United States, penalties for sanctions violations can be up to 1 million USD, and in some cases, imprisonment may also be imposed for top management.

FAQ on Economic Sanctions and Business

What is an economic sanction?

Economic sanctions are official restrictions on trade, finance, or investment imposed by an international organization or state on an individual, company, or country (nation). 

What is the purpose of establishing economic sanctions?

Sanctions are imposed to exert pressure with the aim of changing the policies or actions of a state or organization, often in matters of security, international law, or human rights.

How do sanctions affect businesses?

They restrict market access, financing, and partners, while threatening criminal exposure and fines against those companies that breach them.

Which nations are often sanctioned?

Some of the most recognized examples are Russia, Iran, North Korea, Syria, and Cuba.

How do companies follow sanctions?

Companies should build and follow compliance programs, conduct counterparty due diligence, and, if necessary, obtain special permits to conduct business activity freely.