The Impact on Countries and Companies of Sanctions against Russia - Example

The impact on countries & companies of sanctions against Russia Contents Sanctions imposed against Russia 3 Economic and Political Condition 4 Rangeof stakeholders 5 Objectives 6 Works Cited 8 Name of student Name of professor Name of course Date The impact on countries & companies of sanctions against Russia Sanctions imposed against Russia This paper is explores the imposition of sanctions against Russia by the Western countries. The idea is to explore the impact on companies and countries due to the imposition of sanctions. The root of the problem lies in the annexation of Crimea and the ongoing crisis in Eastern Ukraine. The governments of European Union and the United States of America have targeted certain individuals and companies in Russia that is closely related to the ruling party of the country. Senior government officials and pro-Russian separatists are also penalized for the crisis. The deployment of military forces of Russia to Crimea has endangered the security, territorial integrity, sovereignty and stability of Ukrainian organizations. The sanctions were mainly imposed against chosen Russian and Ukrainian companies belonging to the defense and financial sector of the countries. Total of 14 defense companies, 6 major banks of the country and four energy companies have been sanctioned. Further, actions were also taken against the country to limit the exports, stalling projects of economic development and restrictions particularly affecting the energy sector of the country. The existing economic literature suggests that there are two types of sanctions that can be imposed against a country namely financial and trade sanctions (Nichol 1-84). Three main reasons can be cited for which economic sanctions are imposed against country namely to penalize, help in recovery and prevent a country from doing certain wrong things. In case of Russia, the imposition of sanctions can be directly equated with the aspect of punishing for violating democratic rules of Ukraine. The era of globalization has favored free trade between nations to maximize the welfare of the member countries. The imposition of sanctions is completely opposite to the ideology that is propagated by proponents of free trade. It can be argued that the imposition of sanctions is closely related to the aspect of protection of human rights for the unhindered development of democracy and free markets (Weiss 137). The economies of western countries especially America, have imposed maximum number of sanctions on other countries. In this case as well the U.S. was the one to impose sanctions on Russia. Sanctions have also been imposed on the financial trade with Russia, with the objective of reducing the power to obtain commercial finance for business activities and effort of the government to finance the economy. The action of Russia towards Ukraine is condemnable and hinders the development of free markets in Ukraine. Economists have argued that use of sanctions can be considered as an alternative to war and it has the potential to create more loss than benefits. According to the study conducted by Mobil (1997 cited in Kruse 217-220) had revealed that, imposition of sanctions have rarely been successful in altering the behavior of the target governments. Sanctions also reportedly reduce the level of welfare of countries, the one which imposes the sanction and the one on which the sanction is imposed. The consequence of economic sanctions is beginning to show impacts on the Russian economy. It has started to show signs of economic slowdown and growth forecasts are grim. European companies like the Rabobank have reported that clients are facing losses. Companies of Finland are also facing heavy losses on account of the sanctions. BP had not yet faced any losses, yet imposition of further sanctions is expected to cut the profits of the company. German retailers like Metro cash and carry have stalled their further expansion in Russia, and Adidas have also reduced the forecasts of their profit margins (“Factbox -The effect of Russia sanctions on European companies”). Economic and Political Condition The economic and political condition of the country is explained by using the PEST framework as it is one of the comprehensive tools to capture the macroeconomic forces affecting the business environment in a country: Political: The political climate of Russia is marked by few stark changes in the past two decades. The period of 90s in Russia was heavily marked by an attempt of the government to establish a democratic structure of governance. However, the rise of Putin to power was met with mixed reactions. Under the rule of Mr. Putin, the Russian government had taken the ownership over a large number of industries including the financial and the energy sector. The recent political turmoil in the country in the form of Ukrainian crisis has greatly impacted the business environment in the country (Nichol 1-84). Though, it is early to comment on the overall business environment of the country, there is a growing fear that the foreign investments in the country are likely to reduce in the future. The credit rating outlook of in Russia is grim due to the recent political turmoil in the country. Economic: Though, the average rate of economic growth of Russia was 7% between 19998-2008, there has shown considerable fluctuations in economic growth. The period of 90’s was marked by efforts of the government to promote privatization of majority of the industries except the ones in the energy and defense sector of the country (“The World Factbook”). The economic growth in the country has been largely propelled by the energy sector of the country and the rising prices of oil in the global economy (“Battered Russian economy faces more pain over Ukraine: IMF”). The economic crisis of 2008 had hugely impacted the economic growth of the country as oil prices were hit. The condition had begun to improve from 2009. High rate of crime and political corruption in the country also undermines economic growth. Social: The social conditions of people in Russia have improved with the economic growth of the country. The consumer market of the country is growing fast which is the result of growing disposable income of the country. The proportion of middle class in the economy is growing rapidly which provides opportunity to the business enterprises. Technological: The government of the country is attempting to reduce its dependence on the oil and energy sector of the country by diversifying the business portfolio. Increasing attention is being provided to the development of IT sector of the country to capitalize on the growth of the technology. The economy is making a gradual shift from an energy oriented economy to a technologically driven one. Range of stakeholders The present situation in Russia is greatly altering the dynamics of relationship with the existing stakeholders. The trade and financial sanctions imposed on the country is likely to affect both the companies of Russia that has operations abroad and the foreign companies that are currently operating in Russia. The management literature states that the stakeholder of a business comprises both internal and external stakeholders. The internal stakeholders of business are the employees and suppliers, and the external stakeholders are the customers, government, society and investors. Economic sanctions have been argued to reduce the overall well-being of the economy by restricting free trade. In the present scenario it has been observed that the imposition of sanctions has affected Russian, European and American companies. For instance, many German companies that depended on Russian energy sector are likely to be affected by these impositions. Italy is another country of the European Union that is likely to be worst affected from the sanctions (Jones and Whitworth 21-30). Economists have shown that economic sanctions are unlikely to work and always inevitably reduce the level of economic welfare of the common citizens. In this case, the ban of exports of certain products and the stalling of development projects in Russia is likely to effect to the level of welfare of the ordinary citizens (Pape 90-136). Also, there will be a dearth in the availability of quality products in Russia as the Russian government had imported the bans from foreign companies in durable consumer products. Abnormal rise in the tariff rates, dwarfs the purchasing power of consumers forcing them to shift to less superior products resulting in welfare loss. The Bank of Finland has estimated that the level of total output of Finland is likely to fall. In macroeconomic terms, the range of stakeholders in the present scenario is extremely wide. It ranges from the citizens of the country to the investors channeling money in the business. The deteriorating trade relations between the U.S.A. and Russia is likely to hurt the U.S. companies as well in the long-run and this will bear negative consequences for the U.S. government and people. The losses to the Russian companies will also be inevitable as the Russian banks are greatly restricted to raise finances which in turn will impact all the Russian companies to obtain finances for expansion. The Russian economy is likely to be jeopardized as the investments in the oil sector is likely to dry up if the European Union and the U.S. continues to enhance the sanctions. Funding in the oil projects and alternative sources of energy is likely to be hit on account of the restrictions (“Ukraine crisis: Russia and sanctions”). Therefore, it can be stated that the imposition of sanctions is likely to impact a wide range of investors starting from individual business and their customers, investors to the government agencies. The adverse impacts are to be felt in all the three trading units namely Russia, European Union and the U.S. Objectives The objective of imposition of sanctions is largely to change the behavior of a target government. In this particular scenario the objective of the U.S. government is to punish Russia for the mayhem it has created in Ukraine. Historically, it has been observed that the use of sanctions has been sanitized with the logic of preventing military force against nations. Theoretically, economic sanctions and trade restrictions are one of the strongest ways to reduce the economic welfare of a country. According to the research conducted by Mayers, (1997 cited in Ali and Camp 66-75) it has been observed that the U.S. politics have always resorted to economic sanctions as a policy alternative to use of military force for any actions that are considered unconstitutional according to America. The same logic also holds true for the government of the European Union. The idea is to prevent the Russian government from unlawfully violating the rights of Ukraine. The government of Russia on the other hand has adopted a defensive stance on the scenario and has imposed counter bans on the European businesses primarily because the trade ties of Europe and Russia are comparatively stronger. Russian government is expecting to weaken the European and American economy by banning agricultural imports. The measures undertaken by Russia are to counter the loss of welfare by targeting the farmers of the West. Banning of agricultural products is likely to affect the European food market (“Backfire? How Russia sanctions could hit Europe”). Though, the impact of sanctions has been highly debated, there is little evidence that the efforts are effective. In the present case of imposition of sanctions against Russia, it is too early to predict the results. It has been observed in an empirical study that economic sanctions are likely to be effective only when there is multilateral cooperation; target country on which the imposition is made is weaker than the country which imposes the restriction. Also sanctions are likely to be effective when the countries have a cordial relationship between them (“Evidence on the Costs and Benefits of Economic Sanctions”). Based on this logic it can be argued that the economic sanctions are unlikely to change the behavior of Russian government against Ukraine. However, the weak growth of the Russian economy may lead to corrective actions on the part of the government in future. In the next five years time if the Russian economy wants to maintain its democratic structure then it has to change its outlook towards Ukraine. It has been witnessed that the government have been already trying to diversify portfolio of business away from the energy sector. In the next five years it will be crucial for the economy to rely on foreign direct investments in its non-oil sectors. Therefore, in order to meet the long-term goal of the country it is likely that the government will negotiate with the global superpowers like America and Europe as a large portion of Russian trade depends on these nations. The Putin government is unlikely to let the chaotic political climate ruin the long-term economic growth of the country. Works Cited Ali, A. J. and Robert C. Camp. “Economic sanctions: obstruction or instrument for world trade?” Managerial Finance 25.3 (1999): 66-75. Print. “Backfire? How Russia sanctions could hit Europe.” CNBC. CNBC, 2014. Web. 09 October. 2014. “Battered Russian economy faces more pain over Ukraine: IMF.” News Au. AEDT, 2014. Web. 09 October. 2014. “Evidence on the Costs and Benefits of Economic Sanctions.” IIE. Institute for International Economics, 2014. Web. 09 October. 2014. “Factbox -The effect of Russia sanctions on European companies.” Reuters. Reuters, 2014. Web. 09 October. 2014. Jones, Erik, and Andrew Whitworth. “The Unintended Consequences of European Sanctions on Russia.” Survival 56.5 (2014): 21-30. Kruse, Anders. “Financial and economic sanctions from a perspective of international law and human rights.” Journal of Financial Crime 12.3 (2005): 217 – 220. Print. Nichol, Jim. “Russian Political, Economic, and Security Issues and U.S. Interests.” (2014): 1-84. Congressional Research Service. PDF File. Pape, Robert A. “Why economic sanctions do not work.” International Security 22.2 (1997): 90-136. Print. “The World Factbook.” CIA. CIA, 2014. Web. 09 October. 2014. “Ukraine crisis: Russia and sanctions.” BBC News. BBC News, 2014. Web. 09 October. 2014. Weiss, Thomas George. Political Gain and Civilian Pain: Humanitarian impacts of economic sanctions. New York: Rowman & Littlefield, 1997. Read More