In April’s column, we considered trade sanctions and their effects. We now look at financial sanctions, where a sender country (or coalition) tries to affect a “target” country by restricting assets and income from investments and loans. Unlike trade sanctions, which are broad instruments tied to the national-level flow of goods and services, financial sanctions can be imposed more precisely. In the case of both Russia and Hamas, financial sanctions have restricted financial options for specific individuals (some of whom may be decision-makers or influencers) to gain access to wealth or income from investments. Will political and aggressive behaviors change?
Based on domestic or international law violations, sanctions on investments can keep currency, income and principal from the rightful owner. In the United States, the federal Office of Foreign Asset Control (OFAC) monitors the flow of assets and incomes when sanctions are imposed. The world invests in the United States due to relatively low taxes and the ability to invest in almost any asset without many questions. Over time, our federal government has become more focused on terrorism or pariah states being financed with American investments. This includes seizing and monitoring the physical and financial assets, including everything from corporate stock to yachts.
Because sanctions generally are considered a blunt instrument of international policy and a proxy to armed conflict otherwise (sometimes parallel, think blockades throughout history), financial sanctions evolved to be “smart” and collaborative in affecting individual decision-makers and containing broader impacts. Billions of dollars in physical and financial assets and incomes have been frozen by allied sanctions (United States, Canada, European Union, United Kingdom, Japan and others) held by or owed to those affiliated with decision-making in Russia and Hamas as a reaction to both conflicts. Generally, these amounts are not enough to directly shift global financial market outcomes but can pinch the target economy.
Looking at Russia, specifically, the initial shock of the 2022 invasion led to a roller coaster in the Russian currency (ruble) value, which led to swift action by the Russian central bank to increase interest rates and reduce the outflow of currency toward Western markets. This happened in earnest before financial sanctions took place. Still, it tells a story about how restricting (or the threat of limiting) financial transactions and assets can make any target country user of the target currency consider how they store their money. The accompanying graphic shows the ride for the ruble since 2019, where the arrows show the immediate drop, Russian central bank intervention, and a slow fall since mid-2022. If exchange rates indicate how sanctions may affect the targeted economy, this suggests the pinch has come to the Russian economy.
The financial sanctions on Hamas are slightly trickier. They cannot necessarily trigger domestic policy change that may (as a reaction to sanctions or their perception) lead to a more complete pinch on residents. Gaza, before November 2023, used the Israeli currency officially (the shekel) but is now using an amalgam of currencies on the ground due to the current chaos and unknown financial outcomes once the shooting ends.
For the North Bay, these sanctions mean more financial uncertainty in global markets, especially for local businesses and residents with financial ties to the affected areas. These ties could be in energy, biotechnology or consumer goods markets to relatives in the Ukraine, Palestine or Gaza. Moving cash to the affected areas is more costly and scrutinized as part of sanctions. That increases the costs of providing loans and financial options for those who interact with the affected areas. Watch for more news of the Russian economy under sanctions and if the United States flirts with some economic action against Israel if the humanitarian situation worsens in Gaza.
