Sanctions: Economic Coercion, Global Interdependence & India’s Resilience

GS II: Effect of policies and politics of developed and developing countries on India’s interests.

Context: The growing use of secondary sanctions, financial restrictions and trade controls has increased the vulnerability of globally integrated economies, highlighting the need for India to strengthen its institutional capacity to anticipate and manage external economic coercion.

Primary vs Secondary Sanctions

• Primary Sanctions: Restrictions imposed directly by a country on another country, entity or individual under its domestic legal framework.
• Secondary Sanctions: Measures that seek to penalise third-country entities for conducting specified transactions with a sanctioned country or entity.
• Extraterritorial Effect: Secondary sanctions can extend the practical reach of one country’s financial and regulatory decisions beyond its own jurisdiction.
• Economic Pressure: Restrictions may affect banking, shipping, insurance, energy, technology and international trade.

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Weaponised Interdependence

• Concept: Political scientists Henry Farrell and Abraham Newman developed the concept of weaponised interdependence to explain how states can exploit their control over critical global networks.
• Network Power: Countries controlling strategically important financial, technological, logistical or information networks can use these networks to exert pressure.
• Financial Networks: Dependence on international banking and dollar-based payment systems can increase exposure to financial sanctions.
• Strategic Vulnerability: Interdependence therefore creates both economic opportunities and geopolitical vulnerabilities.

Why Sanctions Matter for India

• Banking: Sanctions can complicate international payments and access to foreign financial institutions.
• Energy Security: Restrictions on oil, gas, petroleum products and shipping can affect India’s import costs and supply chains.
• Shipping and Insurance: Sanctions can disrupt vessel financing, maritime insurance and transportation routes.
• Trade: Indian firms may face uncertainty even when a transaction is permissible under Indian law but involves a sanctioned foreign entity.

Institutional Fragmentation in India

• Multiple Ministries: Sanctions-related consequences can involve the Ministry of External Affairs, Ministry of Finance, Reserve Bank of India, Ministry of Commerce and Industry, Ministry of Petroleum and Natural Gas and Ministry of Ports, Shipping and Waterways.
• Cross-Sector Impact: A single foreign sanction can simultaneously affect banking, trade, energy, shipping and domestic prices.
• Coordination Gap: Fragmented institutional responses can make it difficult to develop a comprehensive assessment of economic and strategic risks.
• Whole-of-Government Approach: Sanctions management requires coordination across foreign policy, finance, trade, energy and strategic security.

Lessons from International Experience

• Blocking Statutes: The European Union has used legal mechanisms intended to protect European entities from certain extraterritorial effects of foreign sanctions.
• Practical Constraint: Legal protection alone may not eliminate commercial risks when businesses depend heavily on foreign financial markets.
• Financial Leverage: Access to major banking and payment networks can create powerful incentives for private entities to comply with sanctions.
• Strategic Autonomy: Effective sanctions resilience therefore requires both legal preparedness and reduced structural dependence.

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Building India’s Sanctions Resilience

• Economic Security Mechanism: India could strengthen a centralised institutional mechanism for assessing the economy-wide consequences of external sanctions.
• Real-Time Tracking: Monitor vulnerabilities in payments, insurance, shipping, commodities and supply chains.
• Legal Preparedness: Develop mechanisms for analysing foreign sanctions, negotiating exemptions and providing regulatory clarity to Indian businesses.
• Early Warning: Banks and companies should receive timely guidance regarding emerging sanctions-related risks.
• Strategic Reserves: Strengthen reserves and alternative supply arrangements for critical commodities such as crude oil, LPG and fertilisers.
• Domestic Capacity: Develop greater capacity in shipping, insurance, payment systems and critical supply chains.

India’s Strategic Approach

• UN Framework: India has generally distinguished between sanctions imposed through the United Nations Security Council and unilateral sanctions imposed by individual states.
• Strategic Autonomy: India seeks to preserve independent foreign-policy choices while managing the economic consequences of external restrictions.
• Diversification: Greater use of alternative suppliers, payment mechanisms and trading currencies can reduce concentration risks.
• Economic Strength: A larger and more diversified domestic economy can increase India’s resilience and negotiating space during sanctions-related disruptions.

Way Forward

• Economic Security and Sanctions Cell: Establish a coordinated mechanism at the appropriate governmental level for economy-wide sanctions assessment.
• Integrated Database: Create real-time mapping of critical dependencies across energy, finance, shipping, technology and trade.
• Supply Diversification: Reduce excessive dependence on a single supplier, route, currency or financial network.
• Domestic Insurance and Shipping: Strengthen indigenous maritime insurance and shipping capabilities.
• Strategic Reserves: Expand reserves of critical commodities and establish alternative logistics arrangements.
• International Partnerships: Work with partner countries to develop resilient payment, trade and supply-chain mechanisms.

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Conclusion

In an era of weaponised interdependence, sanctions are no longer confined to foreign policy. They can transmit shocks into banking, energy, trade and household welfare. India’s response therefore requires institutional coordination, economic diversification and stronger domestic strategic capabilities.

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