When experts and media publications discuss the issue of sanctions, they often say that they are against a particular country. We often hear about sanctions against Russia, Iran, China, or retaliatory measures against the US, EU and other countries. At the same time, given the specifics of modern sanctions, there is an increasingly widespread use of so-called “pin-point”, “targeted” or “smart” sanctions. If in the twentieth century, sanctions often meant trade bans against certain countries, then in the twenty-first century they are widely used against individuals and organisations: starting from drug dealers and terrorists, and ending with officials, businessmen, ministries, departments, companies or sectors of the economy, associated with certain “political regimes”.
This situation raised the question of what the purpose of modern sanctions is exactly, and whether it is correct to talk about sanctions against certain states. For example, should sanctions against individual Russian citizens be considered anti-Russian? The same goes for any other country. A decisive answer to this question remains elusive. The source of scepticism, on the one hand, emanates from legal experts, and on the other, some states initiating the sanctions, for which the separation of persons under sanctions from the state to which they belong is an element of political doctrine and a way of legitimising political decisions.
Legal experts reasonably point out that, from a formal point of view, modern sanctions are increasingly restricting the rights of certain individuals and legal entities, and not the state as a whole. Moreover, the citizens of the initiating countries also see their rights curtailed. After all, they are instructed, for example, not to enter into economic transactions with persons involved in the sanctions lists. In the case of extraterritorial sanctions, such restrictions also apply to foreigners. So, it is technically correct to talk about sanctions against citizen X, department Y or company Z, and not about sanctions against the country in which they may reside.
The largest initiator of “targeted” sanctions is the United States. In the American political discourse, the trend was also established in order to separate persons under sanctions from their states. This is largely due to the specifics of the American foreign policy ideology; it’s based on the idea of promoting democracy throughout the world. Americans assume that one of the reasons for the hostile behaviour of states towards the United States and other countries, as well as domestic violations of human rights, is the autocratic nature of the political system. US policymakers contend that the state’s political regime, and not the state as a whole, is to blame for the viciousness of the state’s behaviour. In this way, Americans separate the government from society. In the foreign policy statements of officials, you can often find passages that the United States opposes the Chinese Communist Party, but supports the creative Chinese people. That they hope to bleed the Iranian theocratic regime, but desire the liberation of Iranian society. That they oppose the “authoritarian Putin regime”, but strive for friendship with the Russian people, and so on. In the context of such a doctrine, sanctions are a political technique aimed at both the foreign policy and internal political processes of the targeted country. The separation of the regime, individuals and organisations from the state itself is an important source of legitimisation of sanctions (in the sense in which Max Weber understood it, that is, in terms of politics, not law). One way or another, a similar approach is manifested in the practice of sanctions by the European Union and other initiators.
Naturally, this approach is not very encouraging for those who advocate the idea of sovereign equality of states. In terms of equality of sovereignty, the sanctions of the 20th century are quite acceptable; they were often a mechanism to contain and undermine military and economic potential. That is, they were part of the competition and rivalry of national states that recognised each other as equal players. The situation turns out quite different when one of the rivals questions the very legitimacy of the state structure of the other side or applies restrictive measures bypassing its sovereign rights. In such a situation, consolidated democracies with a high level of statehood and significant power potential gain noticeable advantages. It is difficult to shatter them by opposing the regime and society. Autocracies and unconsolidated democracies with weak and corrupt state institutions are in a much more difficult situation if they seek to resist such interference. Consolidated autocracies with a high level of statehood feel relatively protected. But they are also vulnerable in their own way, since even a stable “vertical system” can fail.
To an even greater extent, the advantages of consolidated democracies are multiplied by the global nature of the modern world economy, and the importance of markets and financial systems of such states, which are the most active initiators of sanctions. This is manifested in the fact that the citizens and organisations of the sanctions-targeted countries, which at the same time carry out this or that international economic activity, are forced to at least take into account, and, as maximum, to comply with the sanctions regimes of the country that is the enemy. Situations when, for example, Russian or Chinese exporting companies comply with US sanctions can be encountered quite often today.
In such a situation, it is important to understand that in addition to formal legal aspects, there are also political ones. Modern international relations are still relations between nation-states. They pursue their political goals and interests, and vie with each other for power and influence. Therefore, formally, “pin-point” sanctions should be considered in the context of the agenda of relations between specific states. Outside of such a context, we have the risk of falling into one of two pitfalls. First, we risk studying sanctions in purely laboratorial way, without “impurities”, as an ideal type. It is clear that such research is of little use when addressing real-life situations. Second, sanctions could be misconstrued to be thought of exclusively in the context of the political narrative of a particular country or group of countries (for example, the US and the EU). There is nothing wrong with understanding such a narrative. However, it should not be taken as a “self-sufficient value”.
It seems that “pin-point” or “smart sanctions” can be considered as directed against the state, for at least two reasons.
First, the damage from sanctions imposed on sectors of the economy, organisations, enterprises and even individual citizens usually isn’t limited exclusively to them, but has a wider effect. US sanctions against Iran’s oil or financial sectors can nominally be considered “smart” and “pin-point”. However, the damage from them affects wide strata of the population. For example, sanctions against banks has make it difficult for Iran to obtain medical equipment supplies, which in turn affects the quality of life. Blacklisting the owner or top manager of a large enterprise affects all its activities, and also affects suppliers and consumers. For example, US sanctions against Oleg Deripaska have threatened serious disruptions in the work of Rusal, an important enterprise for the Russian economy.
The same applies to sanctions against a political administration. It is difficult to separate it from the state. Yes, disgusting dictatorships and arrogant autocracies often crop up in the world. The question of their right to exist is not only a legal or political, but also an ethical problem. The question is: who exactly passes judgment on such a regime, and who exactly has the right to contain or change it, including via sanctions? A number of states reserve this right, using unilateral measures and bypassing the UN Security Council. Smart sanctions against individuals nominally target the regime. But in reality, they lead to shifts in domestic or foreign policy, that is, they change the structure and behaviour of the state as a whole.
Second, the state cannot abstract itself from hostile measures against its citizens or organisations that are in its jurisdiction. For example, Article 2 of the Constitution of Russia states that “The recognition, observance and protection of human and civil rights and freedoms shall be an obligation of the State.” The use of “pin-point” restrictive measures by a foreign state is an obvious violation of such rights. To some extent, such a norm is universal for a modern nation state. The question is, how exactly will the state react to restrictive measures? It can agree to the demands of the initiators or force its citizens to comply with these requirements (such cases are not uncommon). But it may well leave its course unchanged, introduce retaliatory restrictive measures or respond in any other way, including breaking ties with the state that initiated the sanctions.
Without a doubt, in the practice of applying sanctions, there are more cases where the nationality of the individuals fades into the background. This applies, for example, to sanctions against terrorists and drug dealers. Both problems are universal. However, universality does not exempt us from problems with the state. Human rights can be viewed universally. But for many states, this is already a sensitive political issue. Despite the fact that modern sanctions are increasingly targeted at individuals, organisations or structures, their ultimate goal is often altering the political course of a particular country. As long as the nation-state remains a key player in the international arena, even targeted sanctions will affect state interests. This means that it is too early to write off the concept of anti-Russian, anti-Chinese and any other anti-state sanctions.
From our partner RIAC
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
US Economic Turmoil: The Paradox of Recovery and Inflation
The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.
The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.
The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.
Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!
Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.
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