“The sanctions policy pursued by the West, that is, ourselves, a necessary consequence of which, has been what the Russians are doing, causes more harm to us than to Russia. In politics, this is called shooting oneself in the foot.” ~ Viktor Orban, Prime Minister of Hungry
An embargo is a complete or partial block of trade and business activities between two nations, usually imposed by one nation against the other as a diplomatic tool. The basic idea is to create hardship for the defiant nation, forcing it to fall in line. But while policymakers use embargoes as a bargaining tool, businesses and their investors on both sides of the border are the ones who absorb the losses, which can run into millions or billions of dollars.
In extreme cases, governments will use embargoes to effect complete economic isolation on another nations. Today, that is called a blockade and is tantamount to declaring war on another country. In modern times, embargoes are never complete—at the very minimum, humanitarian aid in the form of food and medical supplies will still cross borders. Nations usually use targeted embargoes that affect only specific industries or activities. They are sometimes called sanctions instead of embargoes.
The restrictions most relevant for businesses are financial and trade sanctions in the form of asset freezes, prohibitions on joint ventures, financial assistance, import and export bans, and more. The impact of these restrictions on international businesses depends on the region, the participation of international community in imposing such restrictions, the length of restrictions, and previous trade history.
Impact of the Russian Energy Embargo
When nations have been engaging in economic collaboration in the recent past, businesses on both sides tend to suffer more. For example, in July 2014, the European Union and the United States began imposing sanctions on Russia in its energy sector. The U.S. sanctions banned American companies from conducting commercial activities with oil and gas drillers in Russia. The EU sanctions targeted the energy sector slightly differently; it banned Rosneft, Gazpromneft and Transneft (Russian energy companies) from raising long-term debt on European capital markets. The EU also restricted services Russia needed to explore oil and gas in the Arctic and to conduct deep sea and shale extraction projects.
The U.S. sanctions came as a big jolt to the $723 million joint venture set for 2015 between Exxon Mobil Corporation (NYSE: XOM) and Russia’s Rosneft Oil Company (69.5 percent state-owned). Reportedly, Exxon may lose up to $1 billion as a result.
While the EU meant to take Russia to task with these sanctions, they directly punished EU corporations as well. In 2013, British Petroleum, BP Inc (NYSE ADR: BP) acquired a 19.75 percent stake in Rosneft Oil Company. The joint EU/U.S. sanctions against Russian resulted in drop in Rosneft’s share price and investment value—a drop which British Petroleum must also bear at 19.75 percent ownership. While the EU/U.S. sanctions were meant to send a strong message to Russia, the pain has been shared among U.S. and EU companies and their investors. (Related reading How US & European Union Sanctions Impact Russia)
The effects of sanctions and embargoes also have a way of bleeding outside their set policy areas. Rolls-Royce Holdings Plc (LON: RR), for example, has also felt the effects of the energy sector sanction. The English luxury automaker announced that it anticipated a fall in its revenue as as some Russian customers delayed or canceled orders.
As Isaac Newton proved in his third law of motion, exerting force on an object results in an equal and opposite force. Russia retaliated against the energy sanction by imposing a full, one-year embargo against agricultural, dairy, and poultry products from all the regions and nations cooperating in sanctions against it. These include the EU, the United States, Canada, Australia, and Norway. The United States exports $1.3 billion to Russia in agriculture, dairy, and poultry products.
The EU’s agricultural exports to Russia come in at a much higher $15.8 billion. The European Union is particularly worried about the effect of the Russian sanction on its precarious economic recovery and has also felt backfire from its own business community. The Chairman of the Association of European Business in Russia (AEB) once said, “Sanctions against Russia are de facto sanctions against European business.”
Embargo Against Iran
Embargoes and sanctions can continue for decades, adding up to billions in lost revenue for businesses. Around 35 years ago, Germany and United States were Iran’s largest trading partners. After the 1979 revolution, the United States and other nations imposed an embargo against Iran which changed the trading landscape for the long term. According to a report by the National Iranian American Council (NIAC), U.S. businesses lost the biggest chunk among nations enforcing sanctions against Iran. According to NIAC, “from 1995 to 2012, the US sacrificed between $134.7 and $175.3 billion in potential export revenue to Iran.”
Still embargoes can also be a great opportunity. By artificially ending trading relationships, they open a business need that other countries can jump into. Today, China and many other nations from Asia and Middle East are among Iran’s biggest trading partners. China has invested heavily in Iran’s oil and gas sector. In 2011, China and Iran signed agreements that give Chinese companies exclusive rights to some resource-rich regions in Iran.
The Bottom Line
Embargoes oppose the basic spirit of business, which is to expand and move into areas of opportunities according to profit. Trade restrictions cause strain on businesses of all participating countries in the form of lost opportunities, profits, relationships, and resources.