Capital Blockade

Capital Blockade

Investopedia / Candra Huff

What Is a Capital Blockade?

A capital blockade is an economic sanction that limits or prevents investment capital from flowing offshore from a country that may use it for possibly questionable purposes. A capital blockade may be combined with freezing foreign bank accounts that belong to the target country's citizens to add pressure.

Key Takeaways

  • A capital blockade limits or prevents investment capital from exiting a country that may use it for possibly questionable purposes.
  • A country or group of countries may impose a capital blockade to pressure an offending country to resolve differences through negotiations.
  • A capital blockade may be combined with freezing foreign bank accounts that belong to the target country's citizens to add pressure.

Understanding Capital Blockades

A country, or group of countries, may impose a capital blockade to hamper the economic growth of the sanctioned country as a measure meant to pressure that country to resolve differences through negotiations. Such sanctions may be an effective and relatively peaceful way to return the offending country to the bargaining table without the need for escalation to armed conflict.

Sanctions are generally viewed as a lower-cost, lower-risk, middle course of action between diplomacy and war. Policymakers may consider sanctions as a response to foreign crises where the national interest is minor or where military action is not feasible. Leaders may issue sanctions while they evaluate taking more serious actions.

Capital Blockade vs. Economic Sanction

A capital blockade is a type of economic sanction. Economic sanctions are the withdrawal of customary trade and financial relations for foreign policy and security purposes. They may be comprehensive—prohibiting commercial activity with an entire country—or they may be targeted, blocking the transactions of and with specific businesses, groups, or individuals.

National governments, and especially international governing bodies such as the United Nations (UN) and European Union (EU), have imposed economic sanctions to coerce, deter, punish, or shame entities that endanger their interests or violate international norms.

Sanctions have been used to advance foreign policy goals including counterterrorism, counternarcotics, nonproliferation, promoting democracy, expanding human rights, conflict resolution, and cybersecurity.

Since the terrorist attacks of Sept. 11, 2001, there has been a shift toward targeted sanctions, which aim to minimize the effects on civilians. Sanctions can take many forms, including travel bans, asset freezes, arms embargoes, capital restraints, foreign aid reductions, and trade restrictions.

Special Considerations

Usually, economic sanctions prohibit only a home country’s or region’s corporations and citizens from doing business with a blacklisted entity. For example, on Feb. 22, 2022, U.S. President Joe Biden announced sanctions against Russia in response to its invasion of Ukraine. The sanctions include blocking two state-owned Russian financial institutions—Vnesheconombank and Promsvyazbank and their subsidiaries, which provide financing to the Russian military, from accessing the U.S. financial system. Other sanctions include the U.S Treasury prohibiting the purchase of new Russian sovereign debt and banning U.S. companies and individuals from buying sovereign debt in the secondary market.

Extraterritorial sanctions, also called secondary sanctions or a secondary boycott, are designed to restrict the economic activity of governments, businesses, and nationals of additional countries. Many governments consider these sanctions a violation of their sovereignty and international law.

Sanction results vary by case. Sanctions with relatively limited objectives appear more likely to succeed than those with major political ambitions. Sanctions may evolve. For example, except for a brief period in the 1980s, the United States has had sanctions on Iran since U.S. hostages were taken in 1979, but the scope and logic of the sanctions have changed. Most often, the utility of sanctions is more important than whether they achieve their objectives. In some cases, sanctions may be intended just to express censure.

Article Sources
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  1. The White House. "Fact Sheet: United States Imposes First Tranche of Swift and Severe Costs on Russia."