Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 580

Do sanctions work?

According to the US Department of Treasury, there are 38 active sanction programs. Are these programs working? Historically, sanctions have worked because there has been widespread global support in limiting a country’s access to foreign investment and products. Support these days is splitting along Global South/North lines with countries in the BRICS (Brazil, Russia, India, China, South Africa) family finding ways to circumvent the sanctions and thus minimising their effects.

Sanctions on China do not appear to be working because of its economic strength and changing relationships with BRICS countries. China’s monthly trade surplus continues to increase with July 2024 being around US$100 billion. This surplus is in both US dollars and Renminbi, and as a result, China has become the largest creditor country in the world and is lending the currency (USDs) of the largest debtor country in the world, i.e., the USA which also has the world’s reserve currency.

Countries subject to sanctions are circumventing them through a range of actions:

  1. Trading in local currencies to avoid the US controlled SWIFT system
  2. Pricing discounting on their products
  3. Finding new markets
  4. Adjusting supply chains
  5. Creating new alliances.

For the above reasons and because the US is selectively applying the sanctions and, in many cases, hurting its allies, sanctions are no longer working with the force they used to.

Below are some examples of sanctions and their consequences:

1. Huawei - In 2019, the US government placed sanctions on Huawei, a Chinese technology company over concerns of spying through its technology and specifically the mobile phone. Readers may recall that Huawei’s Deputy Chairperson, Meng Wanzhou was arrested at Vancouver International Airport on an arrest warrant from the US who sought her extradition from Canada for fraud and conspiracy to commit fraud by circumventing US sanctions on Iran. A political solution was reached, and she was released.

Huawei responded to these sanctions by developing supply chains outside of US control and increased its product range and invested in start-ups further growing its profitability. US corporations have had to find alternative products to Huawei which have turned out to be more expensive or have had to find ways to work around the sanctions.

Interestingly, it has been the Pentagon (US military) that since 2019 each year asks and receive a sanction waiver because of its dependency on Huawei products which the US government will not provide to US corporations.

The US government continues to pressurise non-US companies, e.g., Dutch company ASML that earns half its revenue from China to discontinue trading with Huawei. ASML's share price has collapsed because of the sanctions.

2. Oil - Both Iran and Russia are under US oil sanctions, yet their oil revenues have grown. In July 2024, according to Russian budgetary data, its oil and gas revenues grew by 41%. Since 2020, Iran crude oil production has gone from about 1.75m barrels per day to 3.3m barrels per day as shown in the graph below.

Figure 1: Iran Crude Oil Production

Iran sells its oil in non-USDs and at a discount to China, India and South Korea, a close US ally.

3. Batteries - CATL, a Chinese company, is the world’s largest producer of batteries for Electric Vehicles (EVs) producing batteries for Tesla, VW, Toyota, etc., The US Secretary of Defence, wants to ban CATL products. Time will tell as there are enormous implications for the US and world’s car industry, if this ban occurs. This will be a 1st import ban of Chinese products, as the US has relied on tariffs for imports and bans for exports.

4. Flight paths - US sanctions require US airlines, e.g. United, Delta to fly around Russia, increasing flight times and fuel costs because of the extra distance. This is forcing prices up for western airlines while Chinese airlines that can fly over Russia are now taking market share because of these sanctions. One of British Airways most profitable and popular routes was London to Beijing. This flight now takes 11.5 hours on British Airways, whereas on Chinese airlines who are flying over Russia, the flight time is 2 hours shorter and their lower cost structure means increased market share and profitability. Passengers may not like the movies and food on Chinese airlines, but they do like the cheaper price and shorter flight time. Consequently, British Airways is giving up this route because it can no longer compete because of the US sanctions. This is another example of US sanctions hurting US allies.

5. Graphite - Batteries need graphite and China has a monopoly on refined graphite. In 2023, China imposed strict export controls on graphite in response to US sanctions. The major expansion plans of US corporations in building new factories to produce batteries are now slowing down because these factories need graphite. China mines 66% of the world’s graphite, it controls 60% of the synthetic graphite and it produces 98% of the anodes. More recently, in response to US sanctions, from 15 September 2024, China the world’s largest exporter of antimony has set down very strict export controls. Antimony is a critical mineral used in armour-piercing ammunition, infrared sensors and precision optics, as well as solar panels.

Sanctions are no longer as effective as in the past and not likely to be in the future, if the world continues down the multi-polarisation path.

 

Michael McAlary is CEO of Chairmont Group and Managing Director of WealthMaker Financial Services, a family office that provides investment, financial planning and mortgage broking services. This article is for general information only and has been prepared without taking into account your personal objectives, financial situation or needs.

 

RELATED ARTICLES

America, the world's new energy superpower

The pivotal fight between China and the US

Oil and the storm before the really big storm

banner

Most viewed in recent weeks

Vale Graham Hand

It’s with heavy hearts that we announce Firstlinks’ co-founder and former Managing Editor, Graham Hand, has died aged 66. Graham was a legendary figure in the finance industry and here are three tributes to him.

Australian stocks will crush housing over the next decade, one year on

Last year, I wrote an article suggesting returns from ASX stocks would trample those from housing over the next decade. One year later, this is an update on how that forecast is going and what's changed since.

Avoiding wealth transfer pitfalls

Australia is in the early throes of an intergenerational wealth transfer worth an estimated $3.5 trillion. Here's a case study highlighting some of the challenges with transferring wealth between generations.

Taxpayers betrayed by Future Fund debacle

The Future Fund's original purpose was to meet the unfunded liabilities of Commonwealth defined benefit schemes. These liabilities have ballooned to an estimated $290 billion and taxpayers continue to be treated like fools.

Australia’s shameful super gap

ASFA provides a key guide for how much you will need to live on in retirement. Unfortunately it has many deficiencies, and the averages don't tell the full story of the growing gender superannuation gap.

Looking beyond banks for dividend income

The Big Four banks have had an extraordinary run and it’s left income investors with a conundrum: to stick with them even though they now offer relatively low dividend yields and limited growth prospects or to look elsewhere.

Latest Updates

Investment strategies

9 lessons from 2024

Key lessons include expensive stocks can always get more expensive, Bitcoin is our tulip mania, follow the smart money, the young are coming with pitchforks on housing, and the importance of staying invested.

Investment strategies

Time to announce the X-factor for 2024

What is the X-factor - the largely unexpected influence that wasn’t thought about when the year began but came from left field to have powerful effects on investment returns - for 2024? It's time to select the winner.

Shares

Australian shares struggle as 2020s reach halfway point

It’s halfway through the 2020s decade and time to get a scorecheck on the Australian stock market. The picture isn't pretty as Aussie shares are having a below-average decade so far, though history shows that all is not lost.

Shares

Is FOMO overruling investment basics?

Four years ago, we introduced our 'bubbles' chart to show how the market had become concentrated in one type of stock and one view of the future. This looks at what, if anything, has changed, and what it means for investors.

Shares

Is Medibank Private a bargain?

Regulatory tensions have weighed on Medibank's share price though it's unlikely that the government will step in and prop up private hospitals. This creates an opportunity to invest in Australia’s largest health insurer.

Shares

Negative correlations, positive allocations

A nascent theme today is that the inverse correlation between bonds and stocks has returned as inflation and economic growth moderate. This broadens the potential for risk-adjusted returns in multi-asset portfolios.

Retirement

The secret to a good retirement

An Australian anthropologist studying Japanese seniors has come to a counter-intuitive conclusion to what makes for a great retirement: she suggests the seeds may be found in how we approach our working years.

Sponsors

Alliances

© 2024 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.