Deflecting economic sanctions: do trade and political alliances matter?

Success of economic sanctions hinges on their impact on sanctioned countries’ trade. This, in turn, depends on the sanctioned country’s opportunity to divert trade to a third party (a country not involved in sanctions). History is witness to third parties facilitating trade diversion, thus busting sanction. Nonetheless, literature does not present conclusive evidence on trade diversion or on motivation for busting sanctions. Therefore, in this paper, we address the following: What bearing do sanctions have on bilateral trade flows and trade diversion? Is diversion dependent on the political and trade alliance third-party shares with the sanctioned and/or the sanctioning countries? We estimate a structural gravity model for globally representative country-dyads, during 1990–2019, using inter-alia the Global Sanctions Database. We find that sanctions depress bilateral trade between sanctioned and sanctioning nations and cause trade diversion via third party. The existence of trade alliance between third party and country involved in sanction has an additional impact on trade diversion. Furthermore, a political alliance between third party and sanctioned country heightens trade between them. However, political alliance between third party and sanctioning country does not explain trade between them. Our findings offer insights into India’s trade relations with Russia, since 2022, when Russia was subject to US-led sanctions.