Introduction
Economic sanctions have become the primary instrument of coercive statecraft for the United States and, increasingly, the European Union, the United Kingdom, and their allies. In the decade between 2012 and 2022, US sanctions programmes expanded dramatically: from the comprehensive Iran nuclear sanctions regime to the CAATSA framework targeting Russia’s defence and intelligence sectors, from the Venezuela oil sanctions to the cryptocurrency-related designations under the IEEPA. By the time Russia invaded Ukraine in February 2022, the US sanctions architecture was the most extensive in American history, and the collective Western sanctions response to that invasion, freezing over 300 billion dollars in Russian sovereign assets and removing major Russian banks from the SWIFT financial messaging system, represented the first time economic sanctions had been deployed at such scale against an economy of Russia’s size.
For India, this escalating sanctions environment creates an acute legal and strategic dilemma. India has long maintained close defence relationships with Russia and has historically traded with Iran; it resists the extraterritorial reach of US secondary sanctions as a violation of sovereign equality and international law; yet its banks and corporations face genuine operational risks from OFAC designations if they maintain commercial relationships with sanctioned entities. This article examines the legal basis and structure of US sanctions, the contested legality of secondary sanctions under international law, India’s navigation of the CAATSA-Russia and Iran-oil challenges, and the broader question of whether unilateral coercive measures can be challenged through international legal mechanisms.
Legal Framework
The principal US domestic legal authorities for economic sanctions are the International Emergency Economic Powers Act (IEEPA, enacted 1977) and the Trading with the Enemy Act (TWEA, enacted 1917, now limited to wartime). IEEPA authorises the President to regulate international commerce and financial transactions during a “national emergency” declared with respect to an “unusual and extraordinary threat” to the national security, foreign policy, or economy of the United States. The IEEPA grant of authority is extremely broad: it covers the power to block, prevent, avoid, or void the transfer of property in which a foreign country or national has an interest, where such property comes within the US, is possessed by a US person, or is transferred to the US.
OFAC (the Office of Foreign Assets Control within the Treasury Department) administers IEEPA-based sanctions programmes. The SDN (Specially Designated Nationals and Blocked Persons) List is OFAC’s primary designation tool: persons and entities on the SDN List have their US-held property blocked, and US persons are generally prohibited from transacting with them. The extraterritorial reach of US sanctions arises from two mechanisms. First, “primary sanctions” apply to US persons (including US-incorporated entities and their foreign branches) wherever they operate. Second, “secondary sanctions” are directed at non-US persons: they threaten to impose penalties (including SDN designation, loss of access to the US financial system, and denial of US export privileges) on any person, regardless of nationality, who engages in specified transactions with sanctioned entities or countries. Secondary sanctions do not require any US-nexus in the underlying transaction; they operate as a threat: conduct your trade with Iran (or Russia, or Venezuela) and face exclusion from US markets.
CAATSA (Countering America’s Adversaries Through Sanctions Act, enacted August 2017) is specifically relevant to India because Section 231 mandates the imposition of sanctions on any person that “knowingly, on or after [the enactment date], engages in a significant transaction with a person that is part of, or operates for or on behalf of, the defense or intelligence sectors of the Government of the Russian Federation.” India’s agreement to purchase the S-400 Triumf surface-to-air missile system from Russia, signed in 2018, is a textbook “significant transaction” with Russia’s defence sector, triggering CAATSA’s mandatory sanctions provision absent a presidential waiver.
Key Developments and India’s Navigation
The S-400 purchase placed India in direct conflict with CAATSA’s requirements from the moment of contract signing. The US administration’s response has been to refrain from imposing sanctions through a combination of executive discretion (CAATSA’s waiver provision for countries taking concrete steps to reduce dependence on Russian defence equipment, applicable to NATO allies, and a separate presidential waiver authority that applies to India) and political reluctance to damage the US-India strategic partnership. The waiver has been repeatedly renewed or extended informally rather than formally invoked, leaving India in a legal grey zone: technically still exposed to mandatory sanctions that the executive branch has chosen not to impose, with no formal legal protection against a future administration deciding otherwise.
This ambiguity has had practical consequences. Indian banks, particularly public sector banks with significant US dollar clearing operations through US correspondent banks, have been extremely cautious about processing any transaction that could be characterised as related to sanctioned Russian entities, even where India’s government has asserted that its Russian oil purchases are lawful. The rupee-rouble trade settlement mechanism, developed in 2022-23 to enable Indian payment for Russian oil without using US dollar transactions subject to OFAC, has faced operational difficulties: Russian exporters prefer hard currency, and the accumulating rouble balances in Russian accounts at Indian banks have not been easily deployable.
India’s purchases of Russian crude oil increased dramatically after February 2022, as Russian oil was offered at discounts reflecting the risk premium imposed by Western sanctions. India became one of Russia’s largest oil customers, refining Russian crude and in some cases re-exporting refined petroleum products. US officials repeatedly stated informally that India’s oil purchases, while not consistent with the spirit of the sanctions regime, would not trigger OFAC action as long as Indian entities did not facilitate transactions for third parties and maintained appropriate sanctions screening processes.
Iran presents a related but distinct challenge. India historically imported significant volumes of Iranian crude under the India-Iran bilateral arrangement, including through the rupee payment mechanism that preceded the Russia situation. The Trump administration’s “maximum pressure” Iran sanctions regime, reimposed in November 2018 and maintained thereafter, effectively ended India’s Iranian oil imports after Indian refiners could not obtain waivers sufficient to maintain commercially significant imports without endangering their US banking relationships.
Contemporary Issues and Analysis
The international law challenge to secondary sanctions rests on the principle of territoriality: under customary international law, a state’s prescriptive jurisdiction (its authority to make rules) extends to its nationals wherever they are and to conduct within its territory, but does not generally extend to the conduct of foreign nationals on foreign territory with no US-nexus. Secondary sanctions, which penalise a German company for trading with Iran in a Germany-to-Iran transaction with no involvement of US persons or US financial infrastructure, appear to violate this territoriality principle.
The European Union articulated this position through the EU Blocking Statute (Council Regulation 2018/1100), which prohibits EU persons from complying with certain US extraterritorial sanctions, provides EU companies with the right to recover damages from persons seeking to enforce such sanctions, and nullifies any judgment of a non-EU court based on sanctioned measures. In practice, the EU Blocking Statute has been largely ineffective: EU companies have continued to comply with US secondary sanctions because the commercial consequences of losing US market access dwarf the legal consequences of violating the Blocking Statute. The statute has been invoked in very few cases and has not successfully countered US extraterritorial enforcement.
India has not enacted a Blocking Statute equivalent, though there have been legislative discussions. India’s position on secondary sanctions is articulated diplomatically as a rejection of extraterritoriality in principle while managing the practical reality of exposure through careful transaction structuring. The Ministry of External Affairs has stated explicitly that India does not recognise the legal validity of unilateral sanctions imposed without UN Security Council authorisation, a position consistent with the UNGA resolution on “Unilateral Economic Measures as a Means of Political and Economic Coercion against Developing Countries” which India has consistently supported.
The WTO dispute resolution mechanism’s limitations for challenging unilateral sanctions are severe. GATT Article XXI (national security exception) has been interpreted by WTO panels and the Appellate Body (in the Russia-Ukraine trade dispute and the Saudi Arabia-Qatar dispute) as partially justiciable but with a high threshold for panel review. Secondary sanctions imposed for national security purposes would likely fall within the Article XXI exception, making WTO challenge legally available in theory but practically unlikely to succeed.
Comparative and International Perspective
The EU’s experience with US extraterritorial sanctions over SWIFT (the Belgian-based financial messaging cooperative that was compelled to disconnect Iranian banks in 2012 under US secondary sanctions threat) illustrates the asymmetric power of US financial infrastructure control. SWIFT’s disconnection of Iranian banks, and later Russian banks, demonstrates that secondary sanctions function not primarily through legal compulsion of foreign entities but through the private economic calculus of companies that depend on US financial market access.
India’s approach of maintaining strategic autonomy while managing sanctions risk through transaction structuring has parallels in Turkey’s and China’s responses to the Iran sanctions regime: Turkey’s state bank Halkbank was prosecuted in US courts for facilitating Iranian sanctions evasion through gold-for-gas transactions, illustrating the limits of informal accommodation when US prosecutors choose to act. China’s establishment of alternative payment infrastructure (the CIPS system as an alternative to SWIFT, the digital renminbi’s cross-border ambitions) reflects a longer-term strategy to reduce financial infrastructure dependence on US-controlled systems.
The broader trajectory of the international monetary system is toward greater fragmentation along geopolitical lines, with competing dollar, euro, and renminbi-centred blocs each with their own sanctions enforcement logics. This fragmentation, if it accelerates, will reduce the effectiveness of US secondary sanctions over time but may increase the costs of global trade in the interim.
Practical and Policy Implications
For Indian banks and corporates, the sanctions navigation challenge requires sophisticated compliance programmes, legal opinions on specific transaction structures, and ongoing dialogue with OFAC through the General Licence and specific licence mechanisms. The risk of inadvertent OFAC violation is significant given the complexity of correspondent banking chains: an Indian bank processing a seemingly innocent trade finance transaction may unknowingly be downstream of a sanctioned entity. Indian banks’ correspondent banking relationships with US banks are existentially important to their international operations, creating a powerful deterrent against overt sanctions non-compliance regardless of India’s government’s legal position.
For India’s strategic autonomy doctrine, the sanctions landscape creates a genuine policy dilemma: insisting on legal non-recognition of extraterritorial sanctions while simultaneously ensuring that Indian entities do not incur the commercial penalties that follow from sanctions violations requires constant diplomatic management and cannot be indefinitely sustained as US-Russia and US-Iran tensions persist.
Suggestions and Reforms
The most constructive international law reform would be the development of a multilateral treaty or UNGA declaration specifically addressing the conditions under which extraterritorial sanctions are permissible under international law, establishing that unilateral secondary sanctions imposed without UNSC authorisation violate sovereign equality and the principle of non-interference. The ILC’s work on the law of unilateral coercive measures, currently at a preliminary stage, could be accelerated and elevated to a treaty-making exercise. India, as a consistent advocate against UCMs in General Assembly resolutions, could lead this initiative within the G77 framework.
Domestically, India should develop a legislative framework (analogous to the EU Blocking Statute) that provides legal cover for Indian entities complying with Indian government directives to engage in transactions that might otherwise be characterised as sanctions violations, and establishes a clear legal basis for challenging foreign sanctions enforcement in Indian courts.
Conclusion
Economic sanctions have become the currency of great power competition, but their extraterritorial application raises fundamental questions of international law, sovereign equality, and the coherence of a rules-based international order. India’s navigation of US-Russia and US-Iran sanctions dynamics illustrates both the pragmatic reality that no state with significant US financial exposure can simply ignore US secondary sanctions, and the principled position that international law does not legitimise the use of one state’s financial infrastructure control as a substitute for UNSC-authorised collective measures. The tension between these positions is unlikely to be resolved through litigation alone; it requires a multilateral political and legal effort to restore the principle that states acting outside their jurisdiction must have a recognised legal basis for doing so, not merely the economic power to compel compliance.
