Sanctions and Their Impact on Financial Markets

Financial sanctions: a tool of geopolitics Economic and financial sanctions have become one of the main instruments of foreign policy. They are used to exert pressure on states, companies, and individuals without the use of military force. For financial market participants, sanctions create significant compliance risks and restrictions. Types of sanctions Sectoral sanctions restrict certain types of activity with entire sectors of a country's economy. For example, a ban on providing long-term financing to the Russian oil sector or Iranian petrochemicals. Blocking sanctions (SDN list in the US) completely freeze the assets of persons and organizations, prohibit any transactions with them. Any property controlled by SDN is subject to blocking. Secondary sanctions threaten third parties doing business with sanctioned entities. Even a non-American company can fall under sanctions for dealings with Iranian or Russian counterparties.

Key sanctions regimes The United States has the most advanced sanctions regime. OFAC (Office of Foreign Assets Control) administers sanctions. The SDN List contains thousands of individuals and organizations. The dominance of the dollar makes American sanctions especially effective—every dollar transaction passes through American banks and falls under their jurisdiction. The EU has its own sanctions regime, which does not always coincide with the American one. After 2022, European sanctions against Russia were significantly expanded, becoming closer to the American ones. The UN imposes sanctions with the approval of the Security Council. They have the greatest legitimacy, but are limited by the possibility of a veto by permanent members.

Compliance procedures Financial institutions are required to check counterparties for sanctions. Screening—matching client names, counterparties, beneficiaries with sanction lists. Automated systems process millions of transactions, generating alerts for manual review. The problem of false positives is significant—common names, similar company names create many alerts. Precise system adjustment is a balance between the risk of missing a real violation and overloading the compliance department. Fines for breaking sanctions can be enormous. BNP Paribas paid $8.9 billion for violating sanctions against Iran, Sudan, and Cuba. Standard Chartered, ING, HSBC also paid multibillion-dollar fines.

Impact on investments Sanctions create risks for investors in assets of sanctioned countries. Securities may become untradeable, dividends—unpayable. Index providers exclude sanctioned companies from indices. The Russian market after 2022 demonstrates an extreme example. Foreign investors lost access to their assets, trading of depositary receipts ceased, ruble conversion was restricted. Sanctions screening is necessary before any investment in emerging markets. Due diligence should include checking beneficial owners, connections with sanctioned persons, sectoral restrictions.

Deglobalization and fragmentation Active use of sanctions leads to fragmentation of the global financial system. Countries fearing sanctions develop alternative payment systems (CIPS in China), reduce dollar reserves, diversify trade relationships. For investors, this means rising political risks, the necessity to consider the geopolitical context, and a potential decrease in the effectiveness of global diversification.