When Sanctions Escalate but Exit Does Not: Strategic Adaptation by European Financial Institutions

Adrián Rojo () and Hamed Ghiaie ()
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Adrián Rojo: ESCP Business School, Alumnus
Hamed Ghiaie: ESCP Business School

No 2026.04, Working Papers from International Network for Economic Research - INFER

Abstract: This paper examines the strategic adjustment of European financial institutions under escalating EU sanctions. We show that tighter sanctions do not necessarily lead to sustained financial disengagement from targeted jurisdictions. We use an interactive fixed-effects framework to estimate institution-specific counterfactual trajectories. We find that institutions that have already internalized prior restrictions respond to progressively tighter sanctions through defensive adaptation. They gradually and heterogeneously reconfigure customer relationships, interbank activity, investment portfolios, and physical presence rather than disengage financially. These findings show that sanctions operate as dynamic adjustment processes rather than one-time regulatory shocks. Sanctions effectiveness therefore depends not only on sanctions intensity but also on institutional adaptation.

Keywords: Strategic adaptation; economic sanctions; financial institutions (search for similar items in EconPapers)
JEL-codes: F G (search for similar items in EconPapers)
Pages: 37 pages
Date: 2026
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