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Secondary effects of financial sanctions: Bank compliance and economic isolation of non-target states

Abraham L. Newman and Qi Zhang

Review of International Political Economy, 2024, vol. 31, issue 3, 995-1021

Abstract: As states employ financial sanctions as a form of economic coercion, firms become the foot soldiers. This analysis bridges work on weaponized interdependence with work on extraterritorial authority to understand the de-risking behavior of these firms. Companies fearing extraterritorial enforcement are likely to limit exposure to third party jurisdictions, which may expose the firm to the sanctions regime. In particular, we identify two mechanisms – target leakage and political cascades – to understand which third-party jurisdictions are most likely to be affected. We test our hypotheses through analyses of multinational banks’ lending before and after the 2010 sanctions on Iran. Using a difference-in-differences estimator to evaluate the sanction’s impact on cross-border lending, our analysis shows that the sanction reduced multinational banks’ lending to neighboring countries of Iran and its politically aligned states by approximately 14% and 12% respectively. Moreover, we observed lender heterogeneity as banks from offshore financial centers increased their lending to the affected jurisdictions by 32% and 33%. Our findings demonstrate the broader consequences of financial sanctions in terms of the impacted countries and the potential to drive lending to less regulated spaces.

Date: 2024
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DOI: 10.1080/09692290.2023.2267051

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Review of International Political Economy is currently edited by Gregory Chin, Juliet Johnson, Daniel Mügge, Kevin Gallagher, Ilene Grabel and Cornelia Woll

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