Financial Sanctions and the Global Payments Network

Financial sanctions targeting banks are widely viewed as powerful tools of economic statecraft. This is particularly true for sanctions imposed by the United States, in part reflecting the central role of the U.S. dollar in global payments. Yet there is limited systematic evidence on how financial sanctions affect access to the global payments system. We fill this gap by combining data on the network of correspondent banking relationships—a system that facilitates cross-border payments by linking banks across currencies and countries—with U.S., EU, and UK sanctions lists since 2021, a period of rapid growth in the designation of financial institutions. Comparing sanctioned institu-tions to unsanctioned peers in the same country, we find that sanctions substantially reduce access to the global payments network by severing key correspondent relationships, particularly those that provide the most direct access to currencies such as the U.S. dollar. However, sanctions do not eliminate connectivity: sanctioned institutions often retain indirect access by routing payments through longer and more fragile chains of intermediaries. Further, at the country level, sanctions induce a reconfiguration of payment networks. In countries where sanctions expanded sharply, such as Belarus, Kyrgyzstan, Myanmar, and Russia, unsanctioned banks developed or expanded alternative correspondent relationships, especially in Chinese yuan. Outside of these heavily-sanctioned economies, on average, the decrease in dollar and increase in yuan correspondent shares are modest.