The Threat of Financial Sanctions: What Safeguards Can Central Banks Build?

Abstract

The sanctions imposed by the G10 countries on financial institutions in Russia, including on its central bank, will come under scrutiny by emerging market central banks. This will help them build appropriate safeguards against disruptions to cross‐border transactions and revise their investment mandates to reduce the risk of reserve asset freezes. Building new financial market infrastructure and cross‐border payment systems, or strengthening existing ones, will become the priority of emerging global powers. The goal will be to build systems that support democratic governance mechanisms, have oversight arrangements involving the central banks of trusted countries, and promote fair and safe access to clearing and settlement under well‐defined policy guidelines. The use of alternatives to the US dollar as the invoicing currency in international trade will gather momentum. Markets for energy and other commodities will be the change drivers. China has an important role to play.

Reconsidering contemporary classifications of sanctions in the light of the Russia sanctions regime

“…All of the above may significantly hamper cross-border payments and meeting coupon payment obligations, as was the case with Russia in 2022. The Russia sanctions sent an alarm signal to many developing countries, including China and India, prompting them to search for ways to avoid the risks of being exposed to secondary sanctions (Ramaswamy, 2022).…”