Yves right here. This text argues that despite the fact that banks in sanctioned nations have made effort to maneuver to make use of different currencies, the variety of “hops” in doing so is an obstacle. The result’s that use of the renminbi has not elevated as a lot as most observers anticipated.
By Gregor Matvos, Howard Berolzheimer Chair in Finance, Kellogg College of Administration Northwestern College and Brent Neiman, Edward Eagle Brown Professor of Economics, Sales space College of Enterprise College Of Chicago. Initially revealed at VoxEU
Direct proof on the consequences of monetary sanctions stays restricted. This column makes use of correspondent banking information to check how sanctions have an effect on entry to world cost networks. The greenback and euro networks supply essentially the most environment friendly connections to banks in different nations. Moreover, monetary sanctions imposed throughout 2021-2026 diminished focused banks’ entry to major-currency networks, making it tougher for sanctioned establishments to make or obtain funds. Non-sanctioned banks in closely sanctioned nations additionally misplaced connectivity to those networks however reoriented in direction of options, significantly the Chinese language yuan. Extra usually, shifts away from the greenback and in direction of the yuan stay minimal.
The US Treasury’s latest ‘Operation Financial Outcast’ marketing campaign in opposition to Iran goals to sever Iran’s monetary connections to the remainder of the world. Do sanctions comparable to these levied in opposition to Iran’s banks work? If that’s the case, how? Does utilizing sanctions at present weaken their effectiveness tomorrow?
A quickly rising theoretical literature addresses these questions. Farrell and Newman (2019) and Clayton et al. (2024, 2025) focus on how nations can use management over key networks to exert geopolitical energy. Bianchi and Sosa-Padilla (2025) mannequin how the usage of sanctions would possibly result in diminished future use of the greenback. However onerous empirical proof is proscribed on why overseas corporations depend on the greenback community or whether or not sanctions have an effect on banks’ entry to it.
In a recnent paper (Matvos and Neiman 2026), we study these questions utilizing correspondent banking information. We use business information from LexisNexis Threat Options on correspondent banking relationships – the accounts banks maintain with each other to ship and obtain funds throughout borders – protecting greater than 17,000 monetary establishments in rising market and creating economies (EMDEs). We merge these information with information on monetary sanctions designated by the US, EU, and the UK from September 2021 to August 2026.
Understanding how monetary sanctions work is more and more pressing as sanctions exercise of all types has trended upwards for many years (Felbermayr et al. 2020). The variety of entities on the US Treasury’s main sanctions record has grown from below 1,000 in 2000 to just about 20,000 at present. In our pattern, the variety of rising market and creating economic system banks sanctioned by the US, EU, or the UK rose by about 70% in 5 years, from 204 to 346 (Determine 1). Russian banks account for a lot of the improve, with substantial expansions additionally in Belarus and Kyrgyzstan.
Determine 1 Rising market and creating economic system banks below sanctions, by authority, 2021-2026
Supply: Matvos and Neiman (2026), Determine 3.
Our work asks and solutions 4 key questions:
1) Are the greenback (and euro) networks essentially the most helpful for world funds?
Sure. To point out this, we begin by explaining the position of correspondent banks in cross-border funds. Whereas home transactions profit from a shared central financial institution, this isn’t the case for worldwide transactions. As such, a financial institution that desires to obtain {dollars} does so by holding a greenback account at one other financial institution, referred to as a correspondent, which will be credited. Take into account an importer paying an exporter. If their banks share a correspondent, the correspondent can settle the cost by debiting one financial institution’s account and crediting the opposite’s. If not, the cost should cross by means of a sequence of intermediaries. Every hyperlink within the chain – every ‘hop’ – provides charges, compliance checks, the price of prefunding accounts, and counterparty danger.
Greenback and euro networks usually join banks in fewer hops than different foreign money networks. Of rising market and creating economic system banks that record any correspondent, 90% have one for {dollars} and 88% have one for euros. Against this, solely 62% have one for British kilos, and 34% for yuan. Additional, greenback and euro chains join 4 to 5 occasions as many cross-border financial institution pairs as yuan chains, and achieve this in fewer hops – beneath three on common, versus almost 4 for the yuan. For roughly three-quarters of linked financial institution pairs, the shortest cost path runs by means of the greenback or euro community. The yuan affords the shortest path about 3% of the time.
Additional, the larger connectivity provided by the greenback community is owed largely to the presence of key hubs that sit within the US jurisdiction. The ten most central banks – hubs within the community – account for 77% of the full PageRank of the greenback community, indicating a excessive focus of community centrality. The comparable determine is about half for the euro and the yuan. Entry to essentially the most environment friendly cost infrastructures runs by means of a small set of establishments to which US and European authorities can deny entry.
2) Do sanctions achieve reducing targets off?
Largely, sure. Sanctions sharply reduce focused banks’ entry, throughout almost all currencies and counterparty nations.
Sanctioned banks lose their correspondent relationships. Of these banks which are finally sanctioned and that report not less than one correspondent relationship, the probability that they’ve greenback correspondents drops from 89% to twenty% after being sanctioned by the US. The share with a US-based greenback correspondent falls to 11%. Comparable losses happen for sanctioned banks’ euro, pound, and yuan correspondent relationships.
Additional, their remaining community entry additionally deteriorates. Earlier than designation, finally sanctioned banks keep relationships with greenback correspondents that collectively account for about 15% of the full PageRank of the greenback community. After designation, they lose entry to a very powerful correspondents, so this share falls to beneath 2%.
In consequence, the size of cost chains from sanctioned banks to the remainder of the world grows considerably. The variety of hops sanctioned banks want to attach with reachable banks of their house nations’ 5 largest buying and selling companions rises in all currencies we research, apart from the Russian ruble.
Sanctions make funds costlier, slower, and riskier, usually routed by means of oblique clearers in third nations.
3) What occurs to untargeted banks in closely sanctioned nations?
In closely sanctioned nations like Belarus, Kyrgyzstan, Myanmar, and Russia, even untargeted banks lose entry to Western cost networks. They equally lose entry to greenback, euro, and pound correspondents. The probably driver is de-risking: correspondents reduce ties with whole jurisdictions fairly than danger secondary sanctions or compliance failures. The country-level penalties are substantial. Throughout all Belarusian banks, cross-border correspondent relationships in {dollars}, euros, and kilos fell from 139 in 2021 to 19 by 2026. Additional, the greenback correspondents that remained have been situated in Kazakhstan and China, not within the US.
Non-sanctioned banks in these economies, nevertheless, shifted in direction of various cost networks. The yuan’s share of their cross-border correspondent relationships rose sharply. As proven in Determine 2, the shift has stark penalties for the relative effectivity provided by every foreign money’s community. In 2021, the greenback or euro supplied the shortest cost path from Belarusian banks to greater than 80% of reachable overseas banks. At the moment, the yuan nearly by no means provided the trail with fewest hops. Nonetheless, by 2026, the image had modified. Greenback and euro networks collectively accounted for lower than half of the set of shortest paths, whereas the yuan accounted for about 20%, greater than the greenback alone. Kyrgyzstan and Russia present related patterns.
Determine 2 Foreign money delivering the shortest cost route, 2021 versus 2026
Supply: Matvos and Neiman (2026), Determine 15.
4) Is that this proof of a worldwide decline within the greenback’s position?
No – not in our information, and never but. As proven within the last bars of Determine 2, throughout all different EMDEs, the foreign money composition of shortest cost routes was primarily unchanged between 2021 and 2026. The greenback and euro nonetheless present the shortest route for roughly three-quarters of reachable financial institution pairs. The yuan’s share rose by about one share level.
Brunnermeier et al. (2022) predicted at first of the Russia sanctions that the greenback’s dominance would survive, and Eichengreen (2023) reached an identical verdict from information on official reserves. To this point, our funds information agree and solely doc a shift away from the greenback within the small set of economies the place sanctions hit hardest.
See unique put up for references
