How U.S. Sanctions Shape the Global Financial System?

How U.S. Sanctions Shape the Global Financial System?

The United States’ use of economic and financial sanctions has become one of its primary tools of foreign-policy and national-security strategy. While designed to coerce targeted regimes, entities or individuals into changing behaviour, these sanctions ripple well beyond the immediate target. They affect banks, correspondent-banks, payment systems, commodity-markets and the structure of the global financial system itself. In today’s interconnected world, unilateral U.S. sanctions often yield unintended global consequences—some that may reshape the architecture of international finance.

This article explores how U.S. sanctions are structured, how they impact the global financial system, the unintended knock-on effects (including on third-party countries and institutions), and how they may be driving long-term structural shifts in global finance.

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• The Structure of American Sanctions

At its core, the U.S. sanctions regime is administered by the U.S. Department of the Treasury’s Office of Foreign Assets Control (OFAC) which enforces economic and trade restrictions against selected foreign jurisdictions, individuals and entities on behalf of U.S. foreign-policy and national-security objectives.

Types of Sanctions Instruments

• Blocking & asset-freezing – designating targeted individuals/entities, and freezing their U.S.-dollar assets or access to U.S. institutions.
• Trade/sectoral sanctions – prohibiting trade or investment in particular sectors (such as oil, energy, defence) of a target country.
• Financial-infrastructure sanctions – restricting access to the global payments system (for example via the SWIFT network) or preventing certain banks from using correspondent banking relationships.

• Case Studies: Real-World Examples

2.1 Russia

Following the 2022 invasion of Ukraine, the U.S. and its allies imposed sweeping sanctions on large parts of the Russian economy—energy, finance, export-controls and more.

Financial sanctions cut Russian banks off from dollar-denominated funding and blocked access to key payment infrastructures. The IMF observed that because Russia remains a major commodity exporter and the global economy is highly integrated, the effects are unusually wide-ranging.

2.2 Iran

Iran has been under U.S. sanctions for many years. The regime’s limited access to international finance and banking has hampered investment, increased costs and triggered alternative arrangements.

• Structural Shifts and Long-Term Implications

3.1 Towards alternative payment and settlement systems

One of the most significant structural responses has been the acceleration of alternatives to the dollar-dominated payment system. Countries under sanction or seeking to mitigate risk are developing alternate networks and currencies, including bilateral currency arrangements, regional payment systems, or parallel networks outside traditional correspondent banks.

3.2 Pressure on the dollar’s dominance

Because U.S. sanctions leverage the dollar and U.S. banking dominance, widespread use of alternatives could erode the relative power of the dollar over time. Some analysts see sanctions as inadvertently accelerating de-dollarisation or regionalisation of finance.

• The U.S. Face-Off: Balancing Leverage vs. Blowback

4.1 Benefits and costs to the U.S. economy

While sanctions may serve U.S. foreign-policy objectives, they also impose costs on U.S. firms and the economy. Trade sanctions reduce access to export markets and raise uncertainty for U.S. companies. Research found U.S. exports forgone of $15-19 billion annually in one historical study.

4.2 The risk of diminishing leverage

As financial globalisation deepened and more countries became interconnected and diversified, the unilateral sanction power of the U.S. may have declined. The efficacy of sanctions tends to be higher when broadly multilateral, yet U.S. ones are often unilateral.

• What This Means for Global Financial Actors

• For banks & financial institutions

• Heightened need for sanctions-compliance, screening and monitoring of correspondent relationships.
• Risk-aversion may lead banks to sever ties with broadly defined risky jurisdictions, even when not directly sanctioned.
• Alternative networks (non-dollar, regional clearing systems) may gain business or become competitive threats.

• For companies and trade-finance

• Trade flows increasingly exposed to sanction risk: supply-chain disruption, cancelled financing, higher transaction costs.
• Multinationals must navigate the divergence between U.S. sanctions and other jurisdictions (e.g., EU blocking statutes) which sometimes place firms in a bind.

In conclusion: How U.S. Sanctions Shape the Global Financial System?

The use of U.S. sanctions is a double-edged sword. On one side, they provide the leverage to influence foreign actors without deploying troops; on the other, they carry wide and sometimes unpredictable consequences for the global financial system. 

Through correspondent-banking channels, trade-finance networks, payment-system access and banking relationships, sanctions extend far beyond their targets and into the architecture of global finance itself.

As banks, companies and governments adapt to these realities—by tightening compliance, building alternate networks or seeking to reduce exposure—the longer-term structural implications become clearer: gradual erosion of dollar-centric dominance, increased regionalisation of financial systems, and a more fragmented but perhaps more complex global financial order.

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