Sanctions and the global financial system

Intervention of Francesco Papadia at a webinar on central bank reserves management

March 16 2022

I have chosen for my intervention today a somewhat controversial issue, highly relevant for reserve management by central banks.

The United States and other countries or jurisdictions sitting over globally relevant financial markets, like the euro-area, the UK and Japan, are always confronted with a dilemma when adopting financial sanctions against another country. On one hand, sanctions can indeed cause the sought-after damage to the affected country and can, over time, give incentives to change behaviour. On the other hand, sanctions give incentives to become immune from them, severing ties with the global financial system.

We have clearly seen an example of this dilemma with SWIFT, which is the archetypal representation of the global financial system. Fears of sanctions to be excluded from it led China and Russia, with different but in both cases limited success, to build their own messaging system. Another occurrence has been the imposition of sanctions on Iran, after the abandonment by the Trump administration of the agreement to avoid the construction of an atomic bomb by that country. In that case, the Europeans were not directly affected by the sanctions, still they suffered from so-called secondary sanctions and tried, again without much success, to establish a parallel arrangement that would have allowed them to continue trading, for some products, with Iran. In these cases, either the imposition of sanctions or just the fear of sanctions led to initiatives that could lead to a fragmentation of the global financial system.

Given this dilemma, two, interrelated, questions arise:

  • Which are the criteria to determine which of the two horns of the dilemma prevails?
  • What is the potential fragmentation effect of Russian sanctions?

In my view, the following factors attenuate the potential fragmentation effect:

  • The wider is the group of countries that take the sanctions relative to that hit by the sanctions
  • The more the sanctions are reasonable, i.e. are consistent with some objective reasoning resonating with global interests rather than just being the result of narrow national interests
  • The more the sanctions follow some behaviour from the affected country generally felt as unacceptable.

Just to be more concrete, sanctions decided by the United Nations would satisfy the three criteria above better than a unilateral initiative by anyone country.

How do these factors play out in the case of the Russian sanctions?

My assessment is that the fragmentation risk is there, but is attenuated by the following considerations:

  • The sanctions were consistent with a large majority of countries at the UN condemning the Russian invasion of Ukraine (the relative resolution was approved with 141 votes in favour, 5 against and 35 abstentions, even if two heavy ones from China and India)
  • It is in the interest of the world to send a signal that changing borders by military force goes against a peaceful world order
  • There is a growing, if not universal, support for a country militarily attacked by another one.

In conclusion, while the imposition of sanctions, in particular the freezing of transactions of the Central Bank of Russia that severely affected its ability to use its reserves, will have fragmentation effects, in particular as it could further push China to preemptively protect itself from sanctions, I think that these will be attenuated by the factors mentioned above.

Of course, the damage for the integration of the global financial system will also depend on how long the sanctions will prevail. If, as one hopes, a peaceful solution will be found to the war, and Russia will no longer threaten and militarily attack another country, sanctions could be gradually raised, and this would confirm that they were imposed just because of the exceptionally grave event that took place.


I think it is in everybody’s interest to have a peaceful Russia integrated into the global economy and financial system: the sooner its behaviour changes and it will therefore be possible to withdraw the sanctions, the sooner will this result be achieved.