Effects of Economic Sanction on Financial Markets

Abstract

This paper seeks to analyze the effects of economic sanctions on financial markets. It will first consider the direct and indirect effects of economic sanctions on the target country, the country imposing the sanctions, and third-party countries. The paper will then narrow down to the indirect effects of economic sanctions on the financial markets of the target country and third-party countries. The paper will then use Pakistan and India as case studies of the impact of economic sanctions on the financial markets and how countries can cushion their financial markets against the adverse effects of economic sanctions. The economic sanctions of 1998 imposed on Pakistan and India affected the financial markets of the two countries differently. On one hand, Pakistan was hit hard by the sanctions, leading to, among other things, a fall in the country’s foreign exchange reserves to $458 million within the first three months and a 28%. depreciation in the open market rate for the Pakistan Rupee (Rs.). On the other hand, India’s financial markets were only affected during the first few days after the announcement of the sanction and then stabilized later on.