Financial market information flows when counteracting rogue states: The indirect effects of targeted sanction packages

Abstract

This study investigates how financial sanctions packages targeting Russia influenced traditional information flow dynamics with other international financial markets and products. While providing empirical evidence regarding the use of payment systems and finance as weapons of war, it is crucial to understand if the market's response to international sanctions diminished as expectations shifted over time. Results, supported by robustness testing procedures, indicate important dynamic information flows relating to specific sanctions after the onset of the Russia-Ukraine war. In particular, those sanctions relating to the exclusion of Russia from the SWIFT payment system and those targeting banks and private wealth resulted in significant contagion effects sourced from all Russian markets examined. Such influence, however, is found to moderate and dilute as investors reconstruct their expectations and valuations. While targeted sanctions appear to impose intended market isolation, it is also associated with significant contagion effects. Although such secondary effects dissipate, they should be seen as important when implementing further targeted sanction packages.