The financial sanctions imposed on Russia in response to its invasion of Ukraine not only targeted the country’s banking system but also sent shockwaves across global financial markets. This paper investigates how these sanctions influenced market contagion effects, particularly in non-targeted economies, shedding light on the unintended consequences of politically driven financial restrictions.
The study finds that sanctions, especially those aimed at Russia’s financial institutions and its exclusion from the SWIFT payment system, initially created significant turbulence in international markets. Investors reacted swiftly, with markets in Europe and the UK showing the strongest signs of instability, the US experiencing a slightly milder hit, while Australia and Canada were relatively insulated from these effects. However, as financial actors adjusted to the new conditions, the intensity of these disruptions declined, illustrating how markets adapt over time to geopolitical shocks.
A crucial insight from the study is the role of Russian market volatility in transmitting financial instability beyond its borders. Volatility spikes in Russian equity markets, captured by the Russian Volatility Index and turbulence in the Russian banking index, both amplified by banking-sector restrictions, emerged as the dominant channels through which instability spread to other international financial centres. While the intended goal of isolating Russia’s economy was achieved to some extent, the study highlights that these measures also had ripple effects on international stock markets and banking sectors, impacting financial efficiency in ways that were not entirely anticipated.
The authors warn that, although targeted financial sanctions do impair Russia’s market influence, their repeated deployment can dilute effectiveness and disrupt global price-discovery dynamics, so any future packages must be carefully coordinated and proportionate to contain unintended spillovers.
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