“Crime and Punishment”? How Banks Anticipate and Propagate Global Financial Sanctions

We study the impacts of global financial sanctions on banks and their corporate borrowers in Russia. Financial sanctions were imposed consecutively between 2014 and 2019, allowing targeted (but not-yetsanctioned) banks to adapt their international and domestic exposures in advance. Using a staggered difference-in-differences approach with in-advance adaptation to anticipated treatment, we establish that targeted banks immediately reduced their foreign assets and actually increased their international borrowings after the first sanction announcement compared to other similar banks. We reveal that the added value of the next sanction announcements was rather limited. Despite considerable outflow of domestic private deposits, the government support prevented disorderly bank failures and resulted in credit reshuffling: the banks contracted corporate lending by 4% of GDP and increased household lending by almost the same magnitude, which mostly offset the total economic loss. Further, we introduce a two-stage treatment diffusion approach that flexibly addresses potential spillovers of the sanctions to private banks with political connections. Employing unique hand-collected board membership and bank location data, our approach shows that throughout this period, politically-connected banks were not all equally recognized as potential sanction targets. Finally, using syndicated loan data, we establish that the real negative effects of sanctions materialized only when sanctioned firms were borrowing from sanctioned banks. When borrowing from unsanctioned banks, sanctioned firms even gained in terms of employment and investment but still lost in terms of market sales pointing to a misallocation of government support.