The impact of trade sanctions on financial risk: Empirical evidence from global data

This paper examines the impact of trade sanctions on financial risk in target countries using panel data covering 124 countries from 2001 to 2020. The empirical results show that the imposition of trade sanctions by sender countries significantly elevates financial risk in the sanctioned states. Notably, bilateral sanctions and export sanctions exert a stronger effect on financial risk than import sanctions. Furthermore, the analysis reveals that trade sanctions increase financial risk primarily by reducing trade openness and hindering financial development in target countries. Our heterogeneity tests indicate that the impact on financial risk is significant in low and lower-middle income countries, countries with low levels of globalization, and countries with high financial risk, but not in high and upper-middle income countries, countries with high levels of globalization, or countries with high financial risk.