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Cut off from capital: The impacts of sanctions on portfolio investments

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  • Korhonen, Iikka
  • Simola, Heli

Abstract

We examine the impact from sanctions on global capital flows. Sanctions can be understood as an extreme version of geopolitical decoupling that affects economic relations, including trade and foreign direct investment. Specifically, we look at how the introduction of wide-ranging financial sanctions has affected foreign portfolio investment, treating Western sanctions packages on Russia in 2014 and 2022 as a natural experiment. Applying a triple-difference setup and using annual portfolio investment data collected by the IMF, our results show that portfolio investment flows into Russia sharply declined from both sanctioning and non-sanctioning countries particularly after 2022. The decline in investment from sanctioning countries was much more severe, however. Unlike with trade, we find little evidence of investment diversion for Russia after imposition of sanctions.

Suggested Citation

  • Korhonen, Iikka & Simola, Heli, 2026. "Cut off from capital: The impacts of sanctions on portfolio investments," BOFIT Discussion Papers 7/2026, Bank of Finland Institute for Emerging Economies (BOFIT).
    • Handle: RePEc:zbw:bofitp:343548
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    JEL classification:

    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F2 - International Economics - - International Factor Movements and International Business
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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