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Cheap talk? Financial sanctions and non-financial activity

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  • Besedeš, Tibor
  • Goldbach, Stefan
  • Nitsch, Volker

Abstract

Sanctions restrict cross-border interactions and, therefore, not only put political and economic pressure on the target country, but they also adversely affect the sender country. This paper examines the effect of financial sanctions on the country imposing them. In particular, we analyze the business responses of German non-financial entities to the imposition of sanctions on 23 countries over the period from 1999 through 2014. Examining highly disaggregated, monthly data from the German balance of payments statistics, we find four main results. First, German financial activities with sanctioned countries are sizably reduced after the imposition of sanctions, with strong reductions in the scope of cross-border activities (i.e., the extensive margin with fewer firms and fewer asset categories) and less statistically robust results for total financial flows (sum of inflows and outflows) which is consistent with the concept of 'smart sanctions'. Second, firms doing business with sanctioned countries tend to be disproportionately large, making them largely immune to the reduction in business opportunities with individual partners. Third, firms affected by sanctions expand their activities with non-sanctioned countries, some of which display close trade ties to the sanctioned country. Fourth, we find no effect of sanctions on aggregate variables of firm performance such as employment or total sales. Overall, we conclude that the economic costs of financial sanctions to the sender country are limited.

Suggested Citation

  • Besedeš, Tibor & Goldbach, Stefan & Nitsch, Volker, 2018. "Cheap talk? Financial sanctions and non-financial activity," Discussion Papers 09/2018, Deutsche Bundesbank.
  • Handle: RePEc:zbw:bubdps:092018
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    References listed on IDEAS

    as
    1. Tibor Besedeš & Stefan Goldbach & Volker Nitsch, 2017. "You’re banned! The effect of sanctions on German cross-border financial flows," Economic Policy, CEPR;CES;MSH, vol. 32(90), pages 263-318.
    2. Gary Clyde Hufbauer & Jeffrey J. Schott & Kimberly Ann Elliott, 2007. "Economic Sanctions Reconsidered, 3rd edition (hardcover)," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4075, January.
    3. Forbes, Kristin J. & Warnock, Francis E., 2012. "Capital flow waves: Surges, stops, flight, and retrenchment," Journal of International Economics, Elsevier, vol. 88(2), pages 235-251.
    4. Gary Clyde Hufbauer & Jeffrey J. Schott & Kimberly Ann Elliott, 2009. "Economic Sanctions Reconsidered, 3rd Edition (paper)," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 4129, July.
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    Cited by:

    1. Matthias Efing & Stefan Goldbach & Volker Nitsch, 2018. "Freeze! Financial Sanctions and Bank Responses," CESifo Working Paper Series 7424, CESifo.
    2. Felbermayr, Gabriel & Syropoulos, Constantinos & Yalcin, Erdal & Yotov, Yoto V., 2019. "On the effects of sanctions on trade and welfare: New evidence based on structural gravity and a new database," Kiel Working Papers 2131, Kiel Institute for the World Economy (IfW).
    3. Joakim Gullstrand, 2020. "What goes around comes around: The effects of sanctions on Swedish firms in the wake of the Ukraine crisis," The World Economy, Wiley Blackwell, vol. 43(9), pages 2315-2342, September.
    4. Larch, Mario & Shikher, Serge & Syropoulos, Costas & Yotov, Yoto, 2021. "Quantifying the Impact of Economic Sanctions on International Trade in the Energy and Mining Sectors," School of Economics Working Paper Series 2021-9, LeBow College of Business, Drexel University.
    5. Felbermayr, Gabriel & Kirilakha, Aleksandra & Syropoulos, Constantinos & Yalcin, Erdal & Yotov, Yoto V., 2020. "The global sanctions data base," European Economic Review, Elsevier, vol. 129(C).
    6. Hufbauer, Gary Clyde & Jung, Euijin, 2020. "What's new in economic sanctions?," European Economic Review, Elsevier, vol. 130(C).

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    More about this item

    Keywords

    sanction; restriction; cross-border transaction;
    All these keywords.

    JEL classification:

    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F36 - International Economics - - International Finance - - - Financial Aspects of Economic Integration
    • F38 - International Economics - - International Finance - - - International Financial Policy: Financial Transactions Tax; Capital Controls
    • F51 - International Economics - - International Relations, National Security, and International Political Economy - - - International Conflicts; Negotiations; Sanctions

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