Cheap Talk ? Financial Sanctions and Non-Financial Activity

Mardi | 2017-04-04
Salle des thèses de 16h00 à 17h20


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, using highly disaggregated, monthly data from the German balance of payments statistic for the period from 1999 through 2014 to identify firms affected by sanctions. Examining evidence from sanctions on 24 countries, we find, in a differences-in-differences setting, a measurable decline in German financial activities with the sanctioned country. For non-financial firms, however, the effect has been mainly on the extensive margin, while the volume of direct financial flows to and from these countries is much less affected. Moreover, firms doing business with sanctioned countries tend to be disproportionately large, making them largely immune to the reduction in business opportunities with selected partners. In fact, we find no effect of sanctions on firm-level variables such as employment or sales. Finally, sanctions imposed by the European Union alone, and therefore only enforced by their member countries instead of the United Nations, turn out to be evaded as flows with major trading partners of sanctioned countries increase. In sum, these results suggest that, despite the reduction in cross-border financial activities, the economic costs of financial sanctions to the sender country are limited.