Finance is a core part of national competitiveness, and financial security is an important component of national security. Maintaining financial security is a strategic and fundamental undertaking that is relevant to the overall economic and social development of China. The world is currently in a period of turmoil and change as the external environment becomes more complex and challenging. The connotation of China’s national security has been broadened to an unprecedented degree, covering areas of external security and internal security, homeland security and public security, traditional security and non-traditional security, and our own security and common security, among many other areas. The number of areas that national security issues cover has also steadily increased to 20.1 Among these areas, financial security is classified as a non-traditional security issue. As risks continue to evolve and change, the meaning of financial security has also been developing and evolving itself. Traditional financial security is primarily concerned with domestic financial risks and the risk of contagion from international financial markets. However, with the significant increase in financial sanctions in recent years, the risk of being subjected to financial sanctions has heightened significantly as well. Since the outbreak of the crisis in Ukraine in 2022, the United States and the West have launched a series of financial sanctions against Russia, and have even unexpectedly frozen Russia’s central bank assets and removed many Russian banks from the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system. The frequent use of financial sanctions and its increase in scope and intensity not only threaten the national financial security of the sanctioned countries, but also bring potential risks to other economies.
I. The Increasingly Frequent Use of Financial Sanctions Shows New Characteristics of Threats Jeopardizing National Financial Security
Up till now, the academic circle has not settled on a consistent definition of national financial security. It is generally believed that national financial security refers to a state of dynamic stability in which a country’s financial system can maintain normal operations without being damaged and threatened, and can withstand various financial crises. Compared with financial risks and financial crises, the connotation of national financial security is broader in scope.
(1) Context behind the Increasing Risks of Financial Sanctions
Since the outbreak of the financial crisis in 2008, the landscape for global economic governance has been characterized by the “rise of the East and decline of the West”. Emerging market economies have voiced increasingly stronger demands to reform the international governance system, so as to meet their actual needs in reality, while the proposals put forward by developed countries tend to maintain their own interests. Against this backdrop, the United States and the West are more inclined to politicize their economic decisions, making finance a tool for engaging in power games and more and more frequently bound to national security and ideology. The competition among major powers is gradually eroding the basis and consensus for global financial governance. Furthermore, with the frequent occurrence of geopolitical risks and the increasing use of financial sanctions, there have been escalating risks of uncertainty challenging international financial security.
The United States is the biggest beneficiary of economic and financial globalization, and it is also the one that dominates and leads the decisions on international financial sanctions. The capability to effectively implement financial sanctions is necessarily based on a country’s dominant position in the international financial system. Relying on the hegemony of the U.S. dollar, the United States has imposed more financial sanctions than other countries. It has carried out “precision strikes” against quite a few countries, institutions, and even persons. The main agency of the United States for imposing sanctions is the Office of Foreign Assets Control (OFAC) under the Department of the Treasury, which inflicts financial sanctions on specific targets by including the targets on the list of Specially Designated Nationals (SDN). Although the OFAC does not have a specific list of sanctioned countries, the list of country-related sanctions on its website shows that the United States has imposed financial sanctions on more than 20 countries and regions including North Korea, Iran, and Afghanistan.2
美国是经济金融全球化的最大受益者，也是国际金融制裁的主导者。金融制裁能够得以有效施行，必须基于该国在国际金融体系中的优势地位。凭借美元霸权，相比于其他国家，美国更多发起金融制裁，对不少国家、机构乃至个人进行“精准打击”。美国执行制裁的主要机构是财政部下的外国资产管理办公室（Oﬃce Of Foreign Assets Control，OFAC），主要通过将被制裁目标列入特别指定国民（SDN）清单等方式对特定目标实施金融制裁。尽管OFAC没有特定的制裁国家名单，但其网站上与国家相关的制裁项目名单显示，美国对朝鲜、伊朗、阿富汗等20多个国家和地区实施了金融制裁。
Objectively speaking, economic sanctions, including financial sanctions, do entail certain costs for the sanctioning country. First, sanctions increase the fiscal expenditures of the sanctioning country, including the administrative resources and law enforcement costs for imposing sanctions, as well as subsidies given to domestic companies damaged by sanctions. Second, sanctions undermine the economic and financial ties between the sanctioning and the sanctioned country, damage the economic interests of the sanctioning country, and reduce employment opportunities. Third, due to close international economic and financial ties, the losses of the sanctioned country have spillover effects, which in turn damage the sanctioning country’s economy. This can include damage to business operations and asset depreciation of enterprises and financial institutions in the sanctioning country, as well as the increase in risk exposures of financial institutions investing in the capital market of the sanctioned country. Fourth, the countermeasures taken by the sanctioned country result in losses to the sanctioning country.
Nevertheless, the United States still frequently resorts to sanctions for the following reasons: First, compared to military operations, sanctions generate less public opposition to the sanctioning country, and the political costs are relatively low. Second, the president, Congress, and state governments all have the right to initiate sanctions. In this case, sanctions not only cost less to initiate, but are also easier and quicker to deploy than military actions. Third, the sanctioned country cannot quickly adjust its economy in the short term, thus when the sanctioning country uses its superior position in the global economy, financial markets, science and technology, and supply chains to launch sanctions, it quickly strikes the economy of the sanctioned country and even threatens the basis for people’s livelihood in the country. At the same time, the sanctioning country can continuously improve the means and methods of sanctions and implement more joint sanctions to significantly improve the effectiveness of sanctions.
(2) New Characteristics of Current Financial Sanctions
Since the 21st century, the United States has used economic sanctions more frequently than military force, and the frequency of financial sanctions has increased significantly. In 2021 alone, the number of entities subject to OFAC economic and financial sanctions reached 9,421, an increase of 933% from that of 2000.3 As of October 2022, the OFAC’s SDN list included approximately 6,300 sanctions-related names. As the United States and the West are increasingly politicizing economic issues, financial sanctions have become a common tool. Sanctions are not only imposed on small and medium-sized countries, but also used as an important tool in the power games between major powers. The current financial sanctions present the following characteristics.
First, financial sanctions are clearly targeted and can carry out precise strikes. Financial sanctions are often used as a supplementary or alternative measure to conventional wars, in order to ensure that the sanctioning country can constrain the sanctioned party from using and pooling funds and undermine its fighting power without suffering from military casualties and criticisms of the international community. The Treasury 2021 Sanctions Review of the U.S. Department of the Treasury clearly stated that a structured policy framework is used to link sanctions to clear policy goals. Judging from past cases, the United States has once frozen the overseas assets of the Libyan government and Muammar Gaddafi himself while simultaneously funding opposition forces, thus benefiting from the internal conflict in Libya (鹬蚌相争中渔翁得利, Chinese idiom “When the snipe and the clam fight, the fisherman profits”). Another example is the financial sanctions against Russia, which not only froze Russia’s assets, but also prevented Russia from receiving funds for exporting oil, natural gas, and other resources, weakening its economic strength to support the war.
Second, financial sanctions can take various forms and are often used in combination with other sanctions. When imposing financial sanctions, the sanctioning country usually implements a package strategy, including freezing assets, prohibiting financial transactions, and curbing international financing. The scope and intensity of sanctions can be flexibly adjusted and steadily increased, resulting in multi-level impacts and damage to the sanctioned party. At the same time, financial sanctions are often used together with trade and technology sanctions, and it has become a trend that different means of sanctions are used in combination and with greater effectiveness. For example, since the Ukraine crisis in 2022, the United States and its allies imposed financial sanctions on Russia by methods of freezing the Russian central bank’s foreign exchange reserves, prohibiting financial transactions, and excluding some Russian banks from the SWIFT payment system. At the same time, the United States expanded its export restriction measures against Russia to cover the fields of microelectronics, telecommunications facilities, sensors, navigation equipment, and avionics equipment, and has included more Russian institutions in the Entity List. The combination of various types of sanctions have helped to achieve the overall goals of the U.S. government.
Third, more secondary sanctions are being imposed with an expanded scope of “long-arm jurisdiction”. Secondary sanctions mainly restrict non-U.S. financial institutions from conducting financial transactions with or providing financial services to sanctioned parties outside the United States, and the targets of these sanctions are third-country entities that do not have a jurisdictional nexus with the United States. Secondary sanctions have been widely criticized for being an inappropriate extraterritorial application of U.S. domestic law and have received much resistance. However, since the “9/11” attacks in 2001, the United States, relying on powerful synergy between its dollar hegemony and its intelligence apparatuses, forced third countries and their companies to choose between maintaining economic and financial ties with the sanctioned country or with the United States, which strengthened its ability to enforce secondary sanctions.
Fourth, countries may implement joint sanctions or resort to multilateral sanctions. When one country imposes sanctions individually, the sanctioned party can use third parties to circumvent the sanctions. In order to improve the effectiveness of sanctions, the United States in recent years has often initiated joint financial sanctions together with its allies and sought to form multilateral sanctions through sanction resolutions of the United Nations. For example, on the nuclear program of Iran, the United States had pushed the United Nations Security Council to pass multiple rounds of sanction resolutions against Iran, and pushed its allies and other non-Western countries to join in the financial sanctions against Iran. Eventually, under the pressure of multi-level sanctions, Iran was forced to reach the substantive Geneva Interim Agreement with six relevant countries at the end of 2013.4
II. Means and Channels by Which Financial Sanctions Impact National Financial Security
Preventing and defusing risks of financial sanctions, and particularly guarding against systemic financial risks caused by such sanctions, is a fundamental task of financial work, and is integral to upholding China’s national financial security. To this end, it is urgent that we understand the means of financial sanctions and the transmission channels through which they impact financial security.
(1) Major Means of Financial Sanctions
1. Asset Freezing and Disposal
(1) Asset freezing. Such a method imposes controls on the assets deposited by the sanctioned party in U.S. financial institutions, and prohibits the sanctioned party from withdrawal, transfer, payment, trade, or any other form of disposal. Historically, the United States has frozen the assets of foreign governments or central banks many times, including the assets of North Korea, Cuba, Iran, Libya, Iraq, Afghanistan, Syria, and Venezuela. On February 28, 2022, the U.S. Treasury Department issued an announcement that, pursuant to Executive Order 14024, the Treasury’s OFAC prohibited American citizens from conducting transactions with the Central Bank of the Russian Federation, the National Wealth Fund, and the Ministry of Finance, effectively freezing all assets of the Central Bank of Russian Federation in the United States.5
(2) Asset disposal. Technically, the ownership status of frozen assets will not be changed, and the assets in question should be unfrozen when the sanctions are lifted and left at the disposal of the previously sanctioned party. However, the United States has also set many precedents for disposing of frozen assets. For example, on March 20, 2003, the day the Iraq war broke out, the assets of the Iraqi government and Iraq’s central bank were confiscated by the United States and were used for post-war reconstruction in Iraq.
2. Financing Restrictions
(1) Restricting access to financial aid and loans from international financial institutions. The sanctioning country may take advantage of its dominance in international financial organizations to place restrictions on the sanctioned country, preventing it from receiving aid and loans from international institutions. For example, on March 11, 2022, after the outbreak of the Ukraine crisis, the Group of Seven (G7) issued a joint statement announcing that they would jointly block Russia from obtaining funds from major international financial institutions such as the International Monetary Fund, the World Bank, and the European Bank for Reconstruction and Development.6
(2) Restricting access to international business loans or financing via international capital markets. Putting sanctioned entities on the SDN list is an important means for the United States to impose financial sanctions. As U.S. entities are prohibited from conducting transactions with institutions on the SDN list, the sanctioned entities will naturally not be able to obtain U.S. commercial loans. In addition, as the United States is the world’s largest capital market, it can use sanctions to stop the issuance and trade of bonds, stocks, and other securities of sanctioned countries in the United States, in order to limit their access to financing. For example, on February 24, 2022, pursuant to Executive Order 14024, the OFAC expanded its restrictions on Russian debt and equity to other key sectors of the Russian economy, prohibiting transactions and dealings by U.S. persons or within the United States in new debt of longer than 14 days maturity and new equity of Russian state-owned enterprises and the financial service sector. 7
(3) In addition, the sanctioning country can also prevent the sanctioned country from obtaining international capital by restricting its investment. For example, on February 21, 2022, in response to Russia’s recognition of the independence of Donetsk and Luhansk, the United States issued Executive Order No. 14065, prohibiting U.S. persons from making new investments in the Donetsk and Luhansk regions of Ukraine.
3. Denying Access to International Payment and Settlement Channels
(1) Denying access to SWIFT. The sanctioning country may remove banks and other financial institutions of the sanctioned county from the SWIFT system and restrict the sanctioned institutions from engaging in global financial messaging, making it difficult for them to carry out international financial businesses and transactions. For example, on March 15, 2012, pursuant to the decision of the Council of the European Union, SWIFT announced that it would stop providing service to Iranian financial institutions sanctioned by Europe. On February 26, 2022, the European Commission, France, Germany, Italy, the United Kingdom, Canada, and the United States issued a joint statement removing certain Russian banks from the SWIFT messaging network in order to disconnect these banks from the international financial system and compromise their global operating capabilities.8
(2) Denying access to U.S. dollar payment and settlement channels. Because the U.S. dollar is the main currency for global payments and global foreign exchange transactions, cutting off sanctioned financial institutions from U.S. dollar payment and settlement channels will severely damage their international financial businesses. This is mainly implemented through OFAC’s Correspondent Account or Payable-Through Account (CAPTA) list. Financial institutions on the list are prohibited or strictly restricted from opening or holding U.S. correspondent accounts or payable-through accounts. For example, on February 24, 2022, the United States added Russia’s largest financial institution, Sberbank, and its affiliates to the CAPTA list. Given that the gross daily foreign exchange transactions of Russian financial institutions amounted to the equivalent of 46 billion U.S. dollars, with 80 percent of which in U.S. dollars, the U.S. Treasury Department believed that this measure, together with other measures, would block the vast majority of Russian transactions in U.S. dollar.9
(2) 切断美元支付清算通道。由于美元是全球主要的支付货币，也是全球外汇交易的主要货币，切断美元支付清算通道，会重击被制裁金融机构的国际金融业务。这主要是通过OFAC的往来账户或通汇账户（Correspondent Account or Payable-Through Account，CAPTA）清单实施的，即清单内的金融机构被禁止或被严格限制开立或持有美国往来账户或通汇账户。例如，2022年2月24日，美国将俄罗斯最大的金融机构俄罗斯联邦储蓄银行（Sberbank）及其附属实体列入CAPTA清单。鉴于俄金融机构每天在全球进行约460亿美元的外汇交易且其中80%是美元，美国财政部认为，这项措施与其他措施一起，将中断俄罗斯绝大多数的美元交易。
4. Indirect Attacks
Examples of indirect attacks include manipulating international rating agencies to lower the sovereign credit rating or corporate rating of the sanctioned country; provoking financial market turmoil in the sanctioned country by announcing financial sanctions; prohibiting sanctioned financial institutions from using IT hardware and software services provided by companies of the sanctioning country through information technology blocking, or even launching technology-targeted attacks.
(2) Transmission Channels for Financial Sanctions’ Impact on National Financial Security
The impact of financial sanctions on the national financial security of the sanctioned country can be divided into two rounds. In the first round, there is a direct impact on the financial market and financial institutions, resulting in violent fluctuations in the financial market, as well as operational constraints and losses inflicted on financial institutions. In the second round, there are indirect impacts from the spillover and contagion damage originating from the real economy. Finance is the lifeblood of the economy. Once the financial system is damaged, its ability to serve the real economy will decline, and the damage suffered by the real economy will in turn aggravate the volatility of the financial system.
1. First-tier Impacts
When the assets of financial institutions of the sanctioned country are frozen, the available cash flows will decrease, and normal operations will be affected. If financing channels are restricted, the business of financial institutions will decrease, and if the financial institutions have been denied access to the international payment and settlement systems, they cannot conduct receipts and payments businesses in foreign currencies. Due to the threat of sanctions and their own interests, other financial institutions and cross-national enterprise groups are very likely to terminate business cooperation with the sanctioned institutions, therefore gravely damaging banks’ ability to serve customers and conduct operations. All of these effects will lead to a decline in projected income and profits, or even result in major losses or inability to continue business operations.
In terms of the financial markets of the sanctioned country, its stock market, bond market, and foreign exchange market will all be impacted. Once financial sanctions are announced, the currency of the sanctioned country will often see a sharp depreciation. On the one hand, financial sanctions serve as a signal that the economic and financial prospects of the sanctioned countries are bleak. This is likely to lead to rising sovereign credit risks and downgraded ratings, harming investor confidence and thus resulting in disinvestment and capital flight. On the other hand, freezing the central bank’s foreign exchange reserves would weaken the central bank’s ability to intervene in the foreign exchange market and stabilize currency values. The sharp drop in foreign exchange reserves will cause a decline in the international liquidity of the sanctioned country, while blocking financing access will constrict the channels used by the sanctioned country to obtain international reserve currencies, further aggravating the depreciating pressure on local currency.
Financial sanctions will affect the stock market and bonds of the sanctioned country through channels of sovereign risk and credit, driving up short- and medium-term financing costs. First, if the sanctions directly prohibit investors from the sanctioning country from buying stocks and bonds of companies in the sanctioned country, the decrease in demand for securities will lead to a slump in the sanctioned country’s stock and bond markets. Second, financial sanctions lead to higher risks for companies in the sanctioned country and lower estimated values of its stocks. Restrictions on accessing financing also cause a reduction in the supply of funds in the sanctioned country, an increase in interest rates, and a slump in the bond market. Finally, being more and more sensitive to the risks of the sanctioned country, investors will reduce their holdings of financial assets such as stocks in order to avoid risks. This will cause the funding pool of the capital market to contract drastically, triggering further declines in the stock and bond markets.
2. Second-tier Impacts
The impact of financial sanctions on the financial institutions and financial markets of the sanctioned country will be transmitted to the real economy, leading to a decline in investment, consumption, and output, as well as an increase in inflation. Then, these effects will in turn impact the stability of the financial system.
First, financial sanctions usually result in slower economic growth or even lower output and increased unemployment in the sanctioned country. In terms of consumption, sanctions cause a sharp depreciation of the local currency of the sanctioned country. Coupled with the freezing of certain assets, there will be a contraction of people’s wealth, higher inflation rates, and reduced purchasing power. In terms of investment, sanctions will lead to a large-scale flight of international capital and a decline in foreign direct investment, which, in combination with obstructed international financing channels, are not conductive to investment growth. In terms of export, international trade payments, settlement, and pricing are still mainly conducted in U.S. dollars. When financial institutions are excluded from the SWIFT system and enterprises’ access to international financing is restricted, it will have a major negative impact on the export of the sanctioned country. Financial sanctions are often accompanied by other economic sanctions. For example, when key production links are put in a “stranglehold,” it will disrupt some industry chains in the sanctioned country, causing a decline in output, economic depression, and rising unemployment.
Second, financial sanctions usually lead to relatively serious inflation in the sanctioned country. On the one hand, sanctions obstruct international payment and settlement channels of the sanctioned country, reduce its ability to engage in foreign trade, and reduce its supply of imported goods. The depreciation of the sanctioned country’s currency and the rise in import prices will all impose imported inflationary pressure on the country. On the other hand, sanctions will lead to a decline in output and insufficient supply of commodities, while the scarcity of some commodities can even trigger panic buying in the public, which further exacerbates inflation.
Third, the sanctions’ damage to the real economy will spill over and flow back to the financial system. In this case, businesses will struggle to operate themselves, defaults will increase, and financial institutions will have higher bad debt ratios and suffer greater losses. At the same time, the financial market serves as a barometer that reflects the performance of the real economy. If the real economy is sluggish, the stock and bond markets will consequently decline, also increasing the downward pressure on the national currency of the sanctioned country.
Figure 1 Diagram of the Transmission Channels of How Financial Sanctions Impact National Financial Security
(3) Financial Sanctions will also Impact the Financial Security of Other Countries
Currently, the scope of financial sanctions continues to expand. Unlike in the past, sanctions are no longer limited to small and medium-sized economies, where sanctions only produce local impacts. Due to the universal connectedness of the global economy and finance, sanctions will add to global economic and financial risks, which in turn will have an impact on the financial security of other countries. Specific impacts include: First, due to concerns about secondary sanctions, other financial institutions are very cautious about businesses involving the sanctioned country. Sanctions not only obstruct foreign payment and settlement in some regions and sectors, but drive up the compliance costs for financial institutions. Second, financial institutions that hold financial assets of sanctioned countries may be subject to risks and losses. Third, sanctions cause investors to become prone to risk avoidance, leading to capital outflow from emerging market economies, depreciation of local currencies in some emerging economies, rising international refinancing costs, and subsequently complicating foreign debt repayment. Fourth, financial sanctions impact the normal operation of the international economy and even increase the risk of recession. Some relatively fragile economies may face pressures due to factors such as insufficient supply of raw materials, declining output, and soaring inflation, further escalating their financial risks. Fifth, sanctions will further aggravate the difficulty of international financial governance and policy coordination.
III. The Degree of Impact Imposed by Financial Sanctions on National Financial Security Depends on Many Factors
Financial sanctions are only effective when the sanctioning country occupies an important position in the international financial system. However, if the sanctioned country has robust and stable economic and financial operations, takes appropriate response measures, and has a strong ability to manage risks, these factors will help mitigate the impact of financial sanctions on national financial security. Because most of the current sanctions are not supported by UN resolutions, the sanctioned country usually chooses to use third parties to bypass the sanctions. The sanctioning country either relies on the deterrence power of secondary sanctions to prohibit other countries from providing assistance to the sanctioned country, or further tightens the noose of sanctions through joint sanctions with its allies. In this context, the economic and financial security of other countries may be affected. They may have to make a choice under pressure or voluntarily: either reduce their economic and financial ties with the sanctioned country, or reduce economic and financial ties with the sanctioning country. The pros and cons of this decision weighed by a third party not only concern political factors, but are also related to how closely the economic and financial interests of the third party are bound to the sanctioning country and the sanctioned country. Generally speaking, when faced with sanctions, there is leeway for the sanctioned country to manage and respond to national financial risks, while sanctions are also a double-edged sword for the sanctioning country.
(1) The Sanctioned Country’s Own Financial Stability is the Basis for Defense against the Risks of Sanctions
The risks of financial sanctions can be intertwined with and superimposed upon traditional financial risks, therefore generating higher threats. The robust and stable operation of the domestic financial system is itself the foundation for national financial security. In terms of national financial security, systemic financial risks are more threatening. Such risks generally concern temporal and spatial dimensions. In the temporal dimension, the [level of risks] is manifested by procyclical self-strengthening and escalation of risks. In the spatial dimension, it is manifested by the connection and inter-contagion between the institutions and the market. If financial sanctions are targeted at a financial institution of systemic importance, while the institution is not robust or lacks the means and measures to manage sanctions risks, unable to withstand the impact of sanctions, the sanctions may directly cause systemic financial risks. Even if financial sanctions’ target is not systemically important financial institutions, if sanctions achieve broad coverage, or if the breakage of an already fragile but critical link causes the financial system to be partially dysfunctional, or if the financial market itself is already in turmoil, then traditional financial risks and sanction risks may reinforce each other. As a result, sanctions are likely to trigger systemic risks or even financial crises. In terms of the temporal dimension, if the risk of financial sanctions coincides with the time when the economy is at the top or bottom of the financial cycle, it will aggravate the shock that sanctions have on the financial system. Therefore, as it takes a good blacksmith to forge good steel (打铁还需自身硬, Chinese idiom), only when the domestic financial system is stable and healthy, can the sanctioned country better withstand the impact of financial sanctions on its national financial security.
(2) Prompt and Effective Countermeasures are a Safety Valve to Mitigate the Impact of Sanctions
When the sanctioned country is politically stable and has a firm determination to resist the sanctions, the more stable the sanctioned country’s economy and finances are, the more effective its countermeasures will be. Prompt and effective measures can reduce the impact of sanctions on national security to a considerable extent. For example, during the Crimea conflict in 2014, in the face of U.S. and Western sanctions, Russia methodically adopted many countermeasures: starting the process of de-dollarization, such as restricting the use of U.S. dollars in cross-border payment and settlement, reducing U.S. dollar assets in foreign exchange reserves, and increasing the shares of Euros, gold, and RMB to reduce dependence on the U.S. dollar; and improving its financial infrastructure in an orderly manner by establishing the (System for Transfer of Financial Messages) SPFS cross-border financial information transmission system and National Payment Card System (NSPK) to replace the SWIFT, MasterCard, and Visa systems while expanding access to international financing through multiple channels. After the outbreak of the Ukraine crisis in 2022, in the face of escalating sanctions from the United States and the West, Russia responded with a combination of actions: rapidly raising its interest rates and implementing strict capital controls; using its advantages in the energy sector to impose a “Ruble Settlement Decree” for natural gas and stabilize of the ruble exchange rate; expanding bilateral trade in local currencies; and withdrawing “Russian concept stocks” (俄概股) from U.S. and UK stock markets. Due to these prompt, timely, and highly targeted response measures, some macroeconomic indicators in Russia quickly stopped falling and rebounded, and the ruble exchange rate bottomed out after a rapid depreciation period.
(3) The Financial Competitiveness of the Sanctioning Country Affects the Severity of Sanctions Risks
To date, the United States has imposed the most financial sanctions, and U.S. sanctions have a serious impact on the financial security of the sanctioned countries. Some other Western countries will follow the sanctions imposed by the United States, but few have initiated financial sanctions alone, and there are also very few financial sanctions resulting from UN sanction resolutions. The reason the United States can impose effective “long-arm jurisdiction” in the financial field lies in its dollar hegemony. As the most important international reserve currency and an important infrastructure that allows the United States to dominate the international financial system, the U.S. dollar is the basis for U.S. financial sanctions. After World War II, the U.S. dollar became the most important international reserve currency, accounting for nearly 60% of the foreign exchange reserves among central banks. 10 Globally important commodities such as oil and grains are mainly settled in U.S. dollars.
The United States also plays a leading role in the international financial infrastructure, especially the SWIFT system. SWIFT helps users communicate and exchange financial messages such as payment instructions through a safe and reliable channel. The payment and settlement systems of various countries and economies, such as the Clearing House Interbank Payment System (CHIPS) for the U.S. dollar, and the Trans-European Automated Real-time Gross Settlement Express Transfer (TARGET) for the euro, will complete fund payment and settlement after receiving SWIFT payment instructions. The United States and its allies hold the majority of seats on the SWIFT board of directors, with a U.S. representative serving as chairman of the board. U.S. financial security and intelligence organizations have also gradually strengthened their control over SWIFT in the name of anti-terrorism. Since 2011, the U.S. State Department has been monitoring real-time SWIFT data.11 At present, SWIFT is connected to more than 11,000 banks, securities institutions, financial market infrastructures, and corporate users around the world, and its business covers more than 200 countries and regions.12 The United States has benefited significantly from controlling SWIFT: On the one hand, the United States obtains relevant financial information through the SWIFT system, which improves its effectiveness of secondary sanctions; On the other hand, if a sanctioned institution is excluded from the SWIFT system, it will be extremely difficult for the institution to conduct business involving international payment and settlement.
美国在国际金融基础设施方面也有主导权，特别是SWIFT系统。SWIFT协助用户通过安全可靠的途径开展通讯并交换支付指令等金融报文，各国或经济体的支付清算系统，如美元的清算所银行同业支付系统（Clearing House Interbank Payment System，CHIPS）、欧元的泛欧实时全额自动清算系统（The Trans-European Automated Real-time Gross Settlement Express Transfer，TARGET）等，在收到SWIFT支付指令后完成资金支付结算。美国及其盟友拥有SWIFT中大多数的董事席位，且由美国代表担任董事会主席。美国的金融安全和情报组织还借反恐之名逐步加强对SWIFT的控制，从2011年起，美国国务院开始对SWIFT数据进行实时监控。目前，SWIFT对接全球超过11000家银行、证券机构、金融市场基础设施和企业用户，业务覆盖200多个国家和地区。美国掌控SWIFT获益颇丰：一方面，美国通过SWIFT系统获取相关金融信息，提高了二级制裁的执行力；另一方面，被制裁机构被剔除出SWIFT系统，其国际收付清算业务就会极度困难。
The power to formulate international financial rules serves as a critical part of U.S. financial sanctions. The United States holds the biggest voting rights in major international financial institutions. As of October 2022, the United States holds 16.5% of the voting rights in the International Monetary Fund (IMF).13 According to the regulations of the IMF, a majority of at least 85% is required to pass major resolutions, which means that the United States has the power to veto any major resolutions. At the same time, the voting rights of the United States in the International Bank for Reconstruction and Development, the International Finance Corporation, the International Development Association, and the Multilateral Investment Guarantee Agency of the World Bank Group are 15.6%, 18.78%, 9.86%, and 14.81%, respectively.14 In addition, the presidency of the World Bank has long been held by a U.S. representative.
(4) The Choices Made by Other Parties will also Affect Sanctions Risks
There is an essential difference between “the strong bullying the weak” and “the rivalry between great powers.” On the one hand, the United States and the West have increased the power of sanctions through continuous “improvement” of financial sanctions, gradually expanding the scope of financial sanctions from being mainly used against small and mid-sized economies to being a part of the strategic rivalry between major powers. In this scenario, if the sanctioned party is also a major power, it will be endowed with high economic resilience and the power to initiate countermeasures in the financial rivalry. Today, with the deep economic integration due to globalization, it is unrealistic for a sanctioning country to be completely decoupled from its target country economically and financially. Furthermore, if other countries bear close economic and financial ties with the target country, sanctions will prompt these countries to weigh the pros and cons of the sanctions more cautiously, rather than blindly following the sanctioning country in lockstep on all issues. On the other hand, although the United States can use the hegemony of the U.S. dollar to impose financial sanctions, this deterring effect may also push some countries to double down on their “de-dollarization” efforts. For example, in 2019, Germany, France, and the United Kingdom created the Instrument for Supporting Trade Exchanges (INSTEX) mechanism to support legal trade between Europe and Iran. And up until now, 10 countries have joined this system. After financial sanctions were imposed on Russia in 2022, Russia and India were also exploring the establishment of an exchange for ruble-rupee trade payments.15 In the long run, the continuous weakening of international economic and financial ties will also diminish the competitiveness and overall national strength of the sanctioning country. Not only will more countries use other currencies for trade, investment, and financing to reduce their dependence on major reserve currencies, global cooperation will also decrease, hindering scientific and technological innovation.
“以强凌弱”的打击与“大国博弈”的角逐存在本质上的区别。一方面，美西方通过不断“改进”金融制裁来提高制裁威力，将金融制裁从主要用于中小型经济体，逐步扩展至大国博弈。在此情景下，对手方的大国属性赋予其在金融博弈中具有较高的经济韧性与反制能力。在全球化深度融合的今天，制裁发起国欲与对手方在经济金融上完全脱钩并不现实。不仅如此，如果其他国家与对手方的经济金融联系非常紧密，也会促使这些国家更加审慎地权衡利弊，而非盲目地在所有问题上与制裁发起国保持完全一致。另一方面，虽然美国可以利用美元霸权实施金融制裁，但这种威慑效应也会促使一些国家加快“去美元化”的步伐。例如，2019年德国、法国和英国创建贸易往来支持工具（Instrument for Supporting Trade Exchanges，INSTEX）的贸易结算支持机制，以支持欧洲与伊朗之间的合法贸易，目前已有10个国家加入。2022年对俄金融制裁后，俄罗斯和印度探索建立卢布—卢比贸易支付。长期来看，国际经济金融联系持续减弱也会削弱发起国的竞争力和综合国力，不仅更多国家采用其他货币进行贸易及投融资以降低对主要储备货币的依赖，全球合作还会减少，阻碍科技创新等。
Overall, financial sanctions are also a double-edged sword for the sanctioning country. On the global chessboard, if one’s opponent can win more partners, this will not only help the country reduce the risk of sanctions, but also allow it to transform the international political and economic landscape towards its own interests, ensuring its national financial security in the long run.
IV. Approaches to Address the Risks of Financial Sanctions
The world is currently facing major changes unseen in a century, and national financial security is confronting new challenges, especially the challenge of financial sanctions. On the one hand, the frequent use of financial sanctions has a negative impact on normal international economic and financial operations. In particular, the United States continues to expand its “long-arm jurisdiction,” which has a spillover and contagion effect on China, and may affect the operations of Chinese enterprises and financial institutions. On the other hand, the international landscape is complex and challenging, and the possibility that some countries will stir up trouble and find excuses to impose financial sanctions on China cannot be ruled out. These trends will all increase national financial security risks. National security is the foundation of China’s national rejuvenation, and social stability is the prerequisite for national prosperity. We must plan for the troubles ahead, coordinate economic growth and national security, strengthen our ability to maintain national financial security, and firmly safeguard national financial security.
(1) Strengthen Countermeasures against Sanctions, Interference, and “Long-arm Jurisdiction” in Finance and Respond to Financial sanctions in a Duly Justified and Well-grounded Manner
First, we must strengthen the legal system for countering sanctions. In recent years, China has gradually established anti-sanction laws and regulations, such as the Provisions on the Unreliable Entity List and Rules on Counteracting Unjustified Extra-territorial Application of Foreign Legislation and Other Measures. In particular, the Anti-Foreign Sanctions Law was issued in June 2021, providing solid legal basis and protection for China to take corresponding countermeasures. On that basis, countermeasures can be a multi-level combination of various departmental regulations and other forms of approaches, and especially combinations of economic and financial measures that can be flexibly adjusted. Anti-sanction measures serve as a means of both self-protection and deterrence. They prompt major powers to make decisions based on rational judgments during power games, and promote peace by achieving the optimal equilibrium of power. Second, financial institutions must acquire the necessary methods for sanctions relief, give full play to the role of industrial associations and other organizations, and improve the effectiveness of responses to sanctions. In theory, a sanctioned financial institution can apply to be removed from the sanction list by appealing to the administrative institution of the sanctioning country or filing lawsuits in court in the sanctioning country. After weighing the costs and benefits, the sanctioned institution can adopt relevant laws and regulations of the sanctioning country in a proper manner, to delay or even avoid sanctions through litigation and other means. Due to the increasing frequency of sanctions and the high cost of litigation and other methods, industrial associations and other organizations can play a greater role in disseminating relevant knowledge on how to effectively respond to sanctions risks, so as to leverage the large size of the industrial sector to reduce the relative costs of countermeasures. Third, overseas institutions must strictly abide by their local laws and regulations. In addition to strengthening everyday business management to accommodate local practices, they also need to pay close attention to and monitor geopolitical risks, pay close attention to various sanctions lists in the United States and Europe, monitor the real-time situation of clients and risk exposure relevant to cross-border businesses, and formulate proper contingency plans. Fourth, we must diversify our trading channels, strive to diversify and decentralize our investment, reduce our dependence on any single financial trading platform, and make adjustments to establish a multi-currency financial portfolio, especially diversifying the constitutive currencies of foreign exchange reserve assets.
(2) Strengthen Security Capability Building in the Financial Sector and Guard Vigilantly against Systemic Financial Risks from the Combined Effects of Financial Sanctions and Traditional Financial Risks
First, we must pay attention to the potential risks of financial sanctions and possible contagion effects, continuously improve the risk monitoring and assessment framework of the financial industry, include financial sanction risks and their interaction with traditional financial risks as factors for consideration, enhance emergency response plans, improve financial risk prevention, early warning, treatment, and accountability systems, and shore up the weak points in financial risk prevention and response systems. Second, we must strengthen and refine modern financial regulation, reinforce the systems that safeguard financial stability, bring various financial activities under regulation according to law, and ensure no systemic risks arise. Third, we must further promote and deepen the reform of financial institutions, improve corporate governance structures, and effectively guide financial institutions to operate in a robust and stable manner. The financial sector should take serving the real economy as its immutable goal, comprehensively improve its efficiency and standard of work, promote financing facilitation, reduce costs of the real economy, improve resource allocation efficiency, and ensure risk control. It should also facilitate the national economy to achieve better development in quality, efficiency, fairness, sustainability, and security, which in turn will contribute to the security and stability of financial operations. Fourth, we must build a national financial security inspection mechanism to strengthen the defensive borders of national financial security, make critical infrastructure, key financial technologies, and the security of financial data the focuses of national financial security inspection, and comprehensively and objectively assess and review their impact on national financial security. Fifth, we must properly respond to risks of information technology, improve our independence and capabilities in operating and maintaining software and hardware purchased abroad, thoroughly investigate and rectify potential security hazards in network equipment and software packages, ensure the availability of data backup and business emergency response plans, and gradually replace foreign hardware and software with domestic hardware and software through research and development of information technology infrastructure with its own core capabilities.
(3) Making Headway in High-quality Opening Up of the Financial Industry and Actively Participating in Global Economic and Financial Governance
Opening up the financial sector can be risky, but an exclusionary financial system is much less secure. Deepening high-level opening up of the financial industry, expanding global partnerships based on equality, openness, and cooperation, as well as broadening the convergence of our interests with other countries are not only necessary for promoting high-quality development, but also help to ensure national financial security. First, we must promote targeted financial reform through financial opening and introduce international financial resources in the “dual circulations” (双循环, domestic and international circulation) through high-level opening up. We must adhere to the principle of developing a market-oriented, law-based, and international economy, roll out nationwide the management system of pre-establishment national treatment plus a negative list, and achieve institutional and systematic opening up. Second, we must play a constructive role in global economic and financial governance and international financial cooperation, engage in global economic governance and policy coordination in an all-round, multi-level, pragmatic, and flexible manner, jointly promote global economic growth, and maintain international financial stability. Third, we must promote the internationalization of RMB in an orderly manner. Based on the principles of adapting to demand and “things will naturally fall into place when conditions are ripe” (水到渠成), we must respect the market demand and independent choices of enterprises, further improve the policy support system and infrastructure arrangements for the cross-border usage of RMB, promote the two-way opening-up of the financial market, develop offshore RMB market, and create a more convenient environment for market entities to use RMB. At the same time, we must further improve the prudential management framework for cross-border capital flows and ensure no systemic risks arise.