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Financial sanctions and political risk in the international currency system

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  • Daniel McDowell

Abstract

Scholarship on international currencies has traditionally emphasised how an issuing state’s foreign policy can enhance the attractiveness of its currency for cross-border use. Yet, foreign policy actions need not only boost a currency’s international appeal—they may also undermine it. This study introduces a general theory of how US foreign policy can influence governments’ policy orientations toward the dollar in positive or negative ways. Policies like financial sanctions generate ‘political risk’ that weaken the dollar’s attractiveness for international use. The study tests the claim that the United States’ use of financial sanctions incentivises targeted governments to implement de-dollarization policies. I employ a most-likely case study design, presenting evidence from three countries targeted by US sanctions: Russia, Venezuela and Turkey. In each instance, the evidence shows that financial sanctions created political risk concerns by generating expectations of future direct costs of dollar use. These expectations set off policy efforts by targeted governments to reduce their economies’ exposure to the currency. This study raises important questions about the long-term efficacy of an approach to foreign policy that relies on financial sanctions as a primary means of leverage over foreign adversaries as overuse may undermine the effectiveness of the tool itself.

Suggested Citation

  • Daniel McDowell, 2021. "Financial sanctions and political risk in the international currency system," Review of International Political Economy, Taylor & Francis Journals, vol. 28(3), pages 635-661, May.
  • Handle: RePEc:taf:rripxx:v:28:y:2021:i:3:p:635-661
    DOI: 10.1080/09692290.2020.1736126
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    Citations

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    Cited by:

    1. Luca Fantacci & Lucio Gobbi & Dario Luciani, 2022. "Bene pubblico globale o arma finanziaria? L'egemonia del dollaro alla prova delle sanzioni (Global public good or financial weapon? Dollar hegemony to the test of sanctions)," Moneta e Credito, Economia civile, vol. 75(298), pages 123-147.
    2. Paweł Kowalewski & Dominik Skopiec, 2023. "Wzrost znaczenia złota w rezerwach dewizowych banków centralnych gospodarek wschodzących," Bank i Kredyt, Narodowy Bank Polski, vol. 54(3), pages 259-284.
    3. Abroon Qazi & Mecit Can Emre Simsekler, 2022. "Prioritizing interdependent drivers of financial, economic, and political risks using a data-driven probabilistic approach," Risk Management, Palgrave Macmillan, vol. 24(2), pages 164-185, June.
    4. Colin Weiss, 2022. "Geopolitics and the U.S. Dollar's Future as a Reserve Currency," International Finance Discussion Papers 1359, Board of Governors of the Federal Reserve System (U.S.).
    5. Qazi, Abroon, 2023. "Exploring Global Competitiveness Index 4.0 through the lens of country risk," Technological Forecasting and Social Change, Elsevier, vol. 196(C).

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