Economic coercion and currency crises in target countries

Abstract

Despite significant research on the efficacy and inadvertent humanitarian and political effects of economic sanctions, surprisingly little is known about the possible economic and financial consequences of sanctions for target economies. Synthesizing insights from the currency crisis literature with sanctions scholarship, we argue that economic sanctions are likely to trigger currency collapses, a major form of financial crisis that impedes economic growth and prosperity. We assert that economic coercion instigates currency crises by weakening the economy and creating political risks conducive to speculative attacks by currency traders. To substantiate the theoretical claims, we use time-series cross-national data for the 1970-2005 period. The results from the data analysis lend support for the hypothesis that sanctions undermine the financial stability of target countries. The findings also indicate that the adverse effect of economic coercion on the financial stability of target economies is likely to be conditioned by the severity of the coercion and the type of actors involved in the implementation of sanctions. The findings of this article add to the sanctions literature demonstrating how economic coercion could be detrimental to the target economy beyond the immediate effect on trade and investment. It also complements and adds to the literature on political economy of currency crises that has so far overlooked the significant role that economic coercion plays in financial crises.

The Impact of Economic Sanctions on Income Inequality of Target States

“…Others such as Peksen and Son (2015), Neumeier (2015a, 2015b), Dizaji and van Bergeijk (2013), Yang et al (2009), Kaempfer and Lowenberg (2007a) and Caruso (2003) have analyzed how these episodes of sanctions have instead adverse economic outcomes on national currency, poverty, GDP, trade, government consumption and employment. Our study contributes to this strand of the literature by empirically examining for the first time the impact of economic sanctions on the re-distribution of income within the segments of the target states.…”

The impact of economic sanctions on international trade: How do threatened sanctions compare with imposed sanctions?

“…Apart from the dyadic eects, current studies have shown that sanctions have adverse consequences for target states. They show that the imposition of sanctions has adverse distributional eects and it is more severe for the poor and the civilian population (Afesorgbor & Mahadevan, 2016); it triggers currency crises (Peksen & Son, 2015); it retards the targets' economic growth and development (Neuenkirch & Neumeier, 2015) and it widens the poverty gap (Neuenkirch & Neumeier, 2016). These adverse and unintended consequences of sanctions have shifted the attention of the international community and researchers to how to minimize the impact of sanctions on the poor or target the sanctions at specic groups (so-called smart sanctions).…”

Perceptions of the threat to national security and the stock market

“…The target nation's banking system can also be affected (Hatipoglu and Peksen, 2016), with foreign direct investment dissipating as firms recall funds from the sanctioned country (Biglaiser and Lektzian, 2011). There is also a distinct possibility that sanctions increase the probability that a currency crisis may occur in the target country (Peksen and Son, 2015). Therefore, the bellicose atmosphere that accompanies these policy directives may adversely affect individual and firm fortunes in both economies.…”