The power of financial sanctions rests on a narrow base. A small group of banks in the United States and Europe carries most of the world’s dollar and euro payments, and when authorities close those doors to a lender, it loses its fastest routes abroad. New research shows the damage rarely stops there. Banks that were never targeted often lose access as well.
Washington has been testing that power. On October 5, the US Treasury’s Office of Foreign Assets Control (OFAC) warned foreign banks still dealing with sanctioned Iranian institutions that they could be targeted “at any time without advance notification”. The alert followed Operation Economic Outcast, announced by Treasury Secretary Scott Bessent on August 24. Treasury has since severed Banque Misr UAE’s access to US correspondent banking, designated Türkiye-based Golden Global Bank, and designated VTB Bank over its role in Iranian sanctions evasion.
Europe and Britain have kept pace. The EU’s 21st package, adopted on July 23, froze the assets of 94 Russian banks and major financial institutions. Britain added 38 names to its Russia list on October 8. And on October 13, OFAC settled with Bank of America for $11.66 million over 475 apparent violations, most of them payments routed through blocked banks.
The Concentration Behind the Dollar’s Reach
Cross-border payments depend on correspondent banking, in which banks hold accounts with one another so they can settle on each other’s books. Where two banks share a correspondent, settlement is a simple transfer between accounts. Where they do not, the payment passes along a chain of intermediaries, each adding cost, screening and counterparty risk.
Gregor Matvos of Northwestern University and Brent Neiman of the University of Chicago have measured how uneven that system is. Their study, issued as a National Bureau of Economic Research working paper in July and revised in October, covers more than 17,000 financial institutions in emerging and developing economies. Of the banks with at least one correspondent, 90% hold one for dollars and 88% for euros. Coverage drops to 62% for sterling and 34% for the yuan.
The routing data are starker. For roughly three quarters of connected bank pairs, the shortest path runs through the dollar or euro network. The yuan provides it in about 3% of cases. Within the dollar network, the ten most central banks account for 77% of the network’s centrality, against about half in the euro and yuan networks. That concentration is the lever. Deny a bank access to those few institutions and most of its efficient routes disappear.
Sanctioned Banks, and the Banks Next Door
The evidence suggests sanctions largely achieve their aim. Among banks later sanctioned by the US, the share holding a dollar correspondent fell from 89% to 20%, and only 11% kept a US-based one. Those that retained access mostly did so through longer, more fragile chains of intermediaries, making each payment slower, dearer and riskier.
The fallout reaches banks that were never designated. In Belarus, Kyrgyzstan, Myanmar and Russia, untargeted lenders lost links to Western networks as well. The authors say this most likely reflects de-risking, as correspondents exit whole jurisdictions rather than carry secondary sanctions or compliance exposure. Across all Belarusian banks, correspondent relationships in dollars, euros and sterling fell from 139 in 2021 to 19 by 2026. The dollar correspondents that remain sit in Kazakhstan and China, not the United States.
Where Pressure Is Heaviest, the Yuan Fills the Gap
Cut off from Western hubs, banks in these markets rebuilt elsewhere. In 2021, the dollar and euro offered Belarusian banks the shortest route to more than 80% of reachable foreign banks. By 2026 that share had fallen below half, and the yuan supplied the shortest route for about 20%, more than the dollar alone. Kyrgyzstan and Russia show a similar pattern.
The shift has not travelled. Across other emerging economies, the yuan’s share of shortest routes rose by about one percentage point, and the authors find no global retreat from the dollar to date.
Risk That Sits Down the Chain
For banks and their corporate clients, the exposure can sit several links removed from the transaction. A company can pay a supplier with an unblemished record and still see the funds held because an intermediary has a sanctions problem.
Bank of America’s settlement shows the same weakness from inside a bank. OFAC found that the bank routed payments using a third-party vendor’s directory that included blocked banks. Between February 2022 and March 2025, it processed 403 transactions worth $14.3 million through 35 of them, and most were not stopped by other banks. The bank had known since March 2022 that the directory contained blocked institutions. OFAC was explicit that every firm remains responsible for its own compliance, whatever outside providers it relies on.
De-risking offers a blunt remedy. Exiting a jurisdiction removes the exposure, at a cost in clients and revenue. Yet OFAC’s own alert describes Iranian shadow banking networks built on front and shell companies to keep funds moving. Where money travels that way, withdrawing from a country may not reduce the risk so much as push it out of view.
What Follows
Customers rarely see any of this until a payment stalls. Exporters, importers and households relying on remittances in heavily sanctioned markets bear the most direct cost. Companies elsewhere carry a quieter exposure, because a clean payment can still be caught by a compromised bank mid-chain.
For policymakers, the arithmetic is uncomfortable. Sanctions work because a few banks sit at the centre of the dollar and euro systems, and every new round of designations raises the incentive for targeted economies to build around that centre. Belarus shows an alternative route already exists. The question for Washington and Brussels is how many more countries they push onto it.
