ALL SECTIONS
When finance becomes geopolitical
The illusion of neutral finance is fading. As sanctions expand and geopolitical tensions rise, capital flows are being reshaped by power – forcing markets to price politics alongside risk and return
 
Featured | Government policy | Strategy
Author: Jemima Hunter, Features Writer
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For much of the post-Cold War period, the global financial system operated under the assumption that it was, if not entirely apolitical, then at least insulated from the harsher realities of geopolitical conflict. Capital flowed across borders with relative ease, reserve assets were treated as sacrosanct, and the infrastructure underpinning global finance, from correspondent banking to payments systems, was seen as broadly neutral.
That assumption is now under sustained pressure. What is emerging is not an economics politics substitutive, but a more complex intersection of both. Geopolitical factors, once peripheral, are increasingly impacting financial decision-making by central banks, sovereign wealth funds, institutional investors and multinational corporations. The implications are huge, not because the system has splintered, but because the perception of it being neutral is fraying. Its evolution of financial sanctions has been the most visible driver of that shift. Historically often symbolic, sanctions have become systemic in scope, capable of isolating entire economies from the global financial architecture.
The shuttering of Russian banks from parts of the SWIFT messaging infrastructure following the invasion of Ukraine and around $300bn of Russian central bank assets immobilised after that, in some cases, was a turning point. These were by no means modest moves; they were tests of the profound ways in which entrenched financial infrastructures can be weaponised as a tool of statecraft. Such actions always have the effect of spreading beyond their intended targets.
Contemporary supply chains, energy markets and cross-border flows of investment are tightly interconnected, meaning sanctions can reverberate through the global economy in non-structural and unpredictable ways. Currency fluctuations, commodity price shocks, and disruptions to trade financing are no longer secondary effects, they are factored into the calculus. This has raised concerns that are felt by legislators and investors, too. Desmond Lachman, a senior fellow at the American Enterprise Institute, said, “the US freezing of Iranian and Russian assets seems to be raising questions as to the reliability of the US as an economic partner.”
The undercurrent here is clear: financial access is no longer all rules-based, it is increasingly conditional upon political alignment. But what is more recent is how sanctions are now anticipated, priced and, in some cases, pre-empted. Banks are incorporating geopolitical risk scenarios into compliance frameworks more and more; asset managers are scrutinising portfolios for sanction exposure; and corporates are also adjusting their supply chains, so they don’t merely deliver efficiency but
 
