Shocking Truth: How Economic Sanctions Are Crashing Global Currencies

By John Nicolic

January 17th, 2025

BURLINGTON, ON

One or more countries can take economic sanctions against another country in order for the latter state to lose certain economic opportunities. Sanctions aim to change the state’s behavior, decrease its economy, or penalize it for the occurrence of international violations. Trade restrictions, asset freezes, and restrictions on financial transactions are all sorts of sanctions.

These measures have a variety of impacts on the target country’s economy, from reducing export dollars to raising import costs and foreign investment. A perfect example here is Russia right now. Sanctions also have a psychological effect on consumers and investors, which leads to huge capital outflow, and a devaluation of national currencies.

Sanctions and National Currencies

Often, countries under sanctions have very devalued their national currencies. This is due to several factors:

• Access to international capital markets is restricted;
• Cuts in exports because of trade bans;
• Loss of investor confidence and huge capital outflow;
• Foreign currency reserves liquidation.

The ruble lost a lot of its value after, for example, in 2014 when sanctions were imposed on Russia. A sharp drop in export revenues particularly in the form of oil and gas sales led to such a shortage of foreign exchange earnings that proved to be the main factor.

The Case of Iran

Iran has been facing sanctions for decades, which has had serious consequences for its national currency, the rial. The main effects include persistent inflation due to restrictions on imports of vital goods, a decline in the foreign exchange reserves needed to maintain the currency, and the emergence of a shadow market for currency exchange where the rial’s exchange rate differs significantly from the official rate.

In addition to that, Iran has been forced to look for alternatives to trading, and one of them was using barter transactions or cryptocurrency. This example serves global Forex trader a reminder that geopolitical factors need to be factored in before looking at currency risk.

The Venezuelan Crisis

The economic downturn in Venezuela has been exacerbated by falling oil prices, with sanctions against Venezuela among the possible culprits. The national currency — the Bolivar — has effectively become nearly worthless and hyperinflation has gone into hyperdrive. The loss of oil revenues as the primary foreign exchange source made it impossible to raise capital abroad, and the loss of trust in the economic system by the domestic and foreign public (citizens and the international community) had been key causes.

In this case, we see the negative impact of reliance on a single export commodity that renders an economy vulnerable to sanctions and global shocks. What is more, such crises show how quickly macroeconomic problems can grow into the total collapse of the economy.

Impact of sanctions on Venezuela:

The example of Venezuela for global traders demonstrates why it is never a bad idea to diversify and remember geopolitical factors when thinking about currency risk. This is precisely the situation in which you should pay to have your investments handled by brokers such as the xChief. A proven forex broker will reduce the impact of these factors on your investment, plus supply you with quality analytics.

Ripple Effects on Global Markets

Sanctions hit their targets as well as the global markets. The main consequence is an increase in the price of commodities such as oil and gas because of less supplies. Increased volatility in currency markets means both threat and opportunity for traders: The sanctions strengthen alternate currency usage such as the Chinese yuan or cryptocurrencies as a means to avoid sanctions restrictions. The situation is that reduced world economic growth results from falling international trade. As a result, often sanctions completely upset the global currency landscape, launch new financial alliances, and intensify the need for portfolio diversification on the investor’s side.

Lessons for Traders

Sanctions need to be considered in any trader’s strategy. Key lessons include:

1. Check on the news imposing or tightening sanctions that may have an impact on currencies and stock prices;
2. Analyze the long-term effects on a currency due to sanctions, including a dependency on the export of a limited commodity;
3. Of course, diversify the portfolio to mitigate the exposure to geopolitical risks;
4. To minimize the losses that occur during volatility, use risk management tools like stop losses and limit orders.

The currencies of countries not covered by sanctions can be also thought of as attractive to investors in conditions of geopolitical instability. For example, you might think the US dollar, or the Swiss franc, is a safe haven.

Conclusion

Exchange rates and global economic stability are influenced by economic sanctions. However, analyzing their impact allows the traders to understand better currency market dynamics and minimize risk. Past cases provide lessons that for success in foreign exchange markets you need to be flexible, driven, and able to adapt to changing geopolitical circumstances.