Economic Sanctions and Sovereign Bond Ratings in the Developing World

Abstract Although much scholarship has noted economic sanctions’ ineffectiveness in reducing foreign aid, trade, and foreign direct investment, no empirical research has explored sanctions’ impact on targeted states’ bond ratings. Sovereign bond ratings are important as they affect future interest rates on bonds. Using data from up to 47 developing countries from 1996 to 2016, we find that sanctions raise capital costs, which in turn lowers bond ratings of targeted countries. Furthermore, we employ mediation analysis and learn that sanctions promote higher debt loads, as targeted states find it harder to obtain lower-cost loans and instead borrow at higher interest rate terms, contributing to reduced ratings. Given developing countries’ capital needs and credit rating agencies’ role in rating bonds, our research signals that countries should seek to avoid sanctions in order to acquire lower-cost finance. The findings also indicate that sanction senders hold indirect leverage over targeted countries’ bonds, suggesting a possible path to sanctions effectiveness for sender states.