Economic sanctions have become a popular policy tool used to pressure other countries into changing their policies. According to Morgan et al. (2023), the use of sanctions has steadily increased over time, and there are roughly ten times as many active sanctions in 2022 as in 1950. Whereas the primary purpose of imposing sanctions is to change the target country’s policies, they may also affect private sector economic activities. 

The fact that sanctions have large effects on bilateral trade has been well documented. For example, Larch et al. (2022) find that trade sanctions reduce mining trade by about 44% on average. The impact of specific sanction episodes, particularly sanctions imposed on Russia, has also been investigated. Felbermayr et al. (2025) report that although the 2022 sanctions on Russia reduced trade with sanctioning countries, the primary effect was only about a 25% reduction on average. However, evidence on foreign direct investment, particularly on firms’ mergers and acquisitions (M&As), is limited. Unlike trade, the impact of sanctions on M&As is not straightforward. That is because, while financial sanctions and travel restrictions impose constraints on the activities of private firms in the target country, they do not directly restrict M&A activities. On the contrary, if exports are banned, the incentive for firms to enter the target country’s market through FDI to conduct business could even increase. Thus, whether sanctions reduce or stimulate bilateral M&A needs to be examined empirically.

Against this backdrop, in a new paper (Jinji and Kawaguchi 2026) we analyse the effects of sanctions on cross-border M&As from sanctioning countries to target countries for the period 2006-2023. We aggregate deal-level M&A data to the investor-host-year level. Compared with a previous related study (Carril-Caccia 2025), the main contribution of our new paper is to address an important issue of possible distortions in estimated results caused by the different timing of imposing sanctions. We address that issue by employing an estimator developed by Nagengast and Yotov (2025) within the framework of a staggered difference-in-differences approach.

The focus of our analysis is on the average effect of all types of sanctions (including trade, financial, travel, and arms sanctions) on the number and the total value of bilateral cross-border M&A deals and on its possible heterogeneity across cohorts defined by the first year of the imposition of sanctions. Our results reveal a much stronger average effect of sanctions than reported by Carril-Caccia (2025). He reported that sanctions lead to a 13.5% reduction in bilateral M&As on average. By contrast, we find that the imposition of sanctions causes roughly a 50% decline in the expected number of M&A deals from sanctioning to target countries. The impact on total value of M&A deals could be much larger: as much as an approximately 83% decline, though this estimate may be less accurate due to the existence of a small pre-trend difference. Furthermore, we also estimate dynamic effects of sanctions. As shown in Figure 1 Panel A, the negative effect of sanctions is strengthened as time passes. In the year immediately following the onset of sanctions, the annual number of M&A deals is reduced by only about 17%. However, when sanctions are continuously imposed, they reduce the annual number of M&A deals by an average of about 68% after six years. However, the impact of sanctions is expected to vary significantly depending on the specific countries involved and the type of measures taken. Figure 1 Panel B indicates heterogeneity in the average effect across different cohorts. While the effects of sanctions are negative and statistically significant for many cohorts, there are cases, such as the 2022 cohort, where the effects are statistically insignificant. Even when the cohorts share the same signs (positive/negative), the magnitude of the effects varies widely. For example, the 2014 cohort, which includes most of the country pairs with Russia as the target, indicates one of the strongest negative effects. The effect also varies across different sectors. Specifically, we separately estimated the effects on M&As in the manufacturing, mining, and energy sector and in the services sector. We find that sanctions reduce M&A deals to a greater extent in the manufacturing, mining, and energy sector than in the services sector, with an average reduction in the manufacturing, mining, and energy sector of 62%, and a 45% reduction in the services sector.

Figure 1 The impact of sanctions on cross-border mergers and acquisitions

Note: The cohort-by-year average treatment effects are aggregated in two ways: (a) in relative time, with the year of sanction imposition set to 0, and (b) by cohort defined by the first sanction year (e.g. ‘2014’ in the figure represents the average effect for the cohort that initiated sanctions in 2014). Dots denote point estimates and bars denote 95% confidence intervals. For details see Jinji and Kawaguchi (2026).

Several policy implications can be drawn from the above findings. First, on average, sanctions lead to a sizeable contraction in bilateral cross-border M&As from sanctioning to target countries, even when they do not directly restrict M&A activities. Thus, in addition to direct consequences — such as trade-sanction-induced export reductions — policymakers should anticipate that sanctions may affect private-sector activities beyond the directly restricted transactions.

Second, from a methodological perspective, our new estimates suggest the importance of addressing potential distortions caused by variations in the timing of sanction implementation. Failure to account for this issue can result in underestimating the true impact of sanctions. Therefore, to assess these impacts more accurately, policymakers must evaluate not only the final estimates but also the underlying methodology used to derive them.

Third, consistent with Carril-Caccia (2025), the impact of sanctions on cross-border M&As is heterogeneous across different cohorts and sectors. Consequently, the expected impact of specific sanction episodes should be carefully evaluated by taking their unique characteristics into consideration. Notably, such heterogeneous effects have also been documented in international trade (e.g. Felbermayr et al. 2025, Larch et al. 2022), indicating that this phenomenon is not unique to cross-border M&As.

Our analysis focuses on new cross-border M&A deals, rather than existing FDI stocks, divestment, or firm exits. The results therefore suggest that sanctions weaken the formation of new investment linkages between sanctioning and target countries. Why these linkages decline remains an important question for future research, including the roles of uncertainty, compliance risks, reputational costs, financial frictions, and difficulties encountered in negotiating and employing due diligence.

Authors’ note: The main research on which this column is based (Jinji and Kawaguchi 2026) first appeared as a Discussion Paper of the Research Institute of Economy, Trade and Industry (RIETI) of Japan.

References

Carril-Caccia, F (2025), “The impact of economic sanctions on bilateral mergers and acquisitions”, European Journal of Political Economy 86, 102650.

Felbermayr, G, H Kariem, A Kirilakha, O Kwon, C Syropoulos, E Yalcin and Y Yotov (2025), “On the effectiveness of the sanctions on Russia: New data and new evidence”, VoxEU.org, 12 March.

Jinji, N and S Kawaguchi (2026), “The impact of global sanctions on foreign direct investment: A staggered difference-in-differences approach”, RIETI Discussion Paper Series 26-E-032.

Larch, M, S Shikher, C Syropoulos and Y V Yotov (2022), “Quantifying the impact of economic sanctions on international trade in the energy and mining sectors”, Economic Inquiry 60(3): 1038–1063.

Morgan, T C, C Syropoulos and Y V Yotov (2023), “Economic sanctions: Evolution, consequences, and challenges”, Journal of Economic Perspectives 37(1): 3-30.

Nagengast, A J and Y V Yotov (2025), “Staggered difference-in-differences in gravity settings: Revisiting the effects of trade agreements”, American Economic Journal: Applied Economics 17(1): 271–96.