For years, Washington treated economic sanctions as the Goldilocks instrument of foreign policy: tougher than diplomacy, safer than war, and cheap enough to impose without asking much of the American public. That formula is beginning to break down. Sanctions can still inflict severe damage, but their repeated use is also changing the financial landscape on which their power depends.
The warning is not coming only from Beijing, Moscow, or the BRICS. The U.S. Treasury’s own 2021 sanctions review acknowledged “new challenges” from alternative payment systems and digital assets. It recommended tying sanctions to clear objectives, coordinating them multilaterally, limiting unintended harm, and making them reversible where possible. In other words, Treasury understood that a tool used without an exit strategy can become a habit rather than a policy.
That habit has grown dramatically. A 2026 study by economists Gregor Matvos and Brent Neiman notes that Treasury’s main sanctions list expanded from fewer than 1,000 entries in 2000 to nearly 20,000 individuals, vessels, and entities today. Their research confirms that sanctions can cut banks off from direct correspondent relationships, especially in dollars. But it also finds that they do not eliminate connectivity. Payments are rerouted through longer chains, while banks in heavily sanctioned economies expand alternative relationships, particularly in Chinese yuan.
This is the contradiction at the heart of American sanctions policy. Each designation demonstrates Washington’s reach in the short term. Each workaround reduces that reach at the margin over the long term.
Afghanistan shows how targeted sanctions can overreach. After the Taliban returned to power, banks’ compliance fears helped choke ordinary payments. The World Bank found that banking restrictions forced firms to use cash domestically and hawala for international transfers. Treasury then issued General License 20 to authorize transactions involving Afghanistan and its governing institutions. The episode showed how private risk-aversion can turn targeted designations into economy-wide isolation.
Russia shows the workaround problem. Moscow shifted oil sales to a shadow fleet with opaque ownership, and Treasury acknowledged that the average price earned on Russian oil rose above the Group of Seven cap as those channels expanded. In 2024, Treasury sanctioned 275 people and entities across 17 jurisdictions for supplying advanced equipment, while the Commerce Department warned that Russian procurement routinely uses third-country intermediaries and transshipment points. Sanctions raised costs, but they redirected rather than ended the trade.
The alternatives are no longer theoretical. China’s Cross-Border Interbank Payment System reported 180 trillion yuan in business volume in 2025 and, by July 2026, more than 200 direct participants and over 1,600 indirect participants. It is not replacing the dollar system, but it is giving banks and companies another rail to use when access to Western finance becomes uncertain.
Elsewhere, the motivation is often less ideological than practical. Africa’s Pan-African Payment and Settlement System allows businesses to settle regional trade in local currencies rather than routing transactions through distant dollar-correspondent banks. Advocates estimate that the system could save the continent $5 billion annually in scarce hard currency. India’s central bank has also proposed linking BRICS digital currencies for trade and tourism payments, although technical disagreements and trade imbalances remain serious obstacles.
These experiments should not be mistaken for the imminent collapse of dollar dominance. The dollar still accounted for around 57 percent of allocated foreign exchange reserves in the first quarter of 2026. No rival currency offers the same combination of liquid markets, legal infrastructure, and global acceptance. The dollar remains first by a wide margin.
But dominance is not the same as invulnerability. The dollar’s reserve share stood near 71 percent when the euro was launched in 1999 . More important, countries do not need a single replacement currency to reduce U.S. leverage. A patchwork of local-currency trade, regional payment networks, swap lines, digital settlement tools, and yuan-based finance can gradually make sanctions more porous and enforcement more expensive.
Washington’s response has too often been to threaten additional punishment. President Donald Trump has warned of tariffs against countries pursuing de-dollarization . That approach may rally domestic audiences, but it turns participation in the dollar system from an economic choice into a political loyalty test. Neutral governments then have an incentive to hedge before they become the next target.
The United States should preserve sanctions by using them less casually. That means reserving broad financial restrictions for exceptional cases, favoring narrowly targeted and multilateral measures, protecting humanitarian trade, setting measurable goals, and publishing conditions for removal. Diplomacy cannot be an afterthought once coercion fails.
Sanctions derive power not only from American law but from international confidence in the fairness and stability of the system Washington leads. If that confidence erodes, the United States may discover that it has sanctioned its way into the multipolar financial order it hoped to prevent.
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America’s Sanctions Are Building a Post-Dollar World
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