Navigating Global Financial System Fragmentation 2025

In the current geopolitical environment, complete regulatory harmonization is unlikely and a certain degree of fragmentation will probably persist. Nevertheless, policy-makers can strive to design geoeconomic statecraft policies that do not result in excessive fragmentation. The following rules of engagement are intended to assist policy-makers in balancing the unintended consequences of geoeconomic statecraft and excessive fragmentation with safeguarding national security and sovereignty. 1. Design and implement targeted and well-aligned statecraft measures to minimize the risk of unintended consequences and reduce the private sector’s administrative burden (e.g. carry out cost-benefit analyses, provide clear implementation guidance, and assess and reinforce existing regimes) Economic statecraft measures designed to disrupt global capital flows or sever payment connections can also have unintended consequences. For example, when the United States sanctioned the Russian firm Rusal in 2018, then the second largest producer of aluminium in the world, the measures disrupted global aluminium trade, which caused aluminium prices on commodity markets to surge to seven-year highs and impacted downstream consumers.60 This example also shows that financial markets are fundamentally interwoven with the real economy – financial fragmentation inevitably affects all global trade flows, raising costs for market participants and undermining investor confidence. 3.2 Rules of Engagement for Responsible Economic Statecraft Designing targeted economic statecraft measures FIGURE 10 – Identify specific areas in the financial system and economy – Use a “small yard and high fence” strategy to limit impact– Coordinate measures on a broad multilateral basis – Ensure effective design, implementation and enforcementDefine context Cost-benefit analysis Multilateral alignment – Assess the potential financial, geopolitical and sectoral impacts – Anticipate spillovers and evaluate effectiveness Source: Oliver Wyman analysis To minimize unintended consequences, policy- makers can adopt ex-ante measures, such as: –Defining specific areas for imposing restrictions within the real economy and domestic financial markets, such as the US proposal to adopt a “small yard and high fence” approach –Conducting cost-benefit analyses to anticipate possible financial and sectoral spillover effects, evaluating likely effectiveness and implementation feasibility, and determining whether existing statecraft measures can be adapted instead of introducing new measures –Aligning economic statecraft measures on the broadest possible multilateral basis across design, implementation and enforcement by establishing intergovernmental “statecraft taskforces” to oversee policy design, develop real-time information exchanges and agree on standard implementation and enforcement protocols Emerging alignment BOX 6 The Committee on Foreign Investment in the United States (CFIUS), which administers the US government’s inbound investment screening mechanism, has set up new working groups with the EU and Mexico to better coordinate their respective investment screening regimes. Establishing permanent fora to exchange information and best practices can help close enforcement gaps, reduce compliance costs for the private sector and foster investment. The rules of engagement aim to assist policy- makers in balancing the unintended consequences of geoeconomic statecraft and excessive fragmentation with the safeguarding of national security and sovereignty. Navigating Global Financial System Fragmentation 28