Navigating Global Financial System Fragmentation 2025

Constructive carve-outs BOX 7 The United Nations developed a model for carve- outs to sanctions by creating a “humanitarian exemption” that authorized humanitarian agencies to pay sanctioned entities for procuring essential supplies, such as food and medicine. A 2023 UN resolution authorized payments “necessary to ensure the timely delivery of humanitarian assistance”.632. Establish public–private consultation mechanisms to promote transparency in decision- making regarding the impact of economic statecraft measures on the financial system Developing public–private consultation mechanisms could provide greater transparency, clarity and consistency about economic statecraft measures. Such channels could have three specific goals: –Providing clear and exhaustive guidance to private-sector entities about how to implement statecraft measures, such as identifying the individual and entity whose assets a bank must freeze –Establishing a standing feedback cycle between policy-makers and financial institutions to manage questions and challenges, flag inconsistent policy directives and help policy-makers prioritize competing directives61 –Creating public–private advisory committees for finance ministries and sector-specific working groups to facilitate ongoing exchanges, etc. Business mitigation strategies: Participate in feedback mechanisms Active participation in discussions with policy-makers can allow financial institutions to highlight potential blind spots and unintended consequences of regulatory actions, promoting more informed decision-making. 3. Protect populations, sectors, industries and supply chains for humanitarian purposes through exemptions and carve-outs to avoid collateral damage and ensure their continued access to the global financial system Exemptions and carve-outs can help policy- makers adopt statecraft measures that accomplish political goals while still mitigating harms to the most at-risk populations. Before implementing new statecraft measures, policy- makers can identify those sectors, industries and supply chains that would likely be subject to spillovers or private-sector derisking practices. Policy-makers can also create explicit carve-outs for the relevant areas before deploying the statecraft measures. Standardized guidelines could identify exempt sectors and promote other tools, such as financial assistance, capacity- building and technical support, to shield vulnerable actors in the global financial system.62 4. Prioritize the use of economic inducements, including trade agreements compliant with international law, and other financial instruments that foster mutual gain and cooperation over those designed to cause economic pain Infrastructure finance and other financial instruments can advance political objectives through cooperation and mutual gain, rather than by imposing economic harms. Promoting debt relief, trade, development, technical assistance, grants, aid and public–private partnerships are only some of the different ways to offer economic inducements. The US used economic inducements in its United States Marshall Plan, which helped rebuild Western Europe after the Second World War.64 By modelling policy alternatives, governments can minimize their use of punitive tools in favour of more cooperative measures. The first step is to determine whether there is a way to achieve or surpass the intended policy objective through inducements rather than a measure that disrupts economic activity. If this is not possible, policy-makers should assess whether and how it might be possible to accompany a disruptive measure with, for example, inducements to protect vulnerable industries. 5. Collaborate on areas of geoeconomic consensus, including combating financial crime, terrorist financing and the energy transition, recognizing the need for collective action to address these global financial challenges Combating financial crime, disrupting terrorist financing and financing the energy transition are global financial challenges that are recognized as requiring collective action. Greater fragmentation of the global financial system enhances the Combating financial crime, disrupting terrorist financing and financing the energy transition are global financial challenges that are recognized to require collective action Navigating Global Financial System Fragmentation 29