What you will learn in this lesson
A simple question: when a bank is described as "sanctioned," what exactly gets cut off? No physical cash is moved or blocked; what gets cut is a message and a chain of accounts. In this lesson you will learn how an ordinary international payment actually travels, which specific link in that chain sanctions target, why cutting that link pushes importers and exporters toward costlier and slower alternatives, and why that extra cost eventually shows up in the exchange rate. This lesson is about mechanism, not about whether any particular policy is right or wrong.
Definitions
- Correspondent bank: a bank in the destination country that, acting for a foreign bank, actually credits the recipient's account there. Without a chain of correspondent banks, a sending bank has no direct way to get money to a foreign recipient.
- SWIFT: the messaging network banks use to talk to each other, not the settlement system itself. SWIFT only carries the payment instruction from Bank A to Bank B; the actual movement of funds still happens through the chain of correspondent banks.
- Settlement: the moment funds actually move from one bank's account to another's and the two sides' obligation is cleared; distinct from sending the payment instruction.
- Barter (countertrade): exchanging goods or services instead of cash, or settling between two parties in their own national currencies instead of a third currency.
- Informal transfer network (hawala type): moving value between two people in two countries through a network built on mutual trust, without money necessarily crossing the border at all.
- Risk premium: the extra charge one party to a deal demands for accepting more uncertainty or danger; the less certain a route is, the larger this premium gets.
Mechanism: from message to settlement, and what sanctions sever
An ordinary international payment has two layers. The first is the message: the sending bank tells the counterparty bank over SWIFT, "credit this account with this amount." The second is settlement: the actual funds have to travel through a chain of correspondent banks before reaching the recipient's account. Banking sanctions typically target both layers at once: they remove targeted banks from SWIFT's membership so they cannot send an official instruction, and they bar foreign correspondent banks from holding an account relationship with those banks at all, so that even if an instruction did arrive, there would be no settlement path to execute it.
When both layers are cut, trade does not stop, but its route changes. Instead of one direct, cheap transfer, exporters and importers are forced to route through one or more intermediaries: an exchange house or bank in a third country that still holds correspondent relationships with both sides, settlement in the two countries' own national currencies instead of dollars or euros, goods-for-goods barter, or informal transfer networks that operate outside the formal banking system. Each of these routes carries three extra costs: a higher intermediary fee, a longer wait until final settlement, and a risk premium the intermediary charges for taking on the danger of being sanctioned or having its own account frozen. These costs are added to the final import price independent of the price of the goods themselves; even if a good's world price stays flat, the cost of actually getting it into the country rises.
Another important point: sanctions risk does not stay confined to listed entities. Many correspondent banks avoid any transaction connected to a sanctioned country at all, simply to steer clear of any suspicion of dealing with a sanctioned party; this behaviour is known in banking as "de-risking." The result is that even companies and banks that are not themselves on any sanctions list find the pool of correspondents willing to work with them shrinking, and that shrinking pool means less competition among intermediaries and a higher cost on whatever routes remain.
A worked example
Suppose an importer owes a foreign seller one hundred thousand dollars for a shipment. On a normal banking route, that transfer might carry a correspondent fee of half a percent to one percent, roughly five hundred to a thousand dollars, and settle within a day or two. Now suppose the direct correspondent relationship has been severed by sanctions and the importer must use an exchange house in a third country instead. That exchange house might charge five percent for taking on the risk and doing the work (five thousand dollars), and settlement could take two to three weeks. The roughly four-thousand-five-hundred-dollar gap in fees, plus the opportunity cost of capital tied up for those two or three weeks, lands directly on the importer's landed cost. If the importer wants to protect their margin, that extra cost shows up either in the domestic resale price of the goods or in the exchange rate they are willing to pay to source that same dollar. These figures are entirely hypothetical and built only to illustrate the mechanism; real intermediary fees vary widely by route and timing.
In Iran's market
Three local specifics complete this framework.
One. As the lesson What Moves the Dollar Rate showed, a sanctions shock is one of four channels that build the exchange rate. What this lesson adds is that this shock reaches the price through the "cost of exchange" channel, not only through the psychological, expectations channel.
Two. This same higher cost on alternative channels is one reason the multiple exchange rate system, explained in Iran's Currency Market: Why So Many Rates, keeps a noticeable gap between the free market rate and the official exchange center rate. As of when this lesson was written (Sunday, August 9, 2026), based on Sahmino's own data, the dollar traded at roughly 186,700 toman in the free market, while the exchange center's sell rate for a dollar remittance stood at roughly 154,650 toman the same day, a gap of nearly 21 percent. These figures move constantly; see the dollar price page for today's number.
Three. Settling trade in national currencies instead of a third currency is a real, formal channel, not just an informal workaround; Iran and Afghanistan have worked in recent years to formalize settling trade in rial and afghani, replacing traditional cross-border barter, to reduce exporters' dependence on third currencies (more in this Sahmino report).
Common mistakes
Mistake one: "sanctions mean money is physically frozen or seized." In most cases what is actually cut is the correspondent relationship between two banks, not the existence of the money itself; the usual result is a transfer that becomes more expensive and slower, not necessarily impossible.
Mistake two: "SWIFT is the settlement system." SWIFT only carries messages; removing a bank from SWIFT does not by itself destroy that bank's correspondent relationships, but it does take away the main tool for coordinating them.
Mistake three: "alternative routes like barter or informal transfer only exist to dodge the law." These tools have a long, legitimate track record in many currency constrained economies, including in formal, registered trade between governments; what sanctions change is the cost and speed of these routes, not whether they are inherently legal or illegal.
Mistake four: "only listed banks and companies feel the pressure." Because of de-risking, the effect of sanctions spreads beyond the official list and makes the entire banking ecosystem connected to that country more cautious.
Summary
A banking sanction targets the two layers of an international payment: messaging and settlement. When the direct route is cut, trade flows through costlier, slower intermediary routes, and that extra cost, independent of the world price of the goods, reaches the landed cost of imports and from there the exchange rate. The previous lesson covered the budget deficit and fiscal dominance; here we saw a different force, the cost of exchange under sanctions, reach the same currency market through an entirely different route. To learn about the formal lists and licenses behind sanctions, the next lesson in this series covers the mechanics of secondary sanctions.
