Assessing the Geopolitical and Economic Impact of Trump’s 'State Sponsor of Wrongful Detention' Policy on Global Risk Markets

In September 2025, President Donald Trump signed an executive order establishing the "State Sponsor of Wrongful Detention" policy, a framework designed to penalize nations that wrongfully imprison Americans or engage in hostage diplomacy. This move, modeled after the U.S. state sponsor of terrorism designations, introduces sanctions, export controls, and travel bans targeting countries like China, Iran, Afghanistan, and Russia [1]. The policy’s implications extend beyond diplomatic leverage, reshaping global risk markets and creating new investment dynamics in emerging economies.

Geopolitical Risk as a Tradable Asset

Geopolitical risk (GPR) has evolved from an abstract concern into a quantifiable asset class, with indices and financial instruments now tracking its impact on markets. For instance, the Geopolitical Risk Index for energy trade highlights how conflicts and institutional quality influence trade partnerships, with countries like Singapore and Canada scoring high on reliability while conflict zones lag [3]. Trump’s new policy amplifies this dynamic by introducing a binary "sponsor of wrongful detention" label, which could trigger immediate market revaluations.

Historical parallels, such as U.S. sanctions on Iran and Russia, illustrate how such designations create volatility. For example, Russia’s pivot to Asian markets after 2022 sanctions led to a 75% decline in EU-Russia trade but spurred growth in BRICS-aligned trade networks [2]. Similarly, Iran’s "dark fleet" oil exports circumvented Western sanctions, redirecting capital flows to non-traditional buyers [4]. These patterns suggest that Trump’s policy could accelerate capital reallocation in emerging markets, favoring nations outside the U.S. sanctions framework.

Emerging Market Portfolio Adjustments

Emerging markets are particularly vulnerable to GPR-driven shocks. Sectors like energy, critical minerals, and defense are often the most sensitive, while cybersecurity and infrastructure may act as hedges [2]. For instance, the U.S.-China trade war prompted Vietnam and Mexico to absorb some of the lost trade, diversifying global supply chains [2]. Trump’s policy could replicate this effect, with investors shifting capital away from sanctioned countries toward regions like Southeast Asia or Africa.

ETFs tracking emerging markets may see pronounced sector rotations. For example, the iShares MSCI Emerging Markets ETF (EEM) historically underperforms during U.S. sanctions escalations, as seen in 2022 when Russia’s invasion of Ukraine triggered a 12% drop in EEM [5]. Conversely, niche ETFs focused on BRICS nations or energy diversification could gain traction, mirroring the rise of the iShares MSCI Brazil ETF (EWZ) during the 2020-2022 BRICS expansion [6].

Sanctions-Driven Investment Opportunities

Sanctions often create unintended opportunities. For example, Russia’s 2025 policy rate cut of 200 basis points, aimed at stabilizing its economy amid Western pressure, attracted speculative capital into its ruble-denominated bonds [2]. Similarly, Iran’s post-sanctions economic reforms in 2023-2024 led to a 10% GDP rebound, driven by domestic consumption and regional trade [4]. These cases highlight how sanctioned economies can develop parallel financial systems, offering high-risk, high-reward opportunities for investors.

Trump’s policy could spur similar dynamics. Countries like Venezuela, already under U.S. scrutiny for wrongful detention, might deepen ties with BRICS nations, creating alternative trade corridors. Investors could capitalize on this by hedging against U.S. policy shifts through instruments like sanctions-linked derivatives or sovereign CDS (credit default swaps) on targeted nations.

Strategic Implications for Investors

1. Sector Rotation: Overweight defense, cybersecurity, and energy diversification in emerging markets. Underweight energy and raw materials in sanctioned regions.
2. ETF Adjustments: Monitor EEM and BRICS-focused ETFs for volatility. Consider niche funds like the iShares MSCI India ETF (INDA) as a proxy for India’s potential to absorb U.S. trade shifts.
3. Derivatives and Hedging: Use CDS and geopolitical risk swaps to hedge against capital flight in high-risk emerging markets.
4. Long-Term Positioning: Invest in countries outside the U.S. sanctions framework, such as Indonesia or Nigeria, which have shown resilience in trade diversification [2].

Conclusion

Trump’s "State Sponsor of Wrongful Detention" policy marks a new phase in U.S. geopolitical economic warfare, with far-reaching implications for global risk markets. By treating GPR as a tradable asset, investors can navigate emerging market volatility and capitalize on sanctions-driven opportunities. However, the policy’s success hinges on its ability to balance deterrence with diplomatic flexibility—a challenge that will shape the next decade of global finance.

Source:
[1] Trump signs executive order paving way for state sponsor of wrongful detention designations, [https://www.yahoo.com/news/articles/trump-signs-executive-order-paving-205757472.html]
[2] Impact of Geopolitical and International Trade Dynamics on ..., [https://www.mdpi.com/2078-2489/16/7/525]
[3] Geopolitical risk index for guiding international sustainable ..., [https://www.sciencedirect.com/science/article/pii/S2666955225000280]
[4] The Evolution of U.S. Sanctions Strategy, [https://ucigcc.org/blog/between-power-and-promise-the-evolution-of-u-s-sanctions-strategy/]
[5] Market Outlook 2025 | J.P. Morgan Research, [https://www.jpmorgan.com/insights/global-research/outlook/market-outlook]
[6] BRICS Expansion and the Future of World Order, [https://carnegieendowment.org/research/2025/03/brics-expansion-and-the-future-of-world-order-perspectives-from-member-states-partners-and-aspirants?lang=en]