JOHANNESBURG South Africa's central bank has warned of risks to the country's financial stability, due to capital outflows and the possibility of sanctions following a U.S. diplomat's accusation of supplying weapons to Russia to aid its campaign in Ukraine.

These risks, along with the threat of a grid failure due to repeated power cuts and persistent high inflation, have increased the systemic risks to the financial system, the South African Reserve Bank (SARB) said in its biannual health check on Monday.

The South African economy has been pummeled by a host of negative factors this year, with the continent's most advanced economy facing its worst-ever power cuts, adding billions of rand to the cost of doing business and household expenses.

In February, the country was also put on a "grey list" by the Financial Action Task Force (FATF), an intergovernmental financial crime watchdog, to force it to implement standards to prevent money laundering and terrorism financing.

The FATF greylisting and poor local economic conditions have brought down foreign participation in South African government bonds to 25% from 42% in the last five years, SARB's Financial Stability Review (FSR) said.

These local issues were followed earlier this month by a diplomatic stand-off with the U.S. as one of its diplomats accused the country of supplying weapons to Russia, leading to fears of sanctions and to a sharp drop in the rand.

Sanctions on South Africa would make it "impossible to finance any trade or investment flows, or to make or receive any payments from correspondent banks in USD," the report said.

It said the country's domestic financial institutions and financial system remained resilient amid the recent global banking sector turmoil, but a mix of global and local factors could test its strength beyond the next 12 months.

(Reporting by Promit Mukherjee; Editing by David Holmes)