The coming collapse of Iran sanctions

Imposing secondary sanctions on non-US entities transacting with Iran could backfire on Washington if implemented.

Obama signs Iran Sanctions Act in Washington
Since the 1979 Iranian revolution, the United States has imposed unilateral sanctions against the nation [Reuters]

Western policymakers and commentators wrongly assume that sanctions will force Iranian concessions in nuclear talks that resume this week in Kazakhstan – or perhaps even undermine the Islamic Republic’s basic stability in advance of the next Iranian presidential election in June. 

Besides exaggerating sanctions’ impact on Iranian attitudes and decision-making, this argument ignores potentially fatal flaws in the US-led sanctions regime itself – flaws highlighted by ongoing developments in Europe and Asia, and that are likely to prompt the erosion, if not outright collapse of America’s sanctions policy.      

Virtually since the 1979 Iranian revolution, US administrations have imposed unilateral sanctions against the Islamic Republic. These measures, though, have not significantly damaged Iran’s economy and have certainly not changed Iranian policies Washington doesn’t like. 

Between 2006 and 2010, America got the UN Security Council to adopt six resolutions authorising multilateral sanctions against Iran – also with limited impact, because China and Russia refused to allow any resolution to pass that would have harmed their interests in Iran. 

Beyond unilateral and multilateral measures against Iran’s economy, the US has, since 1996, threatened to impose “secondary” sanctions against third-country entities doing business with the Islamic Republic. In recent years, Congress has dramatically expanded the range of activities subject to such sanctions, going beyond investments in Iranian oil and gas production to include simple purchases of Iranian crude and almost all financial transactions. 

This year, Congress blacklisted transfers of precious metals to Iran, to make it harder for Tehran to repatriate export earnings or pay for imports in gold. Congress has also increased the sanctions that can be imposed on offending entities, including their cut-off from the US financial system. 

Secondary sanctions

Secondary sanctions are a legal and political house of cards. They almost certainly violate American commitments under the World Trade Organisation, which allows members to cut trade with states they deem national security threats but not to sanction other members over lawful business conducted in third countries. If challenged on the issue in the WTO’s Dispute Resolution Mechanism, Washington would surely lose.  

India aims to cash in on Iran sanctions

Consequently, US administrations have been reluctant to impose secondary sanctions on non-US entities transacting with Iran. In 1998, the Clinton administration waived sanctions against a consortium of European, Russian and Asian companies developing an Iranian gas field; over the next decade, Washington declined to make determinations whether other non-US companies’ Iranian activities were sanctionable. 

The Obama administration now issues blanket waivers for countries continuing to buy Iranian oil, even when it is questionable they are really reducing their purchases.      

Still, legal and reputational risks posed by the threat of US secondary sanctions have reduced the willingness of companies and banks in many countries to transact with Iran, with negative consequences for its oil export volumes, the value of its currency and other dimensions of its economic life.  

Last year, the European Union – which for years had condemned America’s prospective “extraterritorial” application of national trade law and warned it would go to the WTO’s Dispute Resolution Mechanism if Washington ever sanctioned European firms over Iran-related business – finally subordinated its Iran policy to American preferences, banning Iranian oil and imposing close to a comprehensive economic embargo against the Islamic Republic.  

In recent weeks, however, Europe’s General Court overturned European sanctions against two of Iran’s biggest banks, ruling that the EU never substantiated its claims that the banks provided “financial services for entities procuring on behalf of Iran’s nuclear and ballistic missile programmes”. 

The European Council has two months to respond – but removing sanctions against the banks would severely weaken Europe’s sanctions regime. Other major players in Iran’s economy, including the Central Bank of Iran and the National Iranian Oil Company, are now challenging their own sanctioned status.  

On the other side of the world, America is on a collision course with China over sanctions. In recent years, Beijing has tried to accommodate US concerns about Iran. It has not developed trade and investment positions there as rapidly as it might have, and has shifted some Iran-related transactional flows into renminbito to help the Obama administration avoid sanctioning Chinese banks (similarly, India now pays for some Iranian oil imports in rupees).

Whether Beijing has really lowered its aggregate imports of Iranian oil is unclear – but it clearly reduces them when the administration is deciding about six-month sanctions waivers for countries buying Iranian crude.  

The administration is taking its own steps to forestall a Sino-American conflict over sanctions. Besides issuing waivers for oil imports, the one Chinese bank Washington has barred from the US financial system for Iran-related transactions is a subsidiary of a Chinese energy company – a subsidiary with no business in the US.  

However, as Congress enacts additional layers of secondary sanctions, President Obama’s room to manoeuver is being progressively reduced. Therein lies the looming policy train wreck.   

Middle East strategy

If, at congressional insistence, the administration later this year demands that China sharply cut Iranian oil imports and that Chinese banks stop virtually any Iran-related transactions, Beijing will say no. If Washington retreats, the deterrent effect of secondary sanctions will erode rapidly. Iran’s oil exports are rising again, largely from Chinese demand.

“If Washington sanctions major Chinese banks and energy companies, Beijing will respond… by retaliating against US companies in China.”

Once it becomes evident Washington won’t seriously impose secondary sanctions, growth in Iranian oil shipments to China and other non-Western economies (for example, India and South Korea) will accelerate. Likewise, non-Western powers are central to Iran’s quest for alternatives to US-dominated mechanisms for conducting and settling international transactions – a project that will also gain momentum after Washington’s bluff is called.  

Conversely, if Washington sanctions major Chinese banks and energy companies, Beijing will respond – at least by taking America to the WTO’s Dispute Resolution Mechanism (where China will win), perhaps by retaliating against US companies in China. 

Chinese policymakers are increasingly concerned Washington is reneging on its part of the core bargain that grounded Sino-American rapprochement in the 1970s – to accept China’s relative economic and political rise and not try to secure a hegemonic position in Asia.  

Beijing is already less willing to work in the Security Council on a new (even watered-down) sanctions resolution and more willing to resist US initiatives that, in its view, challenge Chinese interests (witness China’s vetoes of three US-backed resolutions on Syria). 

In this context, Chinese leaders will not accept American high-handedness on Iran sanctions. At this point, Beijing has more ways to impose costs on America for violations of international economic law that impinge on Chinese interests than Washington has levers to coerce China’s compliance.  

As America’s sanctions policy unravels, President Obama will have to decide whether to stay on a path of open-ended hostility toward Iran that ultimately leads to another US-initiated war in the Middle East, or develop a very different vision for America’s Middle East strategy – a vision emphasising genuine diplomacy with Tehran, rooted in American acceptance of the Islamic Republic as a legitimate political order representing legitimate national interests and aimed at fundamentally realigning US-Iranian relations.  

Flynt Leverett and Hillary Mann Leverett are authors of Going to Tehran: Why the United States Must Come to Terms with the Islamic Republic of Iran, and teach international relations, he at Penn State, she at American University.