On Monday, the United States completed the re-imposition of sanctions suspended as part of the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran deal, related to Iran’s nuclear program.
Though these sanctions are described as “unprecedented” by the Trump Administration, it is debatable whether they surpass what was in place in the lead up to the Iran deal, which had the force of a global coalition and the United Nations. But it is clear that Monday’s sanctions are incredibly powerful measures that will inflict significant pain on the Iranian economy. They target Iran’s connectivity to the international financial system and its largest source of income – oil sales – and leave little room for maneuvering by Iran.
Five Things to Know About Monday’s Announcement
- The sanctions include “secondary” sanctions. A key feature of the sanctions announced Monday is that they create consequences for third parties who are not required by their own laws to comply with the sanctions. If they don’t comply with Monday’s sanctions, however, they could become targets of U.S. sanctions themselves and lose access to U.S. markets. Facing such severe consequences, financial institutions and others will overwhelmingly choose to preserve their access to the United States, as they have in the past.
- Iran’s largest oil purchasers received waivers to allow them to continue to purchase oil from Iran. Eight countries received waivers to continue to purchase oil from Iran, with the largest purchasers – China and India – among them. While the Trump Administration had said it was looking for all purchasers to zero out their oil imports, such a reduction would have been difficult, if not possible, for many. While the Trump Administration has not made public the amount of reduction each country agreed to make in exchange for a waiver, it’s likely that they each have unique commitments to the United States based on their individual level of imports and energy situation. Regardless, the diplomatic effort to persuade countries to cease oil purchases from Iran has already succeeded in costing Iran $2.5 billion in revenue, according to the Administration.
- Any money Iran does earn from oil sales will be “locked up” and difficult for Iran to spend. Part of the power of the U.S. oil sanctions is that they also target any revenues Iran continues to earn from oil sales. The U.S. sanctions restrict the remittances of oil payments to Iran, allowing Iran to tap oil revenues only for certain types of transactions and only for transactions with the oil purchaser. For example, Iran can only spend its oil revenues from India for humanitarian goods or other non-sanctioned goods for purchase from India. When such sanctions were previously in place, Iran found it challenging to find enough of the goods it needed from oil purchasers, making it difficult to spend its oil revenues.
- The U.S. has re-imposed sanctions on a lengthy list of previously sanctioned Iran-linked banks, aircraft, ships, individuals and entities, along with a significant number of new names. Transactions with any of those named are now prohibited, and the United States has indicated it will enforce the measures to prevent them from getting access to any essential services, from banking to insurance, including access to the SWIFT international financial messaging system. SWIFT yesterday said that it would suspend “certain Iranian banks’ access to the messaging system.” Key among the entities sanctioned Monday are 70 Iran-linked financial institutions and their foreign subsidiaries and domestic subsidiaries. While Iran never re-established significant banking connectivity as a result of the Iran deal, Monday’s sanctions reinforce that financial transactions with Iran remain prohibitively high risk.
- A European Union blocking order creates a stark choice for European companies. The EU put an order in place this summer prohibiting European companies from complying with U.S. sanctions. Under the order European companies will need permission from the European Commission to exit Iran business and can seek damages from the United States for losses associated with the sanctions. While most observers believe the EU order will not prevent companies from exiting Iran business, and many European companies have already taken that decision, the order creates additional legal and political considerations for decisions in Europe related to Iran business.
Five Things to Watch
- Who will be the first to face penalties from the United States for violations? To demonstrate its seriousness, the United States will be looking to identify and penalize sanctions violations in short order. While the largest global financial institutions and multinational corporations have long since abandoned any involvement with Iran, those who have remaining sanctionable business or who violate the oil sanctions could be a target.
- Can Iran recoup enough oil revenue through illicit oil trade to weather the new sanctions? Oil sanctions were a game changer in creating pressure on Iran that resulted in the Iran nuclear deal. The Trump Administration will want to ramp up the oil sanctions as quickly as possible, but Iran will continue to earn revenue through illicit oil trade. Furthermore, it isn’t clear how long the waivers issued to key purchasers Monday will permit legitimate oil purchases to continue. Whether Iran continues to find buyers for its oil six months or a year from now is an open question and depends on how strictly the United States enforces these measures.
- Will Europe’s “Special Purpose Vehicle” succeed? Europe’s response to this round of U.S. sanctions is truly unprecedented, as it contemplates a special purpose vehicle (SPV) to finance trade with Iran in circumvention of U.S. sanctions. Given the force of U.S. sanctions, and the pervasiveness of the U.S. financial system, it’s unclear whether the SPV will be able to finance transactions of any notable scale. The United States will seek an avenue to pressure those that participate or host the SPV. If so, the existing strain in the U.S.-EU relationship could worsen dramatically, spilling over into broader trade issues.
- Will Iran be able to import food and medicine? In theory, the sanctions permit humanitarian trade – e.g., trade in food, medicine, medical devices. In practice, Iran’s ability to finance purchases of such humanitarian goods will be quite constrained. Most financial institutions will be unwilling to conduct any transactions that involve Iran, even if they are permitted under U.S. sanctions.
- How will the United States continue to target Iran’s support for terrorism and other “malign” activities? The sanctions re-imposed Monday are focused on pressuring Iran on the nuclear front, but the United States will continue to act against Iran’s support for terrorist groups, its human rights violations, and its other activities that are destabilizing the region. Additional sanctions, regulatory measures, or stricter measures through the Financial Action Task Force are possible.
Jennifer Fowler is a Director at Brunswick Group, based from our Washington, D.C. office. She is an expert in illicit finance and economic sanctions-related issues, having served in senior positions in the U.S. Department of the Treasury for nearly two decades, including most recently Treasury’s Deputy Assistant Secretary for Terrorist Financing and Financial Crimes, and served as the Vice President of the Financial Action Task Force (FATF). Sir Jonathan Faull, Partner and Chair of European Public Affairs, and Ambassador Anthony Gardner, Senior Adviser, also contributed to the piece.