The US sanctions against Iran have just become more difficult. What's happening now?

The US sanctions against Iran have just become more difficult. What's happening now?

A worker looks out from a low gear aboard an offshore oil rig in the Salman field of the Persian Gulf, operated by National Iranian Offshore Oil near the island of Lavan, Iran. (Ali Mohammedi / Bloomberg News)

President Trump's decision in May to abandon the Joint Comprehensive Action of Action (JCPOA) and reinstate sanctions against Iran generated resentment and resistance from the other supporters of the agreement.

On Friday, Trump announced that he will enforce severe sanctions on Iranian financial deals and Iranian oil, petrochemical and petroleum product purchases. This sanction policy includes controversial "secondary sanctions" – provisions that force companies in other countries to comply with US sanctioning guidelines.

What's happening now? Will this aggressive policy, starting on Monday, lead to major conflicts or cooperation with US sanctioning efforts?

The European Union, China and Russia have all agreed to continue supporting the JCPOA agreement by helping Iran to circumvent US sanctions. For example, Russia has reached an agreement to keep Iran's oil exports running and E.U. creates "Special Purpose Vehicles" (SPVs) that enable Iran to conduct business beyond the reach of US financial sanctions.

States generally mobilize to stop sanctions that they reject. What's different this time is how obviously many governments are challenging US sanctions – and how much the US might want to fight back.

The full sanctions against Iran

The United States announced on 8 May its intention to withdraw from the JCPOA and reintroduce sanctions against Iran. The setting of two cut-off periods before the sanctions would come into effect on November 5 was fully enforced on November 5, dollars and precious metals as well as export sanctions for auto and aerospace products and services.

This latest announcement imposes tough sanctions to stop Iran from exporting fossil fuels and further isolate the financial sector that was in power before the JCPOA agreement. The United States has a significant impact on foreign financial institutions that rely on access to the US financial system to conduct international transactions. Many governments sought and received waivers to continue buying fossil fuels from Iran during the 180-day waiver period. The Trump administration announced that only eight countries – and not the E.U. – would receive this waiver even after 4 November.

Sanctions do not work well when other countries bypass them

The sanctions against foreign companies are the main reason for the failure of US sanctions policy, a problem that US politicians seek to address with secondary sanctions. The Ministry of Finance has also become increasingly active by using the list of specially designated Relatives and Blocked Persons (SDNs) to target and economically isolate Iranian entities.

Being SDN-designated is more than a modern Scarlet letter – it can be an economic death penalty for parties relying on international trade or transactions. The US's secondary sanctions and the aggressive use of the SDN list against Iran will undoubtedly affect the profits of many foreign companies, forcing them to pay a price for a US policy that their governments reject. And the economies outside of Iran will also suffer.

In the absence of broad cooperation by foreign governments, the United States will rely heavily on SDN / secondary sanctions to prevent foreign companies from undercutting their sanctions against Iran. In the past, such policies have caused significant political setbacks by foreign governments. For example Canada, Mexico and E.U. The members strongly opposed US efforts to apply secondary sanctions against Cuba during the 1990s. In the early 1980s, President Ronald Reagan's efforts to meet companies supporting a new gas pipeline from the Soviet Union to Europe prompted opposition from some North Atlantic Treaty Organization (NATO) ally.

So it is not surprising that the E.U. also passed a blocking law in August, the E.U. Companies failing to comply with secondary sanctions in the US. The EU. also announced the creation of special purpose vehicles to enable continued trade with Iran by providing channels for financial transactions that are kept away from the US financial system. The E.U. assisted SPVs would act as third parties to transactions with Iran that operate outside the international banking system and protect the transactions of the companies that use them. The US reacted angrily to this announcement.

For many large companies such as Total, Volvo and Deutsche Telekom, the risks associated with US sanctions convinced them to stop operating in Iran. Even companies operating in sectors that are not subject to US sanctions, such as health care, are closed down for fear of violations of sanction regulations and difficulties in financing transactions. For risk-averse companies that do not rely on business with the United States, the SPVs could provide the financial resources to continue trading with Iran. However, there is at least one catch – these SPVs are not ready yet.

All eyes will be on Europe to see how the new sanctions develop

The Trump administration is likely to face two big questions:

  • Is the US ready to damage its political relations with JCPOA supporters in order to convince them to cooperate with the tighter US sanctions?
  • In particular, how much are the EU, China and Russia prepared to invest financially and politically in order to maintain their independence from US sanctions?

Active E.U. Support for the sanctions will be a blow because the Trump government expects European governments and businesses to be in harmony – and the E.U. had worked closely with the United States in sanctioning Iran during the Obama administration. In August, Trump put forward a clear Twitter threat: "Anyone doing business with Iran will NOT do business with the United States." Italy in particular was the only E.U. Members receive a sanction waiver – a clear break line for future conflicts over the sanctions.

If European countries actively bypass US sanctions against Iran, this would exacerbate the already strained relations between the United States and Europe in bodies such as NATO. The success of initiatives such as SPVs could also encourage European countries to work more closely with Russia and China to protect themselves in the future against US economic pressures.

Many big companies could decide against doing business with Iran in view of the threat of US sanctions. Small and medium-sized businesses that rely less on United States business may risk trade with Iran, but may need to support their governments to support those efforts and protect them from reprisals. Although there is considerable uncertainty about how much collateral damage the new US sanctions will cause, one can say with certainty that they will harm much more parties than Iran.

Bryan R. Early is Associate Professor of Political Science and Director of the Policy Research Center at the University of Albany, SUNY. His book "Busted Sanctions: Explaining why sanctions fail" describes how the penance of foreign sanctions has consistently undermined the effectiveness of US sanctions.

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