The United States has begun a new round of economic pressure on Iran. Washington says that new secondary sanctions could be announced every week, with banks and companies that continue to do business with Iran facing the possibility of losing access to the dollar-based financial system.
There is no doubt that this pressure could hurt Iran. The harder question is whether the economic damage can still produce the political outcome that Washington wants.
Iran has lived under various forms of US sanctions for decades. During that time, it has built an economy that has partly adapted to the restrictions. Oil is sold through intermediaries and independent refiners. Shipping companies change ownership and registration. Cargoes are transferred between ships, while payments can be made through exchanges, shell companies, and non-dollar channels.
None of this makes sanctions harmless. They make trade more expensive, less transparent, and more dependent on networks capable of operating outside normal commercial channels. But it also means that isolating Iran today is harder than simply preventing a European company from signing a contract in Tehran.
China is now at the center of this system.
Before the current war, China bought the bulk of Iran’s oil exports. Much of it went not to the largest state-owned companies but to independent refiners with less contact with the United States. According to official U.S. data, these independent refiners account for the bulk of China’s purchases of Iranian crude.
Washington has already sanctioned several of them. But in May, Chinese authorities took an unusual additional step: ordering local players not to recognize, implement, or comply with U.S. sanctions imposed on five Chinese companies for their involvement in trading Iranian oil.
That doesn’t mean China is immune to U.S. pressure.
Big Chinese banks and globally active companies have much more to lose from being cut off from U.S. markets and the dollar system than smaller refiners. The same pattern has emerged in trade with Russia. Concerns about secondary sanctions have pushed some Russian-Chinese trade toward smaller banks, intermediaries, and more complex payment arrangements. According to media reports, at one point half of some Russian payments to China were made through intermediaries.
The result is a paradox.
To close off Iran’s remaining trade channels, Washington may eventually have to move from sanctioning Iranian companies, ships, and relatively small foreign intermediaries to confronting large financial institutions in countries like China. So far, despite increasingly aggressive language, it has been cautious about taking such a step.
At that point, sanctions would no longer be a simple tool against Iran. They would become part of a broader economic confrontation over how far US control of the international financial system can go.
This is important because the history of sanctions against Iran contains two very different episodes.
Between 2010 and 2015, international pressure sharply reduced Iranian oil revenues and helped push Tehran into serious negotiations. But the sanctions were coupled with a clear political deal: restrictions on the nuclear program in exchange for sanctions relief. The nuclear deal therefore offered not only pressure but also an identifiable way out of that pressure.
The “maximum pressure” campaign that followed the US withdrawal from the deal in 2018 was different. It caused major economic damage, weakened Iran’s ability to trade, and put enormous pressure on its currency and households. But Tehran has not accepted Washington’s broader policy demands.
Research from this period points to a fundamental problem with sanctions: increasing the costs of not agreeing does not necessarily lead to agreement, especially when the party being sanctioned does not believe that concessions will lead to lasting sanctions relief.
Sanctions can therefore be economically effective but politically unsuccessful.
The counterargument is also quite simple. The lifting of sanctions is not automatically a reward received by the government alone.
After the easing of nuclear-related sanctions, Iran’s economy expanded by 13.4% in 2016, largely thanks to a recovery in oil and gas production. But non-oil GDP also grew by 3.3%. The recovery has been incomplete: foreign investment has been weaker than expected, unemployment has remained high, and Iranian banks have never fully integrated into the international financial system.
This experience complicates the familiar argument about the choice between "stick" and "carrot".
Sanctions and sanctions relief do not act directly on the government, while leaving society unaffected. Sanctions reduce government revenues, but they also affect wages, food consumption, employment, investment, and household savings. Studies using data on Iranian households have found that the effects are particularly severe on poorer households.
Sanctions relief can expand the resources available to both the state and society. But it cannot decide how those resources will be distributed. That depends on Iran’s own economic structure, political institutions, and balance of power.
The current US strategy therefore faces a problem that another list of sanctioned ships or companies cannot solve on its own.
Washington has repeatedly demonstrated that it can make economic life in Iran difficult. It remains uncertain whether he can turn these difficulties into the political concessions he seeks.
After decades of sanctions, this may be the more important indicator of whether they are working.
Author: Siyavash Shahabi