Why Trump’s Iran Sanctions Are Working

February 27, 2019 Updated: March 1, 2019

Commentary

When President Donald Trump announced his administration’s withdrawal from the 2015 Iran nuclear deal and the reimposition of U.S. economic sanctions on Iran last May, the naysayers confidently predicted failure.

After all, they lectured, it took years of combined U.S., EU, and U.N. Security Council sanctions just to get Iran to suspend development of its nuclear program. How on earth can Trump, going it alone, force Tehran not only to dismantle its nuclear program, but also to curb its development of ballistic missiles and end its support for extremist regional proxies?

It’s called “maximum pressure,” and it’s been phenomenally effective so far.

But let’s back up. Multilateralism wasn’t what gave the first Iran sanctions regime its punch. Rather, it was the 2010-2012 introduction by Congress—over the objections of the Obama administration—of tough secondary sanctions on non-U.S. businesses and individuals for proscribed commercial dealings with Iran (mostly in the energy, banking, and shipping sectors) that forced the Iranians to come to the table.

The EU’s subsequent direct sanctions on Iran and various U.N. Security Council resolutions helped to legitimize the use of this strong-armed U.S. tactic, but it was the threat of exclusion from American markets and financial institutions—a penalty far outweighing the benefits of illicit trade with Iran for most major companies—that forced the world to ostracize Iran.

But the full power of secondary sanctions wasn’t brought to bear on the Iranian regime the first time around. The Obama administration began direct secret talks with Iran just four months after the last tranche of sanctions were thrust upon it in December 2012. It feared that aggressive enforcement would cause Iranian hardliners to nix the negotiations, strain U.S. relations with its European allies, and cause the global price of oil to rise.

Consequently, while Obama fulfilled his statutory obligations to enforce the sanctions, he used little of his discretionary authority to see that sanctions violators were punished. All told, Iranian oil exports fell by about 40 percent before the lifting of secondary sanctions in 2016, because that was the “sweet spot” considered ideal for Obama’s policy priorities.

In sharp contrast, Trump’s sanctions are embedded within a comprehensive strategy to roll back, not accommodate, Iran’s regional hegemonic ambitions. Having wisely nailed down commitments by Saudi Arabia and others who share this goal to increase production as needed, Trump’s “sweet spot” is no export of Iranian oil whatsoever. Maximum pressure means, as senior officials have repeatedly stated, that the United States will punish “any sanctionable activity.”

Of course, that’s impractical if potential transgressors violate the sanctions en masse, which is exactly what the EU has tried to make happen.

As the Trump administration began the rollout of the sanctions, the EU urged its constituent governments not to abide by them; updated its Blocking Regulation to prohibit citizens of its members states from complying with them; pledged to compensate firms targeted by U.S. sanctions; and pledged to set up a so-called special purpose vehicle (SPV) designed to circumvent the U.S. financial system, by matching Iranian oil exports against EU goods and services of equivalent value.

Although Iranian leaders rejoiced, the Trump administration charged ahead, confident, as national security adviser John Bolton later put it, that “the European Union is strong on rhetoric and weak on follow-through.” The EU relies on member states to carry out its decrees, the member states do what’s good for business, and businesses do what’s good for their bottom line.

U.S. diplomats began fanning out across Europe during the 180-day wind-down period before sanctions fully snapped back, personally visiting companies and warning them to comply. “It is unconventional for the United States to enforce them so vigorously on the home turf of its closest allies,” the Washington Post noted, and it has been met with local resentment. But it worked.

To give them an added push, Trump set his sights on forcing the Belgium-based Society for Worldwide Interbank Financial Telecommunication (SWIFT), a global messaging service critical to cross-border financial transactions, to disconnect Iran’s central bank and other designated financial institutions. SWIFT’s disconnection of Iranian banks in 2012 made it so difficult for Iran to transfer money abroad that it couldn’t fully spend even its reduced oil revenues on imports.

In 2012, however, SWIFT was acting at the direction of the EU. In 2018, the EU was pressing SWIFT not to disconnect Iranian banks. But the Trump administration played hardball, not only vowing to sanction SWIFT, but hinting that individual SWIFT officials may be sanctioned as well. To the surprise of most experts, SWIFT capitulated in early November.

Meanwhile, the EU’s ambitious promise to set up an SPV as an alternative to SWIFT was a bust.

For months, the EU could find no country willing to host the SPV, for fear of being targeted by U.S. countermeasures (France eventually drew the short straw). When the SPV was finally unveiled last month as the Instrument in Support of Trade Exchanges (INSTEX), it fell well short of what the EU promised. European officials said that INSTEX will initially handle trade only in food, medicine, and other humanitarian goods permitted under the sanctions.

Moreover, they attached a critical condition to its operation and possible expansion—that Iran fully comply with anti-money-laundering and terrorism finance standards set by the Financial Action Task Force (FATF). But Iranian hardliners have prevented Iranian President Hassan Rouhani from adopting FATF standards, fearing that it will conflict with the regime’s illicit financing of terrorists and proxies abroad.

Even if Iran meets this condition, however, INSTEX will likely prove ineffective because circumventing the U.S. financial system doesn’t protect those who engage in illicit transactions with Iran either from detection or penalties.

U.S. officials can find out where large volumes of Iranian oil are going simply by picking up a newspaper, and the Treasury Department’s guidelines explicitly state that “barter transactions … could result in sanctions, regardless of whether a financial institution is involved.”

Bolton put this more bluntly: “We will be watching the development of this structure … [and] we do not intend to allow our sanctions to be evaded by Europe or anybody else.”

Ignoring EU decrees and the empty rhetoric of their own governments, most major European companies have pulled out of Iran. Fear of triggering U.S. retaliation is so pervasive that many European banks have refused Iranian financial transactions, even for imports of goods exempt from the sanctions, and branch offices of Iranian-owned companies in Europe have had trouble finding local phone and internet service providers.

The Trump administration’s “maximum pressure” tactics have been even more effective outside of Europe. Except for Turkey, all of the (mostly Asian) top importers of Iranian oil agreed to slash purchases in exchange for “significant reduction exemptions” from the Trump administration. Consequently, Iran’s oil exports have fallen by 60 percent since sanctions were re-imposed in November.

Although the Chinese government has denounced U.S. sanctions on Iran, Chinese companies are eager to comply with them. The Bank of Kunlun, the primary official channel for Chinese-Iranian financial transactions, cut off Iran in November.

Contrary to widespread expectations, Chinese companies have not rushed to replace departing European firms in meeting Iran’s desperate need of advanced oil recovery technology to boost the declining output of mature fields.

In December, China National Petroleum Corp (CNPC) suspended its investment in Iran’s South Pars natural gas project.

“China sees the relationship with the U.S. as paramount over anything else. As a state-owned entity, CNPC will stay clear of bringing any unwanted trouble into this relationship as the U.S. China trade talks are under way,” a Chinese state oil executive explained to Reuters.

Impact

The Trump administration’s effectiveness in diminishing Iran’s oil exports and cutting off its access to the global financial system has far exceeded the expectations of most pundits.

“These sanctions have surprised people by how effective they’ve been,” Elizabeth Rosenberg, a senior Treasury Department official in charge of sanctions enforcement during the Obama administration, remarked last week.

The impact of renewed sanctions on Iran has been devastating. The re-imposition of sanctions sent Iran’s national currency plummeting, foreign investment dropping, and prices of food and other essential goods soaring.

Iran’s GDP contracted by 1.5 percent in 2018, and the World Bank predicts that Iran’s economy will shrink by 3.6 percent in 2019. Iran’s longer-term outlook appears even bleaker if the sanctions persist. Amid rising unemployment, labor strikes and other demonstrations against the government have been growing in frequency and intensity.

Whether all of this pressure will translate into a change in the Iranian regime’s behavior—or a change in the regime itself—remains to be seen, but there is good reason for optimism. Not only is the economic impact of Trump’s sanctions greater than Obama’s, but the psychological impact is also greater.

Whereas previous sanctions peaked amid ongoing negotiations, giving Iranians hope that the austerity their government asked them to endure would be short-lived, there is no diplomatic light at the end of this tunnel with the Trump sanctions. The Iranian people are being asked to accept open-ended economic misery as the price for their government’s nuclear ambitions and pursuit of regional hegemony.

In the meantime, “maximum pressure” on Iran is already eroding its ability to finance extremist proxies. Iran’s annual financial support for Hezbollah, previously estimated at around $700 million, has reportedly diminished after just a few months of Trump sanctions. So long as Iran’s Islamist regime is bent on regional domination, better it be as poor and isolated as possible.

Ziad Abdelnour is CEO of the New York-based private equity firm Blackhawk Partners, chairman of the Financial Policy Council, and author of “Economic Warfare: Secrets of Wealth Creation in the Age of Welfare Politics” (2011). Follow him on Twitter @blackhawkinc.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

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