Sanctions 4: The "Chilling Effect" of U.S. Sanctions on Iran

October 11, 2020

Richard Nephew, author of The Art of Sanctions, is a senior research scholar at Columbia’s Center on Global Energy Policy. He was director for Iran policy at the National Security Staff from 2011 to 2013, during the expansion of U.S. sanctions on Iran. He coordinated sanctions policy at the Department of State from 2013 to 2015, during negotiations between the six major powers and Iran that led to the 2015 nuclear deal.

*Update: In March 2021, Nephew was selected to serve as deputy special envoy for Iran at the Department of State.

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The Trump administration sanctioned 18 major Iranian banks on October 8. What is the importance of these 18 banks, especially since the Central Bank and several large banks had already been sanctioned?

The new sanctions on these 18 banks are important, but only because of the overall chilling effect on the limited business still going on in the country. Most of Iran’s major banks have faced U.S. sanctions since November 2018, when the Trump administration reimposed the punitive economic measures that had been suspended by the 2015 nuclear deal, formally known as the Joint Comprehensive Plan of Action. The Central Bank of Iran was then sanctioned in September 2019.  

Central Bank of Iran
Central Bank of Iran

The new sanctions mainly hit private banks that had limited or no involvement in illicit activities. They were designated, as the Treasury Department noted, because the administration decided to declare Iran’s entire financial sector a threat to the United States. They were sanctioned because of that general decision, not because of their own activities.

Iran’s financial sector had already been badly mauled by existing U.S. sanctions and the flight of non-Iranian banks. The threat of being sanctioned by the United States led most reputable European and other international banks to withdraw from relationships with Iran. So, interaction with the 18 banks was already limited.  

But the number of conduits to conduct trade with Iran has now shrunk significantly. Some business with these banks remains legal under U.S. sanctions, but the conservative nature of many foreign banks – especially in dealing with Iran – will complicate even legitimate trade. Experts on sanctions call that the “chilling effect.”

 

 

What impact will the move have on Iran’s already battered economy? 

The effects on the economy are probably marginal compared to the sweeping effects of sanctions already in place. The 18 banks were responsible for limited trade, including imports of consumer and humanitarian goods. But Iran’s non-oil trade is small – roughly $14 billion in exports, and $17 billion in imports, for the last six months (March 20-September 21) – and most of it is with neighbors. Further reductions in Iran’s already limited trade will be problematic for the economy, particularly in terms of consumer goods and supplies for industry.

But some of the trade is being conducted via non-financial avenues, such as the agreement with Iraq to exchange goods rather than cash to pay Iran for purchases of electricity and natural gas. Other means of transaction may also be developed to avoid use of these banks by the few companies still prepared to do business in iran. Some trade also involves goods not subject to sanctions because of the humanitarian exemption, as described below. 

 

What impact will this have on the government?

The new measures are unlikely to materially affect the Iranian government or its thinking. Iran’s strategy since 2018 has been to play for international support and time. Tehran will see an advantage in portraying the United States as the aggressor, particularly since the new sanctions lack the credibility of previous U.S. measures that were linked to illicit trade. Iran will wait for the outcome of the U.S. election before it makes any serious moves. 

 

What impact will this have on the Iranian public and private businesses?

Some trade – for humanitarian and other goods exempted by Treasury – may continue, but possibly with delays as the banking system intensified scrutiny. Business could also be disrupted as foreign banks and companies try to better understand the new sanctions. They are different than earlier measures.  

First, the latest sanctions come with a general license that explicitly carves out humanitarian trade. They also will not limit goods for the manufacture of humanitarian goods in Iran. Second, Treasury’s guidance said they will not take effect for 45 days (effectively, after the U.S. election) to permit foreign companies to wind down any business that is not covered by the exemptions. The Treasury said that it will examine other types of business activity that may be authorized after the 45-day period expires. (See FAQ 847).

 

Does the new move effectively cut Iran off from the global financial system? 

The answer is yes and no. The vast majority of Iran’s banks are now sanctioned. But Iran will still be able to participate in some international trade if it can find partners prepared to brave the chilling effect of the current and previous sanctions. Trade that is exempted from sanctions may still require or involve banking. 

 

What access does either the Iranian government or public have to foreign banks to fund the import of goods or investments?

This is the bigger problem. The new sanctions do not undermine Iran’s ability to fund imports or exports, but the totality of U.S. sanctions does. Iran lacks any ability to engage in significant international trade since separate U.S. sanctions cover the vast majority of its export sectors. Its hard currency reserves have also dwindled, and the value of the Iranian currency has depreciated significantly in recent years.  

Funding trade is now incredibly difficult. Iran has tried various schemes to inject more cash into government by, for example, selling oil via non-government brokers and on its stock market. This is significant politically for a revolutionary regime dedicated to the idea that oil revenues belong to the people (in the form of the state). Economically, the schemes have not generated much help. 

 

Will it be harder for Iran, an epicenter of the global pandemic, to get access to medical supplies?

Trade with Iran was already disrupted by earlier U.S. sanctions. It will probably now be more difficult to get supplies, but possibly for a short period of time while banks and companies evaluate the new sanctions. The sanctions specifically exclude restrictions on humanitarian goods, either actual goods or support for goods made in Iran. So, there is no legal reason for trade to be disrupted any more than it is now.

 

Is there a role the United States could play in helping Iran contain the coronavirus?

The Trump Administration could ease trade in goods necessary to combat the coronavirus. It could identify channels for the transfer of supplies to Iran and facilitate financial mechanisms to ensure trade. The Trump Administration has taken some steps – such as activation of a humanitarian mechanism via the Swiss – but its impact has been limited, in part because of mixed messages about whether this trade is necessary, safe and compliant with sanctions.

 

How hard would it be for the next U.S. president to lift these sanctions? And how would he do it?

As a legal matter, the next U.S. president could remove sanctions on Iranian banks immediately, although there could be practical limitations, such as how quickly the bureaucracy updates regulations and documentation for compliance officers worldwide. But the president has wide-ranging authorities under the International Emergency Economic Powers Act to suspend or terminate the sanctions under which these designations were made. He could simply instruct the Treasury Department to terminate the designations.

Politically, it may be more complicated. The terms of the designations do not identify any illicit conduct by these institutions, which makes it easier to argue for their termination. But it would be more controversial politically to remove sanctions on banks identified as facilitating terrorism, human rights violations, or the proliferation of weapons of mass destruction. 

Trump’s “maximum pressure” strategy also has support outside the administration; any move to lift sanctions could face opposition and claims that lifting sanctions undermines the broader effort to contain Iran’s ability to conduct terrorism, repress its own population, or build up its military.  

 

 

Photo Credits: Treasury Building by woodleywonderworks via Flickr (CC by 2.0)
Some of the information in this article was originally published on October 11, 2020.