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U.S. sanctions against Iran just got tougher. What happens now?

A worker looks out to sea from a low walkway aboard an offshore oil platform in the Persian Gulf’s Salman Oil Field, operated by National Iranian Offshore Oil, near Lavan Island, Iran. (Ali Mohammedi/Bloomberg News)

President Trump’s decision in May to leave the Joint Comprehensive Plan of Action (JCPOA) and reimpose sanctions against Iran produced resentment and resistance from the deal’s other supporters.

On Friday, Trump announced that he will follow through with reimposing stringent sanctions on financial deals with Iran and purchases of Iranian oil, petrochemicals and petroleum products. These sanctions policies include controversial “secondary sanctions” — provisions that seek to coerce companies in other countries to comply with U.S. sanctions policies.

What happens now? Will these aggressive policies, which start Monday, lead to greater conflict or cooperation with U.S. sanctioning efforts?

The European Union, China and Russia have all agreed to continue supporting the JCPOA deal by assisting Iran in circumventing U.S. sanctions. For example, Russia struck a deal to keep Iranian oil exports flowing, and the E.U. is creating “special purpose vehicles” (SPVs) to allow Iran to do business outside the reach of U.S. financial sanctions.

States commonly mobilize to undercut sanctions they oppose. What’s different this time is how blatantly many governments are challenging U.S. sanctions — and how hard the United States may be willing to strike back.

The full sanctions against Iran

The United States on May 8 announced its intention to withdrawal from JCPOA and reimpose sanctions against Iran — establishing two waiver periods before the sanctions would fully go into effect Nov. 5. In August, the Trump administration reinstated restrictions on Iran’s ability to obtain U.S. dollars and precious metals, along with export sanctions on auto/aerospace products and services.

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This latest announcement reimposes harsh sanctions designed to prevent Iran from exporting fossil fuels and further isolate its financial sector that had been in effect before the JCPOA deal. The United States has significant leverage over foreign financial institutions that depend upon access to the U.S. financial system to carry out international transactions. Many governments sought and received waivers to continue purchasing fossil fuels from Iran during the 180-day waiver period. The Trump administration announced that only eight countries — and not the E.U. — would continue to receive that waiver after Nov. 4.

Sanctions don’t work well when other countries go around them

Sanctions-busting by foreign firms is one of the leading reasons U.S. sanctions policies fail, a problem U.S. policymakers are trying to address by employing secondary sanctions. The Treasury Department has also become increasingly active in using its Specially Designated Nationals and Blocked Persons (SDN) list to target and economically isolate Iranian entities.

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Being SDN-designated is more than a modern-day Scarlet Letter — it can be an economic death sentence for parties relying on international trade or transactions. The U.S. secondary sanctions and aggressive use of the SDN list against Iran will undoubtedly damage many foreign companies’ bottom lines — forcing them to pay a price for a U.S. policy their governments oppose. And economies beyond Iran will also suffer.

In the absence of broad cooperation from foreign governments, the United States will rely heavily on SDN/secondary sanctions to dissuade foreign companies from undercutting its sanctions against Iran. In the past, such policies have provoked significant political backlash from foreign governments. For example, Canada, Mexico and E.U. members strongly resisted U.S. efforts at using secondary sanctions against Cuba during the 1990s. In the early 1980s, President Ronald Reagan’s efforts to target companies that supported a new gas pipeline from the Soviet Union to Europe prompted adamant opposition from a number of NATO allies.

So it’s not surprising that the E.U. also adopted a blocking statute in August, requiring E.U. companies not to comply with U.S. secondary sanctions. The E.U. also announced the creation of SPVs to facilitate continued trade with Iran by providing channels for financial transactions that are firewalled from the U.S. financial system. The E.U.-backed SPVs would serve as third parties in transactions with Iran — operating outside of the international banking system, and shielding the transactions of the companies that use them. The United States reacted angrily to this announcement.

For many large companies such as Total, Volvo and Deutsche Telekom, the risks associated with U.S. sanctions persuaded them to cease doing business in Iran. Even firms operating in sectors not subject to U.S. sanctions, such as health care, are ending operations for fear of running afoul of sanctions provisions and the difficulties associated with financing transactions. For risk-accepting firms that are not dependent upon doing business with the United States, the SPVs could provide the financial means to continue trading with Iran. But there’s at least one hitch — these SPVs are not yet operational.

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

The Trump administration is likely to face two big questions:

  • Is the United States willing to damage its political relationships with JCPOA supporters to convince them to cooperate with the tighter U.S. sanctions?
  • How much are the E.U., China and Russia, in particular, are willing to invest — financially and politically — to preserve their independence from U.S. sanctions?

Active E.U. support for sanctions-busting will be a blow, because the Trump administration expects European governments and companies to fall in line — and the E.U. had closely cooperated with the United States in sanctioning Iran during the Obama administration. In August, Trump laid down a clear Twitter threat: “Anyone doing business with Iran will NOT be doing business with the United States.” Notably, Italy was the only E.U. member to receive a sanctions waiver — creating a clear fault line for future conflict.

If European countries actively evade U.S. sanctions against Iran, it would exacerbate already-strained relations between the United States and Europe in bodies such as NATO. The success of initiatives such as the SPVs could also encourage European countries to work more closely with Russia and China to find ways of buffering themselves from U.S. economic coercion in the future.

Many large corporations may opt to stop doing business with Iran, given the threat of U.S. punitive measures. Small- and medium-size enterprises that are less dependent upon doing business with the United States can better risk trading with Iran, but may need their governments to support those efforts and protect them from retaliation. Though there is significant uncertainty related to how much collateral damage the U.S. sanctions will produce, it’s safe to say, that they will, by design, harm a lot more parties than just Iran.

Bryan R. Early is an associate professor of political science and director of the Center for Policy Research at the University at Albany, SUNY. His book “Busted Sanctions: Explaining Why Sanctions Fail” describes how foreign sanctions-busting has consistently undermined the effectiveness of U.S. sanctions.