Upcoming Iran Sanctions: Likely Impact and Response from Iran

On November 5, the United States will reimpose an array of powerful sanctions on the most important economic institutions in Iran, including its central bank and national oil company. This is the result of President Trump’s decision in May to withdraw the United States from the Iran nuclear agreement and snap back U.S. sanctions that strike at Iran and global firms that do business with Iran. The economic measures will stifle Iran’s economic growth and links to the global financial system. They have already caused governments and companies around the world to distance themselves from Iran to avoid devastating U.S. sanctions. Though the United States has the economic power to compel Iran’s economic isolation, the end result of this policy remains unclear, but it is more likely that Iran will cease abiding by the nuclear agreement than it is to come back to the table for a new deal on the administration’s terms.

Although the re-imposition of these sanctions are an escalation in the U.S. pressure strategy—and the administration has hyped this date as a defining moment—countries have already begun significantly curtailing oil imports. U.S. government officials have also indicated they may be willing to issue wavers to permit a slower wind down of Iranian imports, rather than slam down punishment on those countries that continue to buy oil after the November 5 deadline. That would have the effect of not spiking oil prices too high for global consumers, and forestalling the need to punish allies like India, Japan, and South Korea, who are scrambling to find alternative oil supplies. The end result will be that the full economic effect of these sanctions will take hold over more months.

These sanctions are not a surprise for Iran, and its leaders have tried to prepare the population for forthcoming economic hardship – though President Rouhani has been significantly weakened by Trump’s decision to walk away from the agreement. Tehran’s strategy at this point is to try and retain the upper hand by staying in the nuclear deal and portraying the United States as the isolated and irresponsible party. Thus far this approach has had some success as the remaining parties – the United Kingdom, France, Germany, Russia, China, and the European Union – have all looked for ways to work with Iran to keep the deal alive. Though they have taken a hard line with the Iranians by making clear that even the smallest deviation from the JCPOA will cause them to change positions and side with the Americans. Moreover, the recent disruption of alleged Iranian terror plots in France and Denmark will be a roadblock in Iran’s strategy, but this roadblock is not insurmountable.

As sanctions begin to bite, Iran could try and push the envelope on its nuclear commitments to signal to the West that there are costs to its actions and to acquire negotiating leverage. But Tehran is more likely to take a wait-and-see approach in the coming weeks and months as it gauges the effect of the latest sanctions and the U.S. administration’s next moves. JCPOA supporters inside Iran appear to be playing for time, hoping they can win the internal debates and keep Iran in the nuclear agreement for the next two years, wait out the Trump administration, and hope that a new American President in 2021 will recommit to the deal.

As the Trump administration pursues its pressure campaign, it should avoid trying to deliberately collapse the nuclear deal. Iran’s adherence to the deal helps—rather than hurts—the administration’s strategy because it prevents progress on Iran’s nuclear program, buying time for the United States to build pressure on Iran in other areas.