Leaving the Iran Nuclear Deal Will Have Unintended Consequences

President Donald Trump’s decision to withdraw the United States from the Iran nuclear deal and reinstate all U.S. sanctions won’t deliver punishing economic pressure capable of forcing Iran to submit to Washington’s policy demands. Along with diplomatic furor and a blow to nuclear arms control, the move also comes with damning unintended economic consequences for the United States.

The new U.S. policy involves snapping back all the sanctions on Iran that were removed in 2016 under the deal. Primary among them are the sanctions on Iran’s central bank and on its oil trade, the engine of the country’s economy.

Administration officials are betting that foreign firms that have invested in Iran and buy its oil will abide by the sanctions. They will also fan out around the globe to try to pressure foreign countries into joining the United States with measures of their own. Presumably the White House thinking is that the Iranian regime, once backed up against the wall, will capitulate or crumble.

This scenario is unlikely. Not every foreign company, bank, or oil trader will be inclined to comply with U.S. sanctions, particularly if their own governments are frustrated with the U.S. re-imposition of sanctions. There is no multilateral interest now in targeting Iran with financial pressure and diplomatic isolation, unlike during the 2012 to 2015 period of most intensive global sanctions on Iran.

Even when foreign firms are inclined to comply, many will be confused about how to do so. Explaining the rules to foreign banking associations, chambers of commerce, foreign financial and commercial regulators, and central banks takes an army of U.S. diplomats. The Trump administration has hollowed out the State Department’s ranks, and the department did away with its sanctions implementation office last year. Several key senior staff members at the Treasury Department, which is responsible for crafting and enforcing the sanctions, just resigned.

To be sure, some purchasers of Iranian oil will wind down their business to escape legal liability and out of grudging loyalty to the United States, a security ally. European refiners, which buy more than 500,000 barrels per day, will probably unhappily follow the U.S. sanctions rules. Japanese and South Korean purchasers, which together account for more than 500,000 barrels per day, will too. Even here, though, the effects may be delayed or softened as countries seek temporary waivers or exemptions.

But Iran’s biggest oil purchasers, China and India, may be less inclined to cooperate. They might even find opportunities to purchase additional barrels of oil from Iran, which has been pushing out more supplies in recent months. This could meaningfully diminish the effect of the sanctions.

When it comes to foreign banks and traders severing financial relationships and trade in goods with Iran, compliance will also be a mixed bag. European and Asian firms of any meaningful size will not tolerate the risk of violating sanctions and will stop dealing with sanctioned entities. These institutions, however, were already risk-averse and had minimized their exposure to Iran, so the effect of the new sanctions will be marginal at best. Meanwhile, some foreign banks insulated from U.S. jurisdiction could create bespoke facilities to sustain trade with Iran, even if they are hit with sanctions. There is precedent for this in China.

More generally, these broad new Iran sanctions will encourage some countries to explore an array of alternative financial conduits to Iran, from barter to blockchain, to shield their banks and companies from U.S. jurisdiction. Russia and China are already pioneering alternative payment systems to stay outside of U.S. banks and currency, and these measures will likely accelerate that work and international interest.

European leaders are threatening to push back re-imposition of U.S. sanctions, guaranteeing a path for their companies to sustain business with Iran. They are exploring a revival of blocking statutes that ban European companies from complying with U.S. sanctions, measures that during the Bill Clinton presidency helped undermine the effect of U.S. Iran sanctions. However, these European Union leaders ultimately cannot tell private companies how to operate and force them to tempt the U.S. Treasury’s sanctions enforcement team.

Chinese and Indian political officials are no doubt also considering how to continue some oil business with Iran in defiance of the United States. And Iranian and independent oil smugglers are dusting off their old playbooks for moving Iranian crude. During the prior period of intensive global sanctions on the country, smugglers mislabeled Iranian crude cargoes, blended Iranian crude with other regional grades, and engaged in ship-to-ship transfers to disguise its origin.

Unfortunately, smugglers were very good at this activity then and show evidence of sophisticated evolution over time. They learned from the Iran sanctions of the 1990s that U.S. pressure can practically shut down foreign oil and gas exploration and production in Iran, but it has limitations that can be exploited when it comes to rules against trading petroleum, condensate, refined product, and petrochemicals. This energy trading will probably be enough to enable Iran’s resistance economy to soldier on, though not to achieve marked growth. Iran is no Venezuela, which will no doubt see more of its barrels disappear from the market this year than Iran will, as President Nicolás Maduro drives Venezuela toward total economic collapse.

Now, there will be far more opportunities to cheat if the rest of the world does not cooperate with the U.S. sanctions. That lack of cooperation will make it harder to enforce the sanctions. Foreign partners may not collect or share intelligence on evasion with U.S. government analysts as they did in the past under a multilateral sanctions framework. They also may stand in the way of efforts to enforce sanctions by impeding U.S. official access to violators to try to convince them to desist.

This slow-rolling tactic to stymie U.S. sanctions enforcement would actually be a smaller problem for the United States than the lack of foreign cooperation to match U.S. sanctions in the EU and other jurisdictions. Prior sanctions on Iran were as forceful as they were because they were multilateral and involved the strong will of foreign counterparts to join the effort. Some of the most powerful oil import restrictions and the cutoff of Iran from SWIFT, the global financial payments messaging system, came from the EU, not the United States.

Now, U.S. allies have sanctions fatigue (to say nothing of their tariff woes) and are fed up with the United States bullying them and their companies. As an example, sanctions on Russia that the United States rolled out last month roiled financial markets, spiked the price of aluminum, and squeezed supply chains around the world. In the face of distress and outrage from businesspeople from Munich to Seoul to Hong Kong, the U.S. Treasury had to back off. Firms in the same countries, many of whom are allies, would also be hemmed in with the Iran measures.

This picture does not bode well for the strength of U.S. sanctions. Beyond this challenge, the sanctions involve serious unintended consequences that will make life more expensive and less safe for U.S. citizens. To begin with, the announcement of sanctions drove up oil prices and may continue to apply upward pressure as the conditions for the new oil penalties become clearer over the next 180 days. Higher oil prices translate into higher gasoline prices for U.S. consumers right as the country enters the summer driving season, which already puts pressure on fuel stocks and prices.

Another unintended consequence of the sanctions is that they give Russia and Saudi Arabia more clout as alternative oil suppliers to fill the gap left by Iran as customers wind down their contracts. This arrangement directly empowers and enriches Russia, giving it a greater ability to support Syrian President Bashar al-Assad’s bloody campaign against his citizens, and to undermine U.S. democratic institutions with misinformation and malicious cyber activities. By enriching Moscow and its oil companies, the new Iran sanctions also undermine U.S. sanctions on Russia, a stark example of U.S. policy working at cross purposes.

Both Russia and Saudi Arabia have an interest in exercising their influence to keep oil prices fairly high to break even on their enormous burdens of state spending. Also, ahead of the pending public offering of the Saudi state oil company Aramco, high oil prices are an excellent way to pump up company value.

As a further unintended consequence, the new Iran sanctions introduce a major source of tension into the U.S.-China relationship. China is the largest consumer of Iranian crude and probably the only one with the scale of economy and political will necessary to sustain trading of Iranian oil even if an offending Chinese importer or bank is slapped with sanctions penalties. China’s potential to not comply with sanctions is a new lever over the United States that it could pull if Beijing decides to engage in a power struggle with Washington.

The most strategically significant unintended economic consequence of the new sanctions, however, is that these measures may ultimately weaken the strength of sanctions as a tool of U.S. statecraft. Limited or uneven compliance with the sanctions will contribute to the impression that sanctions do not work, which will make countries less likely to heed them in the future. In turn, this will make this tool of U.S. foreign policy less cogent and less useful to U.S. leaders not just to counter Iran, but against all security threats.

This would be devastating to the Trump administration, which has made maximum-pressure financial sanctions a cornerstone of an array of foreign-policy files, from Iran to North Korea to Venezuela and even now to Russia, in a reversal from its early interest in rolling back Russia sanctions. It will also be damaging to future presidents, shrinking the tools available to project U.S. strength and leadership internationally. Ultimately, this unintended legacy of the present reversal in Iran policy may be among the gravest and most debilitating for U.S. national security.