US nuclear sanctions on Iran officially resume

Key Points
  • The first round of U.S. nuclear sanctions on Iran have officially snapped back into place.
  • The sanctions hit Iran's ability to access dollars, engage in some financial activity and attract investment into its auto and aviation industry.
  • The penalties pale in comparison to energy sanctions due later this year but send a message that Washington is not backing down.
Foreign tourists in veils seen on a passenger boat with the Iranian flag amass in the waters of the Strait of Hormuz on May 2, 2017 near Hormuz Island, Iran. An oil tanker is seen on the move in the background.
Kaveh Kazemi | Getty Images

The first round of U.S. nuclear sanctions on Iran officially snapped back into place on Tuesday, and although that turn of events pales in comparison to a raft of penalties yet to come, experts say it sends a clear signal that Washington is willing to pummel the Iranian economy.

President Donald Trump gave banks and companies 90 days to prepare for the return of some sanctions after he abandoned the 2015 Iran nuclear deal in May. Since then, Iran's currency, the rial, has plummeted and the Iranian economy is faltering, sparking protests across the country.

The Trump administration is wagering that the sanctions can pile enough pressure on Iran that they will lead to a better deal than President Barack Obama secured, even though Obama enforced the same penalties and marshaled far more international support for them.

"I am pleased that many international firms have already announced their intent to leave the Iranian market, and several countries have indicated that they will reduce or end imports of Iranian crude oil," Trump said in a statement on Monday. "We urge all nations to take such steps to make clear that the Iranian regime faces a choice: either change its threatening, destabilizing behavior and reintegrate with the global economy, or continue down a path of economic isolation.

I think that come Monday, a lot of that speculation, a lot of that wishful thinking will have been put to rest when those sanctions are back in place.
Richard Nephew
senior research fellow, Center on Global Energy Policy

Under the 2015 agreement, the international community lifted wide-ranging sanctions on Iran in exchange for the oil-rich Middle Eastern country accepting limits on its nuclear program. The Trump administration wants Iran to accept a dozen additional concessions.

"One of the things I've heard an awful lot of over the course of the last couple of months is whether or not this is still all a feint, and all intended to rejuvenate the diplomatic process that had otherwise been stalled," said Richard Nephew, the lead sanctions expert to the U.S. team that negotiated the nuclear deal.

"I think that come Monday, a lot of that speculation, a lot of that wishful thinking will have been put to rest when those sanctions are back in place," Nephew, now a senior research scholar at Columbia University's Center on Global Energy Policy, said during a conference call with reporters.

The initial volley of sanctions aims to block the Iranian government from accessing U.S. dollars, making significant rial transactions, maintaining overseas bank accounts or issuing sovereign debt. Iran also faces renewed barriers to transacting in gold, precious metals and other commodities like graphite and types of aluminum and steel.

Those measures weren't designed to level a hammer blow at Iran's economy, but to close loopholes that would help Tehran evade sanctions on Iran's lifeblood energy industry, according to Nephew.

For that reason, their impact on the Iranian economy will be limited, Nephew said. But the end of the 90-day grace period does contain some measures that will have a direct impact on Iran's economy, namely sanctions on Iran's automotive and civil aviation sectors.

Oil market will tighten by year-end, says RBC's Helima Croft

The automotive industry is the nation's biggest employer after the energy sector, and the government had plans to ramp up production in coming years. But the sanctions have forced European automakers like Peugeot to suspend investments In Iran.

Similarly, the sanctions dashed a $20 billion deal to sell Boeing aircraft to Iran and threaten to wipe out billions in orders for Airbus. Iran's aging fleet of air carriers is notorious for its high accident rate.

Against that backdrop, European countries trying to salvage the nuclear deal have been seeking to temper Iran's expectations for the benefits the accord can deliver, said Jarrett Blanc, a senior fellow at the Carnegie Endowment for International Peace, who oversaw U.S. commitments to the agreement in the Obama administration.

The U.S. sanctions are most effective on big multinational companies because Washington can use them to lock companies out of the American market. If companies don't do much business with the U.S., they have little to lose by trading with Iran, though they need a bank willing to process the transactions.

The question boils down to whether Iran can continue to sell enough oil and sustain enough trade with small and mid-size firms to avoid recession, Blanc told reporters on the conference call.

"They're questions that have much more to do with Iran's non-European trading partners, so India, China, and the rest," he said, "The Europeans have a role to play here, but it's by no means the largest role."

How Trump's Iran sanctions impact China and India

China is refusing to cut off purchases of Iranian oil but will not significantly increase imports, Bloomberg News reported on Friday. India is reportedly warning its refiners to prepare to reduce their purchases, but analysts say it remains something of a wild card.

"The main challenge will be the Asian hydrocarbon economies," said Behnam Ben Taleblu, research fellow at the Foundation for Defense of Democracies. "One of the issues with the way the U.S. left the nuclear deal is that the bulk of our attention has been on managing the European partners."

Taleblu, who supports the pursuit of a tougher deal, says the Trump administration must be on guard against giving too much leeway to countries like China, India and Turkey because the impact of the sanctions relies on tough implementation.

The State Department said in June it was pushing oil buyers to cut imports of Iranian crude to zero by Nov. 4, but Cabinet officials have since said some countries could get waivers to reduce purchases more gradually.

"Even a little bit of a reduction from China may not be enough to put pressure on Iran," Taleblu said, noting that Chinese imports of Iranian crude have risen since 2015. "That's the trap we don't want to fall in with China."