Iran is one of the most heavily sanctioned countries in the world. The United States will on Thursday go one severe step further toward strangling the country’s oil-dependent economy. President Donald Trump withdrew from the Iran nuclear deal a year ago—having called it “horrible,” “disastrous,” “incompetently negotiated,” and “laughable” at various points. Ever since, the administration has vowed to drive Iran’s oil exports, which earlier this month were about a million barrels a day, to zero. In pursuit of that goal, U.S. officials have threatened that those still importing Iranian oil after Thursday will face potential sanctions of their own.
Here are five things to know about what’s happening, why it’s happening now, and what’s next.
What is happening?
When Trump withdrew from the nuclear deal, which in part had exchanged sanctions relief for Iranian promises of nuclear restraint, Iran’s oil customers got six months to find other sources of oil or face financial penalties. When those six months expired last November, several countries, including major importers like China and U.S. allies like India and Turkey, got temporary waivers to keep importing Iranian oil. Those expire on May 2.
Administration officials have said they expect countries to honor the deadline and find other sources for their oil. Saudi Arabia has vowed to step in and fill the gap. But if that expectation is wrong, whether because countries didn’t take the threat seriously or have found it too difficult, as potentially in China’s case, to find another supplier for half a million barrels of oil a day, sanctions are supposed to kick in automatically. This could leave the U.S. in the position of having to sanction some of its own allies.
Why is this happening?
The U.S. is pursuing what it calls a “maximum pressure” campaign against the Iranian government, which officials say is aimed at changing the regime’s behavior—including its support for terrorist proxies, its threats to neighbors who are also U.S. allies, its missile development, and so on. State Department officials insist that this is not a policy of regime change, though National Security Adviser John Bolton has advocated that policy outside of government, and told Fox News’s Chris Wallace on Sunday, “The people of Iran, I think, deserve a better government; there’s absolutely no doubt about it. The trouble is it’s not just a theological dictatorship; it’s a military dictatorship too. That’s a very difficult circumstance. We’ll see what happens as the economic pressure continues to grow.”
The U.S. has steadily escalated sanctions on the country since leaving the nuclear deal. Most recently, the U.S. took the controversial step of designating the Islamic Revolutionary Guard Corps, the most important national-security institution in the country, a Foreign Terrorist Organization—an unprecedented step previous administrations considered but never took, and the first time the U.S. has given that designation to a state institution. Typically, “terrorists” are considered nonstate actors.
How will Iran react?
So far Iran has reacted mainly with bluster and not much else. It has threatened to quit the nuclear deal, which could mean restarting its nuclear-weapons program, but it’s still observing the terms of the agreement, along with all the other parties except the United States. Iran reciprocated the terrorism designation by declaring U.S. military forces in the region terrorists themselves. It threatened to close the Strait of Hormuz, a key transit corridor for the world oil trade, and a move Bolton said would be unacceptable, implying it could invite a U.S. military response. There’s no public indication yet, though, that Iran is preparing to follow through.
There are also few indications of the hoped-for behavior change. Iran continues to fund proxies in the region, prepare missile tests, and support the regime of Bashar al-Assad. At the same time, however, though U.S. officials have blamed Iran directly for the deaths of 603 U.S. service members in Iraq from 2003 to 2011, the U.S. and the Iranians fought on the same side in Iraq against the Islamic State after 2014. Meanwhile, though Iran has repeatedly rebuffed negotiation overtures from the United States, there are signs it may be softening—on a recent visit to New York, Foreign Minister Javad Zarif floated the idea of a prisoner exchange.
Who loses from this?
Iran’s regime and its proxies—but also, its economy and its people. Administration officials have pointed to how the sanctions have starved Iran of money to pay its proxies, and indeed the leader of Hezbollah has had to ask for donations. Given that the administration estimates the Islamic Revolutionary Guard Corps controls anywhere from 20 percent to half of Iran’s economy, the economic hit also inhibits the group’s ability to make money. But there is no clear indication that the sanctions have seriously inhibited the Revolutionary Guard’s activities, even as they have constrained its ability to pay proxies.
Inflation is also spiking in Iran. Basic goods are growing more expensive, according to reports, and it’s becoming difficult to import medicine, even though sanctions specifically exempt humanitarian items. The effects hit all social classes, making it harder for the rich to travel or move money, harder for the middle class to procure preferred brands of things like office supplies, and harder for the poor to afford daily life. The economic malaise has stoked protests—which, from the Trump administration’s perspective, is part of the point.
The less tangible losses are to the world economy, as international businesses complain of missed investment opportunities in Iran. U.S. allies who had hoped to find new markets and investment opportunities in the country after the Iran deal must turn away or risk punishment.
Notably, however, the administration’s prediction that global oil markets could handle the disruption without an oil-price spike has so far proved generally correct. After prices rose to six-month highs in the days after the administration announced the end of sanctions waivers, they declined again, reflecting surplus production capacity in the market.
American regional allies Israel, Saudi Arabia, and the United Arab Emirates have cheered the maximum-pressure campaign as important for their own security. There could be commercial benefits, too, to Gulf oil producers who can sell more of their own oil to make up the shortfall from Iran.
Other beneficiaries: the Trump administration, smugglers, and lawyers. The Trump administration may not get Iranian compliance on the 12 demands Secretary of State Mike Pompeo issued for the Islamic Republic. But in the meantime, it’s perfectly happy to deprive the regime of money. In officials’ view, every dollar that doesn’t flow into Iran is a dollar the regime can’t spend on terrorism or missiles.
The more the administration moves to render trade with Iran illegitimate, the more illicit actors will be willing to fill the gap. Iran has three decades’ worth of experience in finding ways to evade U.S. sanctions, from disguising its oil tankers to bartering, and the Islamic Revolutionary Guard Corps in particular has a sophisticated network of front companies that help it hide money. The higher the cost of doing business with Iran, the more money there is to be made for someone willing to facilitate that business.
Meanwhile, as the sanctions grow more wide-reaching and complicated, so does compliance. The Islamic Revolutionary Guard Corps is so integrated into the country’s economy, in so many murky ways, that nearly any business dealings in the country risk U.S. sanctions or even criminal prosecution since the terrorism designation against the group. The U.S. hopes that the uncertainty will deter investment in the country across the board, because there’s no way to be sure what’s a legitimate business and what might have ties to the Revolutionary Guards. But wherever there are legal risks, there are lawyers willing to try to manage them.