Iran Faces Economic Turmoil as US Pressures Nations to Cut Ties

POLICY WIRE — Tehran, Iran — Iran’s economy, already grappling with high inflation, prolonged Western sanctions, and diminished oil revenue due to ongoing conflict, is on the brink of heightened instability. The Trump administration is intensifying efforts to coerce other nations into terminating all financial interactions with the Islamic Republic.

The United Arab Emirates’ recent decision to halt trade with Iran has catalyzed the White House’s latest initiative to isolate Tehran. Iran’s foreign trade, previously concentrated among a limited number of countries, now faces even greater constraints.

The effectiveness of the US strategy largely depends on China, Iran’s primary oil purchaser and top trading partner. Meanwhile, Russia, entangled in its own military conflict and economic crisis, is unlikely to provide substantial financial aid to its ally Iran.

Regional allies such as Turkey, Pakistan, and Iraq, which maintain significant relationships with both Iran and the US, are incentivized to steer clear of secondary sanctions threatened by Treasury Secretary Scott Bessent for nations that continue economic ties with Iran.

Nations aligning with the United States will benefit from our partnership, Bessent declared on Monday, detailing the plan dubbed “Operation Economic Outcast.” Those aligned with the Iranian regime should anticipate sharing in its isolation.

Despite Western sanctions, Iran managed to exchange $125 billion worth of goods globally in 2024, as reported by Trade Data Monitor, a private firm. Notably, Iran is not a member of the World Trade Organization.

The majority of Iran’s declared international trade was conducted with a few key partners. The UAE, China, and Turkey accounted for nearly three-quarters of Iran’s merchandise imports. Meanwhile, China, Iraq, the UAE, and Turkey comprised over two-thirds of its non-oil exports.

On the supply side, the UAE held significant importance for Iran. It was the largest source of imported goods for Iran and served as a crucial financial conduit, enabling Iranian businesses to make and receive international payments. These roles were vital for Iran’s connection to the global economy.

As a re-export hub, the UAE facilitated shipments from foreign suppliers hesitant to engage directly with Iranian clients.

From Iran’s standpoint, the UAE can be replaced, but the Iranians openly admit it will not happen overnight, remarked Alex Vatanka, a senior fellow at the Middle East Institute in Washington.

Beijing has economic interests in the Persian Gulf extending beyond Iran and has thus far avoided being drawn into the conflict initiated by the US and Israel. China acquires the vast majority of Iran’s crude oil through covert trading networks that circumvent sanctions.

Its manufacturing dominance and control over critical mineral supplies afford Beijing greater latitude than Iran’s other partners to resist US pressure, according to David Lubin, a senior research fellow at Chatham House. Aggressive measures against major Chinese banks and businesses could reignite trade tensions as Chinese leader Xi Jinping prepares to meet with President Donald Trump in Washington next month.

I do not foresee China complying by any means, Lubin stated.

China stands as both Iran’s largest reported export market and a supplier of essential parts and products, according to WTO and UN data.

During the Obama administration, Beijing consented to reduce energy imports from Iran, noted Daniel Fried, a fellow at the Atlantic Council and former US ambassador to Poland.

We will seek for the Chinese to go much further than they have in the past, Fried said. But it is considerably more challenging now.

China has a history of aiding an ally under sanctions: it has long been North Korea’s economic lifeline and primary diplomatic supporter. Experts assert that China has not fully enforced UN sanctions on North Korea and has covertly provided aid to help its impoverished neighbor remain afloat.

Iranian Parliament Speaker Mohammad Bagher Qalibaf, who has led his country’s negotiations over the past six months, was in Iraq on the day of the UAE’s trade suspension. One objective of his visit, he stated, was accelerating efforts to expand joint cooperation among all countries in the region, without foreign interference.

The US dollar’s dominance in international trade and finance implies that none of Iran’s trading partners would lightly antagonize Washington, Vatanka noted. We’re still at a juncture where if the US intends to harm you, it will have consequences.

Highlighting potential repercussions, Turkey resolved a longstanding US dispute in July concerning the role of a state-owned bank in assisting Iran in evading sanctions through an oil-for-gold scheme. Trump also moved to lift sanctions on its NATO ally stemming from Turkey’s acquisition of a sophisticated Russian missile system.

I genuinely doubt Turkey would wish to become the next nation aiding Iran in evading sanctions at present, remarked Riccardo Gasco, an analyst at the IstanPol think tank in Istanbul.

Iran serves as a crucial import source for Iraq and maintains influence there through allied political factions and armed groups. Baghdad has pursued closer economic and security ties with Washington. Since its invasion of Iraq in 2003, the US has exerted significant control over the nation’s foreign currency reserves, which are housed in the Federal Reserve Bank in New York.

Oman, a frequent intermediary between Washington and Tehran, has discovered its balancing act suddenly precarious. Trump threatened Oman last week over its ongoing negotiations with Iran regarding the future management of the Strait of Hormuz.

One potential avenue for goods to bypass sanctions on Iran would be ports like Gwadar near the Persian Gulf in Pakistan, suggested Peter Harrell, a visiting scholar at Georgetown University.

Ship an intermodal container of drone parts to one of the ports in western Pakistan and unload it onto a truck to be driven across the border into Iran, he proposed.

While Pakistan, a key ally and economic partner of China in the region, aspires to increase trade with Iran, it confronts competing pressures. It serves as a vital mediator between Tehran and Washington and maintains profound security ties with Saudi Arabia, Iran’s longstanding regional rival.

With the Strait of Hormuz largely obstructed and Russia’s war with Ukraine endangering ships on the Black Sea, Iran has endeavored to establish a “road of life” on the Caspian Sea, according to Nikita Smagin, an independent analyst and former Russian state news agency correspondent in Tehran.

Russia purportedly sent drones to Iran this year, reciprocating Tehran’s favor following Moscow’s full-scale invasion of Ukraine. It also rerouted exports to Iran via Caspian Sea ports like Astrakhan. Agricultural products constitute 80% of Russia and Iran’s reported trade.

“Both economies are exporting natural resources and have little to offer each other,” Smagin observed.

The other nations bordering the Caspian — Azerbaijan, Turkmenistan, and Kazakhstan — are unlikely to hastily join in, according to Umud Shokri, a fellow at George Mason University.

Nevertheless, Russia and Iran are already part of an “axis of the sanctioned,” stated Mark Galeotti, executive director of the Mayak Intelligence firm. For decades, the pair have collaborated to circumvent trade restrictions, and escalating bilateral trade in both “strategic goods” and contraband like military technology, microchips, and luxury items could be the next step.

“Pomegranates and tomatoes only go so far,” he remarked.

Reporting by Policy-Wire (PW)