Iran Sanctions: The Challenge of Isolating a Long-Time Pariah

POLICY WIRE — Washington, USA — Iran’s longstanding status as an economic pariah has not wavered, despite decades of stringent sanctions imposed by the United States.

This week, US officials introduced Operation Economic Outcast, a sanctions campaign aimed at further isolating Iran. However, the impact of this initiative may be limited due to the extensive sanctions already in place.

The US has historically targeted Iran’s banking, shipping, oil, and military sectors with numerous sanctions. As a result, Iran is largely disconnected from the global financial system, experiencing high inflation and shortages of essential goods.

Justin Wolfers, an economics professor at the University of Michigan, noted in his Substack newsletter that the effectiveness of ‘Operation Economic Outcast’ is uncertain, as it primarily signals future actions rather than immediate consequences.

Aya Ibrahim, a State Department official in the Biden administration, highlighted the diminishing returns of continued sanctions, stating that Iran has been an economic pariah for 50 years with the regime still in power.

US officials hope that increasing pressure through additional sanctions on over 60 targets and threatening sanctions on countries dealing with Iran will lead to a diplomatic breakthrough or even the toppling of the regime.

One significant lever the US has not yet pulled is targeting Chinese banks allegedly facilitating Iranian transactions. Treasury Secretary Scott Bessent warned that any entity enabling Iranian transactions would be targeted, but stopped short of implementing such sanctions, indicating a lack of political will.

Bessent’s candid response to CNN’s Kevin Liptak, questioning why immediate action was not taken, revealed concerns about the potential global financial system disruption and Beijing’s possible retaliation with rare earth elements, critical to various US industries.

Ed Mills, a Washington policy analyst at Raymond James, expects Operation Economic Outcast to incrementally increase pressure on Iran, potentially including sanctions against entities in India, Malaysia, or other countries aiding Iran.

The fear of Chinese retaliation through rare earths, which China virtually monopolizes, poses a significant risk to the US economy, particularly in sectors like autos, aerospace, and semiconductors.

A recent study on Iranian social media influencers during previous sanctions rounds found that such measures do not necessarily weaken support for the Iranian government and may even boost regime support.

Wolfers pointed out that the strategy of using economic isolation to topple a regime is not new, having been attempted against Cuba for over six decades.

There are also concerns that the US’s aggressive use of sanctions could prompt countries to seek alternatives to the dollar-dominated financial system, potentially undermining the US’s role in global banking.

Reporting by Policy-Wire (PW)