This report aims to discuss the latest round of US sanctions targeting Iran’s financial sector, particularly analyzing their objectives and the ramifications. This report will examine the practical steps to back the snapback mechanism, the legality of imposing the latest round of sanctions, the reasons and motives behind the new sanctions, and finally the potential implications of the sanctions on Iran’s economy and administration will be examined.
I. Practical Steps Towards backing the Snapback Mechanism
In a move to back its draft snapback resolution to restore all UN sanctions on Iran on September 19, 2020, the United States imposed a new series of sanctions targeting the Iranian financial sector via secondary sanctions – putting pressure on the sanctioned country by pressuring third parties to stop their activities with it. The new sanctions target 18 banks, freeze the US assets of the blacklisted banks, bar Americans from dealing with the sanctioned banks and expose financial institutions or individuals that do business with the targeted banks to secondary sanctions risk. “Under the provisions of Executive Order 13902, the Secretary of the Treasury identified the financial sector of Iran’s economy as an additional avenue that funds the Iranian government’s malign activities,” the US Department of the Treasury said in a statement. “As part of this action, OFAC sanctioned sixteen Iranian banks for operating in Iran’s financial sector and one bank for being owned or controlled by a sanctioned Iranian bank.” Moreover, the US Department of the Treasury also sanctioned one bank pursuant to Executive Order 13382, which provides legal authority to impose sanctions on the proliferators of weapons of mass destruction. The statement added that the Treasury’s action “reflects our commitment to stop illicit access to U.S. dollars” and humanitarian transactions, such as the purchase of agricultural products, food, medicine and medical equipment, will continue.
This new round of sanctions is a continuation of the Trump administration’s maximum pressure campaign on Iran, which aims to further push Tehran to change its position and negotiate a new deal. US Secretary of State Mike Pompeo said the maximum pressure will continue “until Iran is willing to conclude a comprehensive negotiation that addresses the regime’s malign behavior.” The US Department of the Treasury said the sanctions would come into force in 45 days, that is, after the US presidential election which is scheduled for November 3, 2020, and before the winner of the US election takes office on January 20, 2021. After the 45-day period, foreign financial institutions dealing with Iran will risk exposure to US sanctions. The Trump administration’s latest sanctions have targeted Iran’s entire financial sector and economy, prohibiting any financial dealing or money exchange with Iranian institutions. Any foreign financial institution that engages in transactions with the blacklisted Iranian banks will face US sanctions, therefore, Iran will be cut off from the global banking system. The US decision to impose new sanctions on Iran was made a few weeks after Washington’s move to reinstate all UN sanctions on Iran. This move faced stiff opposition from the overwhelming majority of the Security Council members including Europe, Russia and China.
II. The Legal Grounds for the Decision to Impose a New Series of Sanctions on Iran
Most Iranian financial institutions have already been subject to sanctions imposed by the US Department of the Treasury’s Office for the Control of Foreign Assets (OFAC) pursuant to Executive Order 13599. The new round of secondary sanctions imposes further pressure on Iran pursuant to Executive Order 13902. Iran’s major sanctioned banks include: Sarmayeh Bank, Amin Investment Bank, Bank Keshavarzi Iran, Bank Maskan, Bank Refah Kargaran, Bank-e Shahr, Eghtesad Novin Bank, Gharzolhasaneh Resalat Bank, Hekmat Iranian Bank, Iran Zamin Ban, Islamic Regional Cooperation Bank, Karafarin Bank, Khavarmianeh Bank (also known as Middle East Bank), Mehr Iran Credit Union Bank, Pasargad Bank, Saman Bank, Tosee Taavon Bank (also known as Cooperative Development Bank) and Tourism Bank. The banks sanctioned are subject to the Central Bank of Iran’s (CBI) supervision and regulation. The CBI was previously designated under Executive Order 13224 for providing support to the overseas activities of the Islamic Revolutionary Guard Corps (IRGC).
III. The Reasons and Motives for Imposing Sanctions on the Iranian Banking Sector
The new round of US sanctions target the remaining financial mechanisms and channels that were used by Iran to circumvent sanctions. Previously, only institutions and firms that conducted business with the United States risked losing access to the US financial system when dealing with Iran, with Washington pressuring them to either do business with Iran or the United States. On the other hand, institutions that did not have direct business relationships with the United States were not sanctioned, enabling Tehran to create a wide network of institutions and mechanisms to ensure that its cash flow and trade with the rest of the world continued. The Iranian government has reportedly been using its own banks, including the newly-sanctioned banks, to carry out financial transactions with foreign banks through the sale of oil and the exchange of goods in return for foreign currencies other than the US dollar, such as the yuan and ruble, to avoid US sanctions. The latest package of secondary sanctions, however, has shut down the mentioned activities. The latest sanctions came after the US attempt last September to unilaterally activate the snapback mechanism to restore all UN sanctions on Iran. Despite the international opposition to the US attempt to activate the snapback mechanism because it is no longer globally regarded a member of the 2015 nuclear agreement after its withdrawal from it in 2018, the US administration continues to be motivated to activate the mechanism. The United States has imposed sanctions on the Iranian Ministry of Defense and other Iranian entities connected to the country’s nuclear program. In the same week, Washington also blacklisted several Iranian officials and entities for gross violations of human rights. The most recent US sanctions on the Iranian financial system are a continuation of the US path towards undermining Iran’s economic capabilities and isolating its economy from the international financial system.
Along with the mentioned US aims behind imposing sanctions on Iran’s financial sector, Trump and his team, by imposing the latest round of sanctions on Iran, basically want to communicate several messages to US voters and Trump’s Democratic rival, Joe Biden. This analysis is supported by the fact that the Iranian banking sector has already been subject to US sanctions and the fact that the majority of the banks sanctioned by the US Department of the Treasury on October 8 are not linked directly to financing terrorist activities. The first message the US president wants to send is that if he is re-elected for a second term, his maximum pressure campaign will continue until the Iranian leadership is willing to step back from its current policies and enter serious negotiations. The second message Trump wants to send is that he is creating difficult conditions for a potential Biden administration to return to the 2015 nuclear deal, thus undermining any attempts by the Democratic Party to cease his maximum pressure campaign.
IV. The Potential Implications of Applying Financial Sanctions Against Iran
The fresh sanctions imposed by Washington may push Tehran to depend more on illicit/secret trade or even to circumvent US sanctions through covert oil smuggling across maritime routes to rapidly gain profits. In the recent past, Iranian oil shipments have been sent to Venezuela. Iran’s secret trade dealings and attempts to bypass US sanctions through its own banks will continue despite the latest wave of sanctions. The public goal behind the visit to Iraq by the Governor of the CBI ,Abdel Nasser Hemmati, was to release what Iran was owed for exporting gas and electricity to Iraq, however, a covert goal might have been to transfer Iranian funds through Iraqi banks.
Besides, the new US sanctions will push Iran to increase its diplomatic efforts to foster stronger cooperation with its allies that oppose US policies and by finding new mechanisms and solutions to lessen the impact of US sanctions. In the aftermath of the fresh round of sanctions, Iran turned to China for help. This was evident in the two-day visit made by Iranian Foreign Minister Mohammad Javad Zarif to China a day after the US announcement of the latest sanctions. China, a main supporter of Iran amid Iran-US tensions, is a participant to the 2015 Iranian nuclear agreement and recently the Chinese government in the United Nations in September opposed the ongoing US efforts to impose new economic sanctions on Iran. The recent US move may also further deepen the gap between itself and the European Union, particularly the European Troika (France, Germany, and the United Kingdom). European countries have always sought to strike a difficult balance between their strategic interests. On the one hand, they aim to avoid further tensions in transatlantic relations and protect their independence and international sovereignty in the face of the reimposition of secondary US sanctions, which caused their bilateral trade with Iran to decrease by 9 percent from January to July of this year compared to the same period of the previous year. On the other hand, they want to lift US sanctions on Iran, maintain the Joint Comprehensive Plan of Action and try to put an end to US attempts to thwart the agreement once and for all by extending the UN arms embargo on Iran. Amid the new wave of US sanctions, it is also likely that Iran’s currency will see a new record low in the coming period. Since the US withdrawal from the Iran nuclear deal in May 2018 and until the present time, the Iranian toman has noticeably lost its value against the US dollar. In May 2018, the Iranian currency depreciated to 6,000 tomans against the US dollar. On October 8, 2020, one US dollar was worth 29,000 tomans and a few days after the announcement of the new sanctions one US dollar was equal to 31,000 tomans.
The Iranian currency is expected to weaken further considering Washington’s crippling restrictions on Iran’s foreign trade and its declining foreign currency reserves. The decline in Iran’s foreign trade will inevitably create a crisis due to the difficulty in accessing foreign currencies. This will lead to a spike in the inflation rate and raise costs for Iranian importers.
US sanctions that targeted Iran’s oil exports caused Iran to suffer dire economic conditions. Iran’s economy, amid the shortage of foreign currencies resulting from dwindling oil sales, has experienced a plummeting currency and accelerating inflation rate. The country’s economic growth dropped to -7 percent and the inflation rate as well as the unemployment rate reached 42 percent and 10.7 percent respectively by the end of March 2020. This deteriorating economic situation reflects the damaging impact of US sanctions and Iran’s economy will face further pressures as a result of the new sanctions targeting major Iranian banks. Iranian President Hassan Rouhani recently conceded that his country has lost $150 billion since US President Donald Trump withdrew from the 2015 nuclear deal and reimposed sanctions on Iran’s economy.
In short, although US sanctions on Iran’s financial and banking sectors are not completely new, they do represent another blow to the Iranian government and its economy that is already reeling under US sanctions. If more US sanctions are imposed on Iran in the coming days, the country’s economic problems will further aggravate leading to a recession, and will reduce the number of financial channels that provide foreign currency. In addition, more sanctions will lead to the failure of Iran’s administration, despite the billions it spends on the exchange market, to save the national currency from collapsing against the US dollar, as the US dollar exceeds 31,000 tomans.