People look at the damage following a rocket attack the city of Kyiv, Ukraine, Feb. 25, 2022. (AP)

By Saeed Ghasseminejad and Behnam Ben Taleblu

March 2, 2022

In the past three months, the Biden administration tried and failed to leverage the threat of sanctions to prevent a Russian invasion of the Donbas region of Ukraine. Following a recent order by Russian president Vladimir Putin, Russian forces attacked eastern Ukraine by air, land, and sea on February 24, with fighting reaching the capital just two days later. Washington responded with a tranche of sanctions, promises of greater economic pain, and delivering military aid to the embattled Ukrainians.

Since the terrorist attacks of 9/11, the United States has increasingly relied on sanctions and other non-kinetic tools as weapons to adjudicate conflicts around the world. Scholars of sanctions have rightly pointed to the need for policymakers to better understand the mechanisms that underpin global trade as well as where and how U.S. sanctions have impacted those mechanisms as economic forces continue to take center stage in national security debates.

But caution from practitioners and derision from academics notwithstanding, the Iran sanctions case—both prior to achieving as well as after leaving the 2015 nuclear deal—offers key but underutilized insights into the strengths of U.S. economic sanctions. Subject to one form of economic penalty or another for four decades, over the past decade and a half, however, the Islamic Republic was targeted by an increasingly layered and complex web of sanctions. While Russia is a qualitatively larger and different target than Iran, the depth, breadth, and continuity of U.S. sanctions on Iran and related enforcement actions can still offer lessons to inform the debate over sanctioning Russia as Putin’s war in Ukraine continues.

The first lesson is that financial sanctions are among the easiest economic weapons for Washington to use and usually the most painful ones on the target. In fact, in an October 2021 review of U.S. sanctions programs, the U.S. Treasury Department cited the freezing out of Iran from the international financial system as one of the successes of its coercive and punitive economic measures.

Imposing an embargo on large, well-connected, and geopolitically influential countries such as Russia and Iran, both of which have long land borders, can be fraught with challenges. Financial sanctions, however, are considerably easier to employ, affect macro-level trade, and play to the relative advantages the United States enjoys in the world economy today. These sanctions make it exceptionally difficult to move trade-generated revenue around that is denominated in U.S. dollars or euros. After all, if the beating heart of the interconnected world of banking and finance lies in major Western hubs such as New York City, then it is the U.S. dollar and the euro that functions as blood moving throughout its arteries.

Financial sanctions can significantly reduce the accessibility of the target’s foreign assets, as happened to Iran’s oil export earnings, which was subject to additional lock-up provisions found in U.S. law. Beyond growing inflationary forces, as they did in Iran, financial sanctions can also significantly reduce a target country’s capacity to absorb foreign direct investment, as was proven to be the case with Russia since it invaded Crimea in 2014. These sanctions considerably slowed the relative rate of Russian economic growth.

Given that the Russian economy is much more integrated with Western economic structures than that of the Islamic Republic of Iran, the pain Moscow stands to suffer under a comprehensive financial sanctions regime would be much greater than what Tehran felt. Conversely, deeper economic enmeshment means that political resistance inside the Western bloc against such measures would be much more robust, as was seen in the debate over removing Russian banks from the global electronic payments system known as the Society for Worldwide Interbank Financial Telecommunications, or SWIFT.

Borrowing from the model employed against Tehran, U.S. economic pressure should aim at banning all Russian banks from using the SWIFT system rather than focusing on a select number of banks to be removed from the platform as was recently announced. Building on the sanctions against the Central Bank of Russia, blanket sector-wide prohibitions that employ secondary sanctions—which put non-U.S. persons and entities to the choice of trade with Russia’s financial sector or the United States—would also go a long way. Some U.S. senators have already astutely drawn the parallel between the secondary sanctions’ impact on Iran and their applicability here.

The second lesson of the Iran sanctions experience is more political, namely that comprehensive sanctions should be deployed decisively and in one go, not incrementally. While there is a strategic logic behind graduated escalation, a resolute and risk-tolerant adversary committed to maintaining, for example, a nuclear weapons option or an invasion of another nation may perceive the use of graduated economic sanctions as a signal that Washington is unwilling to use force to punish or change behavior. Starting low on the sanctions’ scale and working up means that an adversary may feel that Washington is buying time by meting out the punishment rather than risking the costs of attempting to deliver a near knock-out blow up-front.

As a result, Washington should treat the levying of sanctions as an opportunity to make a positive impression about American resolve by deploying large and far-reaching sanctions packages against target states early in the crisis. While some may believe that was the case for President Donald Trump’s “Maximum Pressure” policy on Iran, the timeline of U.S. sanctions tells a different story.

Despite campaigning against the Iran nuclear deal in 2015 and 2016, Trump decertified the agreement in October 2017 and only left it in May 2018, nearly a year and a half after entering office. The Trump administration then took 180 days to restore all penalties that were waived by the accord, and then used another six months to push towards removing waivers for the sale of Iranian oil. During the post-deal period, the United States continued to maintain several other sanctions waivers for regional energy salesport access/investment, and civil nuclear cooperation. Starting in mid-2019 until it left office, the administration only then began refining and recalibrating the pressure on Iran. This means peak maximum pressure sanctions on the Islamic Republic were around for just under a year and a half.

Course-correcting from that experience, sanctions are likely to have their greatest effect when the shock introduced into the target state’s economy is large, sudden, and sustained over time. Incremental and conditional sanctions that contain carve-outs, multiple waivers, and lengthy wind-down periods to end foreign contracts absorb the shock factor of these penalties on the country and its currency. They also run the political clock on an administration that seeks to enforce these penalties. Concurrently, they provide time for the target state to adjust and begin to develop front companies and sanctions-busting networks. If Washington is committed to using economic sanctions to impose costs and change behavior, concomitant with the swift implementation of comprehensive sanctions, it should clarify the precise concessions and conditions under which its penalties would be lifted.

Building on that point, the third major lesson from the Iran sanctions era is that sanctions and any kind of economic pressure must be continuously assessed, maintained, and improved to be effective. While this may appear at odds with the previous point, continuous refinement is not akin to defaulting to a strategy of incremental escalation. Instead, it involves a habitual refinement of an originally broad sanctions program that held back little when initially deployed. Beyond that, continuous calibration and refinement of sanctions is needed because target states have both agency and an incentive to find countermeasures to circumvent sanctions using every tool available. If Washington is serious about the sanctions option against Putin, it must devote assets and intelligence upfront to monitor the impact on the marketplace and battlefield, as well as what Russia is doing to offset these costs.

This phenomenon is but one reason why sanctions programs have traditionally been likened to a game of “whack-a-mole.” Like any other foreign policy tool, sanctions could also have unintended consequences that require close monitoring to address. One early example was the relationship between sanctions and Iran’s move from being a gasoline importer in 2009, to being “self-sufficient” in the production of such refined petroleum products a decade later.

Much later in the Iran experience, Washington had to broaden out its oil-based sanctions to account for how Iran diversified its economy to grow non-oil export earnings that came from places like the growing petrochemical sector. By 2020, petrochemicals made up about one-third of Tehran’s non-oil exports, and were such a critical component of the regional economy that even saw U.S. partners in the ranks of major purchasers.

Adversaries, like markets and industries, are not static. In response to the Trump administration’s maximum pressure policy, Tehran relied on a foreign exchange platform under the control of the Central Bank of Iran called NIMA to regulate the exchange of foreign currency among importers and exporters without the foreign currency moving through Iran’s financial system or accounts owned or controlled by the sanctioned Central Bank of Iran. This allowed the money to be transferred without touching the formal financial system, akin to a “Hawala” system but monitored directly by the Central Bank. This innovation installed a central monitoring system in the decentralized traditional Hawala system and allowed Tehran to alleviate its hard currency problem through more efficient use of export revenues by the private sector to fund imports.

Given how far U.S. adversaries are willing to go to bust sanctions, creativity should be treated as an element of national power and more welcome in the debate over enforcement measures. Bold actions, such as the seizure of Iranian tankers and forfeiture of their illicit oil cargos were a late but powerful component of the U.S. sanctions strategy against Iran. The further the United States is willing to go to enforce its penalties, the greater the transaction cost for the target state to continue its countermeasures. Psychologically, such moves signal that enforcement can be just as flexible and innovative as circumvention, thus aiming to deter future evasion efforts.

All else equal, the fourth lesson from the Iran experience is that multilateral sanctions are not necessarily more effective than unilateral ones. While this lesson does not aim to downplay the political and diplomatic costs of unilateralism and seemingly occasional irreverence for diplomacy out of Washington, it does aim to right-size such concerns given the risk-aversion of most large multinational enterprises and banks, the growth and importance of the compliance sector, the increasing use of U.S. sanctions, the position of the dollar as the world’s reserve currency, and other factors highlighting the outsized influence of the United States in the global financial system. While multilateral sanctions regimes can be treated as coalitions based around a “price-floor” interpretation of a perceived threat and what to do about it, reaching this consensus through international organizations like the UN Security Council or bilaterally with the European Union can be a lengthy and complex process that waters down sanctions and buy time for the adversary.

In the case of Iran, the unilateral sanctions imposed by the Trump administration were not less effective than the multilateral sanctions signed into law or imposed by President Barack Obama, which followed several rounds of UNSC sanctions. In fact, the takeaway for the 2018-2020 experience is that unilateral sanctions could be just as effective, if not more effective, and in record time. This is despite the skepticism of many U.S. policymakers and sanctions practitioners, as well as the efforts of the European Union to bypass U.S. sanctions. European governments went so far as to create a Special Purpose Vehicle for such trade, to no avail. When push came to shove, European banks and businesses broadly complied with U.S. sanctions regulations much to the chagrin and policy views of their own national governments.

In the case of Russia, European resistance against sanctioning Moscow had been stronger and better organized. But with Putin’s war continuing, considerable cracks have formed, and some European nations are reversing course by offering military aidpausing contracts, and supporting sanctions. Rather than hide behind early European foot-dragging, as some former administration officials have criticized, now is the time for the Biden administration to lead on sanctions efforts, taking a page from the U.S. playbook on Iran and SWIFT from 2018.

There are reportedly even areas where Washington may be able to offset the political cost of any unilateral economic measures by supporting multilateral diplomatic measures that some of its allies already have underway. One example is the Canadian and European decision to close their airspace to Russian planes. As time passes and if Russia’s military operations succeed, as a result of geographical proximity, energy dependence, and pressure from varied economic interest groups, European countries may be more inclined to pump the brakes on sanctioning Russia. It is crucial for Washington to remember that should these governments pull a U-turn, it can still influence the behavior of European companies despite the directives of their governments.

Last but not least, is a bureaucratic lesson. Given the centrality of sanctions to U.S. national security, it is imperative that Washington work to support and expand its financial warfare capabilities to include fully staffing and funding elements in the Department of the Treasury including but not limited to the Office of Terrorism and Financial Intelligence. By way of example, the enacted budget for that office in fiscal year 2021 was $175 million, a figure dwarfed by the country’s $777 billion military budget. As Washington’s reliance on sanctions and related tools expands, its economic warfare headquarters should similarly expand and modernize to make sure the programs they oversee are fully serviced. Sanctions can never replace the U.S. military’s function in deterring foreign adversaries or the State Department in supporting diplomatic efforts, but they are an important, in-demand, and multipurpose foreign policy tool which complements other sources of American power.

To be clear, sanctions alone are unlikely to fully resolve the Ukraine crisis. But this does not imply a vindication of the argument made by sanctions skeptics in the IranianRussian, or broader contexts. At present, the goal of sanctions should be to impose costs on the Russian economy that either make Putin’s tactical and strategic objectives too costly to achieve, change Russia’s overall cost/benefit calculation, weaken its economy, and deter further aggression. These sanctions can support, not replace, broader American policy goals related to countering Russia, supporting NATO, as well as send a message to a wide range of actors about American resolve and economic power.

Not holding back on enforcement of sanctions against the Central Bank, pushing for a full removal of Russian financial institutions from SWIFT, imposing blanket sanctions on Russia’s key economic sectors, and exploring ways to deal with cutting off the Russian energy trade are likely to be the most effective coercive and punitive tools Washington has in its arsenal of economic statecraft that need not wait for a new multilateral consensus. The Iran case has proved at least that.

Foundation for Defense of Democracies 

About Track Persia

Track Persia is a Platform run by dedicated analysts who spend much of their time researching the Middle East, in due process we fall upon many indications of growing expansionary ambitions on the part of Iran in the MENA region and the wider Islamic world. These ambitions commonly increase tensions and undermine stability.