Skip to Content

Iran Sanctions Stoke Up International Tensions: Here’s What You Need to Know

The U.S. unleashed a fresh wave of sanctions against Iran on Monday, targeting its crude oil exports and its shipping and banking sectors.

This is the second tranche of American sanctions on Iran since President Donald Trump decided to pull the U.S. out of the Iran nuclear deal, which aims to stop the Iranian government from developing nuclear weapons. The previous tranche, in August, targeted Iranian currency transactions, its automotive sector and its trade in gold, aluminum, steel and other metals.

This time, however, the U.S. sanctions are stoking up international tensions to a more severe degree. Here’s what you need to know about the situation.

What’s the deal with Iran’s oil?

Last year, Iran was the sixth-biggest oil exporter in the world. Oil is the country’s top export. These latest sanctions are, as such, designed to hit Iran hard – in the words of U.S. Secretary of State Mike Pompeo, this is a strategy of “maximum pressure” that aims to “alter the Iranian regime’s behavior” regarding its nuclear ambitions and support for groups such as Hezbollah.

In general, countries are now supposed to avoid buying Iranian crude, unless they want to incur American wrath. However, the U.S. has granted eight temporary waivers to countries that will let them wind down their imports over time. The recipients haven’t been officially named, but they reportedly include Japan, India – which previously said it wouldn’t play ball on the sanctions – and South Korea.

What about China and the EU?

This is where the new Iran sanctions collide with separate international tensions, over trade.

China, which has been Trump’s main sparring partner on the trade front, is Iran’s main oil customer. It is currently unclear whether or not China is on the waiver list, but the country’s foreign ministry said Monday that the sanctions were regrettable, and China’s trade cooperation with Iran should be respected.

The EU, which Trump is still threatening with trade tariffs, is not on the waiver list. This is unsurprising, as the EU strongly opposed U.S. withdrawal from the nuclear deal, and has always said it would continue trading with Iran. The waivers were only given to countries that are seriously trying to cut out their imports of Iranian oil.

On Monday, the EU reiterated its stance. “The European Union does not approve of it,” said European Economic Affairs Commissioner Pierre Moscovici, regarding the sanctions.

However, the Europeans need to figure out a way to maintain that trade with Iran without enraging the U.S. As reported Monday by the Financial Times, the EU has been preparing a “special purpose vehicle” to safeguard that trade, but it’s not yet ready. The Europeans still need to figure out where the vehicle will be located and who will participate in it.

And even if the vehicle works, Iran needs to be able to receive money for its wares.

What about those financial sanctions?

The Society for Worldwide Interbank Financial Telecommunication, or Swift, is based in Belgium. Iran won’t be able to get paid for its oil without the payments going through this network, even if countries agree to bypass the U.S. sanctions.

On Friday, the U.S. confirmed that it would expose Swift to sanctions if it did not cut all ties with Iranian financial institutions – with the exception of payments for food and medicine. That compromise aside, the Swift move is a victory for Iran hawks in the U.S. administration, such as National Security Adviser John Bolton, who feared the creation of a sanctions loophole.

Swift now needs to decide whether or not to abide by the U.S. demand – a decision that could involve breaking EU rules – although it may well be that banks will now shun Iranian transactions whatever Swift decides.

So this is a moment of great tensions between the U.S. and the EU. Iran, meanwhile, has made noises about possibly blocking the Strait of Hormuz in retaliation against U.S. oil sanctions – a move that would make it difficult for countries such as Saudi Arabia and Iraq to ship their crude.

Oil prices fell by 30 cents a barrel Monday as the sanctions took hold. The world’s biggest producers, including Russia, the U.S. and Saudi Arabia, have been preparing for this moment for months by increasing their output.