US President Donald Trump is doubling down on using economic pressure on Iran to reopen the Strait of Hormuz, but the remaining levers at his disposal carry a set of risks.
Iran remains the second-most sanctioned country on the planet. More than 6,000 sanctions have been issued against its financial, energy and petrochemical, aviation and cryptocurrency sectors. This is in addition to a secondary sanctions framework that the US has used to discourage third countries from engaging in trade with Tehran.
Leading economic indicators in Iran are flashing red: figures from the central bank showed inflation accelerated at a 53.9 per cent pace from April 20 to May 20, compared to 36.8 per cent over the same time last year. The International Monetary Fund expects a contraction of 6 per cent this year and the rial recently sank to an all-time low against the dollar.
“Economic Fury has left the regime desperate for cash. Iran’s economy is in free fall, inflation has skyrocketed and, as President Trump said on Sunday, the regime’s ability to pay its troops has been decimated,” a Treasury representative said.
Tehran, which has weathered numerous sanctions since 1979, remains defiant.
“Iran has demonstrated over decades that it will not be strangled by these exhausted refrains,” Esmaeil Baqhaei, spokesman for the Ministry of Foreign Affairs, wrote on X on Monday.
As negotiations on a durable ceasefire remain stalled, and with Iranian leadership facing an existential crisis, the question is which of these economic levers Mr Trump pull, and at what cost.
“The economic levers that it's got left that are viable – there's not a lot,” said Ryan Bohl, a a senior Middle East and North Africa analyst at the Rane Network.
Because of its isolation from the global financial network, Iran relies on a shadow banking system to evade sanctions. This network consists of Iran-based exchange houses and foreign companies to sell oil and other products abroad and launder the money, which it uses to support its proxy groups and fund its military and weapons programmes.
The Treasury clamped down last week, taking aim at crypto exchanges and clandestine currency networks. The latter was the Treasury's eighth action this year targeting Iran's shadow banking structure.
“I think we could see more of that. As Iran finds new alternate channels, we could see US sanctions in that way,” said Rachel Ziemba, founder of geopolitical risk firm Ziemba Insights.
Considering the regime's ability to circumvent sanctions, Ms Ziemba questioned whether new designations would have a meaningful effect on Iran's economy. “They'll probably be more about closing loopholes rather than additional components,” she said.
There are additional measures the US can use under Section 311 of the Patriot Act, which authorises the Treasury secretary to designate foreign financial jurisdictions, citing money-laundering concerns.
Blockade brings new squeeze
The biggest change in US policy came with the implementation of the naval blockade aimed at preventing Iran from exporting its oil.
By pairing military enforcement with leverage over financial institutions, the blockade introduced a new, physical dimension to US sanctions architecture.
Iran’s oil exports quickly dried up. Its seaborne crude exports fell from two million barrels per day to 200,000 when the blockade was in effect, before tanker traffic surged after it was lifted, cargo-tracking company Vortexa said.
The Treasury Department said average loadings of Iranian oil have declined from prewar levels of 1.8 million bpd to less than 500,000 over the past month.
The blockade has cost Iran $435 million in economic activity each day, according to research from the Foundation for Defence of Democracies.
“That’s been a game-changer in terms of further economic effect,” Ms Ziemba said.
It also cut off a key purchaser in China, which takes in about 90 per cent of Iran's oil exports. China is one of the few countries willing to take on the sanctions risk and bypass the measures through so-called teapot refineries.
TankerTrackers said it estimated Iran exported more than 50 million barrels of crude oil during the brief window in which the blockade was lifted.
“Because so much of it was off transponders, it's hard to tell where all of it went but it flooded out to India, to China, to countries that basically had a backlog and were taking that opportunity to get as cheap of oil as they could,” Mr Bohl said.
The Lindsey Graham Act, passed by the Senate last week, would provide Mr Trump with more leverage to hit Iran through secondary sanctions and tariffs. “But the issue is it would probably cause energy prices to go up, which Trump doesn't want to see,” Mr Bohl said.
Friends and foes
Secondary sanctions and further measures could also alienate key partners, while inflaming tension with China, the chief US economic rival.
“It's absolutely intertwined with the broader bilateral relationship between the US and China,” said Alex Zerden, a former Treasury official and founder of Capitol Peak Strategies.
Mr Trump appeared to recognise the balance he needs to strike in his approach towards China. He warned Russia and China last month that supporting Iran “would be very bad for them”, before acknowledging that while the two countries may have provided support to Iran, the impact was minimal.
This comes as Mr Trump is due to host Chinese President Xi Jinping next month in a high-stakes summit. Trade tension is already bubbling between the two after a series of tit-for-tat sanctions.
The latest episode echoed last year's tariff row that threatened to derail the global economy. The latest summit is seen as an opportunity for the leaders to extend a trade truce they had agreed to late last year.
“The question is to the degree and how provocative or escalatory the US might be in the lead up to the next summit or subsequent summits,” Mr Zerden said.
