Five Lessons Learned From Sanctions on Iran for the Ukraine Crisis

Five Lessons Learned From Sanctions on Iran for the Ukraine Crisis

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, or deter further aggression.

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 sales, port 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.