How snapback sanctions will test Iran's economic resilience

After half-hearted, last-ditch diplomatic efforts to salvage the 2015 JCPOA nuclear deal with Iran collapsed, UN ‘snapback sanctions’ have been re-imposed on Tehran.

Though these restrictions add pressure to Iran’s already struggling economy, the impact on the energy sector and trade may be limited. They may, however, leave space for further bans down the road.

Comprising six restrictions on ballistic missile technologies, nuclear-related activities, travel, banking, and asset freezes, none of the resolutions directly target energy exports.

As a result, there could be more US sanctions to add to the “maximum pressure” doctrine, with some analysts expecting a further escalation in the Iran-West confrontation.

Assessing that the impact of the snapback sanctions could go beyond oil, Rachel Ziemba, a senior adviser at political risk consultancy Horizon Engage, has said that the snapback sanctions could worsen the long-drawn stand-off between Iran and the West.

As Henry Rome, a senior fellow, and Louis Dugit-Gros, a visiting fellow at the Washington Institute, had predicted in their 2022 policy analysis, any economic sanctions under the snapback mechanism would likely be “marginal compared to the existing US secondary sanctions”, and this measure could prove to be just an “emergency stop button”.

Further sanctions on gas?

If the confrontation between Iran and the West grows further, and snapback sanctions prompt EU states, or the UK, to re-impose broader measures, the rift could extend to Europe.

This time, Iraqi imports of Iranian gas could be hit, and this would affect Iraq almost as much as Iran. Even after the 2018 US sanctions were re-imposed, Iraqi gas imports from Iran have continued under waivers.

Under Iran-Iraq agreements in the late 2010s and early 2020s, Iraq imports nearly 1.2 GW/d of electricity and 40 mn ft/d of gas from Iran.

Explaining why more sanctions might be needed, Ziemba pointed out that the returning UN sanctions have “limited scope”, due to the “extent of existing US sanctions”, and the “breadth of [Iran’s] illicit trading channels”.

How Iran's oil trade has survived

The US sanctions reintroduced in 2018 were so severe that Iran had to devise workarounds to sustain its oil exports by building alternative trading routes, with China remaining its most reliable buyer.

Executed primarily through illicit networks and a “shadow fleet” of tankers evading detection, Beijing absorbed over 90% of these volumes.

Notwithstanding the sanctions in place since 2018, Iran is exporting nearly 1.5mn b/d of crude, though less than the 2.3 mn b/d it exported before sanctions, which triples the volume shipped between 2020 and 2021.

Dr. Umud Shokri, energy strategist and senior visiting fellow at George Mason University, told The New Arab that the 2018 sanctions affect Iran’s regular oil trade by “markedly impeding Iran’s petroleum shipments, by zeroing in on Iran’s crude output, shipping logistics, and related monetary dealings, rendering it challenging for Iranian crude to access worldwide buyers through lawful or cost-effective channels”.

But with unofficial fallback options in place, Tehran does not seem worried about new snapback bans. Iran’s oil minister, Mohsen Paknejad, has said “the snapback should not add much to the restrictions already in place”.

Conceding that the new measures “may cause some hardships”, he added that Tehran would implement its own counter-measures in due course.

Can Iran's energy trade still be controlled?

Though the snapback has skipped direct prohibitions on the energy sector, a provision in the UN sanctions allows the US and other UN members to board and inspect vessels suspected of carrying nuclear or missile components, or other sanctioned materials.

And if an entity like the Islamic Revolutionary Guard Corps (IRGC) can be linked to oil supplies, the shipment could fall under the snapback ambit.

Hypothetically, countries like Malaysia, Singapore or China (where most Iranian ship transfers are taking place) could be asked as UN members to enforce the sanctions on ship-to-ship transfers involving Iranian oil, or prohibit Iranian oil from passing through their waters, but this might not be easy to enforce.

A lot depends on whether they are willing to cooperate and if they have the resources to do so.

Debating whether Russia and China’s opposition to the snapback can help with Iran’s oil trade, Shokri observed that, “even with countermeasures, like alliances with nations such as Russia or re-routed trade pathways”, the sanctions could “slash Iran’s export quantities over the near and immediate horizons”.

Economic impact

In June, the Iranian rial collapsed against major international currencies, losing over 12 % of its value, and the point-to-point inflation rate reached 45.3 % in the last couple of months.

Zeeshan Shah, an analyst at FINRA in Washington, told TNA that the JCPOA had “at least held the promise of allowing Iran to re-integrate with the world economy”.

But now, Iran would “once again have to resort to a sanction-busting/evading oriented” economy, which creates huge economic distortions and fuels inflation further.

Shokri noted that banking restrictions have “severed Iran’s ties to global finance and commerce webs, snarling the procurement of vital supplies, equipment, and tech”. Then there are penalties on the maritime, air transport, and reinsurance fields as well.

Fuelling social and economic woes, Shokri observed that snapback sanctions fracture distribution networks, deter overseas capital and “amplify fiscal squeezes on Iran via assaults on key industries outside energy, entrenching its market seclusion and thwarting quests for equilibrium and prosperity”.

But a European diplomat, speaking on condition of anonymity, has told TNA that from Tehran’s perspective, the return of sanctions is “hardly something new”.

He said that the country has “essentially grown up under sanctions and has been preparing its economic operators for this scenario since last year”.

In the diplomat’s opinion, the most impactful restrictions have already been in place for years, limiting business with Iran.

Iranian leaders can manage the sanctions, both technically and administratively.

“While there’s undeniably a psychological impact, particularly on inflation and the currency, they remain confident in their ability to navigate this situation.”

Looking east

Instead of constraining Iran, the snapback could cement Tehran’s pivot to Asia.

Iran has very few options now as its “nuclear program is in tatters, while it remains vulnerable to future Israeli strikes and it has no air defence capabilities,” Shah told TNA.

In his opinion, the only silver lining is that Russia and China have not accepted the snapback, allowing Iran to foster economic ties with them, and also Pakistan and the Gulf states.

Shah noted that Iran’s major weakness has been its economic dependence on the West due to its inability to create alternate economic ties with China. He added that Iran had also tried with India, but “the Indians moved very cautiously”.

Meanwhile, the European diplomat said that Tehran has been “relying on the fact that major economic blocs like China and Russia have openly opposed these sanctions and do not recognise their legitimacy”.

For Tehran, therefore, “the scenario remains consistent with what it has been before, and it can continue doing business with China, Russia, and other countries that do not recognise US sanctions”.

In the worst-case scenario, hardliners in the Tehran administration can also use this development as an excuse to speed up nuclear activity, without caring for IAEA compliance.

If the snapback sanctions cannot deter Iran from nuclear activity, this unhappy end to the JCPOA will have triggered the worst crisis in Tehran’s relations with the West, while alienating the Iranian public.

Sabena Siddiqui is a foreign affairs journalist, lawyer, and geopolitical analyst specialising in modern China, the Belt and Road Initiative, the Middle East, and South Asia.

Follow her on X: @sabena_siddiqi