Iran’s status as an economic outcast is nothing new. It’s been a pariah in the eyes of much of the world for literally decades.
Over the years, the United States has slapped Iran with countless sanctions targeting its banking system, shipping companies, oil industry and military.
That’s why Operation Economic Outcast, the highly-anticipated sanctions campaign unveiled by US officials this week, doesn’t pack as much of a punch as the Treasury Department’s “Economic D-Day” rhetoric might suggest.
Years and years of punishing sanctions have limited how much further action the United States can take.
“It’s hard to know what to make of ‘Operation Economic Outcast’ because it’s mostly just an announcement that there will be future announcements,” Justin Wolfers, economics professor at the University of Michigan, wrote in his Substack newsletter.
Iran was already cut off from much of the global financial system. Inflation was already staggeringly-high. Basic necessities have long been in short supply.
“There are diminishing returns. This country has been an economic pariah for 50 years now and the regime is still there,” said Aya Ibrahim, visiting fellow at Georgetown University’s McCourt School of Public Policy and a State Department official in the Biden administration.
It’s akin to a referee trying to punish a hockey player who has already been ejected from the game. At a certain point, the punishment can be unsatisfying and lose its impact.
But US officials are betting that cranking up the pressure yet another notch – Operation Economic Outcast includes slapping sanctions on more than 60 targets, threatening sanctions on countries dealing with Iran and forcing every branch of Iran’s Bank Melli to be closed – will be enough to finally topple the regime, or at least spark the diplomatic breakthrough the economy craves.
Of course, Washington does have another big lever left to pull: Targeting Chinese banks that are allegedly enabling Tehran.
Asked about applying secondary sanctions on Chinese banks, Treasury Secretary Scott Bessent warned Monday that “no one is above the reach of US sanctions” and any entity that facilitates Iranian transactions “will be targeted.”
And yet Bessent stopped short of taking such action. That suggests the Trump administration does not have political appetite to go there – at least at this point.
US Treasury Secretary Scott Bessent speaks during a press conference on August 24 to outline further sanctions against Iran.
Evelyn Hockstein/Reuters
Bessent gave a telling and surprisingly candid response when CNN’s Kevin Liptak noted D-Day in 1944 was an actual invasion, not a threat to invade, and asked why Treasury did not take immediate action.
“Why would I want to blow up the global financial system?” Bessent said.
Bessent’s answer indicates that US officials worry going after Chinese banks would be crossing a red line.
“Secondary sanctions could be very impactful – but there is a real question of political will,” said Ed Mills, Washington policy analyst at Raymond James.
Mills expects Operation Economic Outcast will ramp up the pressure on Iran – but only incrementally. That could include sanctions against entities in India, Malaysia or other countries if they’re found to be aiding Iran.
“It’s not like this will be without consequence. But the largest lever probably does not get pulled,” he said.
The fear is Beijing could retaliate by hitting a key US vulnerability: Rare earths elements.
China has a virtual monopoly on these minerals, which are critical to making everything from cars and jet engines to smartphones and even the dye used in MRI machines.
“Major parts of our economy do not work without rare earth minerals from China – including autos, aerospace and semiconductors,” Mills said.
Bulldozer scoop soil containing various rare earth to be loaded on to a ship at a port in Lianyungang, east China’s Jiangsu province in 2010, for export to Japan.
AFP/Getty Images
Beijing has already showed a willingness to play that card against Washington. A looming shortage of rare earths last year threatened to set off Covid-like supply disruptions.
“We learned very quickly we cannot afford that lever being pulled,” Ibrahim said.
A rare earth shortage would be an economic and political nightmare for the White House – especially right before the midterms.
A recent study that examined almost two million social media posts by Iranian influencers during previous rounds of sanctions found those punishments don’t necessarily weaken support for the Iranian government.
In fact, researchers found sanctions have at times backfired by fracturing opposition and boosting support for the regime – even among moderate opponents of the government.
“You can make a country poorer for decades, but you don’t get to choose what its politics become,” said Wolfers, the University of Michigan professor.
Wolfers said the idea of using economic isolation to topple a regime isn’t new at all. It’s a playbook Washington has tried for more than six decades against Cuba.
“It’s remarkable how much of the current moment looks like a barely edited rerun,” Wolfers said.
Some also worry that Washington’s willingness to use its leverage in dollar-dominated financial system could backfire.
Washington’s heavy sanctions hand in recent years – against Russia in the Biden years and now Iran under Trump – could embolden countries to find an alternative to the dollar, undermining the US role in the global banking system run by the SWIFT payment network.
“We believe the risk is real,” Jaret Seiberg, managing director at TD Cowen’s Washington Research Group, wrote in a note to clients on Monday. “The more broadly the US weaponizes dollar access, the greater the risk countries and banks start looking for alternatives.”
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