US Secretary of Treasury, Scott Bessent claims that an “economic D-Day” is coming for Iran. The Trump administration announced on Monday sweeping new efforts to further isolate Iran in what has been dubbed, Operation Economic Outcast. Vice President JD Vance has indicated he hopes that this will give the US more leverage to return to peace talks, and yet Bessent seems to be implying that the goal of the operation is regime change.
While Vance’s objective is the more feasible of the two, this is no economic D-Day. D-Day demanded two years of planning. The Trump administration wasn’t even in power two years ago. D-Day also required building relationships with allied commanders. Trump just started a trade war with one of the US’s closest allies, Canada.
Beyond the D-day comparisons, the biggest issue with the success of Operation Economic Outcast is that it largely hinges on China, which imports 90% of Iran’s oil. Dealing a death blow to Iran’s economy requires taking on major Chinese firms and banks, and there appears to be little appetite to do that in the US. The timing isn’t great either. The Trump administration is attempting to reset its relations with China, with Xi Jinping set to visit the White House on September 24th.
The new sanctions will certainly raise the transaction costs for Iran to operate in the global financial system but will not fully constrain Iran’s ability to finance the war or lead to regime change. Additionally, the Trump administration has always tried to get quick results, and there is always a lag between an announcement and implementation.
The other issue is who the sanctions actually affect in Iran. Iran’s currency has dropped to a record low, and its middle class has completely eroded (the average teacher is now considered part of the working poor).
But the sanctions have not affected the intended target—the elites who run the regime. The Revolutionary Guards control up to 50% of Iran’s oil export revenues to fund its military operations and salaries. Moreover, the Revolutionary Guards were already extensively sanctioned before this announcement and are more powerful than ever.
What are the new sanctions being imposed?
The new sanctions would target nearly 60 Iranian linked individuals, companies and vessels covering networks in the UAE, Hong Kong, Singapore, Switzerland, China and elsewhere. Some of the sectors that could face secondary sanctions include petroleum products, cryptocurrency, technology, gold, aviation and shipping.
The Treasury states it can now sanction foreign persons (wherever they are located) who operate or provide services that support these sectors of the Iranian economy. Notably the Treasury Department is targeting front and shell companies, brokers, shipping companies and other intermediaries that help convert Iranian oil into revenue for the regime and for Iran’s Revolutionary Guards.
The US has not yet initiated sanctions on foreign countries or banks doing business with Iran but has set a deadline which specific actors will be notified about in due time to stop Iran related activity. Failure to stop working with Iran would result in exclusion from the US financial system though the US stopped short of immediately imposing penalties on major Chinese financial institutions.
China’s a lifeline to Iran, but not an ally
China is Iran’s biggest trading partner (it exports $14.5 billion to China and imports almost $18 billion) and plays a huge role in Iran’s economic survival. One of the reasons why is since the 2000s import volumes of Iranian oil expanded significantly as Chinese state firms also invested directly in Iranian oilfields.
The big refineries in China have avoided importing Iranian oil since 2019 after sanctions were reimposed on Tehran, concerned that this would cut them off from the US dollar-based international financial system. But this hasn’t mattered for the small independent Chinese refineries, known as teapot refineries (which are clustered around Shandong province) who do not need to access the US financial system. These teapot refineries get Iran crude oil at a huge discount and then turn it into petrol/gasoline and diesel for neighbouring provinces, becoming the main buyer of Iranian crude oil.
Getting the oil to China goes through Malaysia, Singapore, Vietnam, Indonesia or some unknown destination with trade settled in Chinese currency (which helps China promote the Yuan to weaken the dominance of the US petrodollar), through a series of difficult to track intermediaries.
Buying from Iran helps China diversify its energy sources, so that it does not need to rely too heavily on Saudi Arabia, Russia and other suppliers such as Brazil, Venezuela and even the US. The strategic partnership with Iran, which on some levels does carry risks for Beijing is seen as critical to resisting US pressure and Western dominance in global politics and gaining a foothold in the region to reduce US influence.
China and Iran signed a $400 billion dollar 25-year cooperation agreement in 2021 after Tehran placed greater emphasis on its “Look East” policy to develop closer relations with non-Western powers after Trump withdrew from the Joint Comprehensive Plan of Action (JCPOA) in 2018. Iran became an important energy supplier but also was important to China’s Belt and Road Initiative.
While Iran is very dependent on China—which acts as an economic lifeline, China and Iran are not close allies. China is willing to be a strategic partner when it suits Beijing but not a strategic ally as its engagement with Iran is entirely project and interest based and not driven by fixed obligations that entail any costs to China. While hopes in Iran were high after their 2021 cooperation plan was signed, the results have been limited and implementation has been slow.
And yet though Chinese-Iranian ties do not run deep, China usually refuses to be intimidated by the US. Beijing has already denounced the threat of US sanctions for its trade with Iran, claiming that they would be illegal and warning that it will take all necessary means to protect its national interests.
China’s cooperation with the US is crucial, but unlikely
While China rarely publicly capitulates, Beijing has had a pattern of making some tactical partial concessions in the face of threats. This means that Chinese refiners are likely to seek out alternative sources of supply, while China preserves a reduced but significant Iranian relationship. There is already evidence of Chinese buyers turning towards Brazilian and Iraqi crude oil, which will undoubtedly hurt Iran’s economy.
But to truly bring Iran’s regime to its knees, total cooperation from China is vital. Though that sounds far-fetched, in 2010 China backed UN Security Council sanctions on Iran. Without Beijing’s full cooperation, the most likely scenario is that the conflict will remain protracted and in limbo, as Iran finds alternative ways to circumvent the new restrictions.
The Trump administration is hoping for a knock-out blow, but the new sanctions will mostly increase tension with China, cripple Iran’s economy but do little to dislodge the regime, whose grip on power remains firmly intact.