The Iran deal reflects the U.S.’s overwhelming power over the world’s financial system

There is good reason to believe that Iran was prepared to reach a deal over its nuclear program because it was tired of dealing with U.S. sanctions. In President Obama’s words, “We put sanctions in place to get a diplomatic solution, and that is what we have done.” This is a remarkable victory for U.S. economic diplomacy, given how difficult it is to create and maintain an effective sanctions regime. How did it happen?
It’s hard to make sanctions work
Policymakers–especially U.S. policymakers–are fond of applying sanctions. Academics who study sanctions rigorously are often very skeptical that they can get states to change what they are doing. As our Washington Post colleague Daniel Drezner noted in a highly influential research article, it’s especially hard to maintain big multilateral sanctions programs, which rely on the cooperation of many states. International organizations like the UN can help by making sure that all the sanctioning states are on the same page, but they are not a panacea.
As Nick Miller argues in new research, there is evidence that sanctions can deter states from starting up nuclear weapons programs in the first place. But this is likely much easier than getting a state to abandon a nuclear program that it has already started.
U.S. financial power makes it easier
The sanctions program against Iran was supported by the United Nations. The U.S. engaged in an extended diplomatic effort to get the UN Security Council to sign up to extensive sanctions against Iran. It also succeeded in getting the European Union to impose tougher sanctions against Iran, to the chagrin of European energy companies.
However, the willingness of the U.S. to impose “secondary sanctions” against non-U.S. firms that did business with Iran was arguably just as important. In a series of actions, the U.S. has imposed hundreds of millions of dollars in fines on financial institutions dealing with Iran. The European Union also required SWIFT–a key intermediary in all financial transactions–to cut Iranian financial institutions out of its system.
Together, these steps effectively froze the Iranian economy out of the world financial system. This has had drastic consequences for the Iranian economy. It made even basic international financial transactions overwhelmingly difficult. It has also meant that U.S. allies and other states have had less incentive to backslide from the sanctions regime, since their companies are vulnerable to U.S. regulatory action, if they have even very slight contact with the U.S. financial system.
The U.S. will forgo secondary sanctions–but not primary sanctions
The deal has not been officially released yet. However, it appears that Iran will see substantial relief from international sanctions (with a clause that would allow them to be reimposed if Iran appears to be reneging) and from U.S. secondary sanctions (that is, U.S. sanctions against businesses in other countries that do business in Iran).
The U.S. does not appear ready to give up its primary sanctions, which stop the U.S. from doing business with Iran. In other words, the U.S. will stop sanctioning foreign firms that do business with Iran. It will not stop sanctioning U.S. firms that do business with Iran.
It remains to be seen whether the U.S. can and wants to maintain this stance over the longer term. Energy companies from other countries are salivating at the prospect of jumping into Iran to make money from helping to revive its moribund and inefficient extraction system. Big and influential U.S. energy companies are denied these opportunities, and are probably not especially happy at the prospect of their competitors thriving.
Read more about the Iran nuclear deal at the Monkey Cage: