How the US could squeeze Iran with economic isolation – and the risks involved

The United States Treasury Department, under Secretary Scott Bessent, is reportedly exploring intensified economic measures to further isolate Iran, despite the country already facing extensive sanctions and a naval blockade. The proposed strategy aims to target remaining pressure points, primarily focusing on entities facilitating Iran's oil exports, which are overwhelmingly purchased by China. This approach, however, carries significant risks of economic blowback for the US and could exacerbate geopolitical tensions.

Scott Bessent's Strategy

Treasury Secretary Scott Bessent has indicated the US is preparing to exert "unprecedented economic pressure" on Iran. This comes amidst skepticism from critics who point to the existing thousands of sanctions already in place. While the specific actions remain undisclosed, the Treasury Department is considering targeting Chinese banks, shadow fleets, and exchange houses that enable Iran's oil trade. The primary objective is to directly reduce Tehran's oil revenues, which are heavily reliant on sales to China, accounting for over 90 percent of Iran's oil exports.

The administration has already imposed penalties on some Chinese teapot refineries and firms since the conflict began in late February. However, a significant escalation would involve sanctioning major Chinese financial institutions that facilitate these transactions. This move represents a critical juncture, as it would directly challenge China's economic interests and could have far-reaching implications for global financial systems.

Chinese Teapot Refineries

A key target in the US's potential new sanctions regime is the network of Chinese entities, including "teapot refineries," that process Iranian crude. Washington has previously sanctioned some of these smaller, independent refineries and associated firms. These entities play a crucial role in circumventing existing sanctions, allowing Iran to continue exporting oil at discounted rates. By tightening the screws on these operations, the US hopes to further constrict Iran's access to foreign currency.

However, the more impactful, and risky, step would be to target the larger Chinese banks that provide the financial infrastructure for this trade. Such a move would represent a significant escalation from previous actions, which have largely avoided directly confronting major Chinese financial institutions. The decision to target these larger players would signal a heightened commitment to isolating Iran, potentially at the cost of broader economic stability and diplomatic relations.

Donald Trump and Xi Jinping

The prospect of sanctioning major Chinese banks introduces a substantial geopolitical risk, particularly ahead of a planned meeting between US President Donald Trump and Chinese leader Xi Jinping. Such aggressive economic measures against China could severely worsen already strained US-Beijing relations. The Trump administration faces a delicate balancing act: pursuing its Iran policy objectives while attempting to manage its complex relationship with China.

Bloomberg Economics analyst Chris Kennedy highlights this dilemma, suggesting that unless the US president prioritizes the Iran threat above all other issues, especially China, any action taken is unlikely to materially alter Iran’s strategic calculus. Furthermore, curtailing Iranian oil barrels from the global market would remove a source of discounted crude, potentially leading to a rise in already elevated oil prices. This economic trade-off could have domestic implications for the US, including higher petrol prices for consumers, adding another layer of complexity to the administration's decision-making process.