Reduced Trade Sanctions for Iran: How Embargoes Work

by Dan Minutillo, Partner

  • International Trade Law

Over the summer of 2022, US and EU diplomats hinted that the “Iran Joint Comprehensive Plan of Action” (JCPOA) affecting Iran’s capability to develop nuclear weapons might be revived. If revived, the US and EU would reduce secondary sanctions against Iran so long as Iran followed the program set forth in the JCPOA, thereby reducing Iran’s capability to develop nuclear weapons.

Iran is presently embargoed by the US government. An embargo is a comprehensive, country-specific, or region-specific sanction. For example, the country of North Korea is under a country-wide embargo by the US, but the Crimea Region of Ukraine is under regional sanction (a specific part of a country) after it was annexed by Russia. If a country or region is embargoed by the US, then no US citizen, company, or entity, wherever located worldwide, can transact business with any person or business in the embargoed area. An embargo is a severe sanction and basically cuts off the embargoed country from transactions with US persons or US companies. Iran is presently a US embargoed country.

The US and EU have used sanctions imposed on Iran as a bargaining chip to prompt Iran back to the negotiating table to revive the JCPOA. The purpose of this article is not to discuss the revival of the JCPOA but to illuminate how sanctions work.

The US can impose primary and secondary sanctions against an embargoed country. A primary sanction affects US citizens or companies wherever located in the world. A person or business subject to a primary sanction cannot transact business with a counterpart in an embargoed country. A secondary sanction might apply to a non-US citizen or non-US business, prohibiting business transactions with a counterpart in an embargoed country. If the COA is re-instituted, secondary sanctions imposed by the US and EU will likely be mitigated against Iran.

Once sanctions are imposed by the US, it can institute general licenses which carve out pieces of the sanction, thereby allowing specific activities. As an example, the US could institute a full embargo against Iran, allowing no personal or business transactions between US citizens and companies with counterparts in Iran. But, after the embargo is imposed, a general license might be put into place allowing Us citizens to send money or personal items to family members in Iran or allow US citizens to help charities or provide medical supplies to Iran. Most notably, if the US maintains a policy of encouraging the use of the internet in Iran to promote the exchange of ideas between Iranian citizens and the rest of the world, then the US can allow through general license the export of products, like email, chat, etc., enabling Iranian citizens those forms of communication globally. Selling these types of products into ran would be a carve-out to the embargo.

Sanctions, prohibitions, and embargoes are imposed by the US and other countries to advance a concept, e.g., democracy, the free flow of information, to deter the development of weapons, to tumble an autocrat, or to economically squeeze a country until it changes aggressive behavior like in the case of Russia as related to Ukraine.

The US has a powerful bargaining tool to encourage countries to act in a certain way advantageous to US interests. That bargaining tool is the strength of the US economy and its web-like presence in the world. If secondary sanctions are minimized by the US and EU against Iran, financial transactions between Iran and West leaning countries will be easier, allowing a bit more business as usual and less transactional constraints on Iran. This mitigation will brighten the Iranian economy. The possibility of the re-imposition of the sanction will encourage Iran to uphold its part of the JCPOA – the effect of a US embargo.