In June, as the bombs were falling on Tehran, a curious thing happened: Iran’s crude oil exports briefly spiked. Despite being bombed, Iran was not deterred from shipping oil—nor were its customers in China discouraged from continuing to buy the oil, in defiance of sanctions.
While U.S. President Donald Trump likely didn’t want Israel to bomb energy facilities, the reason for Iran’s success was simple: Sanctions no longer work. At least, not as originally intended.
Sanctions are conceived to be coercive tools, inflicting economic pain until a state changes its behavior. In practice, however, states resist sanctions, absorbing the costs while exploring ways around them. Rather than change state behavior, sanctions change markets and reshape economic relationships, redirecting oil into channels built around geopolitics rather than commercial logic.
Now, the age of oil sanctions as a coercive tool is coming to an end. While many in Washington will still be tempted to double down on sanctions as a tool to decouple from China, U.S. policy would be better served by pivoting to other, less disruptive tools.
The cases of both Iran and Russia show the rise and fall of oil sanctions as a tool of economic statecraft. Following the U.S. departure from the nuclear deal with Iran in 2018, reimposed sanctions caused Iran’s oil exports to decline, as its traditional customers in Western Europe and East Asia turned to alternative sources. Iran’s exports dipped near zero in 2020 amid the COVID-19 pandemic.
Once the pandemic-related restrictions were over, however, Chinese purchases of Iranian crude oil surged, recently rising to nearly 2 million barrels per day, and single-handedly bringing Iran’s total exports back up to near their pre-sanctions level. China relies on Iran for about 14.6 percent of its total crude imports.
Rather than disappear, the market for Iran’s oil has been reshaped around the new reality that sanctions have created. While conventional customers remain deterred from touching Iran’s oil, it has become more attractive to buyers without sanctions exposure: specifically, smaller Chinese refiners, known as “teapots,” that serve local demand and deal in nondollar financial channels. Beijing, appreciative of gaining a means of leverage over Tehran but unwilling to take the relationship much further, has obscured the trade in customs data to maintain deniability.
Unlike the sanctions on Iran, Washington’s 2022 sanctions on Russian oil have targeted the country’s finances rather than the physical flow. Measures such as the G-7 price cap were meant to limit Russia’s ability to earn revenue without removing Russian exports from the market—something that Western leaders felt would negatively impact prices.
But targeting Russian revenue didn’t work as hoped. While squeezed, Russian finances have withstood the pressure, although—like other producers—Moscow is grappling with lower prices. Pushed out of Europe, the natural market for its products, Russia now ships its crude through circuitous routes to Asia, where it is in high demand among refiners. Sanctions provide attractive commercial loopholes for India, where refiners buy Russian crude at a steep discount and then reexport the products to Europe, pocketing substantial profits. Just as it does with Iran, Beijing benefits from shackling Russian energy to its massive domestic market, retaining a useful source of potential leverage in its relationship with Moscow.
In neither case did sanctions change state behavior. Iran defied U.S. pressure on its nuclear program, while Russia has not backed down over Ukraine. Efforts to isolate both countries— as well as Venezuela—from the global oil market have instead made these producers dependent on Chinese demand and, in turn, provided Beijing with captive sources of crude and other products.
There have been other negative side effects. The sanctions, while modestly weakening the Russian and Iranian economies, have on balance strengthened the authoritarian regimes in each country. Money now flows into fewer hands—creating incentives for the actors dominating these regimes to keep sanctions in place. Moreover, sanctions have diminishing returns. And as their exposure to the global economy decreases, Tehran and Moscow have less to lose from further sanctions action. While the United States continues to roll out new measures based on a sophisticated understanding of illicit oil networks, they cannot stop the flow entirely.
Recent U.S. policy moves reflect these shortcomings. Trump’s decision to greenlight strikes on Iran served as a tacit acknowledgement that economic pressure wasn’t going to move Tehran toward making concessions (though it’s still unclear if bombing will do any better). In addition, Trump’s recent threats to massively escalate sanctions and tariffs on Russia are largely seen as a negotiating tactic.
This gets to another limiting factor of oil sanctions: If it pushes too far, the United States risks shocking the market and raising prices. That’s why Trump is unlikely to impose 100 percent tariffs on anyone buying Russian crude, just as he has proved unwilling to go after Iranian oil and seemed relieved when Iran’s war with Israel ended without a supply disruption.
With their utility as coercive tools diminished, it’s time to ask what oil sanctions are good for. Even if sanctions are ineffective at changing state behavior, some might argue that they could still be useful in forcibly decoupling Washington from China, which continues to import large volumes of U.S. oil and other energy products.
Yet even here, sanctions carry risks. Though fractured by U.S. measures targeting Russia and Iran, the global oil market is still liquid, with disruptions affecting prices across all major consumers. While the United States and its allies have pushed Russia and Iran into the arms of China (or more specifically, Chinese refiners), efforts against an economic actor such as China—which is the biggest energy importer in the world and consumes more than of the world’s oil supply—would not be contained quite so easily.
Moreover, decoupling via sanctions would require Washington to threaten secondary sanctions on U.S. and European actors that are engaged in trade with China. U.S. energy companies that send billions of dollars’ worth of natural gas, crude oil, and products such as ethane to Chinese consumers would suddenly lose access to the biggest energy consumer in the world.
While painful for China, such a move would be disastrous for U.S. producers, as it would glut the United States’ domestic market and force contractions at a time when energy firms are being squeezed by low prices.
Rather than double down, Washington should reassess the utility of oil sanctions or, more boldly, consider abandoning the effort altogether. With Iran, the United States can dangle relief from sanctions as an incentive for getting the country into a nuclear deal while acknowledging that its ability to meaningfully constrain Iran’s ability to export oil (beyond bombing) is limited. With Russia, the United States should make a similar pivot, leaning more heavily on alternative means, including extending support for Ukraine and targeting Russian weapons exports.
For both Russia and Iran, the United States can continue to make use of targeted sanctions that limit the ability of individuals, companies, and government agencies to operate in Western financial networks. This might not cut their ability to produce and export oil, but it does limit their ability to profit more extensively from doing so. If the United States committed to decoupling from China, then it would be better to do so through gradual and targeted measures, such as export controls and selective tariff barriers, and in conjunction with allies in order to manage the decoupling process in a way that does not produce price shocks for consumers.
Sanctions on oil can be maintained, but imagining that they will change Iranian or Russian behavior in a meaningful way is a pretense that needs to be dropped. At the same time, Washington and its allies should recognize the new reality—sanctions have reworked the global oil market, forcing Iran and Russia closer to China and bifurcating global energy flows along geopolitical rather than commercial lines.