27.08.2026

Upping the sanctions war

Having predictably failed to overthrow the Tehran regime through air power, the US has turned to threatening Iran’s trading partners, the most important being China, of course. Not surprisingly, says Yassamine Mather, there is no sign of a deal happening in the immediate future

Donald Trump’s administration has shifted emphasis from directly attacking Iran militarily to blockading and sanctioning it: a different form of warfare. Treasury secretary Scott Bessent has described Washington’s D-Day measures as an unprecedented attempt to isolate a country economically through possibly sanctioning those helping Iran to circumvent sanctions. Meanwhile, defence secretary Pete Hegseth says that the US navy can maintain the maritime blockade against Iran “indefinitely”.

The purpose is clear: reduce Iran’s oil income, restrict access to the international financial system and make confrontation progressively more expensive for Tehran. Washington has not abandoned its military options: American forces remain positioned in the region and Trump continues threatening renewed attacks. The situation is better understood as a pause in the large-scale bombing and missile campaign, combined with escalating economic warfare.

Bessent warns that countries and financial institutions which continue to trade with Tehran could themselves face punishing measures. Asked about Chinese banks, he declared that “no-one is above the reach of US sanctions”.

China responded immediately. Foreign ministry spokesman Lin Jian condemned “illegal, unilateral” sanctions and said Beijing would take “all necessary measures” to defend its interests. China is Iran’s largest oil customer, but Washington’s ability to pressurise Beijing is constrained by the broader US-China rivalry. China dominates important areas of rare-earth and critical-mineral processing and has restricted exports during trade disputes. Sanctions intended to isolate Tehran therefore risk becoming another source of confrontation between the world’s two largest economies.

Iran’s economy minister, Ali Madanizadeh, says Tehran has developed contingency plans for two years and predicts the sanctions offensive will end in “another defeat” for Washington. Such declarations are not evidence that sanctions are painless. Pezeshkian admits serious economic damage. Tehran’s argument, rather, is that Washington will also pay an increasing price for attempting Iran’s complete isolation.

This conflict also explains why neither side can separate military strategy from economic policy. Every decision over sanctions, shipping and negotiations now affects legitimacy, as well as the regional balance. Tehran must show that the sacrifices imposed on Iran have produced leverage, while Washington must show that its military and financial power can enforce the required results. That need to demonstrate success makes compromise harder, even as costs rise.

The confrontation has become a contest over which side can impose greater costs for longer. Tehran uses Hormuz; Washington uses blockade, sanctions and the international financial system. Hardliners within Iran’s leadership have little incentive to restore normal traffic without substantial concessions, because disruption maintains pressure, while preserving a bargaining instrument strengthened by the war.

This is the central paradox. Both governments face mounting economic costs, yet those costs encourage each to believe the other will eventually give way. Tehran sees oil prices, American consumer discontent and failure to reopen Hormuz. Washington sees Iran’s collapsing currency, inflation, falling revenues and social unrest. Each interprets the other’s difficulties as evidence that pressure will eventually work.

For ordinary people, the calculation looks different. In Iran it means declining purchasing power, shortages, uncertainty and the possibility of renewed bombing. Elsewhere it appears in fuel prices, shipping costs and inflation. The war has moved from the battlefield into everyday economic life.

New phase

As of August 26, there are tentative signs of de-escalation around the Strait of Hormuz itself. Iran and Oman are discussing a temporary shipping corridor and joint mine-clearing operation, while US secretary of state Marco Rubio is reportedly signalling that no further US military attacks on Iran are planned for the moment. Markets have responded positively, with the price of oil falling 8% over the week to below $90 a barrel.

However, this should not be mistaken for a durable settlement. The key language is explicitly provisional - “temporary corridor” and “for now.” It therefore looks more like another phase of tactical de-escalation intended to reduce immediate military and economic pressures than evidence that the underlying confrontation has been resolved.

In fact, the conflict between Iran and the US has entered a new phase. Large-scale missile strikes may have subsided, but neither the war nor the conflict that produced it has ended. Instead, the confrontation has shifted towards economic warfare: sanctions, blockade, shipping routes, oil prices and pressure on ordinary people’s living standards. Tehran and Washington are each trying to demonstrate that time is on their side and that the costs imposed on the opponent will eventually force concessions.

To understand why Tehran is not rushing back to negotiations, it is necessary to begin before the latest phase of the war. Iran entered the conflict with an economy already under enormous pressure. The January protests began in Tehran’s Grand Bazaar after another sharp fall in the value of the rial and increases in the cost of living. Initially, even the government acknowledged their economic basis. President Masoud Pezeshkian asked the interior minister to listen to protestors’ “legitimate demands”, while the government spokesperson acknowledged pressure on people’s livelihoods. The protests soon spread beyond the bazaar and beyond purely economic demands.

The figures indicated the depth of the crisis. At the beginning of the January protests, the dollar traded at around 139,000 tomans on the free market. By mid-August it had reached approximately 188,000 tomans and, in anticipation of further sanctions, nearly 200,000 tomans on August 24. According to Iran’s Statistical Centre, annual inflation reached 66% in July, while food prices were 128% higher than a year earlier. These reflected structural problems predating the war: sanctions, declining investment, currency instability, corruption and growing difficulties for workers and sections of the middle class.

The war intensified these pressures. Factories and transport infrastructure were damaged, trade disrupted and alternative import routes became slower and more expensive. Yet deterioration did not automatically produce another wave of protests comparable to early 2026. There were, however, reports of at least 150 protests by workers and pensioners in July and August. On August 9, social security pensioners demonstrated in several cities. Some slogans explicitly connected hardship to the war: “Enough of warmongering, our tables are empty” and “Inflation and high prices - no to war and ruin.” The Islamic Republic’s hopes of prolonging the confrontation will increase pressure on Washington, but maintaining the status quo is becoming more expensive at home.

Against this background, Iran and the US reached a 14-point understanding in June, establishing a 60-day period to resolve questions concerning Iran’s nuclear programme, sanctions and implementation. The deadline passed without a final settlement. Much of the period was consumed by renewed military clashes and disputes surrounding the Strait of Hormuz.

Before the conflict, the nuclear programme had been Washington’s central concern. Five months later, reopening Hormuz had become one of its most urgent objectives. Before the war, around 130 to 140 ships crossed the strait each day. Recently, traffic on many days has fallen to roughly a tenth of that figure. Military attacks, naval escorts, port blockades and American diplomatic pressure have failed to restore previous levels. Hormuz’s role in global energy trade is precisely what gives Tehran leverage.

Bargaining cards

Article five of the June understanding stipulated that Iran would guarantee safe and cost-free passage for commercial vessels for 60 days. Afterwards, Iran, Oman and other coastal states would discuss the strait’s “future management and maritime services”. The text did not explicitly grant Tehran control over shipping, but the regime interpreted it as potentially giving Iran a larger role. Returning to the pre-war arrangement would mean surrendering one of the few major pieces of leverage produced by the conflict. Washington rejects any interpretation institutionalising greater Iranian influence over this crucial waterway.

Negotiations

Other provisions require cooperation from actors not entirely under Tehran’s or Washington’s control. Nuclear commitments require the International Atomic Energy Agency, while provisions concerning Lebanon depend partly on Israel. For sections of Iran’s leadership, returning to negotiations before these issues are resolved risks surrendering pressure without receiving anything substantial. Failure to implement the June understanding has strengthened opponents of negotiations: why enter another agreement when the previous one failed to deliver?

Pezeshkian freely acknowledges the economic pressure: “Problems have multiplied, while our income has also decreased.” Iran is selling less oil, tax revenues have fallen and alternative import routes are more expensive. Yet foreign minister Abbas Araghchi insists Tehran has made no decision to resume direct negotiations.

Tehran has concluded that the ability to disrupt the strait is one of its strongest bargaining cards. Its calculation also assumes that time imposes costs on Washington. As long as normal traffic is not restored, the Trump administration cannot convincingly claim that the war restored the previous regional order. US gasoline (petrol) prices have risen around 29%, compared with a year earlier. Tehran is also taking into account US domestic politics, the expense of military operations and concerns about stocks of some interceptor missiles.

Former US diplomat Alan Eyre, speaking to BBC Persian, offers a different interpretation. He does not consider the US midterm elections decisive in Trump’s thinking. In his view, Trump’s central problem is presentation: he does not want an agreement that cannot be portrayed domestically as an American ‘victory’. Nevertheless, Eyre acknowledges Republican concern about prolonged disruption of Hormuz and higher consumer prices.

Hormuz also allows the Islamic Republic to challenge Washington’s narrative of military victory. The US possesses overwhelming conventional superiority, but, while a major energy route cannot operate normally, Tehran can argue that American military power has failed to restore the status quo. The strategy is costly and dangerous, but Tehran is attempting to convert geography into economic and political leverage.

The consequences of the US-Iran war are spreading far beyond the Persian Gulf. Disruption in Hormuz is reshaping global shipping routes and increasing pressure on other strategic waterways, notably the Panama Canal.

The 80-kilometre canal links the Atlantic and Pacific, allowing ships to avoid the voyage around Cape Horn. Its capacity is limited, partly because its locks depend heavily on freshwater, so drought can restrict crossings. According to figures cited by the BBC, transits had risen 8% by the end of May compared with the previous year, averaging 38 vessels a day, close to maximum capacity. During the five weeks after the Iran war began, traffic was 16% higher than in the equivalent period a year earlier.

The connection with Hormuz is clear. As Gulf shipping became more hazardous, Asian buyers increasingly looked to the US Gulf Coast for crude oil and refined products. Many cargoes travelling between the Atlantic and Pacific depend on Panama. A conflict thousands of kilometres away has therefore added to congestion, with some shipping companies reportedly paying millions of dollars at auction for priority passage.

The canal has simultaneously become another arena of US-China rivalry. Washington argues that China’s growing economic presence around it threatens international trade and US security. Beijing accuses Washington of invoking a Chinese threat to extend its own influence. For its part, Panama continues to assert its sovereignty and the waterway’s neutrality.

The contrast demonstrates how regional conflict reverberates through global capitalism. Hormuz is primarily an energy chokepoint; Panama is an artery for broader flows of commodities and manufactured goods. Orlando J Pérez of the University of North Texas notes that Panama handles only around 5% of global maritime trade, but nearly 40% of US container traffic.

In conclusion, what began as a struggle centred on Iran’s nuclear programme and the military balance between Tehran and Washington increasingly extends into a contest over chokepoints, energy routes, sanctions, markets and commodity circulation. It is also a struggle over which states can impose the economic costs of conflict on others.

As Luis Barrucho, writing for BBC World Service, argues, Hormuz is fundamentally an energy bottleneck, while Panama is a strategic gateway for the supply chain of the world’s largest economy. The comparison goes beyond shipping. The Iran conflict shows how quickly a regional war can impact the global economy: from missiles over Iran to tankers in Hormuz, from oil prices and sanctions to congested passages through Panama; and ultimately into the wider US-China confrontation.