How US Sanctions Work: The Economic Weapon Behind Iran, Russia, and China Policy

Sanctions are the economic equivalent of a military blockade: they cut off a country, company, or individual from the US financial system and global dollar-denominated trade. Under Trump, sanctions have been used aggressively against Iran, Russia, China, and others. Understanding how they work is essential for reading the market impact of any Trump foreign policy move.

What Sanctions Actually Are

A sanction is a legal restriction imposed by the US government that prohibits specific transactions, freezes assets, or blocks access to the US financial system. They come in several forms:

• Asset freezes: Money held in US banks or under US jurisdiction is frozen — the target can't touch it
• Transaction bans: US persons and companies are prohibited from doing business with the sanctioned party
• Secondary sanctions: Non-US companies that do business with a sanctioned party can also be targeted — even if they have no US connection
• Export controls: Restricting the sale of specific goods (semiconductors, military technology) to targeted countries

The power of US sanctions comes from dollar dominance. Because most global trade is settled in dollars, and most financial institutions need access to the US banking system, being cut off from the dollar effectively cuts you off from the global economy.

Secondary sanctions are the most powerful and most controversial tool. They allow the US to penalize non-American companies for doing business with a sanctioned country — effectively forcing the entire world to choose between the US financial system and the sanctioned country.

Who Imposes Sanctions

Sanctions authority in the US is split between the executive and legislative branches:

Executive sanctions are imposed by the president through executive orders, typically under authority granted by the International Emergency Economic Powers Act (IEEPA) or the National Emergencies Act. These can be imposed and lifted quickly — no congressional vote required.

Legislative sanctions are passed by Congress and signed into law. They are harder to lift because removing them requires another Act of Congress. The Iran sanctions architecture, built up over decades, is primarily legislative.

OFAC (Office of Foreign Assets Control) at the Treasury Department is the agency that administers and enforces most US sanctions. When a company or individual is "sanctioned," it usually means they have been added to the OFAC SDN list (Specially Designated Nationals).

The Iran Sanctions Architecture

Iran operates under one of the most comprehensive sanctions regimes in history — built up over decades and tightened significantly under Trump's "maximum pressure" policy.

Key layers:

1. Oil and energy: Secondary sanctions target any company that buys Iranian oil, effectively locking Iran out of global energy markets
2. Banking: Iranian banks are cut off from SWIFT (the global financial messaging system) and from correspondent banking relationships
3. Central Bank: The Central Bank of Iran itself is sanctioned, which is why Iran collecting Hormuz tolls in cash — rather than through normal banking channels — is not an accident
4. Petrochemical and metals: Sector-specific sanctions block Iran's other major export industries

The goal of sanctions is leverage — to create enough economic pain that Iran negotiates on nuclear and military terms the US can accept. The debate is always whether the pain is sufficient to change behavior, or whether it just entrenches the regime.

How Sanctions Move Markets

Sanction announcements create immediate, directional market effects:

When sanctions are imposed:

• The targeted country's currency weakens sharply
• Its equity markets fall
• Commodity prices move if the country is a significant producer (Iran = oil, Russia = oil/gas/wheat)
• Companies with exposure to the sanctioned country sell off

When sanctions are lifted or eased:

• The reverse: currency strengthens, equities rally, commodity prices adjust
• Companies positioned to re-enter the market see immediate gains

Secondary sanction risk creates the most complex market effects — non-US companies that have been operating in a gray zone suddenly face a binary choice, and the compliance rush can move entire sectors.

Sanctions Evasion and Workarounds

Sanctioned countries develop workarounds, which is why sanctions are never perfectly effective:

• Cryptocurrency: Iran and Russia have explored crypto transactions to bypass dollar-denominated systems (Iran's central bank denied using crypto for Hormuz tolls, but the suspicion exists for good reason)
• Non-dollar trade: China and Russia have pushed bilateral trade in yuan and rubles to reduce dollar dependence
• Shell companies and front companies: Sanctioned entities route transactions through third countries and holding companies
• Barter arrangements: Direct goods-for-goods exchanges that don't involve the financial system

Each workaround creates a new enforcement challenge for OFAC and a new market dynamic — the cat-and-mouse between sanctions enforcement and evasion is itself a driver of cryptocurrency adoption in certain regions.

Key Terms to Know

IEEPA — International Emergency Economic Powers Act. The primary legal authority for executive sanctions.

SDN List — Specially Designated Nationals list. Being on this list means US persons cannot transact with you, and your US-based assets are frozen.

SWIFT — Society for Worldwide Interbank Financial Telecommunication. The global financial messaging network; being cut off from SWIFT is one of the most severe banking sanctions.

Snapback — A mechanism in some sanctions agreements (like the Iran nuclear deal) that allows sanctions to be automatically reimposed if the other party violates the agreement.

Sectoral sanctions — Target specific industries (energy, finance, defense) rather than entire countries or specific individuals.

How Sanctions Connect to the Trump Signal Index

Sanctions announcements are among the highest-impact events tracked by the Trump Signal Index. A major new sanctions designation — especially one involving secondary sanctions on a key trading partner's companies — can move multiple asset classes simultaneously: the targeted country's currency, commodity prices, and equity markets for exposed companies.

Disclaimer

Nothing in this guide constitutes financial or legal advice. Sanctions law is complex and changes frequently. See our full Disclaimer.