Iran Sanctions and Potential Responses: Part III

The Trump administration withdrew from the Iranian nuclear deal earlier this year and plans to implement sanctions on the country in two phases, the first of which went into effect in early August with a second round in November. In Part I of this report, we introduced this topic and covered the first two potential responses from Iran, which were restarting the nuclear program and projecting power. Last week, we covered the threat to the Strait of Hormuz. This week, we will conclude with a discussion on the potential for Iran to deploy a cyberattack against the U.S. or use allies to end sanctions, along with the likelihood that Iran would enter into direct negotiations with Washington. We will conclude with market ramifications.

Response #4: Iranian Cyberattack

Recent reports[1] suggest that Iran has taken steps to carry out extensive attacks on Western infrastructure, including electrical grids, water treatment facilities, hospital and health care systems and technology companies.

We suspect Iran would not immediately attack the U.S. or European targets. It would likely start by attacking nearby U.S. allies, such as Saudi Arabia, the UAE and Israel. The risk of an attack directly on the U.S. would be that the Trump administration moves to a full-scale war. The Pentagon has indicated it views a major cyberattack as worthy of a nuclear response.[2] That factor increases the risk of using this response.

Of course, one advantage of cyberwarfare is that attribution is difficult. It may be nearly impossible to know for certain who attacked critical infrastructure and the potential for “false flag” attacks would be high. At the same time, if Iran was able to disrupt energy production in the Gulf States through a cyberattack, it may be just as, if not more, effective than a blockade of the Strait of Hormuz and with less blowback. Thus, the attractiveness of a cyberattack is high.

Response #5: Finding Allies

As noted above, the Trump administration is increasing pressure on several of Iran’s oil customers in Europe and the Far East. Both Japan and South Korea have indicated they are cutting purchases. European nations are trying to defy the U.S. on this issue but, we suspect, the risks of losing access to the dollar-based financial system will outweigh the benefits of buying Iranian oil. Iran is finding itself increasingly isolated.

However, there are two states that could offer Iran support. China’s relations with the U.S. are not all that positive and it’s unlikely the Chinese will support U.S. sanctions. However, other than buying Iranian oil, there isn’t much China can do to assist Iran. The People’s Liberation Army-Navy isn’t strong enough to take on the 5th Fleet; in fact, we doubt it could conduct aggressive operations outside the first island chain. In addition, if a conflict escalates, we would expect the U.S. Navy to blockade Iran and it is doubtful that the Chinese Navy would run the risk of trying to break the blockade. Thus, China will offer, at best, modest support.