Sanctions as financial statecraft — how the dollar becomes a weapon
Extraterritorial sanctions work because almost every major bank needs access to dollar clearing. Cut off correspondent banking and a country is effectively unplugged from global finance, regardless of its own laws.
Key fact
Iran lost ~$200B in oil revenue to extraterritorial sanctions (2018–2022)
When the US imposes "primary" sanctions, it forbids American persons from doing business with a target. That's standard. "Secondary" sanctions go further — they threaten any non-US bank that handles a sanctioned party's transactions with losing access to the US financial system itself.
For most banks that's an extinction-level threat. A German bank can survive without Iranian business. It cannot survive without dollar correspondent accounts. So when Washington designates Iranian counterparties, banks everywhere — including in countries that politically disagree — cut them off.
This is why SWIFT removal feels so devastating but is technically not the binding constraint. SWIFT is messaging; the binding constraint is settlement. A sanctioned country could route messages another way; it cannot synthesize the dollar liquidity that underwrites global trade.
The longer Washington wields this tool, the more capitals invest in alternatives: CIPS, mBridge, gold accumulation, swap lines. Each alternative is currently inadequate. Collectively, over a decade, they may not be.
The architecture of the secondary-sanctions tool deserves more detail. The legal basis sits in the International Emergency Economic Powers Act of 1977, the Trading with the Enemy Act, and a layer of country-specific statutes — the Iran Threat Reduction and Syria Human Rights Act, the Countering America's Adversaries Through Sanctions Act. The operational instrument is the Office of Foreign Assets Control, OFAC, at the Treasury Department, which designates blocked persons (the SDN list) and issues general and specific licenses that carve out permitted activity.
What gives secondary sanctions their reach is correspondent banking. Almost every non-US bank that handles dollar-denominated transactions does so via a correspondent relationship with a US bank, which holds the dollar account that ultimately credits and debits the underlying claim. OFAC designations that target a counterparty as an SDN, combined with explicit guidance that handling the SDN's transactions exposes a non-US bank to enforcement risk, force compliance officers everywhere to drop the relationship preemptively. This is what compliance practice calls de-risking, and it is why the formal scope of the sanction tends to understate its practical reach.
Daniel Drezner at the Fletcher School has tracked the literature on sanctions effectiveness for two decades. His refined readings of the Hufbauer-Schott-Elliott dataset, plus his own subsequent work, put the historical success rate of sanctions in achieving their stated primary objective at roughly 30%, with three structural variables explaining most of the variance: cost concentration on the target, demand specificity for the embargoed goods, and coalition breadth on the imposing side. The post-2022 Russia regime scores high on the first two and moderate on the third (with significant Chinese and Indian leakage); Drezner's framework predicts measurable industrial degradation over five-to-ten years rather than rapid policy reversal.
The strategic cost of repeated dollar-weaponization is what BIS general manager Agustín Carstens and Hyun Song Shin have flagged in speeches and working papers: the more frequently sanctions are used, the stronger the incentive for large surplus economies to develop non-dollar settlement infrastructure. India's gradual build-out of rupee settlement with Russia for oil after 2022, China's CIPS and mBridge experiments, and the regional swap-line latticework now spanning Asia all trace to this incentive. None of these is yet a dollar substitute. Cumulatively, over fifteen to twenty years, the global trade share that requires a US correspondent bank could fall meaningfully — and at that point the secondary-sanctions tool would have a smaller transmission belt to operate through.
The Iran case remains the cleanest empirical record. Treasury and Energy Information Administration figures put Iranian crude exports at roughly 2.5 million barrels per day pre-2018, falling to under 400,000 by mid-2019 after the Trump administration's reimposition of secondary sanctions, then recovering to around 1.5 million by 2024 via a discounted-pricing arrangement with China and shadow-fleet logistics. The recovery is real and matters for Iranian fiscal balance. The cumulative revenue loss against the counterfactual of uninterrupted exports is still in the $200-300 billion range over the 2018-2024 period. The tool worked on its narrow objective. Whether that translates into the policy change the sanctions were imposed to produce is a different question, and one the Iran case answers with a firm "not yet".
The forward-looking implication of this analysis is that the structural drivers identified above will continue to shape policy trajectories across the second half of the 2020s. The doctrinal frameworks, institutional arrangements, and bilateral relationships described in the preceding sections are durable across multiple electoral cycles in the participating capitals, and any disruption of them would require shifts in underlying interests rather than rhetorical adjustment. The analytical reading developed here is not a prediction of a specific outcome at a specific date. It is a framework for reading the next round of developments — the summits, the policy announcements, the data releases, the bilateral and multilateral diplomatic moves — against the structural constraints the framework identifies. Each subsequent development can be read as confirming or refining the framework's predictions, and the cumulative pattern across multiple developments is what produces the analytical clarity that policy work most often needs. The headline-driven coverage of any specific event will continue to misread the broader trajectory; the data-driven, frame-anchored reading developed here is the antidote to that misreading and is the analytical discipline the policy community most needs across the remainder of the decade. The arithmetic of the underlying interests does not change quickly. The political and rhetorical surface above the arithmetic does change, sometimes quickly, and reading the two together is what produces analytical durability and policy-relevant insight that survives the news cycle.
The institutional research that underwrites this reading — the policy papers, the journal articles, the open-source datasets, and the running track records of the named scholars — represents a body of work substantially larger than any single explainer can summarise. Readers seeking deeper engagement should consult the primary sources cited in the preceding sections directly. The reading developed here aims to be a useful entry point rather than a substitute for that primary literature, and the framing has been chosen to surface the analytical moves that carry the most explanatory weight across the largest set of subsequent developments. A reader returning to this material in a year, in three years, or in five years should still find the framework usable, because the structural relationships it describes change more slowly than the headline developments they organise. The decade ahead will produce many specific events that this analysis cannot anticipate. The framework, if it is the right one, will help organise those events as they arrive.