Iran War Enters a More Dangerous Economic Phase

The war with Iran has entered a new and potentially more dangerous phase. After missiles, drones and artillery reshaped the Middle East battlefield and the conflict spilled into the strategic waters of the Strait of Hormuz, Washington has now opened another front – the global financial system.

US Treasury Secretary Scott Bessent’s announcement of what Washington calls “Operation Economic Outcast” yesterday (25 August) is not merely another round of sanctions against Iran. The United States has expanded sanctions targeting Iran’s economy while warning countries that continue to do business with Tehran that they could risk losing access to the US-based financial system. The US calls to choose the United States and remain within the global financial system dominated by the dollar, or continue supporting Iran and risk isolation.

Bessent has described the campaign as an effort to sever “every economic lifeline” sustaining the Iranian regime. According to the Treasury Secretary, Washington has mapped the networks Iran allegedly uses to sell oil, move money and evade sanctions. The new measures target digital assets, technology, gold, aviation and shipping, while more than 60 entities, individuals and vessels are being targeted over alleged links to Iran’s nuclear and missile programmes, cyber operations and oil revenues.

For decades, American sanctions have been effective partly because access to the US dollar and the international financial system remains indispensable to global commerce. Bessent is now threatening to use that leverage against not only Iranian entities but also those facilitating Iranian trade. “Any entity that facilitates money laundering on behalf of Iran will be removed from the US dollar system”, Bessent warned, adding that “the clock just started ticking”.

The implications are particularly serious for countries that have maintained relations with Iran while seeking to avoid direct confrontation between Washington and Tehran. India, Pakistan and several other Asian economies have legitimate commercial, energy and strategic interests involving Iran.

India’s relationship with Tehran is perhaps the most complicated. New Delhi maintains economic ties with Iran and has strategic interests in Chabahar Port, an important route towards Afghanistan and Central Asia. Any escalation in US secondary sanctions could therefore put India in a difficult position as it balances its partnership with Washington against its regional connectivity interests.

Pakistan faces a different dilemma despite being the ‘peace negotiator’. Its geographical proximity to Iran makes economic disengagement far more difficult. Cross-border trade, transport links and roads connecting Iranian border crossings with major Pakistani ports give the relationship a practical dimension that cannot simply be switched off. There are others who trade with Iran: Türkiye, Afghanistan and Iraq to name a few.

For Sri Lanka, the issue is even more delicate. Colombo has maintained a long-standing relationship with Tehran and continues to honour an oil-debt arrangement through a tea-for-oil mechanism. Sri Lanka has been repaying an old Iranian oil debt by shipping Ceylon tea, with the arrangement designed to avoid the use of scarce foreign currency. Foreign Minister Vijitha Herath has also indicated that Colombo intends to continue honouring the agreement and strengthening bilateral relations with Iran. That position could become increasingly difficult if Washington expands secondary sanctions.

Bangladesh offers another example of the dilemma facing countries caught between Washington’s financial power and their own modest commercial interests with Tehran. Bangladesh is not a major Iranian trading partner, but the relationship has supported a specialised export market, particularly for its jute industry. In FY2023/24, Bangladesh exported mainly jute yarn and jute products to Iran, while imports from Iran were negligible. More recent data show that Bangladesh’s exports to Iran fell to about US$10.9 million in FY2024/25, with jute yarn accounting for almost the entire amount.

The question is therefore no longer simply whether Iran can withstand American economic pressure. The bigger issue is how much collateral pressure Washington is prepared to impose on countries that do not necessarily share Tehran’s political objectives but maintain trade with it for economic or strategic reasons. This is where the economic war becomes a geopolitical contest.

The Strait of Hormuz makes the situation even more consequential. The waterway is one of the world’s most important energy corridors, and any prolonged disruption threatens not only Iran and its immediate neighbours but also global energy markets, shipping and inflation. Tanker movements have continued through escorted routes and other arrangements, while US forces have increased pressure on Iranian-linked shipping.

The new US Envoy for Sri Lanka

For Sri Lanka, the balancing act is particularly significant because Colombo is simultaneously seeking deeper economic, security and diplomatic engagement with Washington. This comes as US Ambassador-designate Eric Meyer has taken up his duties in Colombo. Meyer arrived in Sri Lanka on 22 August to assume duties as the 29th US Ambassador to Sri Lanka. He has said that Washington views the bilateral relationship through the lenses of business, security and prosperity. “It is an honour to represent the US in Sri Lanka,” Meyer said, expressing his intention to build on the strong foundation between the two democracies, create new opportunities for American businesses, advance shared security interests and deliver greater prosperity for Americans and Sri Lankans.

His background gives him an understanding of the strategic importance of South Asia at a time when Washington is increasingly viewing the region through economic and security lenses. Colombo wants American investment, stronger economic links and closer security cooperation while maintaining relationships with countries such as Iran, China, India and Russia. The challenge is to ensure that its foreign policy does not become trapped between competing geopolitical demands.

Washington’s strategy is to make Iran’s economic survival increasingly dependent on two things. Either retreat and negotiate, or remain isolated. However, sanctions rarely operate in isolation. They affect ordinary citizens, businesses, neighbouring countries and global markets. They can also encourage the creation of alternative financial channels, shadow shipping networks and non-dollar trade, precisely the mechanisms Washington is now attempting to dismantle. 

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The writer is an award-winning journalist and the Deputy Editor of Ceylon Today, Colombo