What If China Doesn’t Play Ball? US Sanctions Campaign Faces Its Biggest Test

Eurasia Review  |  Alex Raufoglu

United States Treasury Secretary Scott Bessent unveiled Operation Economic Outcast on August 24, threatening secondary sanctions against foreign entities processing Iranian commercial transactions to cut off Tehran from global dollar networks. The campaign's enforcement hinges on targeting major Chinese financial institutions and oil importers that sustain Iranian state revenues.

Specialized institutions like Bank of Kunlun move essential shadow capital. However, extending designations to larger state-owned enterprises risks triggering reciprocal trade actions from Beijing prior to President Xi Jinping's scheduled September 24 visit to Washington. Prior warning letters issued in April to banking entities across China, Hong Kong, Oman, and the United Arab Emirates established strict wind-down timelines for compliance. Amid persistent maritime trade disruptions across the Strait of Hormuz and rising market volatility, Washington aims to leverage structured financial pressure to compel Tehran into renewed diplomatic negotiations covering regional security, terror financing, and nuclear developments.

Comment

Secondary sanctions enforcement against shadow oil trade relies on exposing transaction pipelines, yet specialised settlement entities decouple commercial clearing from dollar networks. China's Bank of Kunlun demonstrated how purpose-built financial conduits bypass primary clearinghouses supervised by the US Office of Foreign Assets Control. That structural isolation neutralised secondary designation threats against dedicated intermediary firms lacking Western capital exposure.

This resilience stems from local ledger balancing executed through domestic settlement mechanisms rather than SWIFT messaging infrastructure. Inter-bank transactions processed via the Cross-Border Interbank Payment System allow national energy buyers to settle transactions in non-dollar denominated currencies. That bilateral accounting structure leaves state-owned energy conglomerates unexposed to asset forfeiture at the Federal Reserve Bank of New York.

Strategic Question for Discussion

Which mechanism poses a greater operational barrier to US enforcement — the decoupling of intermediary lenders like Bank of Kunlun from Western capital markets, or the migration of bilateral trade settlement onto the Cross-Border Interbank Payment System?

The migration toward alternative inter-bank channels like the Cross-Border Interbank Payment System poses the more durable challenge because it systemically removes settlement data from Western visibility. While individual entities like Bank of Kunlun can be targeted through blocking orders, non-dollar messaging architecture permanently diminishes the leverage of primary US clearing banks. The available evidence points toward sanctions enforcement shifting from absolute transactional exclusion to managing parallel, opaque trade ecosystems.

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