West eyes punishing Iran without angering China

Retaliation for Israel strike likely, but country already under sanctions

President Joe Biden’s aides are preparing to hit Iran with economic sanctions over Tehran’s attack on Israel, but experts say they face limited meaningful options for doing so without antagonizing China or risking a spike in the price of oil.

In retaliation for a strike against its consulate, Iran over the weekend sent more than 300 drones and missiles toward Israel. The unprecedented aerial barrage did not cause major damage or injuries, as U.S.-led forces intercepted most of the projectiles.

Still, U.S. officials and their European allies are discussing potential economic responses to Iran, as leading Western officials converged Monday on Washington for the spring meetings of the International Monetary Fund and World Bank. Their options are limited because Iran is already one of the most heavily sanctioned countries in the world, with U.S. penalties in effect on its banking, manufacturing and energy sectors.

Among the most obvious remaining options is aggressively expanding sanctions on Chinese firms that have bought large quantities of Iranian crude oil exports, which have provided a financial lifeline for Tehran as it remains cut off from the West. The United States has over the last year imposed sanctions on some commercial links in the oil trade between China and Iran, but experts say the administration could go further by hitting many more Chinese refineries and banks with the restrictions.

Doing so carries its own risks, however. Treasury Secretary Janet Yellen and other administration officials have tried stabilizing relations with China in recent months, and a sudden blow to energy production could infuriate Beijing. Additionally, cutting off sales of Iranian crude could cause oil prices to spike globally amid tighter supply, potentially leading to higher gas prices ahead of the 2024 presidential election.

Sanctioning Chinese banks for facilitating the purchase of Iranian oil could remove as many as 1.5 million barrels per day from global markets. That would send the price of oil above $100 per barrel, in what would be a political nightmare for the Biden administration, said Bob McNally, president of the Rapidan Energy Group, a consultancy.

While the West is ruling out participating in a military response, an economic response to Iran’s actions appears increasingly certain. European Commission President Ursula von der Leyen said officials in Brussels would discuss tougher sanctions against Iran.

U.S. officials have, for instance, discussed tightening Iran’s access to frozen funds earmarked for humanitarian relief, according to two people familiar with the matter. They have also discussed imposing additional sanctions on Iranian officials and businesses.