US-Iran fighting flares after diplomatic push stalls

The regime needs hard currency to defend the rial, pay its military and security forces, and keep salaries, pensions, and subsidies flowing. Reports from across the country already describe wages months in arrears, delayed pension payments, and near-daily protests by workers and retirees.

It also needs imports that can physically arrive in the country. China provides neither, with its overland rail corridor being marginal next to the seaborne trade the blockade cut off.

When the Islamic Republic sells oil to China it is paid in yuan, which it already had more than it could spend before the blockade was in place.

The lifeline that China provides to the Iranian regime has proven to be not as helpful in a crisis. While China buys almost all of Iran’s oil, is the largest supplier of the consumer goods Iran imports, and supplies the components that built the regime’s weapons systems, those transactions are entirely on China’s terms.

The relationship is structured around what China wants: the Islamic Republic isn’t paid in currency it can readily deploy. Its main revenue source is largely stuck in China in yuan and can only be swapped for imports that are blocked by the blockade.

China’s private sector is so connected to the rest of the world that it is susceptible to de-risking under pressure.

While Beijing gives cheap cover by condemning American sanctions and ordering its companies to ignore them, its real support has not escalated with the conflict, with the exception of a deniable shoulder-fired missile deal that may not have made it through.

The bank in Dubai

On Friday morning, Treasury named the bank Secretary Bessent had been promising all week, and as I predicted, it was not Chinese.

The Financial Crimes Enforcement Network proposed a rule to cut the UAE branches of Banque Misr, Egypt’s second-largest bank, off from the international financial system, saying they had processed roughly 1.8 billion dollars for 103 companies tied to Iranian shadow banking networks.

The proposal is subject to a 30-day comment period and, if finalized, would cut Banque Misr’s UAE branches off from US correspondent banking.

The choice of a UAE bank reflects that the Emirates is where the regime gets what it needs most. The hard currency comes back through Dubai, where front companies and brokers deal with the world on Iran’s behalf and exchange houses convert the proceeds into currency the regime can spend at home. Dubai functions for Iran the way Hong Kong functions for China.

The same traders supply the imports Iran cannot buy directly, Western machinery, electronics, and parts, purchased in their own name and re-exported across the Gulf. The Emirates also moved Iranian fuel oil, which it sold into the regional ship-fuel market through Fujairah, one of the world’s largest bunkering hubs, where blending stripped its Iranian identity. The blockade now cuts off the Iranian supply.

Even the oil money parked in China depends on this channel. What the regime manages to repatriate from those accounts moves through the Emirates, which is why a trade halt announced in Abu Dhabi reaches revenue earned in Shandong.

The pressure is landing on a country that has already turned against the Iranian regime. The Islamic Republic has fired missiles at the Emirates, and on August 19th, Abu Dhabi announced that all trade and financial transactions with Iran were halted.

American officials had pressed Abu Dhabi for years over the exchange houses and trading companies serving Iran, but the attacks aligned incentives between the U.S. and UAE as a shared security concern. The halt has no precedent in a country that has served as Iran’s commercial gateway for decades, and its value will be decided by enforcement.

The land border

What is of importance in Turkey is the remaining cross-border trade. Petrochemicals and metals earn less than oil, but the proceeds are in currency the regime can spend. The goods are also easier to sell, since petrochemicals and metals don’t carry the same fingerprint as Iranian crude, and can disappear across the border into Turkish plants to be resold.

Washington has designated small and mid-sized Turkish buyers of these commodities for years without meaningfully slowing the trade. The larger importers that have so far gone untouched are most susceptible to the renewed pressure campaign.

The UAE’s suspension leaves Turkey as one of the few channels the Islamic Republic has left, a major hub it can reach by land. Turkish banks are unlikely to handle displaced Iran business, especially after Halkbank’s decade-long criminal case ended this year with a deal barring Iran business that touches the U.S., after its deputy general manager went to American prison. Turkey’s banks avoid the regime’s business rather than process Iran-linked payments. After United Nations sanctions snapped back, Ankara froze the assets of dozens of Iranian entities, including Bank Sepah.

If the pressure on buyers is effective, what remains of the regime’s business in Turkey is what has always run outside the system, cash collected in Turkey and carried across the border.

Iraq’s oil and dollars

The Iran-Iraq border provides an accessible path through the blockade for the Islamic Republic to get its oil out. Iranian crude and fuel oil are blended with Iraqi cargoes, onshore and in ship-to-ship transfers at sea, and sold as Iraqi product. The smuggling earns the regime and its proxies at least a billion dollars a year. The regime collects its share of earnings from the U.S. dollars in Iraq’s own banking system.

The pressure on Iraq’s dollar system is already built and can tighten. Iraq sells its oil for dollars that are held at the Federal Reserve Bank of New York, and for years its banks drew those dollars through a central bank auction that Iranian networks used to buy hard currency. The Treasury Department and the New York Fed barred roughly two dozen Iraqi banks from that window, and at the end of 2024 the auction was shut and replaced with correspondent channels open only to vetted banks. In April, Washington reportedly blocked a shipment of nearly 500 million dollars in banknotes to Baghdad. Electronic transfers continued, and physical deliveries resumed months later.

Pressure here will take the form of policing the correspondent channel, monitoring the vetted banks and cutting off any that move money for the regime, with continued outreach to Baghdad. Iran-backed militias, which hold seats in parliament and units in Iraq’s security forces, run the oil trade across the border, a problem that has confounded policymakers for years due to the Islamic Republic’s meddling in Iraq.

But if the regime cannot turn the proceeds into dollars, the fact that oil crosses the border is less important and turns into the same problem the regime has in China.

What the Islamic Republic needs from its neighbors is what China cannot give it, money it can spend and imports that can arrive. That is why the campaign started in the Emirates rather than Beijing, and why the pressure everywhere aims at the point where the regime’s earnings become usable.

Stopping the trade at the source is not required. If the proceeds cannot be converted, the oil and goods crossing Iran’s borders earn the regime what its oil sales to China earn — money it cannot readily deploy.

The Islamic Republic has made the work easier, firing missiles at its neighbors’ cities and critical infrastructure and mining and attacking the strait its neighbors’ economies depend on. The countries that carried Iran’s business for years now have their own reasons to end it.

Crude and condensate flows from other Persian Gulf producers have recovered to around 70% of pre-war volumes, while Iran is struggling to move newly loaded crude, Homayoun Falakshahi, head of crude oil analysis at Kpler, told Iran International.

“It’s exactly the opposite scenario compared to the beginning of the war where Iran could export its oil but the neighbors couldn’t,” Falakshahi told Iran International’s English-language podcast Eye for Iran. . “And now it’s actually the contrary. Iran cannot export new oil.”

Goldman Sachs said Friday that oil flows through the Strait of Hormuz had recovered to around two-thirds of pre-war levels, according to Bloomberg, helping contain the impact of the conflict on global crude prices.

The figures point to a striking reversal in the oil war: the Strait is increasingly functioning again for Iran’s neighbors while Tehran itself struggles to get fresh crude to market.

Oil already on the water

The full impact on Iranian revenues, however, will take time to emerge because millions of barrels loaded before restrictions tightened are already outside the blockade zone.

Kpler estimates that roughly 40 million to 50 million barrels of Iranian oil remain on the water in Asia, substantially below an earlier estimate of around 80 million barrels.

Falakshahi said the revision reflects stronger-than-previously-understood discharges in China, now running at close to one million barrels per day.

At that rate, the remaining oil could take roughly 50 days to unload. Chinese buyers generally have another one to two months to pay Iranian sellers, creating a lag between the collapse in fresh exports and the loss of revenue.

If the blockade remains in place, Falakshahi estimated that within roughly three to four months Iran’s revenues from oil exports could effectively fall to zero.

China is central to that calculation. Falakshahi said it buys effectively all of Iran’s crude and condensate exports. When petroleum products and petrochemicals are included, he estimated China’s share of Iranian petroleum exports at roughly 90% to 95%.

From tankers to banks

Even as the blockade squeezes Iran’s ability to get new barrels to market, Washington is beginning to target the other end of the transaction: the foreign financial infrastructure Tehran uses to move the proceeds.

On Friday, the US Treasury Department’s Financial Crimes Enforcement Network proposed using Section 311 of the USA Patriot Act to cut Banque Misr’s UAE branches off from US correspondent banking, the first such action under Operation Economic Outcast.

Treasury said the branches processed approximately $1.8 billion between January 2024 and June 2026 for 103 companies potentially connected to Iranian shadow-banking networks.

According to Treasury, their customers included apparent front companies used by Iran’s Ministry of Defense and the Revolutionary Guards to evade US sanctions, as well as entities used to launder money on behalf of Supreme Leader Mojtaba Khamenei.

Max Meizlish, a former official with the US Treasury Department’s Office of Foreign Assets Control, said the significance of the move lies in Washington beginning to target foreign banks that make Iran’s sanctions-evasion networks possible, rather than focusing primarily on Iranian entities and front companies.

Section 311 allows Treasury to threaten a foreign bank’s access to the US financial system without immediately freezing its assets, while giving the institution and its regulators an opportunity to address the activity before restrictions take effect, he said.

“The real test now is whether this becomes a sustained campaign and whether Treasury is willing to bring the same pressure to bear on Iran’s financial enablers in Hong Kong and China,” Meizlish told Iran International.

That question is particularly important given China’s dominant role in Iran’s remaining oil trade.

Meizlish has identified China’s Bank of Kunlun as one potential target for further US action. The bank has previously faced US restrictions over dealings involving Iran, but he argued Washington could go further by imposing full blocking sanctions.

Treasury Secretary Scott Bessent had signaled that a major action against a financial institution was coming under Operation Economic Outcast.

Friday’s move suggests Washington is beginning to extend its campaign beyond Iran’s physical oil exports to the foreign financial infrastructure that allows Tehran to receive and move its money.

For global markets, the recovery in other Persian Gulf exports is helping blunt the energy shock. For Tehran, the trajectory is moving in the opposite direction: fewer opportunities to export fresh oil, a diminishing stockpile already outside the blockade and growing pressure on the financial networks through which it gets paid.

The blockade is squeezing Iran’s ability to sell its next barrel. Operation Economic Outcast is increasingly aimed at making it harder to collect the money for the barrels that got out.

Rezaei named an end to the regional war, lifting the blockade of Iranian ports, compensation and sanctions relief as Iran’s core conditions. He said the demands had been compiled in response to requests from mediators.

Rezaei has served since August 10 as secretary of the Supreme National Security Council and is also the Supreme Leader’s representative on the body, giving his remarks greater institutional weight than those of an individual political or military figure.

Whether the conditions constitute a formally approved negotiating mandate, however, remains unclear. Rezaei’s description suggests an ongoing process of defining Iran’s negotiating position rather than the presentation of final instructions to negotiators.

Since taking over the SNSC, Rezaei has increasingly emerged as one of the principal voices through which Iran’s security establishment frames diplomacy.

The council brings together senior military, intelligence and government officials alongside representatives of the Supreme Leader, who holds ultimate authority over major national security decisions.

Back to MoU

That makes the evolution of Rezaei’s language significant. His movement from advocating an “offensive doctrine” to discussing the terms of a possible agreement has not amounted to an embrace of accommodation with Washington.

But diplomacy is increasingly appearing in his rhetoric as an instrument of Iranian strategy rather than something inherently at odds with it.

Only days ago, Rezaei told Pakistan’s Field Marshal Asim Munir that Washington needed to change its behavior and take practical steps to implement the Islamabad MoU. Iranian media, including Press TV, quoted him as saying the United States should return to the June agreement.

That was notable because the Islamabad MoU provided a framework for de-escalation: ending hostilities, reopening the Strait of Hormuz and moving toward a broader agreement.

President Masoud Pezeshkian has also defended the MoU as the best available path while emphasizing adherence to the Supreme Leader’s policy.

Friday’s demands do not necessarily reverse that position. Rather, they fit an evolving sequence in Rezaei’s public stance: initial rejection of the MoU, movement toward reviving the June framework and now a willingness to discuss negotiations while attaching a higher price to them.

Tactical shift

There is an echo here of Donald Trump’s own approach to the conflict. The US president has moved between military pressure, diplomacy, rejection of the MoU, economic pressure and renewed suggestions that an agreement remains possible.

Both sides appear to be using uncertainty itself as leverage: escalating, reopening the door and then raising the terms for walking through it.

That does not mean Rezaei is consciously emulating Trump. But his recent statements suggest a similarly transactional approach in which apparently contradictory positions can coexist.

Negotiations remain possible, while threats and maximal demands are used to improve the terms on which they might take place.

For Rezaei, this represents a change in tactics rather than ideology. He has not abandoned the hardline worldview that has defined much of his political career, nor do his statements yet signal a broader Iranian pivot toward accommodation with Washington.

More significant may be the evolution of the role he is now playing. The former IRGC commander is no longer simply warning against compromise; he is beginning to define its price.

The Treasury’s Financial Crimes Enforcement Network proposed barring Banque Misr’s six UAE branches from correspondent banking access to US financial institutions, restricting their ability to conduct dollar transactions.

Treasury estimates the branches processed about $1.8 billion in transactions between January 2024 and June 2026 for 103 companies potentially linked to Iran’s shadow-banking networks, describing the operations as a “critical node” in Tehran’s access to US dollars.

“Treasury promised to sever every economic lifeline Tehran has left and finally end the threat of the Iranian regime,” Treasury Secretary Scott Bessent said.

“We also warned that Iran’s enablers cannot continue to enjoy access to the US dollar and the global financial system,” he added. “Banque Misr UAE decided to find out the hard way.”

Bessent had previewed a “major announcement” involving secondary sanctions against an international bank earlier this week as he launched what Washington has called an “Economic D-Day” against Iran and institutions that facilitate its trade.

The measure is narrower than Bessent’s warning initially suggested. It applies only to Banque Misr’s UAE branches, leaving its Cairo headquarters and branches in countries including France, Germany, Saudi Arabia, Lebanon and Djibouti able to continue conducting dollar transactions.

The proposed restriction is also subject to a 30-day public comment period before taking effect.

The Financial Times said the limited scope highlighted Washington’s reluctance so far to target major Chinese banks and other large financial institutions involved in financing Iranian trade, amid concerns over potential disruption to global markets and retaliation.

China remains particularly important to Tehran. Chinese purchases of Iranian oil account for about 45% of the Iranian government budget, according to the US-China Economic and Security Review Commission, cited by the FT.

The Treasury separately sanctioned Reza Mohammad Taeedi, general manager of Iran’s Bank Melli branch in Dubai, as well as a Hong Kong-based company it accused of helping launder money for a sanctioned Iranian exchange house.

Banque Misr UAE did not immediately respond to a Reuters request for comment on Friday, while Reuters said it was unable to reach Taeedi.

The measures come as Washington seeks to intensify economic pressure six months into its war with Iran while avoiding measures that could cause wider financial disruption. Iran has urged other countries not to participate in the new US sanctions campaign.

The activity is an early test for Operation Economic Outcast, the Trump administration’s campaign to cut Iran off from global finance, trade, aviation and shipping. Treasury Secretary Scott Bessent has warned that foreign entities continuing to deal with Tehran could face US penalties, while Washington has initially given governments and companies a short period to wind down ties.

Yet the Journal found little visible change in Dubai this week.

Bank Melli Iran, which Bessent specifically called on foreign governments to close, was still operating its two Dubai branches. At its multistory Deira location, about a dozen tellers continued serving Persian-speaking customers after the US announcement.

Employees said they had received no order to close. Bank Melli has operated in the UAE since 1969, before the country was established, and Dubai’s ruler inaugurated its first branch.

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  Iran's Bank Melli remains open in Germany despite sanctions

“We put our trust in God on what happens next,” one employee told the Journal.

Iranians in Dubai said they were preparing alternatives if banks eventually close, including the centuries-old hawala system, which moves money through trusted intermediaries without conventional cross-border transfers. So far, they said, that has not been necessary.

The situation contrasts with a crackdown earlier in the war, when the UAE closed the Iranian Hospital and Iranian Club, temporarily barred Iranian passport holders from entering or transiting the country and canceled some visas, including those of long-term residents traveling abroad.

The hospital and club remain closed, but Iranians told the Journal that widespread visa cancellations appear to have stopped and some visas have been restored.

Iranian airlines also continue regular direct flights to the UAE. Emirates, Etihad and FlyDubai are not flying directly to Iran, although some services use Iranian airspace. Iranian restaurants and cafes in Dubai remain open.

That activity sits uneasily with the UAE Foreign Ministry’s announcement last week that it was halting trade, commercial exchanges and financial transactions with Iran.

The UAE was Iran’s second-largest trading partner before the war, with bilateral trade of around $27 billion annually, about 80% of it Emirati exports to Iran.

The relationship extends far beyond official trade. Hundreds of thousands of Iranians live in the UAE, particularly Dubai, gaining access to global finance and freedoms unavailable under the Islamic Republic while bringing billions of dollars in Iranian capital into the Emirates.

Those links have survived despite Iran firing more than 2,800 missiles and drones at the UAE during the war, according to the Journal.

Chatham House associate fellow Neil Quilliam told the Journal that UAE economy is ”so closely integrated and intertwined with the Iranian economy, you can’t just simply sever economic trade and activity overnight.”

The US has long focused on Dubai’s role in Iranian finance. Former Treasury official Matthew Levitt said the UAE has the second-largest number of US-sanctioned individuals and companies linked to Iran after China.

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  What Operation Economic Outcast means for Iran, and for everyone trading with

A US Treasury Financial Crimes Enforcement Network study cited by the Journal found Dubai-based companies moved $6.4 billion in potential Iranian shadow-banking funds in 2024, accounting for 71% of the global total identified.

The first Operation Economic Outcast sanctions targeted nearly 60 Iran-linked people, companies and vessels operating across countries including the UAE, China, Singapore and Switzerland.

Washington nevertheless faces its own dilemma. The UAE is a major US security partner, provides military basing access, invests heavily in sectors including artificial intelligence and was a principal Arab signatory of the Abraham Accords with Israel.

Dubai, unlike oil-rich Abu Dhabi, also depends heavily on trade, finance and foreign capital.

“There will be some in the UAE who say, ‘Whatever the price of calm, that is what we need to do,’” Levitt told the Journal, suggesting some officials may regard continued Iranian access to banking and supply chains as preferable to greater confrontation.

Iranians in Dubai also fear the prolonged war could weaken the UAE economy, cost them their jobs and force them back to Iran. Some have already moved to third countries.