The Trump administration’s Iran sanctions campaign, coming into full force Monday with bans on oil exports and banking, already has pushed Tehran’s economy into a nose dive.
The question now is whether Washington can plug the myriad holes that have plagued past sanction regimes, and end revenue flows that keep the government afloat and able to resist the U.S. pressure campaign.
Unlike the global support for the Obama administration’s sanctions, broad opposition to the U.S. policy, including from allies, is expected to make that task much harder.
Still, the Trump administration is off to a strong start: Iranian oil exports have fallen by more than a million barrels a day since the U.S. launched its new campaign. That decline—more than a third of international sales—is twice the level achieved over the same period in the Obama era.
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The Iranian economy, with oil accounting for 80% of Iran’s tax revenue and a quarter of gross domestic product, is in pain. Europe’s largest companies have pulled out. Iranians, fearing economic collapse, rushed to exchange their rials, plunging the currency’s value to record lows and sparking a surge in consumer prices.
The International Monetary Fund forecast this year that Iran’s economy would expand by 4% in 2018. Now it predicts a two-year recession, with a 3.6% contraction next year.
“We have seen a dramatic reduction in oil imports by Iran’s top importers, a collapse in foreign direct investment, capital flight and banks deciding the cost-benefit analysis of doing business in Iran is simply not there,” said Brian Hook, who heads the State Department’s new Iran Action Group, in an interview.
The sanctions taking effect Monday prohibit purchases of Iranian oil, with companies facing sanctions unless the State Department grants waivers to their home countries. Some of Iran’s biggest buyers, including China, India and Turkey, are seeking such waivers and U.S. officials have signaled they will grant some requests to provide time to find alternate energy sources. The sanctions also target the country’s banking sector, shipping and ports, though it isn’t yet clear how aggressive the administration plans to be in shutting down the scores of financial institutions and companies it has the power to blacklist.
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The Trump administration is seeking to replicate the success of the Obama sanctions, which led to the 2015 nuclear deal. After exiting from that deal in May, the Trump team said it wants a more comprehensive agreement with Iran that not only prevents development of nuclear weapons, but also bans long-range missiles and curbs Tehran’s support for armed conflicts in Syria, Lebanon, Yemen and Iraq.
“History shows that this regime only changes its behavior and comes to the negotiating table when under significant pressure,” Mr. Hook said.
The sanctions are compounding domestic tensions, say Iran-watchers. Truck drivers, objecting to the sharp rise in transport costs, recently joined cross-country protests that have largely focused on economic woes.
But the Iranian government isn’t completely isolated. Many of the world’s largest economies, including trans-Atlantic allies, opposed the Trump administration’s decision to pull out of the nuclear accord and reimpose sanctions. Europe, like other governments, has sought to preserve ties with Iran, in part an effort to ensure Tehran stays in the nuclear accord.
That global support for Tehran may give license to evasion.
“The dissatisfaction with the U.S. sanctions program is a silent encouragement for circumvention,” said Alma Angotti, managing director of Navigant Consulting’s global investigations practice.
The European Union, despite a corporate exodus, wants to shield trade and finance with Iran from U.S. sanctions. Firms from China, Russia and elsewhere have remained in Iran.
Washington is aiming to cut oil exports to zero over the coming months, threatening sanctions against companies and countries that don’t switch to the new sources the administration is negotiating to bring online in Saudi Arabia, Iraq, Qatar and at home.
As its aboveboard oil sales decline, Iran’s government is scrambling to keep selling surreptitiously, using techniques honed during the Obama pressure campaign, U.S. officials say: loading cargoes into non-Iranian vessels at sea, and turning off shipboard satellite beacons.
Over the past several months, the government in Tehran assembled a special sanctions-busting group, Iran-watchers say, with top officials from the oil, intelligence, export and foreign ministries, as well as the Central Bank of Iran.
During the Obama-era pressure campaign, Tehran moved tens of billions of dollars-worth of oil, gold and other goods through banks, trading companies and exchange houses across the globe, including in Turkey and Dubai, one of the seven U.A.E. emirates. That infrastructure is being reactivated, U.S. officials say.
Turkey’s state-owned Halkbank—as well as several other Turkish banks under scrutiny by U.S. prosecutors—is facing potential multibillion-dollar fines by the U.S. for its role in those activities.
The bank didn’t return requests for comment. Officials at the Turkish and U.A.E. embassies in the U.S. didn’t respond to a request for comment.
A U.S. security official familiar with the matter said the Dubai government has reassured the U.S. that it won’t allow such activity again.
“There’s nothing right now that gives me a specific concern that there will be real leakage,” Treasury Secretary Steven Mnuchin said between stops on a Middle East tour last month.
Much of his trip—which included stops in the U.A.E., Qatar and Kuwait—centered on securing sanctions enforcement. But, “to the extent that we see it, we will figure out to plug the holes,” Mr. Mnuchin said.
Mr. Hook said the U.S. already knows Iran’s clandestine channels and will be “vigorous and relentless in enforcement.”
—Asa Fitch in Dubai contributed to this article.
Write to Ian Talley at ian.talley@wsj.com
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