By Michael Glackin
The Daily Star
Friday, November 9 2018
“The Iranian regime has a choice,” U.S. Secretary of State Mike Pompeo thundered this week. “It can either do a 180-degree turn from its outlaw course of action and act like a normal country, or it can see its economy crumble.”
Pompeo was unveiling the latest tranche of U.S. sanctions against the Islamic Republic, instigated after President Donald Trump tore up the landmark 2015 Iranian nuclear deal.
The sanctions focused on the country’s oil and gas, banking and shipping industries. Earlier sanctions, revealed in August, prohibited Iran from using U.S. currency, and prevented trading in aircraft and cars and with metals and minerals. Western companies that ignore Trump’s sanctions will be denied access to the U.S. market.
These sanctions are the big one. Oil and gas account for around 80 percent of Iran’s revenues.
Pompeo insisted the sanctions would “starve the Iranian regime of the revenue it uses to fund violent and destabilizing activities throughout the Middle East and indeed around the world.” For good measure he added the U.S. would be “relentless in exerting pressure” on Tehran to “abandon its destructive activities.” Well, up to a point. As Pompeo was preaching fire and brimstone, he also confirmed that eight of Iran’s biggest customers had been granted waivers to the sanctions. Those with free passes include South Korea and Japan, both of whom have already reduced oil imports from Iran to zero, and China, India, Turkey and Iraq. China, with whom Trump has been waging a trade war, is Iran’s biggest oil customer.
How long these waivers would last is a moot point, which means the ultimate goal, to reduce Iranian oil exports to nothing in the coming months, is still in doubt. From a peak of 2.8 million barrels per day in April, Iran’s oil sales have tumbled to around 1.8 million since Trump pulled out of the nuclear accord.
But oil economists estimate Iran could still be selling more than a million barrels per day in January courtesy of the waivers. Japan and South Korea for example look set to resume imports because of the waiver.
Meanwhile, China, India and Turkey are unlikely to feel obliged to adhere to the waiver’s nominal six month time limit.
It is also worth pointing out that during the last batch of sanctions, between 2012 and 2015, Iranian exports exceeded 1 million barrels per day, despite an oversupplied market and European Union cooperation in enforcing the boycott.
Trump’s waiver did not extend to the European Union, with whom he is also engaged in a trade war. The EU remains committed to the 2015 deal and is seeking ways to keep trade with Tehran open, but European companies, aware that violating the sanctions will see them cut off from the much larger U.S. market, are taking their own decisions.
French oil giant Total SA has pulled out of a $5 billion contract to develop Iran’s giant South Pars gas field. German group Siemens is understood to have abandoned a $1.5 billion deal to provide train carriages to Iran, while British Airways and Air France KLM Group terminated services to Tehran earlier this year.
Countless other European companies that do business in the U.S. have also quietly pulled out of Iran.
Few believe the sanctions will topple the regime. However, the sanctions come at a bad time for President Hassan Rouhani and Supreme Leader Ayatollah Ali Khamenei, and will cause severe damage to an Iranian economy already on the brink of collapse.
While growing civilian unrest and sporadic demonstrations over the last year have not posed a serious threat to the regime, the protests could become more widespread as sanctions bite.
The Iranian rial has lost more than two-thirds of its value over the last year, resulting in rampant inflation, currently running at a four-year high of 31 percent.
While bread and cooking oil remain under government price controls, the cost of other basic staples, such as milk and rice, as well as clothing, has soared.
Unemployment is more than 12 percent, while the jobless rate among Iran’s youth is more than 28 percent.
Sanctions will make those numbers a lot worse.
The International Monetary Fund forecasts the Iranian economy will decline 1.5 percent this year and 3.6 percent in 2019.
Other economists predict it will contract by as much as 5 percent.
On the plus side, the EU insists it is determined to maintain the 2015 agreement, despite recent accusations by France and Denmark that Tehran tried to murder Iranian dissidents on their soil.
However, in reality the EU expects to retain less than a third of existing commercial trade deals with Iran.
The EU’s much talked about special purpose vehicle (SPV), an attempt to establish a centralized barter exchange system between the EU and Iran which would avoid the need to deal in U.S. dollars (and thus sidestep U.S. sanctions), has so far come to nothing.
The SPV would mean Iran could sell its wares into Europe and accumulate credits that could be then used in exchange for products from European firms.
The failure to establish the SPV stems from the harsh reality that no one EU member state was keen to host it for fear of falling foul of Washington. Germany and France are now understood to be prepared to provide it with a home, but Iranian Deputy Foreign Minister Kazem Sajjadpour speaking in London this week criticized the lack of progress being made.
One country that will not be home to the SPV is the U.K., which post Brexit has more to fear than most in annoying Trump by undermining his sanctions.
Indeed, there are increasing concerns among European leaders about the United Kingdom’s commitment to the 2015 accord against the backdrop of Brexit and Prime Minister Theresa May’s desperation to secure even the hint of a free trade deal with Washington.
The final part of the jigsaw is the impact on oil prices.
The sanctions could remove around 1 million barrels a day from the global oil market by the end of the year.
Saudi Energy Minister Khalid al-Falih has reiterated the kingdom’s promise to turn on the pumps to make up any shortfall so Americans don’t feel the impact of Trump’s sanctions when they fill up their cars. On a political level the situation has become complicated, to say the least, by the fallout over the murder of Jamal Khashoggi. But so far, the oil price is going in the opposite direction. Not even Iran’s perennial threat in times of trouble to block the Strait of Hormuz has spooked oil markets so far.
However, Saudi Arabia still remains critical to Trump’s sanctions, because any one of myriad events – a colder than expected winter, further supply problems in Venezuela where output is already in decline, or an upsurge in disruption to production in Libya – could push prices higher. Thus, the potential for a tighter oil market in the coming months will keep Saudi Arabia firmly in Washington’s credit ledger.
There’s little doubt Pompeo’s threat to make Iran’s economy crumble is credible.
But will it stop the regime funding its “violent activities?”
It’s worth remembering that almost four decades of Western sanctions after the 1979 revolution failed to stop Iran increasing its influence in the Middle East, or prevent it getting close to joining the nuclear club.
For what it’s worth, I believe Trump’s primary motivation is less about containing Iran’s regional involvement in Syria, Iraq and Yemen, but simply in forcing Tehran to negotiate a new nuclear deal, one he can sell to U.S. voters as better than the one brokered by his predecessor.
Don’t forget, Trump’s supporters firmly believe his face-to-face meeting with North Korean leader Kim Jong Un has curbed the latter’s nuclear program, despite the fact that North Korea still has all its nuclear weapons, and continues to produce more on a daily basis.
Trump lacks class, but style matters to him more than substance.
Michael Glackin, a former managing editor of THE DAILY STAR, is a writer in the United Kingdom. A version of this article appeared on page 7 of THE DAILY STAR on November 9, 2018.
