BEING IN TWO MINDS

Recently, the Trump administration stated that it would not extend the benefits granted in November last year to some buyers of Iranian oil. Washington intends to continue its policy of tightening sanctions against the Iranian energy sector to "deprive the outlaw [Iranian] regime of the funds" it collects by exporting oil.

Americans believe that the global market is supplied with oil fairly well and will not be affected much due to the absence of Iranian oil. In addition, the U.S. president expressed confidence that Saudi Arabia and the United Arab Emirates, if necessary, could compensate for the shortage of oil in the market.

But amidst the ongoing crises in Venezuela and Libya, two major oil exporting countries, there are fears that the American decision will make the oil market even more volatile.

In addition, Saudi Arabia refuses to assume obligations to increase production, stating that it will coordinate with other oil producers to ensure a balanced market. The next OPEC meeting is scheduled for June.

Waiver from the agreement

In 2015, the USA, France, Russia, Great Britain, Germany and China signed with Iran the Joint Comprehensive Action Plan (JCAP), under which Tehran, in exchange for the gradual easing and lifting of economic sanctions, pledged to substantially reduce its nuclear program, including uranium enrichment.

However, last May, Washington unilaterally withdrew from the agreement and announced the resumption of sanctions. By imposing the sanctions in two stages (August and November), the United States warned other states, companies and individuals cooperating with Iran that they would also be punished.

Having banned the purchase of Iranian oil in November, the Trump administration made an exception for eight largest importing countries. Thus, China, India, Turkey, Japan, South Korea, as well as Taiwan, Italy and Greece were allowed to continue import of oil for another six months, with the possibility of renewal in May.

The Special Eight

Perhaps, Donald Trump made his decision fearing that his sharp actions could provoke a rise in oil prices, which is undesirable for the United States. In addition, seven of the eight countries are key allies of Washington. In fact, the U.S. continues difficult talks with China in order to revise trade relations. Perhaps that is why it was decided not to complicate the relations with an energy war.

It would be interesting to know why Italy, which by then did not buy oil in Iran, was included in this list. Most likely the Trump administration wanted to show its warm attitude toward the populist government of the country, which has repeatedly called itself the "preferred negotiating partner" with the United States in Europe.

The German Deutsche Welle  suggested that the inclusion of Italy and Greece on the list is a kind of goodwill gesture for the future, when a decision will be made (in 2019) on the construction of a gas pipeline to Europe from Tamar and Leviathan fields off the Israeli coast. Both fields are being developed by an American company.

Greece and Taiwan joined the Italians earlier this year, also finding an alternative to Iranian oil. By May, five countries remained in the list of exceptions, whose economies are strongly tied to Iranian energy resources.

GDP reduction

Following the forced refusal of 23 countries to buy Iranian oil, the export of oil from Iran, which reached 2.5 million barrels per day at the beginning of last year, decreased to about 1 million barrels by 2019.

Accordingly, the Iranian economy, which is heavily dependent on energy exports (oil revenues make up 40% of the budget), has shrunk greatly compared to the pre-sanction period. According to the IMF, the fall in Iran’s real GDP last year was 1.5%, while the forecast for the current year is between 3.6% and 6%. Before the sanctions, the forecasts were rather optimistic - annual growth of approximately 4%.

Iran's currency reserves are also decreasing rapidly. According to IMF estimates, in January 2017 they were equivalent to approximately $124 billion. At the end of 2018, this figure dropped to $58 billion, $47b of which were outside Iran, mainly in China, India and Russia, and $11 billion in Iran. In 2018, the Iranian currency lost 70% of its value and its rate continues to fall. Inflation in the country is constantly growing and, according to forecasts, this year it will be 40-50%.

Import will not stop

Last year, the world's largest oil importer, China, bought an average of 500-600 thousand bpd of oil from Iran, with India - 500-550, Japan 150, Turkey 120, and South Korea 50 thousand bpd, respectively.

These countries find it difficult to refuse to buy Iranian oil, not only because they have attractive import terms such as favourable credits, low transportation costs, insurance, etc., but also because Iran is their regional partner in a wide spectrum of relations from economic to political. Therefore, many energy analysts suggest that if not all, then most of them are unlikely to stop importing Iranian oil completely.

Threats from Tehran

Although Iran declares, in response to Washington’s actions, that "it will export oil as much as it wants", not less than a million barrels per day, it nevertheless understands that in case of a further reduction in oil revenues, the country will have to reduce its expenses, and also look for other sources of income to the state budget.

In particular, the Central Bank of Iran has promised to review the policy of foreign exchange regulation to stimulate non-oil exports. According to last year, the total value of Iran's non-oil exports amounted to $44 billion.

On April 23, the day after Washington announced new requirements for Iranian oil exports, Iranian lawmakers passed a number of laws forcing the government to "respond to Washington’s hostile actions tougher."

According to Iranian media, the Islamic Revolutionary Guard Corps again threatened to block the strategically important Strait of Hormuz, which ensures the transportation of 20% of all world oil cargo, if the United States prevents Iranian oil tankers from passing through it.

Workarounds

After the U.S. sanctions against Iran became effective last November, oil exports from Iran became even more opaque. According to companies tracing tankers, Iran has secretly sold from 0.1 to 0.3 billion barrels of oil per day using various methods that allow it to bypass sanctions.

Below is a few examples showing how it is possible to hide the origin and destination of oil:

* falsification of cargo and shipping documents (bills of lading, certificates of origin, invoices, packing lists, insurance documents);

* transfer of cargo from one vessel to another in the sea;

* disabling automatic identification system (AIS), which is a collision prevention system that transmits ship identification number and selects navigation and positional data using high frequency radio waves. Although the AIS was not specifically designed for tracking ships, it is often used for this purpose via terrestrial and satellite receivers;

* changing the name of the vessel in order to hide its previous illegal actions;

* using flags of other countries.

According to TankerTrackers.com, Iranian tankers have been trying to hide their activities since August by turning off AIS. In February, two cases of the transfer of Iranian oil from one vessel to another were identified. In March, the State Department reported on their website that Panama had deprived 59 vessels connected with Iran the right to fly under Panamanian flag.

Europe's position

The EU made a statement in which it expressed regret "about the decision of the United States, which again undermines the implementation of the JPAC on the Iranian nuclear program", and stressed that it continues to be loyal to the terms of JPAC "as long as Iran fulfils its obligations."

In August 2018, EU included Iran in the list of countries and regions that can receive financial support from the European Investment Bank under EU guarantees. Brussels also urges European companies to ignore the U.S. sanctions, promising them to receive compensation in the event of financial losses from sanctions.

In January 2019, Germany, France and the United Kingdom reported that they had joined forces to create the Instrument for Supporting Trade Exchanges (INSTEX) so that European companies could do business with Iran using barter methods that bypass the U.S. fiscal system. The INSTEX channel will be used by Europe to sell Iran only food, medicine and medical equipment with the possibility of expansion in the future, the German NDR reported.

However, so far all attempts of European officials to convince businesses to maintain cooperation with Iran have failed to be successful. Private companies, especially large ones, do not want to lose the attractive American market. Moreover, Washington has threatened to take action against any company using a new European financial mechanism to involve Iran in transactions that violate American sanctions.

Wrong method

"Sanctions are not an elixir that, through extensive application, magically achieve desired foreign policy outcomes," former Deputy Director of the CIA and Under Secretary of Treasury for Terrorism and Financial Intelligence David S. Cohen said.

At least because, he says, "sanctions work best when they are amplified by complementary actions by international partners that share the policy objective. Although the U.S. dollar and financial system — the key levers that make our sanctions powerful — dominate international trade and finance, we live in an interdependent world. If others, particularly major economies, seek to circumvent our sanctions, there are ways to do so."

This is so true! Although the sanctions had a negative impact on the Iranian economy, but given the increasing resistance to them from the European Union and other major economies, many politicians and economists believe that Tehran will withstand this blow. It is already clear that the obvious goal of the sanctions — the change of the ruling regime in Iran — is unachievable by the methods chosen by the Trump administration.