“I Am Altering the Deal, Pray I Don’t Alter It Any Further”
The lines are already being drawn for a series of major international confrontations over President Trump’s decision to renew sanctions against Iran.
At issue is a concerted attempt by Teheran’s other foreign partners in the Joint Comprehensive Plan of Action
(JCPOA) to save the deal. JCPOA is the landmark accord by which the permanent members of the United Nations Security Council, the EU, and Germany said they would phase out earlier sanctions in return for an Iranian agreement to scale back nuclear development activities that could lead to weapons programs.
However, on May 8, Trump announced a unilateral US departure from JCPOA, throwing the accord into disarray. In tandem with the departure, the White House will move to reimpose sanctions against Iran. Those moves will target removal of Iranian crude oil from the international market.
Trump wants to expand the scope of any agreement with Teheran to include restricting missile testing and support for terrorism. Neither of these is part of JCPOA. This means the US is reneging on an international agreement for reasons having nothing to do with its compliance.
Under the accord, the International Atomic Energy Agency (IAEA) has been provided with unparalleled access to Iranian nuclear facilities. IAEA monitors have acknowledged that Iran has abided by the dictates of JCPOA.
Trump upped the ante this week by declaring he would require a “zero barrel” approach from both US and foreign oil buyers, intending to cut off Iran from its main source of hard currency revenue beginning on
November 4. Failure to comply would result in the application of secondary US actions against violators.
When considering the declaration’s impact on US end users, it was almost entirely a public relations play. The US market currently receives virtually nothing in oil imports from Iran. Elsewhere, on the other hand, is another matter.
Bringing Imbalance to the Crude Supply
Such secondary sanctions, when combined with the ongoing tariff threats pitting the US against main trading partners Canada, Mexico, Western Europe, and China, would have major adverse implications for the stability of global markets.
The sanctions against Iran are the same as those in place prior to the JCPOA that attempted to prevent access to international banking and finance, shipping, and insurance. Trade in oil is primarily denominated in US dollars, with the availability of foreign exchange and contract pre-finance essential.
The earlier US sanction are still technically on the books, although both the EU and the UN had begun relaxing theirs under JCPOA.
The application of secondary sanctions against companies in other countries that continue to trade in Iranian oil would include being barred from the American market and having assets in the US subject to freeze or seizure.
In a matter of less than two months Trump has ushered in a diplomatic firestorm. Significant opposition has been expressed by every other foreign participant in JCPOA, as well as across Europe as a whole, while plunging the Persian Gulf region into another crisis.
When combined with the tariff moves, this is shaping up as the most concerted rift with allies that the US has experienced since the post-World War II world was created.
The re-imposition of sanctions would significantly weaken the Iranian economy, increase internal protests (always underway), and provide hard line elements with sufficient political leverage to grab power.
The true intention of what the White House has in mind is now clear. Compliance with JCPOA, or even extension of the agreement to include missiles and support for terrorists, is not the objective. It really never has been. The goal is regime change in Teheran.
And I can speak from some personal experience in crafting such policies. This is a very dangerous undertaking. Outcomes are highly uncertain and less under your control when the decision is made to push this kind of snowball down the hill.
It also makes the uncertainty of what moves Teheran would entertain closer to home in the Persian Gulf a major ingredient of uncertainty.
Iran had been steadily increasing its oil exports, rising to 2.7 million barrels a day by May. Thereafter, however, the JCPOA crisis had prompted a pullback of about 500,000 barrels a day this month.
My latest estimates view the net impact of a full renewal of US sanctions as costing at least 700,000 more barrels a day. Extending the sanctions regimen to other foreign participants through the zero balance approach would paralyze Iran. At the height of the last US, EU, and UN combined sanctions, Iranian crude exports had collapsed to less than 1.4 million barrels a day.
The global oil market is now at a virtual balance, resulting from a rapid collapse in production from Venezuela, ongoing problems in Libya, Nigeria, and Mexico, and a new 300,000 barrel a day loss from Canada.
It is, therefore, little wonder that Trump’s sanctions move has led to a rapid increase in oil prices. That has obliged the US to request an increase in production from OPEC to keep the cost of oil products from spiking.
The EU Strikes Back
Europe and India are facing some significant concerns once the sanctions kick in. About a third of all oil imported into Europe comes from Iran. In the case of India, most of the main refinery sector there is geared to Iranian grade crude. And Turkey declared on June 27 that it would flat out not abide by any US sanction moves.
As a result, erstwhile American allies in Europe are striking back. From ongoing conversations with global sources and colleagues over the past week, I can confirm the following.
First, at a recent meeting in Sofia, the EU has agreed to strengthen central banking connections with Teheran that include direct payments to Bank Markazi, the Iranian central bank. These direct transfer arrangements between central banks mean payment for Iranian oil will have European sovereign protection.
Second, moves are developing to provide insurance guarantees that utilize national credit agencies. These are of primary benefit to European companies now facing the threat of US secondary sanctions. Several will nonetheless still comply with those sanctions.
As several contacts inside The Beltway will acknowledge, complete compliance is impossible. But any degree of foreign pull back is a success.
Third, China has been structuring its own response. Under the guise of its reaction to American tariff threats, Beijing has done two things: placed US crude oil and processed oil products on its own tariff list and begun using increasing consignments of Iranian exports as a weapon of its own.
China may not actually want to import massive new volumes of Iranian oil, but it can use them in a broader network of contract swaps. Given the substantial trade surplus held with Iran, this also allows product to be paid for in kind.
Fourth, evidence now exists for a wider usage of future contracts and other derivatives by actors in several trading markets to underpin support for Iranian oil trade and an opposition to US sanctions.
Finally, should the US move to operationalize a sanctions regimen, there exist tangible signs that London, Paris, Berlin, Brussels, Moscow and Beijing will provide sovereign cover for a rejection and concerted opposition.
This will get messy. But the lines are being drawn and the combatants are digging in. Neither of which is ever a good sign.