The Teheran Shuffle
The full resumption of US sanctions against Iran is set to take place in a month, with an initial stage having begun on August 6. I have already discussed here in ECRG Intelligence the impact that resumption will have on crude oil prices. Over the past several days, forecasts of likely Iranian oil export declines have intensified with the slide happening sooner and to a greater level than anticipated.
That certainly puts additional pressure on oil prices generally, while introducing yet another instability factor into an already tense Persian Gulf.
But the situation hardly ends there. The sanctions are threatening both Iran’s primary source of trade revenue and the stability of the country’s domestic political system. And that is prompting some possible nasty options for Teheran.
Over the past several days my network has been abuzz over indications that this situation is about to turn nasty. More forceful moves seem to be afoot. Some of these are primarily to allow Iranian crude to get to international markets once the sanctions are applied.
Discussions include ongoing planning for utilizing Shiite support across the Shatt al-Arab both to foment dissent in Iraq and smuggle Iranian crude to market under the guise of Iraqi cargo. Another approach, which I have previously described here in ECRG Intelligence, is moving exports via contract swaps with both Russia and China. Volumes would either be transported via Russia into global trade or employ third parties in the case of Chinese support. The latter would make use of financial intermediaries in Singapore and Hong Kong.
Straits & Narrows
However, it is the more confrontational steps that have my contacts more concerned. Several sources have indicated that Teheran intends to provide accelerating support for Houthi rebel attacks against the Saudi oil export route through the water areas of the Bab el-Mandeb.
This is a narrow strait attaching the Gulf of Aden with the Red Sea, with the western border of Saudi Arabia just to the north, the Horn of Africa further west, and war-torn Yemen directly east. Previous Houthi missile attacks have forced Riyadh to suspend shipments through the strait.
While unlikely to make a major dent in overall Saudi export figures, the attacks have increased already-heightened tension levels in the region and have threatened to expand the civil war in Yemen where Saudi Arabia and Iran have been contesting through the use of surrogates.
There remains no firm plans that I can identify over the more contentious possibility that the Iranian Revolutionary Guard Navy (IRGN) would attempt to blockade the Strait of Hormuz to the east. That strait is the essential southern exit route from the Persian Gulf through which almost 20% of the world’s total crude exports (pipeline plus tanker) travel each day.
Most military experts doubt the Iranians could hold the narrow strait closed for long, especially given the certain response from the US naval fleet in the area combined with swift action from both the Saudis and the United Arab Emirates.
But there is also a consensus that the IRGN could disrupt tanker traffic through the strait and that would be sufficient to dramatically increase tensions and add about $20 to a barrel of crude in short order.
The other immediate flash point reaction is likely to center on Syria. There, once again through the use of a surrogate regime and internal groups, Teheran will orchestrate a broader strategy to erode the US position (what remains of it) in the country. This will be as much to frustrate Washington in the region as it will be to support the regime in Damascus.
Employing Shiite populations in the broader region is already underway. This includes yet another wave against the Sunni ruling family of a Shiite-majority population in Bahrain, a wider move to oppose US policy in Iraq (where Shiites strongly outnumber Sunni), and even in the Caspian. There one of the other five littoral states – Azerbaijan – is also majority Shiite. Baku is likely to play a lynchpin position in any move of Iranian oil for throughput on the Russian Transneft pipeline to international markets.
Europe the Creek, But Many Paddles
As the mood darkens in the Persian Gulf, a second front in opposition to US sanctions is being finalized in Europe. There, aside from the Continent receiving about a third of its crude from Iran, the primary concern remains JCPOA.
The Joint Comprehensive Plan of Action is the agreement Iran signed in June of 2015 with the five permanent members of the UN Security Council (the US, UK, France, Russia, and China), Germany and the European Union whereby Teheran agreed to suspend nuclear energy developments that could have military applications in return for a phasing out of existing Western and UN sanctions.
Trump’s decision in May to withdraw the US from JCPOA started a firestorm of criticism in Europe. The International Atomic Energy Agency (IAEA) has been granted unparalleled access to Iranian facilities and has attested to Iran’s compliance with the treaty requirements. So has every other signatory to JCPOA.
However, the White House three years after the fact wants to include Teheran’s missile development and support of outside groups labeled terrorist by the US.
The decision to withdraw has bene undermining American credibility worldwide ever since it was announced, provides impetus to the opinion that signing international accords with the US is unproductive, and has strained relations with allies.
Which brings us back to Europe.
My contacts unanimously believe the following will take place or will be strengthened. Some of these developments I have already reported about in previous editions of ECRG Intelligence. First, all other JCPOA members have pledged support to continue the agreement even without a US presence. Second, the EU passed blocking statutes to protect EU member states and companies from the US sanctions. That passage was on August 6, the same date on which the first stage of US sanctions took effect.
Washington has dismissed the EU efforts as a failure. But contacts at the Union secretariat in Brussels believe that remains to be seen. The blocking moves will apply sovereign protection against any US secondary sanctions upon European member companies continuing to work with Iran.
That transforms any US move against these companies as a sovereign attack on both the EU and each of its member states. Several indications have emerged that a response against American economic interests on the Continent will ensue as retaliation should Washington trigger actions against European entities.
Ask Microsoft or Amazon whether such retaliatory actions are a concern. This has all the early warning earmarks of a developing trade war.
Third, for months European central banks and Bank Markazi (the central bank of Iran) have had a banking exchange agreement in force, designed specifically both to guarantee payments and to provide a route to circumvent US attempts to prevent Iranian access to foreign banking.
There is an additional wrinkle emerging on this front. Amid its own tariff and political tiff with the US, Turkey has offered its banks as an intermediary between Iran, Europe, and broader markets. And Chinese financial institutions are similarly positioning themselves to serve an equivalent function in Asia.
Fourth, European sovereign state trade credit agencies are implementing plans to underwrite European company involvement in Iranian projects to reduce risk. A similar move is emerging among private European sources to assemble finance pools to insure trade with Iran.
Fifth, there will be an initiative introduced to place oil swap contracts under sovereign protection to allow Iranian oil consignments into global (non-US) trade under European flags.
Sixth, a preliminary limited trade agreement between the EU and Iran is under discussion.
The underlying base in most of these approaches is European sovereign protection. This is transforming much of the US-Iran controversy into one that is US-European.
These steps will still make doing business with Iran more expensive. That always happens when an indirect and ad hoc system replaces a market-generated one. And these efforts also cannot prevent an overall decline in Iranian oil exports.
That means both the tension level and the price of crude oil are going up.