Corporate Debt Review

Iranian Contacts Go Dark: Never a Good Sign

Trumped Up

Two months from today, the Trump Administration intends to renew the full complement of sanctions against Iran. The avowed objective is to compel Teheran back to the bargaining table by choking off the regime’s primary source of revenue – crude oil sales.

There are multiple anecdotal indications, on the other hand, that the real objective is regime change.

Neither of these targets is the least bit valid. In May, Trump unilaterally announced he was pulling the US out of JCPOA (the Joint Comprehensive Plan of Action). JCPOA is the treaty by which the permanent members of the UN Security Council (the US, UK, France, Russia, and China), Germany, and the EU agree to phase out earlier sanctions in return for Iran suspending nuclear development that could be used for weapons, while allowing the International Atomic Energy Agency (IAEA) unparalleled access to Iranian sites.

All signatories have acknowledged that Iran had been abiding by the treaty, to which the IAEA had provided detailed confirmation. Trump, however, wants retroactively to prevent Iran from developing and testing missile systems, while prohibiting Iranian support for terrorist groups. Neither of these late arriving issues had been part of JCPOA.

When it comes to the treaty itself, White House talking points emphasize an Israeli “report” released earlier this year. This amounted to a public presentation, made with great fanfare, by Israeli Prime Minister Benjamin Netanyahu, in an all too obvious attempt to sway Trump.

Unfortunately, reviewing that presentation provides no tangible information earlier than two years before JCPOA was signed. What it does amount to is a grand (self-serving) conspiracy theory. The entire speech can be found here: https://www.haaretz.com/israel-news/full-text-netanyahu-s-reveals-iran-s-atomic-archive-in- speech-1.6045556

A better deal, one that advances security in both the Persian Gulf region and beyond, is certainly welcome. But in the absence of there being any evidence that Iran has violated JCPOA, scrapping the multinational accord and plunging the Persian Gulf back into an arms race crisis is hardly the remedy.

All Quiet on the Middle Eastern Front

Traditionally, diplomacy is used to improve the overall effect of an agreement. As parties have more to gain from continuing the relationship, additional negotiations are always possible. What exists is taken as the basis for improvements.

Not this time. Once again, the White House seems bent on manufacturing a crisis so that the president can come in at the last minute and save the day. Sounds more like a TV plot than realpolitik. It has replaced a slowly growing opportunity for joint work involving Iran with a genuine dash into dangerous territory.

There is no winning strategy here and little understanding of the impact attending to the president’s decision.

All of the other signatories have rejected the American move. Alternate approaches to save JCPOA are in process. But as discussed shortly, these attempts will have some difficulty in offsetting American sanctions.

My overriding concern as I write this comes from the Iranian side. In what is a most disquieting development, those in the Iranian apparatus with whom I have had a multi-year relationship have gone dark.

This is never a good sign.

I last met with Iranian oil and policy execs in July, a meeting that took place in Switzerland. Some of these individuals are contacts of several years’ standing. I had had an earlier opportunity to meet with them in Frankfurt, prior to the Trump move. Then, prospects for outside investment into Iranian natural gas and liquefied natural gas (LNG) had looked particularly promising. Preliminary discussions on contract swaps that would have opened markets to US LNG exports were even under consideration, in regions where those exports would have been unlikely from a cost standpoint otherwise. In anticipation, interest had emerged among global sources of energy investment.

All of this came to a screeching halt once Trump stepped in.

Strange Bedfellows

There are three emerging themes in what seems to be coming. And my concerns have been heightened by my contacts not attempting to comment or dissuade.

First, Washington has managed to create common ground for Iran, Russia, China, and Europe. Since I first addressed these matters here in ECRG Intelligence, both Russia and China have intensified the fashioning of alternative trading venues to allow Iranian crude oil to bypass US sanctions.

Both Moscow and Beijing now intend to use trade-in-kind to avoid cutting off Iranian access to hard currency (a clear result of the US sanctions). Anecdotal indications have also revealed a complicated system of credit and contract swaps that will also include Turkish and non-Chinese mainland banks.

All of this is less beneficial to Iran than the straight sale of crude into the global market. Such indirect mechanisms increase the cost of exports, produce inefficiency in trade, and lower revenues. There seems little question that aggregate Iranian oil exports will decline. But any US objective to halt them entirely will be thwarted.

For its part, the EU will move on passing regulations to prevent US sanctions from being applied to European- based companies working with Iran. This is guaranteed to ratchet up a trade war between the US and the Continent.

In addition, beginning at a May meeting in Sophia, all European parties to JCPOA have agreed to set up direct payment lines between their central banks and Bank Markazi, the Iranian equivalent. Turkish banks more recently have responded to separate Trump tariff threats against Turkey by announcing they will join in providing intermediary financial conduits for this effort (one that is now likely to include some Russian involvement as well).

Still, the US sanctions will bite.

Quds Mean Trouble

Second, the highly unlikely prospect of regime change in Teheran has been reduced even further by an Iranian version of “rallying around the flag.” The real power is held by Supreme Leader Ayatollah Ali Khamenei, the nation’s religious head. Hassan Rouhani is a more reform-oriented president.

Both have responded in a concerted fashion to the US JCPOA departure and the prospect of renewed US sanctions. They have also kept communication lines open to all other JCPOA signatories.

The real question remains what the leadership of the Iranian Revolutionary Guard Corps (IRGC) will do. The most import individual here is Major General Qasem Soleimani, the commander of the IRGC Quds force. Quds conducts extraterritorial operations. Soleimani is the most respected military commander and is almost singularly responsible for the defeat of ISIS in neighboring Iraq (where Iraqi forces were essentially commanded by Iranian generals).

If IRGC becomes more involved in domestic politics, it will do so to solidify Khamenei’s position (to whom they bear allegiance), rather than Rouhani. If Washington insists on driving a wedge between the two Iranian leaders, it will probably turn the nation away from reform and toward greater religious conservatism.

Third, that dynamic introduces the most disquieting theme. There will be a military response. While it is unlikely that the IRGC Navy will close the strait of Hormuz (despite the threat to do just that from IRGC leadership and Khamenei), the prospect of any interruption in tanker flows will spike oil pricing volatility.

The focus of the military response will use surrogates – Houthi rebels in Yemen and the regime of Bashar al- Assad in Syria. The former will be directed against Iranian arch enemy Saudi Arabia in the ongoing Yemeni civil war. Already, missile attacks by the Houthi (using ordinance provided by Iran) have prompted Riyadh to suspend oil shipments from Red Sea ports.

Meanwhile, in concert with Moscow, Teheran continues to wield leverage in Syria with a dual objective – the continuation of its offensive against ISIS and the defense of al-Assad against militias still supported by the US. Syria remains a vulnerable underbelly of an American foreign policy in search of something beyond a Tweet.

The US posture against Iran may be more destabilizing than the White House cares to admit.

About the Author

KentMoors

Dr. Kent Moors is an internationally recognized expert in oil and natural gas policy, risk management, emerging market economic development, and market risk assessment.

He serves as an advisor to the highest levels of 27 countries, including the U.S., Russian, Kazakh, Chinese, Iraqi, and Kurdish governments, to the governors of several U.S. states, and to the premiers of two Canadian provinces. He’s served as a consultant to private companies, financial institutions and law firms in 29 countries, and has appeared more than 2,300 times as a featured radio-and-television commentator. He appears regularly on ABC, BBC, Bloomberg TV, CBS, CNBC, CNN, NBC, Russian RTV, and the Fox Business Network.

A prolific writer and lecturer, his six books, more than 2,700 professional and market publications, and over 650 private/public sector presentations and workshops have appeared in 47 countries.