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15 August 2018

US wages economic war against Iran

With the United States' first wave of economic sanctions on Iran already having a heavy impact on the Iranian economy, Jonathan Bell looks at how this will also affect the country’s relations with major international companies and trading partners.... as well as a look back at "the week that was"

Iran, with a population of 81 million and a country housing the world’s fourth largest proven reserves of crude oil and the second for natural gas is a market long overdue for normal trading relations with the rest of the world. After decades of isolation and sanctions, the country has a massive shopping list. Trading and business opportunities could be immense.  

In early 2016, the long-standing economic sanctions that had been in place against Iran were lifted as part of the Joint Comprehensive Plan of Action (JCPOA) nuclear agreement signed by Iran, the US, Russia, France, the UK and Germany in 2015. Since then many European and Asian companies have been trying to develop business in Iran and gradually build trade and project ties, although the major foreign commercial banks have stayed away. 

The lifting of the sanctions has not lasted long. In May of this year President Trump and the US withdrew from the nuclear deal with Iran and unilaterally imposed renewed sanctions. This was despite the outcry from the other signatories of the deal pointing out that Iran was fully complying with the terms of the agreement and many other countries wanting to trade with Iran. The only country openly supporting the US on its announcement was Israel.

In an official statement in May, the US Treasury said: “On May 8, 2018, the President announced his decision to cease the United States’ participation in the JCPOA and to begin re-imposing the US nuclear-related sanctions.” It also added: “The US government will continue to make aggressive use of its authorities to target Iran’s malign behaviour.” 

The renewal of economic sanctions has sent shock waves through many big international companies trying to develop business and trade in the Iranian market, and it has pushed the EU to openly challenge the US actions. The US sanctions were phased to come into force after three-months and more severe sanctions after six-months following the May announcement. As of early August, the US has now enacted the first wave of its economic sanctions with Iran. A second round of sanctions will come into force this November, and those will be targeted at Iranian oil and gas exports.

But the US unilateral action is not simply about the nuclear deal agreed with Iran back in 2015. It is about many other issues which the US wants to change. In May, US secretary of state Mike Pompeo said the US was imposing the "strongest sanctions in history" and that those and new measures together would constitute "unprecedented financial pressure on the Iranian regime".

John Bolton, US national security adviser, and the most outspoken anti-Iran adviser within the US administration, very recently stated: “We definitely want to put maximum pressure on Iran. We want to see Iran withdraw their support for international terrorism, stop their military actions in the Middle East, and stop ballistic missile testing.”

And beyond this, many critics argue that the US sanctions and rhetoric is a smokescreen intended to hide a policy where the fundamental goal is designed to deliver severe economic hardship within Iran to ultimately try and force a regime change in the country.

The imposition of sanctions imposed so far is already having a heavy impact on the economy and the people of Iran. It has also forced the Iranian government to change its monetary policy. Unemployment is rising fast, and the Iranian rial has plummeted. And of course, under the US sanctions no company is allowed to use US dollars to trade with Iran.

Speaking to Al Jazeera TV at the weekend, Andreas Schweitzer, managing director at Arjan Capital, a London headquartered capital markets advisory and trade finance facilitator company, said: “The damage is already taking place in the Iranian economy. The rial has devalued dramatically. This is not just the result of sanctions, but also the way the Iranian Central Bank has handled the foreign exchange situation. You have big unemployment and foreign companies leaving.”

He added: “The rial has plummeted to a third of its value, and now by re-opening the markets they try to bring the official rate and the market rate closer together. We believe that this will work because at the moment the country can’t even import anything. It’s just prohibitively expensive.”

On Tuesday last week Trump came out with this quite shocking and bizarre tweet: “The Iran sanctions have officially been cast. These are the most biting sanctions ever imposed, and in November they ratchet up to yet another level. Anyone doing business with Iran will NOT be doing business with the United States. I am asking for WORLD PEACE, nothing less!” Mmmm – strange way to go about world peace! His use of upper case, not mine!

Of course, Trump’s tweets are often designed to bully and scare, they are not US policy. One has to look beyond his belligerent rhetoric. Nevertheless, many big European companies, with interests and exposure in the US are leaving Iran. In fact, some big companies such as Siemens announced their withdrawal from the Iranian market back in May when the US first officially announced it was pulling out of the JCPOA agreement. Danish shipper Maersk also said back in May that it would stop doing business with Iran.

Many others have since also said they will have to withdraw – including Total for example, which is involved in the South Pars project worth up to $5 billion to help Iran develop the world's largest gas field. And Peugeot has said that it will have to suspend Iranian activities.

The EU in an attempt to try and protect European companies active in Iran issued a blocking statement. I won’t go into the details of this – but it is a measure that is hardly going to help companies if they come under attack by the US. Any EU company with a large exposure in the US is fearful of being cut out of the US market and can only be expected to withdraw from Iran.

China can expect to try and work around the sanctions, and unlike many European companies, Chinese entities – for the most part – do not have the level of US exposure that the big EU companies have. Some countries – New Zealand and Australia in particular - are involved in food exports to Iran – primarily lamb and mutton. In previous sanctions years these have always been categorised as ‘humanitarian’ exports.  New Zealand’s exports to Iran are worth around $120 million a year. One would sincerely hope that the US does not start to try to interfere with humanitarian goods trade.

When asked by Al Jazeera TV about Trump’s threats to companies doing business with Iran no longer being allowed to trade with the US, Schweitzer at Arjan Capital stated: “His [Trump’s] comments are more addressed to the Europeans, because the Chinese are more independent and will continue to buy oil [from Iran]. India as well. Turkey makes noises that they will stick to their own mission, and Turkey could suffer from US sanctions. But many EU companies have a lot at stake in the US. Look at what Daimler Benz has said – they are retracting. Scania is not delivering buses and lorries. So, the issue is with Europe again.

Asked how he would advise companies, Schweitzer replied: “You have companies that have decided to leave Iran as they are very strong in Europe and also depend on the US market, so there is no question for them. They have to leave, for example - Siemens. Then you have those that are less exposed and they will probably try to stay. And you have others, that have no US exposure and will see this as an opportunity, and may try to do M&A activity in Iran. Much depends on what your exposure to the US economy is. If you have a lot of exposure to the US, then your Iran exposure is a problem.”

And on the subject of the impact of US sanctions imposed on Iranian oil exports, Schweitzer responded: “Trump wants to reduce Iranian oil exports to zero. But that is not going to happen because China will continue to buy. India will also continue to buy - and these are very large buyers. If the situation goes back to how it was in 2010-2012, then the Iranians will have to adjust to how it was back then. And the Iranians are already well-trained in handling sanctions.”

Oil and gas exports will, of course, be a major key to Iran’s future. Iran’s biggest oil export markets over the past year have been China, India, South Korea, Turkey, Italy, Japan, UAE, Spain, France and Greece – in that order. 

China, Iran’s top oil customer buys approximately 650,000 barrels per day from Iran, or 7% of China’s total oil imports. And at current market prices, those exports to China are worth in the region of $15 billion a year to Iran. Big state-owned companies such as CNPC and Sinopec have also invested billions in Iranian oilfields, and naturally have a vested interest in maintaining the trade.

In a statement sent to Reuters news agency last week, the Chinese Foreign Ministry said: “China has consistently opposed unilateral sanctions and long-armed jurisdiction.” It added: “China’s commercial cooperation with Iran is open and transparent, reasonable and lawful, not violating any United Nations Security Council resolutions. China’s lawful rights should be protected.”   

And on a final note, speaking on the subject of the US sanctions on Iran on Al Jazeera TV on 11 August, Jarrett Blanc, at the Carnegie Endowment for International Peace and former US state department official, had this to say: “The world’s banking system is like a sewer, and all of the plumbing runs to New York. There’s no law of physics says that has to be true, it’s just the way things have developed since World War 2. Right now, you’ve got the EU and their economy is as large as ours [the US], and China which is growing so that it will soon be larger than ours. And if we abuse that power that we get from that central role, if we capriciously apply sanctions without taking into account the national security concerns of our closest allies and partners, we are going to lose that position.”

I couldn’t agree more!

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Well, that’s all for now folks. Please do drop us a line if you have any news and want to broadcast something, or if you have any suggestions/feedback on the editorial front.

Have a great rest of the week and a super weekend.


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