United States Sanction on Iran: New Dynamics

United States Sanction on Iran: New Dynamics

By  Halla Mahdi 

Executive Summary

With the second wave of United States [US] imposed sanctions looming over the Iranian economy, it is essential to consider to what extent such measures bear influence over Iran’s international trading partners.

The announcement of the second set of sanctions targets the Islamic republic’s oil and banking sectors, in addition to prohibiting trade in precious metals, the use of foreign currencies, in addition to Iran’s land, sea and airports for commercial use.

In this light, it is essential to cast a critical perspective, in assessing the ability of the US market in leveraging influence on international investors, with the ultimate aim of halting trade relations with Iran towards the required ‘zero’ trade target.

Would the EU be able to save the JCPOA?

Being the preliminary negotiator of the Joint Comprehensive Plan of Action (JCPOA), the European Union (EU) has stood firmly to support Tehran, launching a series of measures to protect the Islamic republic and foreign investors against the reimposition of economic sanctions . Consequently, the ‘Special Purpose Vehicle,’ orchestrated by the European commission, aims to ‘bundle’ Iranian transactions with the EU and limit the role of commercial banks that may have stakes in the U.S. market; effectively, this would shield the commercial banking sector within Europe from U.S. sanctions (Geranmayeh and Batmanghelidji, 2018).

Analysts are increasingly critical of the leverage of United States sanctions on targeted countries, due to global non-compliance with sanctions. For example, the Treasury Department of the United States is imposing secondary sanctions on third parties conducting trade with Iran, in addition to utilising a Specially Designated Nationals and Blocked Persons List for individuals trading with Iran.

Observers are weighing out the measures conducted by the United States Department of Treasury, in addition to countermeasures by the EU, collectively these would shield the interests of small to medium sized European businesses, salvaging some 30% of EU -Iranian trade[1]. Larger businesses however, within the oil and banking sectors specifically, have had to ‘halt’ their businesses activity in the Islamic republic, this is for fear of risking the access to the $19 trillion US market, which appears unworthy against the £400 billion Iranian one[2].

Consequently, French state-owned bank Bpifrance refused to utilise the ‘Special Purpose Vehicle,’ to facilitate French- Iranian transactions, this was in a move that mirrored a similar reaction of all member states of the European Union, whereby not a single member state agreed to oblige with this countermeasure for fear of being evicted out of the US market[3].

Reports have emerged that the US Treasury has additionally urged the Brussels -based SWIFT banking system to discontinue all business transactions affiliated with Iran. In retaliation, a statement by Germany’s foreign minister revealed the EU Commission’s intention to develop a ‘parallel [payment] system’ that would permit transactions with Iran. Consequently, this would ‘ease’ the reliance of the EU on the US market and re-establish its role within the ‘global order’[4].

China:

Contrary to the EU, the Chinese market is at the forefront of trade with Iran, accounting for 27.5% of Iran’s export and trade[5], this figure has risen by 19% since 2017[6]. More importantly, trade is expected to stay on the rise in light of the United States imposed sanctions, the Beijing Institute of Technology forecasts China may capitalise on the opportunity to dominate the Iranian market, as a result of United States foreign policies[7].

Since the imposing of United States sanctions, China has resumed its economic activity with Iran, which has witnessed establishing a direct train line between Bayannur, northern China to Tehran, Iran; and that is estimated to boost Chinese- Iranian land trade routes[8]. Meanwhile, the decision by French oil giant, Total, to abandon the development of Phase 11 of the Southern Pars oil rich region, could be undertaken by the Chinese government owned CNPC, should this arrangement proceed, this would raise Chinese stakes in the oil market from the current 30% to 80%, allowing China to dominate the Iranian oil market completely.

Though analysts perceive Beijing’s interests within the Middle East region ‘exclusively economic,’ it would not want to upset trade relations with the US, which accounts for $650 billion. consequently, this would spur china to conduct business with Iran through other means, China may conduct business through secondary businesses with fewer or no links to the United States market. It is important to mention that, Beijing has provided credit lines worth $10 billion credit lines to finance water, energy and transport projects in Iran when sanctions had previously been implemented[9].

Invigorating Multilateral trade

Although Turkey has expressed its objection to US imposed sanctions, analysts argue it is unable to risk punishing its volatile banking sector, which depends greatly on accessing the US financial system. A series of political developments throughout the year have strained US -Turkish relations, and have jeopardised the status of the Turkish Lira, losing 44% of its value at one stage this year. To add fuel to flame, there is much apprehension in Turkey over sanctions violations carried out by the state owned Halkbank, over a gold for oil scheme that violated sanctions against Iran before the signing of the JCPOA, which analysts anticipate would place the Turkish economy in a dire position[10] and force Turkey to think twice, prior to jeopardizing its banking sector.

In this light, a multilateral trade agreement has been negotiated jointly by Turkey- Azerbaijan and Iran to conduct trade partnerships utilising Turkish Lira, it would focus mainly on trading agricultural goods.[11]

United States Exempts Eight Countries from Waivers

One day following the second round of sanctions, on the 5th November, the US department of Treasury granted temporary sanctions waivers to eight countries, considered to be the top importers of Iranian oil: China, India, South Korea, Japan, Taiwan, and Turkey, which is subject to scaling back their imports of Iranian oil. Secretary of State, Pompeo, outlined this measure had been implemented to avoid the fluctuation of the price of oil in the international market. Additionally, the primary importers for Iranian oil would be under close monitoring by the US to ensure they are on the way to reaching the ‘zero’ imports of Iranian oil, the US is aiming for.

A study by the crisis group forecast the correlation between imposing sanctions, and Iran’s foreign policy behaviour over the past 40 years. Consequently, the study found little to no correlation between applying sanctions against the Islamic Republic and actual changes within foreign policy. Alternatively, analysts believe the ‘acknowledgement of Iran’s legitimate security concerns’ and adopting a more stable ‘regional security architecture,’[12] as more effective means in bringing Tehran to the negotiating table, which speak more to Tehran’s Forward Defense policy of exploiting power vacuums, wherever chaos has ensued within the Middle East region, such Lebanon, Iraq and Yemen, to name a few case studies.

Equally, experts on Policy Studies have highlighted the futility of unilateral sanctions, unless Iran relies heavily on the United States market; is able to utilise bargaining tools as part of diplomacy; or is able to follow through sanctions concerned with oil; it is unlikely sanctions would yield much effect.[13]

Entering the second wave of sanctions, the US aims to cut Iran’s trade imports to ‘zero,’ forcing the Islamic Republic to return to the negotiating tables for a better nuclear deal. However, being the result of 13 years of intense negotiations, the JCPOA, reflects the best deal for the US and Iran collectively, as has been consistently outlined by Iranian Foreign Minister, Javad Zarif. Consequently, the JCPOA reflects an unprecedented opportunity, where both states achieved an agreement certified by the international community and that meets each of their minimal demands. Observers agree there exists no correlation between sanctions and Iran’s foreign policy behaviour, and go further to comment on the increased futility of unilateral sanctions, which Iran’s oil importers refuse to abide by, namely Russia, China, and Turkey. Although OPEC’s third largest oil producer, Iran, has reduced its oil exports from 2.7 million to 1.6 million barrels a day,[14] it seems that the United States has recognised that maintaining the stability of the crude oil market from fluctuating production, outweighs the ‘zero’ trade target it aspires to implement.

Recommendations

  • It is essential to remain mindful that Iran may easily turn towards the far east energy market, particularly towards China, potentially increasing its Iranian fuel import from the current 30% up to 80%, following the demise of French Total, from the southern Pars oilfields. Realist academics have outlined the geostrategic significance of the Persian and Arab Gulf region for the US, owing to its natural reserves of oil, consequently, the US must be mindful of unintended circumstances of sanctions that involve losing the race against China for dominance of this region.
  • Russia may additionally champion Iran trade, as it lacks much stake within the US market. Observers are closely monitoring its position within OPEC and the way in which power dynamics are shifting in light of the oil exporting vacuum left by Iran, which are ultimately tied to foreign policies projected onto the Middle East region.
  • S. imposed sanctions may rejuvenate multilateral trade agreements in local currencies, the region has already witnessed a trilateral trade agreement between Turkey, Azerbaijan and Iran in the Turkish Lira currency.
  • Losses are felt mostly within the EU, although there have been measures to shield European investors from US sanctions. Such measures are likely to benefit small to medium sized businesses mostly, although, larger investors are abiding by US imposed sanctions in order to guarantee access to the 19 trillion US market.

[1] “As U.S. Sanctions on Iran Kick In, Europe Looks for a Workaround ….” 5 Nov. 2018, https://www.nytimes.com/2018/11/05/world/europe/us-iran-sanctions-europe.html. Accessed 6 Nov. 2018.

[2] “No EU, no Iran deal: the EU’s choice between multilateralism and the ….” 9 Feb. 2018, https://www.tandfonline.com/doi/full/10.1080/10736700.2018.1432321. Accessed 6 Nov. 2018.

[3] “EU, China, Russia seek to bypass US sanctions on Iran with … – Haaretz.” 25 Sep. 2018, https://www.haaretz.com/world-news/remaining-powers-of-nuclear-deal-looking-to-save-trade-ties-with-iran-1.6495264. Accessed 6 Nov. 2018.

[4] “Germany urges SWIFT end to US payments dominance – DW.” 27 Aug. 2018, https://www.dw.com/en/germany-urges-swift-end-to-us-payments-dominance/a-45242528. Accessed 6 Nov. 2018.

[5] “• Iran – main export partners 2017 | Statistic – Statista.” https://www.statista.com/statistics/294379/iran-main-export-partners/. Accessed 2 Nov. 2018.

[6] “Analysis Can China save the Iran nuclear deal? – The International ….” 9 Jul. 2018, https://www.iiss.org/blogs/analysis/2018/07/china-save-iran-nuclear-deal. Accessed 2 Nov. 2018.

[7]https://www.businesslive.co.za/bd/world/2018-05-18-analysis-uss-iran-sanctions-could-be-an-opportunity-for-oil-thirsty-china/

[8] “New freight train links Inner Mongolia and Iran – Xinhua | English.news ….” 10 May. 2018, http://www.xinhuanet.com/english/2018-05/10/c_137170361.htm. Accessed 2 Nov. 2018.

[9] “Analysis Can China save the Iran nuclear deal? – The International ….” 9 Jul. 2018, https://www.iiss.org/blogs/analysis/2018/07/china-save-iran-nuclear-deal. Accessed 6 Nov. 2018.

[10] “How Iran Can Evade Sanctions This Time – The Atlantic.” 22 May. 2018, https://www.theatlantic.com/international/archive/2018/05/iran-sanctions-trump-nuclear-turkey/560819/. Accessed 6 Nov. 2018.

[11] “Turkey, Iran, Azerbaijan to use local currencies for trade – Middle East ….” 31 Oct. 2018, https://www.middleeastmonitor.com/20181031-turkey-iran-azerbaijan-to-use-local-currencies-for-trade/. Accessed 6 Nov. 2018.

[12] “The Illogic of the U.S. Sanctions Snapback on Iran – SeenThis.” https://seenthis.net/sites/1523472. Accessed 6 Nov. 2018.

[13] “New sanctions on Russia and Iran are unlikely to work. Here’s why.” 1 Aug. 2018, http://theconversation.com/new-sanctions-on-russia-and-iran-are-unlikely-to-work-heres-why-100431. Accessed 6 Nov. 2018.

[14] “How the U.S. Can Force the World to Squeeze Iran’s Oil – Bloomberg.” 3 Nov. 2018, https://www.bloomberg.com/news/articles/2018-11-03/how-u-s-can-force-the-world-to-squeeze-iran-s-oil-quicktake. Accessed 6 Nov. 2018.

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