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Trump reimposes sanctions on Iran's oil sector

08 May 2018 19:28 (+01:00 GMT)
Trump reimposes sanctions on Iran's oil sector

Washington, 8 May (Argus) — US president Donald Trump will withdraw the US from the Iran nuclear deal and reimpose sanctions on that country's oil sector.

The Joint Comprehensive Plan of Action (JCPOA) — the agreement that in January 2016 lifted restrictions on Iran's crude exports in exchange for concessions on its nuclear program — explicitly prohibited the reintroduction of sanctions unless Tehran violated its terms.

UN nuclear watchdog the IAEA has certified Iran's compliance on multiple occasions. So did JCPOA signatories China, Russia, the EU and the E3 powers — France, Germany and the UK.

So did the US until now. But Trump said today that Iran has violated its commitments, citing information offered by Israeli prime minister Benjamin Netanyahu last week. The claim has not been verified independently.

The Trump administration expects its decision to force Tehran back to the negotiating table to revise the JCPOA to indefinitely extend restrictions on Iran's nuclear program, to impose new limits on ballistic missiles, and to implement a stronger inspections regime. Ironically, Trump pointed to the success of the sanctions program under former president Barack Obama in getting Tehran to agree to sign the JCPOA.

Will pressure work again?

Asia-Pacific buyers have been taking roughly 70pc of Iranian crude this year. The biggest buyers are locked in to annual term contracts for 2018, so meaningful cuts to imports would be unlikely to come in until early next year.

For China and India, commercial considerations are likely to supersede any impulse to please the White House. The rise in crude prices this year to 3½-year highs has already increased import bills for refiners in Asia-Pacific.

In 2012-15, combined US-EU sanctions reduced Iran's crude exports by 1mn b/d and limited that country's export markets to China, India, Japan, South Korea, Taiwan and Turkey. Iranian crude exports recovered to 2.1mn b/d in 2017 from 1.9mn b/d a year earlier.

Former US government officials said they doubt that a similar reduction in Iran's exports can be achieved through unilateral sanctions.

"We reduced Iran's exports by more than 50pc and it was hard (even) with full support from the EU and Asia," said Amos Hochstein, who in 2013-17 served as special energy envoy at the State Department. Additional revenue from rising oil prices as a result of Trump's action could offset the negative effect for Iran of the decline in export volumes, he said.

Imports of Iranian crude by European buyers would also continue in the near term even under new US sanctions. Brussels could use a regulation designed in 1996 to block extra-territorial legislation, theoretically exempting EU-based importers of Iranian crude, such as Total and its counterparts in Greece, Spain and Italy. But officials admit that the blocking regulation is not a perfect fix, especially for firms that are active in the US.

The main European buyer of Iranian crude is Turkey's Tupras, followed by companies in Italy, France, Greece and Italy.

The law invoked by Trump in reimposing sanctions on Iran leaves some room for exemptions from sanctions. Foreign capitals affected by the Iran sanctions will threaten retaliation or petition Washington for exemptions.

Responses from Iran and Europe

The European signatories of the JCPOA have indicated their commitment to the agreement regardless of Trump's decision and have urged Iran to remain in the agreement. "The EU/E3 used this opportunity to reiterate their support to the continued full and effective implementation of the JCPOA by all sides," Helga Schmid, secretary-general for the EU's External Action Service, said today following a meeting in Brussels between EU and Iranian diplomats.

"We think the JCPOA is relevant as long we can have our market, our oil, receive the proceeds for these sales, have the investment necessary for the implementation of our oil and gas projects, and also receive the equipment we need," Iran's deputy oil minister Amir Hossein Zamaninia said.

The JCPOA was a landmark accomplishment for Iran's president Hassan Rohani as much as it was for Obama, even though economic benefits from sanctions relief have fallen short of expectations. Rohani yesterday defended his decision to negotiate and sign the agreement. "Trust in foreign relations is relative and never absolute in today's world," Rohani said. "We acted based on a set of principles and reached an agreement with the negotiating parties, which the UN endorsed as well."

Officials at Iran's oil ministry and state-owned NIOC say they have modeled a range of scenarios around the US sanctions and have plans in place for any eventuality. But that does not mean US re-imposition of oil sanctions would not hurt. The major concern in Tehran is not around volumes of crude that it could sell — not in the short to medium term at any rate — but over transfer of payments for those volumes.

What is Plan B?

Iran's options to respond may be limited. Its first step would be to appeal the US decision to the JCPOA Joint Commission, starting an arbitration process that would take 45 days or more and ultimately culminate in a referral to the UN Security Council — where a US veto makes any pro-Tehran decision unlikely.

Restarting any parts of Iran's nuclear program would validate Trump's claims and prompt the EU to reimpose nuclear-related sanctions. If Iran continued to abide by the terms of the nuclear agreement, the negative economic effects from US sanctions could still serve to undermine Rohani's government.

Rohani has said that Iran will remain in the agreement so long as "what we want from the JCPOA will be provided without the US."

The Trump administration does not appear to have a Plan B beyond leaving the JCPOA and expecting Iran to meet its demands, UK foreign minister Boris Johnson said.