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Trump reimposes sanctions on Iran's oil sector: Update

08 May 2018 21:07 (+01:00 GMT)
Trump reimposes sanctions on Iran's oil sector: Update

Adds details on US sanctions throughout

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

Most of the sanctions would go into effect on 4 November, but the US action could spur foreign buyers of Iranian crude to start cutting purchases earlier.

Trump cited unverified claims recently released by Israel regarding Iran's past nuclear program as a justification for his decision to leave 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.

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.

And so did the US until now. But White House national security adviser John Bolton claimed today that Iran's full compliance is unknowable because of limits on available intelligence.

The multiple sanctions announced today include a requirement on foreign buyers of Iranian crude and products to significantly reduce their imports from that country, or be cutoff from the US financial system and face other penalties.

Although the sanctions go into effect on 4 November, the Treasury Department advised foreign buyers of crude to start cutting imports now to be able to ask Washington for exemptions at a 180-day review period.

"The State Department intends to consider relevant evidence in assessing each country's efforts to reduce the volume of crude oil imported from Iran during the 180-day wind-down period, including the quantity and percentage of the reduction in purchases of Iranian crude oil, the termination of contracts for future delivery of Iranian crude," according to the guidance.

The State Department previously used an informal metric of a 20pc reduction in imports during a 180-day period over the prior six months to gauge whether the country qualifies for exemptions.

A separate set of sanctions, also going into effect on 4 November, would penalize any foreign company investing in Iran's oil and gas sector. Also on 4 November, the Treasury Department will impose penalties on any foreign counterparty doing transactions with state-owned NIOC, national shipping company IRISL and the Central Bank of Iran.

The Treasury gave a 90-day deadline to wind down acquisitions of US dollar notes by the Central Bank, trade in gold and semi-finished metals and any transactions with Iran's sovereign debt.

EU foreign affairs commissioner Federica Mogherini called on Iran not to let "anyone" dismantle this agreement. "As long as Iran continues to implement its nuclear related commitments, as it is doing so far, the EU will remain committed to the continued full and effective implementation of the nuclear deal," Mogherini said.

French president Emmanuel Macron, German chancellor Angela Merkel and UK prime minister Theresa May in a joint statement urged the US to ensure that the JCPOA structure remains intact and "to avoid taking action which obstructs its full implementation by all other parties to the deal." The European leaders also urged Iranian president Hassan Rohani to remain in the agreement.

Rohani, who blasted Trump's decision as "illegal and illegitimate," said he will hold consultations with the remaining JCPOA members and would remain in the agreement if Iran's interests are guaranteed without the US presence.

But he said he ordered that preparations be made to restart uranium enrichment at industrial levels without limits — a step that would break Tehran's commitments, if implemented.

Will pressure work again?

The White House issued a long list of demands for Tehran, ranging from indefinite restrictions on Iran's nuclear program, limits on ballistic missiles, recognition of Israel, ending cyber-attacks, stopping support for Yemen's Houthi rebels, among others.

Ironically, Trump pointed to the success of the sanctions program under former president Barack Obama in getting Tehran to agree to sign the JCPOA. He promised that his own effort to pressure Tehran will yield even more concessions. Trump said he expected Iran to refuse to negotiate initially — "I would probably say the same thing." But Trump added that Iran's leaders will have no other choice but to enter into new discussions.

Trump's predecessor criticized the move.

"The decision to put the JCPOA at risk without any Iranian violation of the deal is a serious mistake," Obama said.

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.

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. Reinstating US sanctions on foreign buyers of Iranian crude could push European importers to seek Iraqi or Russian alternatives.

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.

Trust is never 'absolute'

The JCPOA was a landmark accomplishment for 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.

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 even though the US is not even pretending to claim a serious breach of Iran's commitments has occurred.

Iran could choose to restart uranium enrichment activities, but that would validate Trump's claims and could prompt the EU to reimpose nuclear-related sanctions. If Iran continued to abide by the terms of the nuclear agreement, negative economic effects from US sanctions could still serve to undermine Rohani's government.

Bolton said the US would continue to negotiate with the E3 powers to ensure its demands on Tehran are met and downplayed potential fallout on trans-Atlantic relations.

The E3 leaders said they will work with Iran and other remaining JCPOA signatories to ensure "the continuing economic benefits to the Iranian people that are linked to the agreement."