Sanctions will bite but will Iran change course?

Washington argues that Iran’s policies and behaviour will change as its leaders recalibrate a complex interplay of calculations.
Sunday 11/11/2018
An Iranian checks various currency rates at an exchange shop window in downtown Tehran. (AP)
Doing the maths. An Iranian checks various currency rates at an exchange shop window in downtown Tehran. (AP)

Donald Trump has claimed that, after his two years as US president, Iran no longer wants “to take over the whole Middle East” but simply “to survive.” In retort, Iranian Supreme Leader Ayatollah Ali Khamenei said: “The world opposes every decision made by Trump.”

Caught in the middle are 82 million Iranians. “Tourism is already 50% less than last year,” an industry insider in Tehran said. “People have been trying to change their money to foreign currency and gold coins to make sure it keeps its value. They’re worried about access to medicines.”

Amid the leaders’ hyperbole, the future looks unclear. A game of cat and mouse began even before the onset of a second wave of US sanctions, which had been lifted under the 2015 nuclear agreement. The sanctions affect 50 Iranian banks and subsidiaries, more than 200 people as well as vessels in shipping and the national airline, Iran Air. However, the main thrust is threatened sanctions against buyers of Iranian oil.

The Trump administration stepped back from its stated objective of ending Tehran’s oil exports. The 6-month waivers for eight countries importing Iran’s oil at reduced levels recognise the needs of Asian buyers, especially China, Japan, South Korea and India, which take nearly all Tehran’s exports.

As the sanctions approached, buyers’ reductions cut Iran’s exports from a post-nuclear agreement high of 2.6 million barrels per day (bpd) in April to around 1.5 million. US Secretary of State Mike Pompeo estimated Iran has lost $2.5 billion in revenue since May and those losses will increase.

Asian buyers are thirsty for Iran’s oil but Pompeo has made clear Washington will review the waivers in six months. The squeeze will continue. Broadly in line with other analysts, Economist Intelligence Unit (EIU) forecasts exports at barely more than 1 million bpd in 2019, with oil revenue falling from $72 billion this year to $45 billion in 2019. The EIU said it expects the Iranian government to relax fiscal discipline, with the GDP shrinking 3.7% and sending inflation from 17% to 38%.

Even so, Iran’s oil trade will become more opaque, with figures less and less reliable. “If we cannot openly trade our commodities, if we cannot get what we want to get from open, transparent international transactions, we will not lie down and wait to die,” Iranian Foreign Minister Mohammad Javad Zarif told USA Today on November 3. “We will do it through whatever means… necessary.”

Iran is already using informal channels with a revived Tehran oil market selling cargoes of 250,000 barrels in late October to private domestic customers. Moscow has also signalled it will buy or barter Iranian oil for domestic use, enabling it to export more of its own oil to lucrative foreign markets.

Iranian tankers are becoming ghost ships by switching off transponders, disguising destinations and buyers. Barter will increase, although it is limited with countries, such as India, where Iran has a large trade surplus.

The sanctions regime is complicated by Pompeo’s suggestion that oil customers should pay through accounts earmarked for humanitarian items. Brian Hook, the US special representative for Iran, explained that Washington expects importers to monitor this, presumably under America’s eagle eye.

“Any time Iran sells oil, that money goes into an escrow account in the importing nation’s bank,” he said. “We strongly encourage those countries to ensure that Iran spends that money on humanitarian purchases to benefit the Iranian people.”

The Trump administration has not accepted the case for sanctioning Swift, the Belgium-based financial messaging service, although US Treasury Secretary Steven Mnuchin warned it could act if Swift dealt with designated Iranian entities. In response, Swift said it would suspend unspecified Iranian banks’ access to protect “the stability and integrity” of the global financial system.

Washington argues that Iran’s policies and behaviour will change as its leaders recalibrate a complex interplay of calculations: falling oil revenue and a struggling economy; the value Tehran puts on relations with Europe, Russia and China and their continuing acceptance of the nuclear agreement; the importance Iran assigns to its regional role in Syria, Iraq and elsewhere.

Hook explained the two aims of the sanctions as denying “the regime the revenue it needs to fund violent wars abroad and also to change the cost-benefit analysis in our favour [sic] so that Iran decides to come back to the negotiating table.”

However, Farideh Farhi, of the University of Hawaii, said she saw no sign “at this point” of Iran making such an analysis.

“The Iranian leaders across the board believe the Trump administration is not genuine in its offer of negotiations and its ultimate aim is regime change or at least destabilising Iran,” she said. “Their approach is rather to show that the Trump’s administration’s calculations regarding the impact of sanctions are misguided.”

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