EU Embargo of Russian Oil Spells Trouble for Iran

European Union leaders have agreed on a landmark embargo of Russian oil that will seek to slash imports by 90 percent by the end of the year. The embargo represents a major intensification of European sanctions on Russia following the invasion of Ukraine.

For most oil producers, the embargo will be a boon. While the measures were widely expected and therefore may have been partly priced-in by traders, oil prices jumped on the news. Saudi Arabia, for one, is already planning how it will spend the windfall enabled by high oil prices.

But for Iran, and to a lesser extent Venezuela, the embargo of Russian oil is bad news. For countries whose oil exports are subject to U.S. or EU sanctions, China is the buyer of last resort. For several years, China has been the sole country to continue significant purchases Iranian and Venezuelan crude oil, ignoring the threat of U.S. secondary sanctions. These imports have been an important contributor to Iran’s economic resilience under sanctions. However, this is not because revenues are flowing back to Iran. The revenues accruing in China are being used to sustain Iran’s imports of crucial intermediate goods for the country’s manufacturing base.

Iran has also benefited from increased financial resources in the United Arab Emirates and Malaysia, two countries which are serving to intermediate Chinese imports of Iranian oil. Most Iranian oil arriving in China is declared as an import from the UAE or Malaysia. As it stands, Iran is consistently exporting more than 1 million barrels per day of crude oil to China.

Russia’s rise as a major energy exporter to China corresponds to the period in which Iranian oil was taken off the market due to the impacts of US, EU, and UN sanctions programmes—Iran’s demise as an oil exporter helped open the door for Russian exports.

The new EU embargo on Russian oil will intensify competition between Russia and Iran in China’s oil market. Russian suppliers are already offering buyers a 30 percent discount on benchmark prices, a much steeper discount than Iran has offered Chinese buyers in recent years. Russia and Iran will be competing for the business of the limited number of Chinese refiners willing to process “sanctioned” oil.

Already, some Chinese “teapot” refiners are replacing Iranian oil with Russian oil because of the attractive discounts on offer. So far, customs data does not reflect a dramatic swing away from Iranian imports. But it is early days and the embargo will dramatically change incentives. According to the IEA, around “60 percent of Russia’s oil exports go to OECD Europe, and another 20 percent go to China.” While some customers, such as India, might import the Russian barrels that would have otherwise gone to Europe, political and economic realities will require Russia to push more oil into the Chinese market.

Looking to Chinese customs data for April, Russia’s ability to squeeze Iran becomes clear. It is clearly a more important supplier of crude oil to China. While logistical bottlenecks might prevent an immediate jump in Chinese purchases, all of the Russian barrels already flowing to China are newly subject to discounts—China can insist on lower prices now that the EU embargo is in place. This in turn creates pressure for Iran to match Russian discounts or risk losing market share.

While it is possible that the further pressure on global supply might push oil prices even higher, minimising the loss of revenue for Iran even as Chinese imports fall, in the medium term, Russia has the means to bully Iran due to its lower fiscal breakeven price and lower production costs. At the outset of the COVID-19 pandemic, Vladimir Putin boasted that Russia could withstand oil prices of as low as $25 dollars per barrel for as long as a decade. Iran’s oil sector, already weakened by a decade of sanctions, does not have the same ability to endure low prices. In short, Russia can afford to undercut Iran. 

Plus, for whatever period that Russian oil is not subject to U.S. secondary sanctions, Chinese tankers and refiners may prefer to handle Russian crude, due to the lower risk of enforcement action.

Iran has a couple of options here. First, it could try and negotiate an arrangement with Russia, agreeing not to engage in a race to the bottom when it comes to pricing their sanctioned barrels for China. Iran might even be able to play a role as an intermediary in Russian energy exports to China, importing refined products across the Caspian and exporting crude oil to China as part of a swap arrangement. But this kind of cooperation is highly unlikely given the track record of Russia-Iran relations and the fact that Russia sees Iran as the junior partner in the relationship.  

The second option would be for Iran to try and get itself out of this predicament by taking decisive steps to restore the nuclear deal. Doing so would see the rollback of U.S. secondary sanctions on Iranian oil and enable the resumption of exports to European buyers precisely when those buyers need it most. Earlier this month, EU High Representative Josep Borrell commented on the heightened value of the nuclear deal for Europe in the wake of the Russia crisis. He told the Financial Times that “Europeans will be very much beneficiaries from this deal” as the “the situation has changed now.” He added that “it would be very much interesting for us to have another [crude] supplier.”

Earlier this week, Iranian officials boasted that oil revenues were up 60 percent year-on-year owing to the high oil prices. But the situation has changed now. As the EU moves forward with its historic embargo, Iran’s oil revenues are suddenly in Russian crosshairs.

Photo: Kremlin.ru

Europe Still Needs INSTEX to Help Solve the Iran Crisis

This article was originally published by the European Leadership Network.

Over the last few months, the mission of INSTEX has grown significantly more complicated. Tensions between the United States and Iran have reached new highs following the assassination of Iranian Major General Qassem Soleimani, and European leaders have called for de-escalation as fears grow of direct conflict. Iran’s recent elections, marked by historically low turnout, have ushered in a more conservative parliament, sceptical of Western intentions. Already hamstrung by delays, the intended political function of INSTEX—to encourage Iran to remain in compliance with the Joint Comprehensive Plan of Action (JCPOA)—has been thrown further into doubt.

However, at a time when constructive diplomatic relations between Europe and Iran may prove instrumental in efforts to stave off a regional conflict, the speedy operationalisation of INSTEX remains an imperative—a point underscored by EU foreign policy chief Josep Borrell following his first trip to Tehran earlier this month.

INSTEX has quietly increased the tempo of its consultations with its Iranian counterpart, the Special Trade and Finance Instrument (STFI), in Tehran and other European capitals. The project was buoyed by the decision of six European countries–Belgium, the Netherlands, Sweden, Denmark, Finland, and Norway–to join the company as shareholders.

The new shareholders will provide further capital to enable INSTEX to grow its team and operational capacity. Having relied on support from staff at E3 foreign and economic ministries until late last year, INSTEX now has its own full-time staff members. The new hires have helped the company present itself more credibly with key stakeholders in Europe and Iran who now perceive the company to be a serious, long-term undertaking.

As has been reported, a first transaction was nearly completed on the eve of the December 6 meeting of the JCPOA Joint Commission. But rather than pursue quick wins, INSTEX and STFI are now resolved that the first transactions serve as a proof-of-concept for the operationalisation of the core service.

The core service INSTEX will offer, which can be referred to as a “cross-border clearing mechanism,” aims to eliminate the need for companies trading goods and services between Europe and Iran to make payments between the financial systems of the two jurisdictions. At a time when few European banks are willing to send or receive Iran-related payments, INSTEX can help make European trade with Iran both more reliable and affordable.

INSTEX has made progress in defining its onboarding procedures and compliance guidelines as part of an overall business model designed in collaboration with a wide range of stakeholders. The company is now in a position to ramp-up its engagement with potential clients this year, and there is a significant interest among European enterprises. Until now, such interest has been channelled through companies’ respective foreign ministries. Importantly, these companies are not only small and medium enterprises but also include major multinational companies with active sales or manufacturing business in Iran. The wide-range of interest is critical information for INSTEX as it begins its own proactive outreach.

INSTEX intends to be less expensive than all other payment solutions available to conduct trade with Iran. The significant transaction costs associated with foreign exchange conversions and wire transfers currently required to conduct trade between Europe and Iran have been a significant driver of the increased cost of imports, particularly humanitarian goods, adding to inflationary pressure in Iran and hardship for ordinary Iranians. The goal is to deliver a solution that facilitates trade at a meaningful scale to help ameliorate these conditions.

This has been the main point of scepticism about INSTEX—a severe imbalance in trade has been taken to mean that the value of Iranian exports to Iran will act as a ceiling for the value of trade that can be cleared through the mechanism. Here, those familiar with INSTEX express confidence. Working with E3 policymakers, INSTEX has identified a source for the required liquidity, allowing the mechanism to work without perfect balance in credits and liabilities.

There have also been longstanding concerns that the reimposition of countermeasures by the Financial Action Task Force (FATF) might interfere with the operationalisation of INSTEX. But given the robust due diligence framework established by INSTEX, Iran’s return to the so-called FATF “blacklist” is not expected to prevent the mechanism from maintaining the banking services necessary for its operation.

While the business case and operational model for INSTEX are clearer than ever before, the company continues to face political headwinds in Washington, European capitals, and Tehran. The first transaction is being pursued at precisely the moment when both the American government is doubling down on “maximum pressure” and European and Iranian governments are reconsidering their strategies in light of wider developments.

European governments have opted to trigger the JCPOA’s Dispute Resolution Mechanism (DRM) given growing concerns regarding Iran’s progressive steps to reduce its compliance with the agreement’s nuclear restrictions and the eroded credibility of the agreement’s credibility as a non-proliferation agreement. Triggering the DRM will no doubt complicate the overall political environment, particularly as UN and EU sanctions snapback remains a possibility should the subsequent negotiations fail to address concerns. But there remain several clear reasons why European and Iranian authorities should proceed with the operationalisation of INSTEX.

First, trade in food and medicine will remain permissible even if EU sanctions are reimposed as demonstrated by the perseverance of European economic operators active in the sale of food and medicine during the sanctions period of 2008-2016. There is a clear role for INSTEX to play in safeguarding and facilitating humanitarian trade even in a scenario where Europe-Iran diplomatic ties deteriorate considerably. In this sense, even if INSTEX fails to save the Iran nuclear deal, its innovative mechanism has a role to play as a tool for humane European foreign policy and the defence of European economic sovereignty.

Second, Iran has emerged as an epicentre of the global public health crisis caused by the spread of the COVID-19 coronavirus. Iranian authorities have already received support and diagnostic kits from the World Health Organization as they seek to contain the spread of the virus, which has so far killed at least sixteen people. Should the public health crisis in Iran intensify, further medication and equipment may be needed. Presently, the indirect effect of sanctions on humanitarian trade makes it difficult for Iranian authorities to source products from new suppliers—onerous due diligence requirements for humanitarian trade discourage financial institutions from onboarding new clients. Such restrictions may encumber Iran’s response to the coronavirus. INSTEX can be used to ensure Iran remains able to make payments to European suppliers and receive speedy and reliable deliveries of the equipment necessary to deal with the coronavirus outbreak.

Finally, as made clear in the aftermath of the assassination of Qassem Solaimani, tensions between the United States and Iran may yet lead to outright war. The Iranian escalatory steps that would contribute to the initiation of any such conflict would no doubt test European resolve to operationalise INSTEX as presently intended. However, in the context of war, Europe’s humanitarian obligations will be even more important. Facilitating the flow of food and medicine to the Iranian population will be crucial should Europe wish to reduce harm to the civilian population and present itself as a credible mediator between the United States and Iran. In this context, and given the existing pressures on humanitarian trade, an operational INSTEX would be a crucial tool for peace-minded European foreign policy. In short, further political and economic investment in the INSTEX project is consistent with European preparedness for such worst-case scenarios.

European policymakers have few tools with which to influence the direction of the brewing security, economic, and public health crises in the Middle East. Against this backdrop of uncertainty and instability, INSTEX deserves greater high-level political support as a key means by which Europe can reassert its credibility as the only major global actor whose economic operators are significantly invested in the economic and humanitarian wellbeing of the people of Iran and the wider Middle East.

Photo: IRNA

New EU Top Diplomat Will Seek Continuity on Iran—if Circumstances Allow

While the recent nominations for European Union’s top posts sparked some controversy, there is broad consensus in Brussels that Josep Borrell, the foreign minister of Spain, is a worthy nominee to replace Federica Mogherini as the EU’s High Representative for foreign policy.

The European Parliament will vote on the new European Commission in October. Prior to that, Borrell—who will also wear the hat of the Commission’s vice-president—will have to face hearings in the Parliament’s foreign affairs committee.  These hearings are not a mere formality and nominees have stumbled in the past. But given Borrell’s profile, there is little doubt he will pass muster.

In Borrell’s favor speaks his ample experience in Spanish and European politics. He is a veteran member of the Spanish Socialist party. He honed his skills in Brussels as the president of the European Parliament from 2004 to 2007. Since June 2018 he is the foreign minister of Spain. To both his supporters and detractors, Borrell is known as an intellectual powerhouse. Although some diplomats fret that he may be “too outspoken” for the High Representative role, his directness could help Europe’s foreign policy find a voice that goes beyond bland statements reflecting the minimum consensus between EU member states.

Borrell’s statements made after securing the nomination show that he sees saving the Joint Comprehensive Plan of Action (JCPOA) as an immediate priority for the EU. In comments to the Spanish media, he expressed hope that  “sanity will prevail” and that “worst will be avoided” in the brewing crisis following the violation of the nuclear deal by the United States. He stressed that Iran fulfilled its part of the agreement, and that the recent surpassing of the limits of the low enriched uranium are due to “technical reasons”, not Iran’s “will to violate the pact.”

He also criticized the decision of the United Kingdom to detain a tanker carrying Iranian oil—allegedly at the request of the United States—off the coast of Gibraltar. While Borrell’s comments must be understood in the context of the long-running dispute between Madrid and London over the status of Gibraltar, the fact that Spain protested a seizure of a tanker with Iranian oil says as much about its rejection of the extra-territorial American sanctions as it does about its feelings of its sovereignty being infringed by the British.

These are not random views expressed in reaction to particular political events. Rather, they are reflective of Borrell’s broader outlook.  The fact that Spain is traditionally one of the EU countries with a pragmatic and moderate view of Iran—a group that also includes Sweden, Finland, Belgium, Austria, Netherlands and, under the previous government, Italy—certainly plays a role. As surely does Borrell’s socialist background. His predecessors in the role of the EU foreign policy chief—another Spaniard Javier Solana, Catherine Ashton, and Federica Mogherini—each hail from this political family and each endeavored to pursue nuclear diplomacy and broader engagement with Iran.

Borrell himself displayed a nuanced understanding of Iran on the occasion of the 40th anniversary of the Islamic revolution in February of this year.  In a series of tweets savaged by the right-wing media as “appeasement of the ayatollahs” he noted how Iran’s literacy rates increased since the revolution from 35 percent to 84 percent. He also recognized Iran as a key power in the Middle East, while contrasting the United States’ attitude to Vietnam and Iran, two countries that “inflicted heavy defeats on the super-power in 1970s.” In Borrell’s assessment, while relations with Vietnam are “now excellent”, Iran is still “an obsession of the American government, with no diplomatic relations and Trump’s decision to withdraw from the nuclear agreement and re-impose sanctions.” In conclusion, Borrell stated that Iran “could survive the sanctions if Trump is not re-elected, but, in the opposite case, could re-active its nuclear program and multiply its interventions in the region.”

Such views led some Israeli and Emirati media outlets to accuse Borrell, preposterously, of being “a supporter of the Iranian regime,” conflating his advocacy for a dialogue with Tehran with the defense of its regime—a favorite tactic of those opposed to diplomatic engagement with the Islamic Republic.

Borrell’s views on Iran suggest continuity with Mogherini’s pro-engagement policy. However, the Spaniard will face two serious challenges on this path. First, he must preserve unity among member states facing the Trump administration’s relentless “maximum pressure” campaign. Already, some European states are showing signs that they may be inching closer to Washington, among them Brexiting Britain and the populist-led Italy. Some eastern European countries, like Hungary and Poland, which maintain excellent relations with both the Trump administration and Israeli prime minister Benyamin Netanyahu, may follow suit.

Borrell was outspoken in his steadfast opposition of the United States’ sanctions on Iran. If his previous statements are any guide, he could well be inclined to push back more aggressively against American unilateralism than has been the case until now, but his ability to rally the member states will be tested. Borrell himself pointed to the unanimity rule as a major impediment for the EU to play a more effective international role. One solution could be for a wider group of member states to join,the “E3” countries of Britain, France and Germany and become shareholders in INSTEX, the mechanism devised to support  bilateral trade with Iran.

The second challenge Borrell faces has to do with the fact that by the time he assumes his position in November, (provided the European Parliament approves the new Commission), he could well face a scenario very different from today. If Iran does not obtain sanctions relief from Washington, nor economic assistance from the remaining parties to the JCPOA, it may well follow through on its warnings and pursue escalation, whether by reducing its compliance with the JCPOA or by retaliating against American allies in the Persian Gulf.

Even if European governments blame the United States for igniting the crisis, they can hardly be expected to condone continued Iranian non-compliance with its commitments under the nuclear deal. The next couple of months will thus be crucial in determining whether the tensions between America and Iran will de-escalate, or degenerate into military confrontation. For now, piloting the EU through this crisis remains Federica Mogherini’s responsibility. Thus, Borrell’s ability to steer the EU policy on Iran will depend not just on his own views, but also on the nature of the crisis he will inherit.

The views and opinions expressed in this article are those of the author and do not necessarily reflect the positions of the European Parliament.

Photo: Wikicommons