Iran's Oil Sector is Breaking Out

In August 2019, Mike Pompeo took something of a victory lap. Speaking to MSNBC, he declared that the Trump administration had “managed to take almost 2.7 million barrels of [Iranian] crude oil off of the market.” A few months prior, the United States had reimposed secondary sanctions on Iran’s oil sector, revoking eight waivers that allowed Iran’s major oil customers to temporarily continue purchasing Iranian oil. Without the waivers, just one major buyer remained—China. At the time of Pompeo’s boast, China was buying a negligible volume of Iranian oil in direct violation of US sanctions. Beijing protested loudly about the extraterritorial impact of US sanctions, but proved unable or unwilling to instruct its major refiners, banks, and tanker companies to sustain the previous level of imports from Iran. 

In Tehran, the loss of oil revenues was adding to the political and fiscal pressures felt by the Rouhani administration, already reeling from the economic fallout following Trump’s withdrawal from the Joint Comprehensive Plan of Action (JCPOA). Iran’s oil minister, Bijan Zanganeh, vowed in October 2019 to “use every possible way” to sustain Iran’s oil exports. In the subsequent year, Iran made its tankers “go dark,” engaged in ship-to-ship transfers off the coast of the UAE and Malaysia to hide the provenance of its oil, sold to opportunistic new customers including Syria and Venezuela, and intensively lobbied China to resume purchases at higher volumes. 

Today it is Zanganeh who is taking a victory lap. He told reporters last week that Iran’s oil exports are “much better than many assume,” and the oil ministry has announced that it would begin ramping-up oil production. Data from TankerTrackers.com, which observes the number of tankers leaving Iran’s ports in order to estimate oil exports, suggests a steady uptick in sales. January 2021 will be the fifth month in a row that Iran has exported in excess of 1 million barrels per day of crude oil and condensates. The new monthly level marks a significant increase from the average of 695,000 barrels per day Iran managed in the 12 months following the Trump administration’s revocation of the oil waivers.

Should the Iranian oil industry recover in the first half of 2021, buoyed by the rise in oil prices from their pandemic lows, the sector would cease to be the deadweight holding Iran’s economy back. The second quarter of this Iranian calendar year marked the first in over two years in which Iran’s oil and gas sector was not in contraction. The International Monetary Fund, the World Bank, and the Institute for International Finance all project Iran’s economy to return to growth in 2021 on the basis of conservative projections for oil production and exports achieved in the absence of sanctions relief. Iran appears poised to match those projections. 

Iran’s rising oil exports pose a dilemma for President Joe Biden, who intends to bring the US back into the nuclear deal. There is a significant political constituency in Tehran that believes that allowing the US to rejoin the JCPOA would be a strategic mistake. The Biden administration has signalled that JCPOA re-entry would serve as the foundation for follow-on talks, a prospect that has Iranian hardliners concerned that the international community will try to force Iran into making painful concessions on strategic issues such as the country’s ballistic missile program.

The Rouhani administration remains strongly in favor of renewed talks and has indicated that it would welcome reentry into the JCPOA should the Biden administration decisively lift the sanctions imposed by Trump and thereby deliver Iran an economic uplift. But the attractiveness of Rouhani’s preferred approach depends entirely on the perceived opportunity cost should Iran fail to engage in new talks. This cost appears to be shrinking as Iran’s economic recovery picks-up steam and as the ferocity of political opposition Biden faces on the JCPOA becomes clear. Iran’s Supreme Leader, Ali Khamenei, presented “defusing sanctions and overcoming them” as the preferred alternative to Rouhani’s efforts for “lifting sanctions” in a important speech last November—a nod to the growing doubts that negotiations are necessary in the short-term.

For now, Iran’s political establishment remains open to negotiations because the country would be entering new talks from a position of relative strength. But that same strength will enable Iran’s hardliners to close the door on diplomacy should Biden dither.

Biden may be tempted to address the dilemma he faces be reasserting economic leverage. But attempting to drive down the oil exports with further sanctions would be a mistake. The only measures that might serve to stop China’s purchases of Iranian crude would require designations on China’s state-owned refiners such as Sinopec and CNPC, subsidiaries of which are widely represented in the portfolios of American and European institutional investors. Such a move would not only risk triggering a true economic war with China, but it would also cause a significant disruption to energy and financial markets.

Moreover, the risks of Iranian retaliation remain high. Iranian leaders have consistently warned that it would seek to deny oil exports by neighbors should it be prevented from selling its own oil. The September 2019 cruise missile attacks on Saudi Aramco’s Abqaiq and Khurrais facilities, which caused production capacity to drop by half, serves as an example of the very real nature of that threat. 

Clearly, Biden has no easy means to bring Iranian exports back down. So long as China continues buying, Iranian persistence will ensure the barrels reach the buyers. A few more months of sustained recovery in exports may be enough to convince Iran’s ascendent hardliners that the country’s economic outlook under sanctions is no longer so negative as to be a political or practical liability, meaning their opposition to the JCPOA will carry no real cost. Biden needs to move fast if he is to save the basic quid-pro-quo that underpins the nuclear deal. 

To do so, Biden must take steps to widen the opportunity cost between diplomacy and defiance once again. His administration ought to immediately issue new, temporary oil waivers in order to enable Iran to export oil without directly contravening US sanctions. Such a move would benefit US allies such as Italy, South Korea, Japan, and India, which count among Iran’s historical oil customers—US sanctions policy would no longer be at odds with their energy security.

The waivers would also help de-escalate tensions with China enabling cooperation on the creation of a stronger non-proliferation framework for the Middle East. The Trump administration used Iran sanctions as a means to target major Chinese enterprises including telecommunications firms Huawei and ZTE and shipping giant COSCO. These designations and the systemic threat their proliferation posed to the Chinese economy have spurred Chinese authorities to begin development of an alternative to the SWIFT bank messaging system and to instruct state lenders to prepare contingencies for further US sanctions pressure. Similar measures have even been contemplated by European governments. These moves foreshadow how the overuse of US sanctions threatens their long-term efficacy. Issuing new oil waivers would see Biden remove the primary impetus for these mitigation efforts in China and other countries. 

Restoring the waivers would also be welcomed by Iran, which could expect to see oil exports double, rising above the level possible through the complex and expensive methods of sanctions evasion currently in use. The additional foreign exchange revenue afforded by the waivers would help Iran more fully address its balance of payments crisis, easing pressure on the country’s currency and thereby reducing the rampant inflation that has led to hardship for millions of Iranians. The Biden administration can be confident that the additional revenues would have this effect because of the restrictions in place around their use. The waiver system, first designed during the Obama administration, sees revenues accrue in escrow accounts carefully monitored by authorities in the countries which have been granted the waivers. This oversight ensures that the funds are used for the purchase of sanctions-exempt goods and not for what the Trump administration termed “malign activities.” The funds cannot be transferred to Iran nor any third country without specific approvals. 

Despite these restrictions, for Iranian stakeholders, the issuing of new waivers would represent an important gesture, indicating Biden’s seriousness about restoring the economic benefits originally envisioned under the JCPOA, and setting the stage for US-Iran talks on the sequencing of steps to restore mutual compliance with the nuclear deal. Should those talks fail, Biden would surely revoke the waivers and Iran would return to selling oil in defiance of US sanctions. But should the talks succeed, the early provision of the waivers will have served to accelerate the reestablishment of Iran’s sales to oil customers, helping the country win back coveted market share. 

Iran’s oil industry is breaking out. Issuing new oil waivers is the best way to ensure Iran ceases to seek leverage by reducing its compliance with the nuclear deal and begins to believe again in the potential for “win-win” diplomacy with the United States.

Biden needs to give up some pressure in order to gain back control.

Photo: SHANA

America’s Latest Wave of Iran Sanctions: An Explainer

This article was originally published by the European Council on Foreign Relations.

On 5 November, the Trump administration’s latest and most significant wave of sanctions against Iran came into effect. The US Treasury has issued a list of more than 700 Specially Designated Nationals (SDNs) and Blocked Persons, which includes roughly 300 entities that did not feature in Obama-era sanctions. The designations combine with a series of briefings from senior US administration officials, along with fact sheets and guidelines from the US Treasury’s Office of Foreign Assets Control (OFAC). Below is an overview what we know so far about how the US will implement its sanctions. 

Waivers allow Iran to maintain some of its oil exports

American sanctions targeting Iran’s oil exports and related banking activity will cause many companies and countries to halt or reduce their purchases of Iranian oil. The US administration has stressed that, in contrast to Obama-era measures, the latest sanctions target Iranian condensate as much as crude oil, thereby affecting another source of energy revenue.

Yet the US administration has issued Significant Reduction Exemptions (SREs) to eight countries: China, India, Italy, Greece, Japan, South Korean, Turkey, and Taiwan. Iraq did not receive an SRE, but obtained a waiver to continue purchasing Iranian electricity.

The United States did not issue a formal response to the joint letter from the E3 (Germany, France, and the United Kingdom) issued in June 2018 to request that EU companies be exempt from secondary sanctions. Other EU member states were surprised that Italy and Greece obtained waivers, suggesting that they separately negotiated country-specific rather than EU-wide exemptions. That China sought a waiver indicates that it may be avoiding confrontation with the US as it seeks to sustain trade with Iran.

The US authorities will review these waivers periodically (it is unclear when), requiring recipient countries to prove that they have substantially reduced their imports of Iranian oil (under Obama-era sanctions, these reductions were around 20 percent). According to Secretary of State Pompeo, two of the countries will eventually “completely end imports as part of their agreements”, but – again – the timing is unclear.

The US has abandoned its stated objective of reducing Iran’s oil exports to “zero”, seemingly due to concerns that this would cause a spike in global oil prices. However, revenues from Iran’s oil sales will be held in escrow accounts and can only be used for trade in humanitarian goods or other non-sanctioned products. As such, the US administration is insisting that its oil waivers are still consistent with its aim of ensuring that Iran’s government has “zero oil revenue” that can be used for “malign activity” in the region.

Banking measures allow for limited humanitarian trade

While most Iranian financial institutions are subject to US secondary sanctions, a few of Iran’s private banks are exempt from these measures. In principle, these banks can facilitate humanitarian trade even with US companies, a situation akin to that prior to the implementation of the sanctions relief that followed the implementation of the Joint Comprehensive Plan of Action (JCPOA).

Until recently, four private companies were responsible for facilitating nearly all of Iran’s humanitarian trade: Parsian Bank, Middle East Bank, Saman Bank, and Pasargad Bank. But, on 16 October, the US Treasury named Parsian Bank as a Specially Designated Global Terrorist. This new measure bans the bank from facilitating humanitarian trade. Responding to the designation, Kourosh Parvizian, Parsian’s CEO, described the new sanctions as a “mistake” that threatened “a bank that handles the transactions behind the majority of imports of foodstuffs, medicine and other humanitarian trade items for the Iranian people.”

The US clearly intended the designation of Parsian Bank to send a message to the Iranian financial system and its international counterparties. Commenting on the thin grounds for designating the bank a terrorist organisation, sanctions attorneys have expressed concern about the US Treasury’s approach to humanitarian trade.

The Parsian designation will loom over the remaining entities engaged in humanitarian trade with Iran, reminding them that the US could block their access to the international financial system at any moment. For now, the White House has not applied new terrorism- or proliferation-related designations to Middle East Bank, Pasargad Bank, or Saman Bank. This is crucial to these companies’ capacity to facilitate humanitarian trade.

OFAC guidelines state: “broadly speaking, transactions for the sale of agricultural commodities, food, medicine, or medical devices to Iran are not sanctionable unless they involve persons on the SDN List that have been designated in connection with Iran’s support for international terrorism or proliferation of weapons of mass destruction.” Companies that use these banks to conduct transactions for humanitarian trade must ensure that no other SDN-listed entities are involved in this trade.

Overall, the manner in which the US has reimposed sanctions allows humanitarian trade to continue. But the US has not taken any steps to actively safeguard vital trade in food and medicine, leaving European companies in the lurch about the risks involved in humanitarian trade linked with Iran and placing the citizens of Iran under intense pressure.

Partly to address this urgent problem, Switzerland is negotiating directly with the US authorities to create a humanitarian banking channel with Iran. Under Obama-era sanctions, several small Swiss merchant banks maintained ties with the likes of Parsian, Middle East Bank, Saman, and Pasargad. That the Swiss government now considers it necessary to intervene could indicate that these Swiss banks are more reluctant to engage with Iranian companies due to the Trump administration’s aggressive stance on all Iran-related commerce. Home to several major pharmaceuticals manufacturers, food companies, and commodities traders, Switzerland is perhaps Iran’s most important partner in humanitarian trade.

Iran’s access to SWIFT has been significantly restricted but not blocked

For several months, there has been widespread speculation about whether the US would pressure Belgium-based financial messaging organisation SWIFT to block payments from all Iranian banks. Treasury Secretary Steven Mnuchin noted the US has required SWIFT to disconnects any Iranian entity that the country designates as a terrorist or proliferation entity. For now, a handful of Iranian banks that are not subject to designations will likely remain connected to SWIFT.

On Monday, SWIFT stated that it would suspend some Iranian banks’ access to its network, noting “this step, while regrettable, has been taken in the interest of the stability and integrity of the wider global financial system”. The move is unsurprising given Mnuchin’s warning that “SWIFT would be subject to US sanctions if it provides financial messaging services to certain designated Iranian financial institutions”. Thus, it is possible that there will be a showdown between the European Union and the US if SWIFT decides not to disconnect all targeted Iranian entities and the US Treasury responds with sanctions against the organisation.

Expanded targeting of civilian aircraft and maritime vessels

American sanctions on aircraft belonging to Iran Air, the country’s national carrier, will complicate its operations. Under Obama-era sanctions, such measures made it difficult for Iran Air to receive ground handling and refuelling services at many European airports. This forced Iran Air planes flying between Europe and Iran to refuel in third countries.

Notably, the US Treasury has targeted Iran Air’s recently acquired ATR regional aircraft, which largely conduct domestic flights. The move may be designed to complicate maintenance of the aircraft, increasing safety risks for Iranian passengers.

The US Treasury has also sanctioned a wide range of Iranian oil tankers, as well as other cargo vessels and container ships. This will restrict Iran’s ability to engage in trade, as ports may refuse to service the vessels.

Civilian nuclear cooperation is permitted in limited cases

The US has placed the Atomic Energy Agency Organization of Iran on its SDN list, subjecting it to secondary sanctions. The organisation is the main entity responsible for implementing Iran’s nuclear-related obligations under the JCPOA.

To fully comply with the agreement, Iran must make several adjustments to its nuclear programme, such as redesigning its heavy water reactor at Arak and converting the Fordow enrichment facility into a research complex. To carry out this technical work, Iran is cooperating with the United Kingdom, China, and Russia.

The US has clarified that “all nuclear cooperation with Iran, except for the limited activities for which waivers are being granted, will be sanctionable”. Nonetheless, the US has granted sanctions waivers to non-proliferation projects at Arak, Bushehr, and Fordow facilities, noting that “each of the waivers we are granting is conditional on the cooperation of the various stakeholders”.

The US is monitoring Europe’s planned SPV

In response to America’s reimposition of sanctions this year, the EU and E3 governments reiterated their intention to create a Special Purpose Vehicle (SPV), a new mechanism to facilitate trade with Iran while reducing Iranian reliance on the international financial system. European officials still hope to legally establish the SPV in the coming weeks, but the mechanism is unlikely to become operational for several months. When asked by reporters about the SPV, US policy adviser Brian Hook noted that the “United States will not hesitate to sanction any sanctionable activity in connection with our Iran sanctions regime”.

European governments could establish an SPV to facilitate humanitarian trade alone, thereby minimising the risk that the US will target the mechanism. But it appears that they are planning a single SPV that would include trade the US regards as sanctionable.

That the White House has issued some waivers to allow for civil nuclear cooperation with Iran signals its desire to maintain the JCPOA’s limitations on Iran without allowing the country any of the tangible economic benefits envisaged under the deal. According to one senior Iranian official, unless the remaining JCPOA parties can provide Iran with a meaningful economic package in the coming months, Tehran is likely to re-evaluate its stance on the agreement. In this respect, it is crucial that Europe demonstrates its ability to successfully launch the SPV and, together with China and Russia, takes both economic and political measures to signal that the JCPOA can weather the American sanctions storm.

Photo Credit: IRNA