Iran importers face sanctions shell game
Trump’s sanctions plan lacks international support for now, but importers will nonetheless have to adapt
Iran's biggest oil customers will face a far more complex trading landscape in the coming months as US President Donald Trump's unilateral decision to exit the nuclear deal begins to take effect.
Although the deal stands and its six other signatories remain committed, the US's dominant role in global economics ensures that Trump's decision to exit the Joint Comprehensive Plan of Action will disrupt the world's oil and gas supply lines.
The US Treasury Department has already confirmed it will reinstate restrictions on companies doing business with Iran in the oil and banking sectors after 90- and 180-day grace periods respectively.
As it currently stands, the US withdrawal creates a situation in the oil market similar to the start of the 2010s. Then, Washington had a tough stance on Iran but the European Union still allowed trade with Tehran before becoming more assertive on the nuclear programme in 2012.
Major importers of Iranian oil including China, India, Turkey and South Korea will need to finance deals in euros or other currencies rather than dollars, and negotiate waivers as they did under the Obama-era sanctions.
It is bad timing for the buoyant Iran oil industry. Exports hit 2.6 million barrels a day in April, according to the Oil Ministry, a record since the lifting of the sanctions. China and India bought more than half.
Should Trump's European allies also exit the Iran deal and payment in euros no longer be an option, those countries that still want to import Iranian oil, may attempt to revive the measures used to circumvent the sanctions used last time around. For instance, while India used Turkish banks to make transfers, Turkey made its payments for natural gas in gold.
There could be benefits of this "under the radar" trade for both sides, with Tehran likely to revive favourable conditions such as providing 90 days of credit for crude purchases.
European and certain East Asian banks that wish to maintain good investor relations with Washington will also need to toe the line to avoid financial penalties. The pitfalls were aptly illustrated by the case of Germany's Commerzbank, which had to pay US authorities $1.45bn in 2015 to resolve an investigation of its dealings with Iran.
The investments made by European energy firms agreed with Iran after the JPCOA was implemented are also now under a cloud.
Shell also signed a provisional deal with the Iranian government in December 2016 to explore three gasfields in the country, and has been licensing petrochemical technology to local Iranian partners. Total has committed $1bn to develop the South Pars field, the world's largest gas field.
Aware that renewed sanctions were a threat, some of these firms have taken steps to limit their exposure. Total Chief Executive Patrick Pouyanne said in April that the company had plans to specific waivers to continue working in Iran if sanctions were imposed. Shell has avoided using US staff and software.
The lengths to which Brussels is prepared to stand up for the European firms involved in major deals will be an important factor in those deals' survival, as few expect the EU to risk a full-blown trade war with Washington.
But the global consensus that Iran was fully complying with the JPCOA's stringent nuclear conditions—and inevitable concerns over the geopolitical risks in its collapse—will likely strengthen the resolve among its signatories to keep it alive. Disruptions to the global supply of oil and gas can be weathered, but reigniting major regional conflict in the Middle East would be the worst outcome for everyone.