US Violation Of Iran Nuclear Agreement Sends Buyers Scrambling

Mr Trump waxed lyrical about Iran’s pernicious regional activity on 8 May as he announced his decision to exit the Joint Comprehensive Plan of Action (JCPOA). He highlighted Iran’s support for Hezbollah and Hamas and said it “continues to fuel sectarian violence in Iraq, and support vicious civil wars in Yemen and Syria.” That Iran engages in such activities is undeniable and a major concern and Mr Trump is correct that funds derived from the JCPOA have facilitated this.

But it is a fallacy to assume that that the re-imposition of sanctions – if achieved – will lead to the rolling back of the Iranian presence in these theaters. Indeed, within Iran’s complex governance system, the move strengthens the hardline elements that promote such endeavors while undermining the more moderate elements. Hardliners’ long-standing and overstated assertions that the US cannot be trusted have been bolstered.

NUCLEAR RESTRICTIONS THREATENED

Mr Trump slammed the JCPOA, saying “we cannot prevent an Iranian nuclear bomb under the decaying and rotten structure of the current agreement.” Yet the other parties to the agreement – the UK, France, Germany, Russia and China – argued that the deal was working despite its limitations. Their words went unheeded.

Similarly, the UN’s nuclear watchdog – the IAEA – has repeatedly said Iran is upholding its obligations. Director General Yukiya Amano praised the agreement in March, “if the JCPOA were to fail, it would be a great loss for nuclear verification.”

“Our inspection work has doubled since 2013. IAEA inspectors now spend 3,000 [person-] days per year on the ground in Iran,” he said. If the JCPOA collapses then this level of inspection will fall, raising the risk of Iranian nuclear development accelerating.

The main grievance that the current US administration cited with the JCPOA, is its “sunset clauses” which enables Iran to begin limited nuclear activity in 2025. A State Department transcript of its 8 May briefing also highlights this, with one official saying that discussions with the European participants on resolving issues “got stuck on sunsets.”

But discarding the deal based on something that may or may not happen seven years hence looks extraordinarily rash.

SANCTIONS NOT THE ANSWER

Moreover, a cursory examination of recent history shows that sanctions have failed abysmally to slow Iran’s development of nuclear enrichment capacity. Iran substantially increased the number of centrifuges used for enriching uranium after the UN imposed tighter nuclear sanctions from 2006, and again after the US and EU further tightened restrictions in 2012 (MEES, 2 July 2012).

The IAEA says the number of IR-1 centrifuges (Iran’s most basic) at the main Natanz facility rose from 2,132 in May 2007 to 9,156 in February 2012, and 15,420 in May 2015. Iran also installed more than 1,000 more advanced IR-2 centrifuges. Since the JCPOA was signed, no new centrifuges were installed.

The official Presidential Memorandum signed by Mr Trump says “I have approved an integrated strategy for Iran that includes the strategic objective of denying Iran all paths to a nuclear weapon.” But having abrogated an agreement that had at least paused this, the US appears to be left with an objective but no clear strategy.

NEW DEAL ACHIEVABLE?

Mr Trump claims “a constructive deal could easily have been struck at the time” adding that “as we exit the Iran deal, we will be working with our allies to find a real, comprehensive, and lasting solution to the Iranian nuclear threat.” This grossly overlooks the complexity of the years of negotiations that led to the deal and Iran’s struggles to sell the JCPOA domestically.

Perhaps the US can corral the other members of the P5+1 into agreeing to an arrangement containing more stringent restrictions, but would Iran agree to such impositions? Highly unlikely. The current government placed a lot of its reputation on the line by dealing with the US and has already faced savage criticism since Mr Trump’s decision. Its critics would have a field day if it signed up for a new, Trump-led, deal.

This leaves Iran and the remaining five partners contemplating forging ahead without the US. Iranian President Hassan Rohani spoke immediately after Mr Trump’s pronouncement saying that Iran plans to continue with the JCPOA, just without the US. But if this is not possible, he has ordered the Atomic Energy Organization of Iran (AEOI) “to go ahead with adequate preparations to resume enrichment” without restrictions.

France, Germany and the UK (the so-called ‘E3’) released a joint statement expressing “regret and concern” at the US decision and that the “world is a safer place as a result” of Iran’s continued commitment to the JCPOA. Affirming their continued commitment to upholding the JCPOA, they urged the US “to ensure that the structures of the JCPOA can remain intact, and to avoid taking action which obstructs its full implementation by all other parties to the deal.”

CARRYING ON WITHOUT THE US?

But the US has immediately set out a course to take that very action, already putting in motion plans to implement the full range of sanctions that existed prior to the JCPOA. The State Department and Treasury have instigated measures for sanctions to be re-imposed in two tranches following 90-day and 180-day wind down periods. This will see them enter force on 6 August and 4 November, respectively.

On 4 November oil-sector sanctions would thus be re-imposed. These include restrictions on port operators, the shipping sector, and a ban on petroleum-related transactions with the National Iranian Oil Company (NIOC) and other oil firms.

The US Treasury also says sanctions on imports of Iranian petroleum products will be re-imposed on 4 November. Waivers for countries that “significantly reduce” imports will be permitted, but the Treasury says “countries seeking such exceptions are advised to reduce their volumes of crude oil purchases from Iran during this wind-down period.”

NO PLAN B

The Trump administration doesn’t appear to have put much thought into whether it can bring along the other members of the P5+1, or at the very least its EU cohort. When the State Department spokespersons were quizzed about this, they failed to provide a cohesive response. “We’re going to continue to work closely with them. We’re going to broaden that engagement.”

Certainly when the US canned the JCPOA, discussions didn’t seem to have progressed to covering what the European position following the US withdrawal will be – a staggering oversight if the case. “We did not talk about a Plan B in our discussions because we were focused on negotiating a supplemental agreement,” a State Department spokesperson said at a background briefing on 8 May in the immediate aftermath of Trump’s pullout announcement.

Given that US companies are already largely prohibited from dealing with Iran, the main focus of the sanctions will be on foreign countries and firms (so-called secondary sanctions). Presumably then, the administration is firm in whether it will impose sanctions where necessary on European companies that continue to do business with Iran? “Those are discussions we’re going to have with the Europeans” says the State Department.

All of this raises the question of whether the E3 will stand up to the US on this issue and continue to trade with Iran despite the threat of Washington sanctions. The EU could potentially look to protect firms from US sanctions through “blocking regulations” conceived in 1996 to shield companies from US sanctions on dealing with Cuba.

Initial comments from French Finance Minister Bruno Le Maire indicate a willingness to stand firm, as he slammed the prospect of US secondary sanctions on domestic radio “The international reach of US sanctions makes the US the economic policeman of the planet, and that is not acceptable.” But will this stance be maintained?

That France wants the JCPOA to persist is unsurprising as French companies were swift to capitalize on the easing of sanctions. French carmakers Renault and PSA (Peugeot Citroën) have invested heavily in Iran in recent years, whilst France-based Airbus inked a post-sanctions deal to sell Tehran jets worth a cool $27bn (at list prices). But the most high profile French firm involved in Iran is oil major Total which alongside China’s CNPC signed a $4.8bn contract to develop the 1.8bn cfd South Pars Phase 11 project in June 2017 (MEES, 23 June 2017).

OIL TRADE FLOWS

Iran had great success in nearly doubling crude sales to the EU to 550,000 b/d last year (see chart 1 and MEES, 30 March), although volumes remained a small fraction of the total 10.5mn b/d the bloc imported overall.

Italy emerged as the largest EU buyer of Iranian crude last year, with volumes quadrupling to 198,000 b/d, although they dropped during the first quarter of 2018 (MEES, 11 May).

But despite the increased EU purchases, Asia remains by far the largest market for Iranian barrels, although demand there also slipped in Q1 (see chart 2). Japan and South Korea have the closest ties to the US and both have said they will apply for a waiver (though even if granted this would require them to “significantly reduce” imports).

It’s less clear cut with China and India, respectively the #1 and #2 buyers of Iranian oil last year. Whereas China complied in curbing exports during the last wave of sanctions, Sino-American relations are turbulent at the moment thanks to Mr Trump’s imposition of tariffs. Moreover, China’s liberalization of its import regime in 2016 enabled small independent refiners to import crude, some of which have turned to Iran.