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Surviving US Sanctions: Can Iran Hold out?


Source: REUTERS/Heinz-Peter Bader

This month, the Islamic Republic of Iran celebrated the 40th anniversary of its 1979 Revolution. Iran has faced a variety of challenges over the past 40 years, and marked this anniversary in an atmosphere of renewed sanctions, protests in the streets, and internal economic challenges.


US Sanctions Return


For almost four decades, Iranians have been dealing with tough economic sanctions by the US government. This string of sanctions began under Jimmy Carter in 1979 until recently with the re-imposition of the sanctions in August 2018 under Trump’s administration. Despite Iranian efforts to work around these sanctions, though selling oil via domestic “private companies” such as subsidiaries of Iranian banks as well as non-stock exchange corporations, these efforts have been insufficient in offsetting the economic shock from re-imposed sanctions. The re-imposition of the US sanctions has drastically harmed Iran’s economy as major companies exit the Iran due to the high risk of being penalized by the United States. Large European companies that have suspended plans to invest in Iran include Airbus, Siemens, France’s oil major Total and its big carmakers, PSA (Peugeot) and Renault. Moreover, companies in Greece and Italy that received US waivers to continue importing Iranian oil have reportedly not been using them.


Can Sanctions Cut Iran’s Oil Exports to Zero?


S&P Global Platts reported Iran’s oil exports to be around 1.7 million barrels per day (bpd) in September 2018. This represents an 11 percent decline from August’s level. Data from Tanker Trackers however, has provided the estimated export volume as around 2 million bpd (Figure 1). The divergence in the data sets is due to the ‘Hide and Seek’ strategy used by Iran. Around a dozen Iranian oil tankers have had their transponders turned off in recent few weeks, making it tricky to track the country's crude exports. For instance, tankers such as Dino I, Diona, Humanity, and Navarz have had their Automatic Identification System (AIS) turned off since mid-September, making it tough to track where shipments might be going. However, in November 2018, as sanctions kicked in, oil exports have fallen to below 1 million bpd and remained at this level in December 2018 and January 2019.


Having said that, Tehran continues to claim that its exports have not declined as much as estimated by the industry. Iran provides that it is selling oil to new buyers but has refused to disclose them out of fear of new sanctions. In November 2018, speaking after a weekly meeting with the heads of the parliament and the judiciary, Rouhani stated that:

"it has now become clear that America cannot cut Iran’s oil exports to zero".

Whether the US can successfully cut Iran’s exports much below 1 million bpd is considered doubtful by many experts in the industry, especially with China likely to remain a willing buyer, despite pressure from the US.


Figure 1: Iran Crude Oil Exports I September 2018

EU Seeks to Save the JCPOA


On 31 January 2019, following the EU Foreign Ministers’ meeting in Bucharest, France, Germany and the United Kingdom, in accordance with their commitment and continued efforts to salvage the Joint Comprehensive Plan of Action (JCPOA), announced the creation of INSTEX SAS (Instrument for Supporting Trade Exchanges). INSTEX is a Special Purpose Vehicle (SPV) aimed at facilitating legitimate trade between the European Union and Iran without relying on the US financial system. INSTEX will be based in Paris and managed by German banking expert Per Fischer, who is also a former Commerzbank manager, while the UK will head the supervisory board. This financial vehicle will handle transactions between Iran and companies trading with it, avoiding direct payments into and out of Iran. For instance, when Iran exports oil to a company operating in a European country, this company will pay into the SPV. Iran can then use the payment as credit to buy goods from other companies in the EU through the SPV. This financial arrangement will focus initially on addressing the immediate economic needs of the Iranian people such as pharmaceutical, medical devices, and agri-food goods. In the long-term, INSTEX aims to open up to economic operators from developing countries who wish to trade with Iran.


Speaking at the EU meeting in Bucharest, the British Foreign Secretary Jeremy Hunt said:

"This is a clear, practical demonstration that we remain firmly committed to the historic 2015 nuclear deal struck with Iran, the Joint Comprehensive Plan of Action, for as long as Iran keeps implementing it fully".

A simple interpretation of this remark shows that the preservation of this trade channel will depend not only its ability to maintain the European-Iranian trade but also on whether Europe can navigate a narrow path between what Iran expects from this SPV and what the United States can tolerate. The question that might be asked then is whether the activity through this channel will go beyond the humanitarian aid trade to convince Iran to remain in the JCPOA. Finally, as no further action has been taken in the process so far, it remains unclear when this financial channel will become operational.


Trade with China: A Bargaining Strategy?


A review of trade statistics from the General Administration of Customs of China shows that the trade activity between China and Iran fell dramatically in the months following the re-imposition of sanctions. Chinese exports to Iran have decreased from around USD 1.18 billion in October 2018 to just USD 0.39 billion in December 2018. This corresponds to a staggering 67 percent decrease. Also, the value of Chinese imports of Iranian oil fell from USD 1.78 billion in August to USD 1.16 billion in September. Imports fell further in October to just USD 0.63 billion. Part of this decrease may be explained by the decision of the Bank of Kunlun, the state-owned bank, to put all Iran-related business on hold pending a change in policy. This has practically meant closing the main financial channels, through which the majority of China-Iran trade was conducted. This decision led the Iranian industrial sector, which relies on raw materials and parts imported from China, with a risk of shortages in key manufacturing inputs. However, on 03 December 2018 the Bank of Kunlun announced that it was resuming transactions with Iran. Yet, the impact of this decision on the trade activity remains to be seen.


Finally, it is worth noting that the Iran-China trade activity, as per figure 1, appears to be inconsistent with the Chinese foreign ministry’s assurances that the country remains committed to its commercial relationship with Iran. The Chinese foreign minister has stated that ‘China opposes unilateral sanctions and long-arm jurisdiction’. One explanation of this reluctance in trade may be interpreted as a bargaining strategy used by China to gain favourable commercial terms for continued trade with Iran. However, until data is available for the first quarter of 2019, it is not possible to tell whether China is standing by its word and to point a clear Chinese strategy for its trade activity with Iran.


Figure 2: Iran-China Trade (in Billion USD Jun18-Dec18)

Foreign Investments Post-Sanctions


To fill the gap left by lost European investment, Iran will be looking East to extend its relations with Russia, India and China. On 02 October 2018, new policies to manage the foreign currency market were approved and new authorities were given to the Central Bank of Iran that allow the bank to conduct Open Market Operation (OMO) and to facilitate the trade of foreign currencies in the secondary market, where Iranian petrochemicals, steel, and other exports are supposed to bring dollars from exports of certain non-oil products. Moreover, in order to encourage foreign investment and attract foreign currency resources, the Supreme Council of Economic Coordination approved that foreign nationals who bring USD 250,000 worth of investment to Iran can obtain 5-year residence permits.


Foreign Investments in the Oil Sector


After the withdrawal of Total, which signed up in 2018 to a USD 4.8 billion Iranian gas field project, China now has set its sights to expand its share in the Iranian gas sector through its state-owned oil company China National Petroleum Corporation (CNPC). Moreover, on 15 January 2019, the Deputy Oil Minister for Oil Products Distribution and Refining Affairs stated that the country attracted EUR 2 billion of Foreign Direct Investment (FDI) from China for modernizing Abadan Oil Refinery. The development project will be implemented in cooperation with China Petroleum & Chemical Corporation (Sinopec) and Iran Oil Design and Construction Company (ODCC).


Also, foreign small and medium enterprises (SMEs) have expressed willingness to cooperate in Iran’s oil projects according to a member of the energy committee of Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA). Who stated:

"We are planning to invite these companies to Iran in Ordibehesht [April 21 – May 21, 2019] to make them acquainted with our projects and our capacities and to prepare the ground for joint development plans".

Foreign Investments in Other Sectors


Transportation and communications infrastructure have dominated the agenda for foreign investment in post-sanctions Iran. The French construction company Vinci and Bouygues has signed deals to support airport expansion in Tehran, Mashhad, and Esfahan. Also, Italian State Railways has signed an agreement to develop high-speed rail network. As for the German investments, the industrial giant Siemens has signed agreements to support the modernization of Iran’s power plants. However, with the re-imposition of the sanctions, many of these foreign companies are abandoning investment projects in the transportation infrastructure sector, which still offers a huge potential for improvement.


However, India has continued its investment in the Chabahar Iranian port and after receiving a US sanctions waiver with respect to its USD 85 million development of the Chabahar port, the construction of an associated railway, and for the shipment of non-sanctionable goods. Located in the Sistan-Baluchistan Province on Iran’s South-eastern coast (outside Persian Gulf), the Chabahar port is of great strategic importance for development of regional maritime transit traffic to Afghanistan and Central Asia. Moreover, a total of 35 manufacturing SMEs enterprises are currently being set up in Iran with USD 2.8 billion foreign investment, according to Sadeq Najafi deputy minister of industries.


In conclusion, Iran offers great potential for investment in the infrastructure and transportation sector which is far from saturated. However, if compliance with US sanctions remains the rule among multinational companies, attracting foreign capital to Iran will be understandably harder to achieve. Yet, for SMEs with less exposure to the US market and the dollar, the investment decision may be different; premium contracts with Iran may outweigh ties to the US market and thus a marginal risk might be tolerable.

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