Global economy pushed to the edge over Iran sanctions

As the Trump administration refuses to extend the sanction waivers for buying Iranian oil to eight major economies, including India, China and Turkey, beyond May 2, the global economy is pushed on edge

April 29, 2019 by Abdul Rahman
Iran sanctions
Weaning away from the cheaper Iranian oil, can adversely affect countries like India, China and Turkey (Photo: Raheb Homavandi/Reuters)

The United States administration has decided to retract exemptions given to countries from the sanctions imposed on the export of Iranian Oil. US had granted six-month waivers to the eight main buyers of Iranian crude, China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece, to give them time to find alternative sources and prevent a shock to global oil markets. The end of waivers are expected to hit India and China the hardest.

Mike Pompeo, the US secretary of state, announced in a press conference on 22 April that exemptions given to countries will end on May 2. Any country that buys oil from Iran after that date would face secondary sanctions from US.

This move has led to a sudden rise in oil prices in the world market, which are expected to further increase in the coming days. US president Donald Trump tweeted that Saudi Arabia and the United Arab Emirates will hopefully fulfill their promise of maintaining the oil supplies in order to help keep prices in check. However, it is widely speculated that Saudi Arabia will not be able to act unilaterally as it is bound by its commitments to the Organization of the Petroleum Exporting Countries (OPEC).

OPEC members agreed to cut the oil production in order to control the falling prices in the international market in December last year. Venezuela, the largest producer in Latin America, is already suffering from US sanctions and reduced production. In this context, the sanctions on Iran might create an incentive to increase the production to help reduce the prices.

Iran is one of the largest oil producing and oil exporting countries of the world. The current sanctions were declared in May 2018, partially imposed in August, and were fully imposed in November 2018. The sanctions were re-imposed after the Trump administration unilaterally withdrew from the Iran Nuclear Deal.

Regime Change?

The Iran deal was signed in 2015 by the Obama administration, Germany, France, the United Kingdom, Russia and China. It allowed the lifting of economic sanctions on Iran if it accepted to limit its nuclear program in return, including allowing international inspectors to visit its nuclear sites. However, the Trump administration wanted to impose greater control over Iran’s ballistic missiles as well as its ability to help Hezbollah and the Syrian regime.

The stated objective of the current sanctions is to reduce Iranian oil exports to zero and destroy its financial health as well as its influence in the regional politics, which is seen to be against the interests of Israel, Saudi Arabia and the US. However, some observers have seen a larger pattern behind the sanctions. The Trump administration wants to destabilize the Islamic regime by depriving them of crucial revenues necessary to maintain the economic health of the country. The economic hardships faced by the people, it is argued, would create popular unrest, leading to regime change.

According to the Guardian, John Bolton, current national security advisor for US, and Rudy Giuliani, Trump’s lawyer, have participated in meetings organized by the National Council of Resistance (NRC). The NRC was controlled by Mojahedin-e-Khalq (MEK) in 2017 and 2018 respectively, and has openly given calls for the overthrow of the Islamic regime in Iran. MEK is a group of Iranian exiles which was on the US terror list few years ago.

The White House issued a statement on Monday saying, “The Trump administration and our allies are determined to sustain and expand the maximum economic pressure campaign against Iran to end the regime’s destabilizing activity threatening the United States, our partners and allies, and security in the middle east.”

Iran is already suffering from a high unemployment rate among its youth. The sanctions will reduce the supply of essential commodities and lead to high inflation. Revenues coming from the export of oil and gas constitute more than half of Iran’s foreign trade. Massive public expenditure is dependent on this revenue.

Impact on the Oil Market

Iranian export had come down to half its volume of trade after the imposition of the sanctions. The export, which was around 2.5 million barrels a day in May 2018, came down to around 1.2 million barrels per day in March.

In November 2018, the eight countries were given a six-month exemption in order for them to shift their imports away from Iran. Greece, Italy and Taiwan have already shifted their oil imports away from Iran. South Korea is reportedly planning to follow the US dictates. However, China, India and Turkey, the three largest buyers, have taken divergent stands.

The European Union (EU) has remained committed to the nuclear deal and moved to a non-dollar trade with Iran to avoid the sanctions. It has created a special purpose vehicle, called Instrument in Support of Trade Exchange (INSTEX), based in France, to facilitate uninterrupted trade.

China, the largest importer of Iranian oil, issued a statement defying the “unilateral sanctions” and questioning “the so-called long armed jurisdiction” of the US. According to AFP, it warned that such a move will “intensify the turmoil in the Middle East and the turmoil in the International energy market”. The statement further said that China will “continue to work in order to safeguard the lawful and legitimate rights of the Chinese companies”.

Iraq, which heavily relies on the imports of Iranian gas and electricity, remains the only country which has been kept out of the sanctions for another 3 months.

Turkey has openly showed its resentment against the move. Mevlut Cavusoglu, Turkey’s foreign minister, tweeted that the move will not help in stabilizing and maintaining peace in the region, and will also harm Iranian people. He added, “Turkey rejects unilateral sanctions and impositions on how to conduct relations with neighbors.”

Turkey’s presidential spokesperson and senior advisor, Ibrahim Kalin, said, “We will look for alternatives in terms of transactions and other things. We don’t want to break or violate the sanctions but at the same we don’t want to be deprived of our right to buy oil and gas from Iran.”

Impact on India

Indian government has chosen not to defy the sanctions publicly. According to a tweet from the petroleum and natural gas minister, Dharmendra Pradhan, on Tuesday, the government “has put in place a robust plan for adequate supply of crude oil to Indian refineries. There will be additional supplies from other major oil producing countries.”

India is the second largest importer of Iranian oil, importing around 1.2 million tons of oil per month, around 10% of Iran’s total exports. It imported around 22 million tons of oil in 2017-18 and 24 million tons in 2018-19. According to the current mechanism, India pays 55% of its oil money in euro and the rest in rupee. A part of the rupee payment is made in kind, such as rice, medicines, etc.

Indian Oil, Mangalore Refinery and Bharat Petroleum are the main companies based on the supply of Iranian oil. Indian refineries prefer Iranian oil because it is cheaper, comes with longer credit period and is suited to the configuration of the refineries. But now they will have to negotiate for additional supplies from Saudi Arabia. It is a double blow for Indian oil market as some refineries are already under US pressure to stop buying oil from Venezuela. According to the sanctions, any company dealing with another from a country which has dealings with Iran will face financial punishments.

India imports 84% of its oil needs and hence the prices are dependent on its prices in the international market. The end of imports from Iran and Venezuela might lead to an increase in the costs of refineries, that will eventually be transferred to the consumers. The increase is delayed because of the ongoing elections but Indian consumers should expect a steep rise in the prices of oil and other petroleum products post elections.

Results in general election might be a major factor deciding India’s policy towards the sanctions. Opinions polls so far have suggested a greater likelihood of a hung parliament, with the elections in most places being too close to predict. If a coalition of opposition parties manage to replace the incumbent right-wing government, a change in the present policy is likely.

Even if India chooses to abide by the sanctions, it will severely affect the economy which has been hit various disastrous fiscal measures and changes in taxation by the present government.

Today, on April 29, oil prices have reportedly fallen by 3% after a month of significant increase, as the United States tightened its sanctions on Iran, as well as Venezuela. This decline in prices, comes after the US government brought several of its allies in the OPEC to bring down supply cuts to compensate for the sanctions.

It remains to be seen how far can these measures stabilize the international oil prices in the long run. Several OPEC nations are already struggling with diminishing returns from oil production and had begun programmes of supply cuts in late March and early April to arrest that trend. The US continuing these sanctions can risk adversely impact global trade and economic growth.