Although the immediate response to Tuesday’s announcement of the US withdrawal from Iran’s nuclear deal was a jump in oil prices, most analysts seem to agree that the largest economic cost of President Trump’s decision to reintroduce sanctions will be the potential disruptions it may cause to global trade flows.
A few numbers may provide some context. Iran currently produces around 3.8 million barrels per day (bpd), or around 4% of the world’s oil supply, of which 2.5 million bpd are exported. Estimates suggest that in 6 months time, when the sanctions are expected to have their full effect, Iran’s crude oil output will decline by some 400 000 bpd.
Compliance with unilateral US sanctions would be much more difficult to enforce than the multilateral measures implemented in 2012. Asia remains the largest buyer of Iranian crude, with China and India topping the charts. Observers believe that it is highly unlikely that both countries would easily yield to US pressure and are expected to keep importing oil from the Persian Gulf state at current levels. So would Turkey. And Saudi Arabia, which is estimated to hold some 2 million bpd of spare capacity, has already pledged to ramp up production of crude to offset any effects on the market caused by the sanctions. Oddly, the highest upside risks to oil prices may come from the unravelling of a string of conflicts in other key oil producing countries. Think the Middle East, Nigeria, Venezuela and Libya.
What will likely leave a more lasting economic impact, though, are the so-called secondary US sanctions. Should such sanctions be introduced through trade and financial instruments, foreign companies will be blocked from accessing the US market unless they are compliant. The US Treasury could cut off from the US banking system any international company that decides to continue doing business with Tehran, if its home country fails to “significantly reduce” Iranian oil purchases.
A strict imposition of the same definition of “significantly reduce” used the last time sanctions were in place, would mean that countries will cut Iranian crude imports by 20% every six months, after a 6-months wind-down period.
This evolving scenario could imply that some European companies will stop doing business with Iran, with significant economic consequences. France’s Total, Renault and Airbus, for instance, have concluded multi-billion deals with Tehran which are now in jeopardy unless they obtain a sanctions waiver from Washington allowing them to continue operating in Iran. Similarly, German business interest in sectors such as steel production could be badly bruised if the US strategy of secondary sanctions works.
And while the EU was swift to insist that it will continue to uphold the nuclear deal, a stringent application of secondary sanctions by the US will leave Iran with little incentive to remain part of the agreement. That’s because, as much as they might want to, European countries will be unable to honour their side of the accord. With EU-Iran trade being some 125 times larger than US-Iran trade, it is clear that Europe has the most to lose if the Iran nuclear deal is scuppered.
The EU would need to find ways to limit the impact of US sanctions to ensure firms continue to do business with Tehran. One possible option could be reviving what are known as “blocking regulations” – a sort of countermeasure instrument against foreign extraterritorial economic sanctions that are considered harmful to the EU’s sovereignty – to protect European firms.