Asia won’t toe the line on Iran sanctions

Though the EU is likely to fall in line with US sanctions against Iran, the Islamic Republic is still unlikely to agree to make new concessions regarding its nuclear program.

A primary reason, Iran sanctions expert Barak Seener – who just recently published a book, in conjunction with the Jerusalem Center for Public Affairs, titled “Commercial Risks Entering the Iranian Market” – told The Jerusalem Post, is that even without the EU, Tehran has key support from Asia.

The numbers speak for themselves.

Take the massive $4.8 billion oil deal with Iran that French company Total recently announced it was pulling out from because of the US sanctions. That sounds like a massive hit to Iran’s economy.

But Seener, also a political risk consultant at Strategic Intelligentia, writes that China has extended $35 billion in credit to Iran. Regarding the Total oil deal, India had been miffed that Iran gave the deal to a French company. Now that Total is out, India could very well jump back in and fill the gap, with no broad ill effects on Iran’s economy.

Russia and South Korea are also likely to maintain their trade with Iran.

Why are EU countries likely to toe the US line, whereas Asian countries, or at least their influential massive state-owned companies, are likely to brush off sanctions and keep doing business with Iran?

Why will the overall impact, when all of this is added up, likely lead Iran to resist the escalated economic pressure to make new concessions on its nuclear program?

Regarding the EU, there has been a decent amount of debate in recent months about whether the EU would be able to resist the pressure of US secondary sanctions to prop up its companies that continue to do business with Iran.

Secondary sanctions mean that any EU entities that did business with Iran would be prohibited from doing business with the US.

The first batch of US sanctions go into effect on August 6.

They will include: sanctions on the acquisition of US dollar banknotes by Iran’s government; sanctions on its trade in gold and other precious metals; sanctions on sales and transfers of aluminum, steel, coal and graphite; and sanctions on Iran’s automotive sector.

The second set of sanctions will be reinstated by November 4.

These include: sanctions on Iran’s shipping sector; sanctions on its petroleum exports; sanctions on the Central Bank of Iran; and broader sanctions on its energy sector.

In January, Jarrett Blanc, Obama-era deputy lead coordinator and State Department coordinator for Iran nuclear implementation, told the Post that secondary US sanctions could hurt the US as much as the EU or at least lead to an economic-legal counterattack.

He said that the EU could fight back using various international legal forums like the World Trade Organization in a trade war of sorts, as it did over Cuba in the 1990s.

Blanc said that in the late 1990s the EU launched a case against the US over the 1996 Helms-Burton Act, in which the US penalized foreign companies trading with Cuba.

The Obama-era official said that the case “did not go very far because, after a year to 18 months, the EU and the US reached an agreement where both sides compromised.”

He said that in the same period during the 1990s, to deal with the Cuba sanctions issue, the EU passed laws so that “EU-regulated entities and individuals could be subject to EU legal liability if they followed US sanctions law.” This would mean the EU would counter-pressure European companies against any pressure from the US.

Part of this strategy could include the EU targeting US assets in Europe “to make EU firms whole which lost money due to US secondary sanctions.”

Seener said that all of this misses a fundamental reality: Even if the EU desperately wants to stick to the Iran deal, it may fail to convince EU companies to prefer the Iranian market over the American market, once they are forced to make the choice.

In fact, he said, early evidence from a number of major EU companies like Total already suggests that the EU’s private sector is taking the lead on abandoning their deals with Iran. This is occurring even before the EU governments can try to rally together to keep them doing business with the Islamic Republic.

He noted that German Chancellor Angela Merkel has admitted that she cannot fully compensate German businesses for losses, if they run afoul of US sanctions.

Why are China, Russia, South Korea and India in a different position?

First, Seener stated that China has a number of massive state-run enterprises far beyond anything that exists in the EU. These companies have “nothing to lose if they enter the Iranian market, and they replace companies that have exited, like Total…. They do not suffer any negative consequences, because they never have to enter the US market.”

He said that China’s non-state companies “will need as many markets as possible and must assess which is the most profitable market to engage in. They are more likely to abide by sanctions because they need access to US markets.”

Overall, he said, China’s “One Belt One Road” initiative is pushing to reconstitute the ancient Silk Road, including developing infrastructure throughout the Persian Gulf, which includes Iran. Also, like other Asian countries, allying itself with Iran will help accommodate its growing population and economy.

Seener said that China is Iran’s largest trading partner, with trade jumping 30% in the first six months of 2017 alone.
Next, China has been the biggest importer of Iranian crude, importing nearly a staggering half of all Iranian exports, wrote Seener. China has continued increasing its interest in Iran by signing multibillion-dollar deals and significantly increasing its import of oil, he wrote.

Similarly, Russia has big state infrastructure and energy companies which do not access US markets, and they will have no problem doing business with Iran, he stated.

Seener believes South Korea will follow suit with China.

In his book, he wrote that South Korea saw its importation of Iranian oil increase by 67% from mid-2015 to mid-2016.
South Korea aims to double the delivery of Iranian oil, as it seeks cheaper sources of oil.

As of 2017, he said, Iran has “firmly retaken its market share in South Korea, where it has become the second-largest exporter to Seoul.”

Seener said that India is more of a wild card, but still could come down on Iran’s side.

India has earmarked at least $20b. in investments in the Iranian energy market.

Showing its devotion to business with Iran, he wrote, India is attempting to make a payment of $6.5b. in arrears to Iran to gain greater access to investments and resources in Iran.

This payment is for Indian oil imports that took place during the period of sanctions on Iran, when Iran effectively fronted India transportation fees to guarantee its alliance during the sanctions period.

Being proactive to avoid complications as a result of further US sanctions, India is currently paying Iran in Euro accounts through Turkey’s Halkbank.

But Seener said that India and some of its companies have wavered on this issue, and that if the US puts on a full-court press with incentives once the August sanctions kick in, the US might flip India onto its side.

There is still one brand-new and developing missing piece that could fundamentally alter the entire picture.

What if the Trump administration’s only current economic conflict was to focus on getting the EU, China and others to sign on to snapping back sanctions on Iran?

As Seener has described, even that would be a challenge. But the actual challenge just recently became doubly difficult.

Trump’s pressure campaign against Iran could be hampered by his much bigger trade war with the EU, China and others.

Seener said that “Trump needs to prioritize objectives: Is his objective to equalize global trade and implement tariffs? If he does that, will he have China play ball on North Korea and Iran? Then China will want commodities at a knockdown rate. China won’t equalize trade and will not abide by Iran sanctions.”

Will the trade wars with the EU and China have similar impacts on the Iran situation?

On one hand, Energy Minister Yuval Steinitz recently told the Post that a trade war with the EU could lead to the EU, like China, being less cooperative with Iran sanctions. It may calculate that the trade war may have already limited its access to US markets so that the threat of losing access for violating Iran sanctions has already played itself out.

On the other hand, Seener said that “a trade war with China will be a lot more severe than a trade war with Europe because it is not just about trade imbalances… and pulling your weight with NATO.” He explained it is also about China’s massive intellectual property theft from the US, its forcing global businesses to relocate to China to learn corporate secrets sometimes even without cyber theft, and its demanding large Chinese ownership percentages of these businesses. Trump’s approach to “Europe is as a transactional issue. With China, it’s a lot more,” he said.

So Seener said the trade wars may or may not slow down the EU from joining the US versus Iran, but the trade wars make China and some other Asian countries standing by Iran even more likely.

What will Iran ultimately decide in its choice of make concessions to the US or try to hold out with its Asian allies?

Seener started by going back to the Islamic Republic’s basics in terms of identity.

He said that “Iran will never” make greater compromises than it already did with the 2015 nuclear deal, “because that would undermine the revolutionary ideals of the regime itself. It might as well be a Western liberal democracy.”

Rather, he said, any Iranian government that makes new concessions “is basically a different regime in place with different priorities, like economic growth. That is not this regime’s priority. Money from the JCPOA is not going to the people but to terrorist proxies because that is the ideology and the religious nature of the regime.”

What will Iran’s strategy be?

“Iran will undertake diplomatic efforts to divide the international community. Iran will offer huge incentives and cut rates for countries to come in” on a variety of business deals, he said.

Seener explained that Iran is currently “sticking to the deal to attract foreign companies and with an orientation toward Asia. After that, if they are unsuccessful, Iran may simply walk away from the deal, attempt to speed up their nuclear program and become more repressive domestically.”

Alternatively, he said, Tehran “may do all of that at the same time as officially abiding by the deal, in order to really confuse the international community and to get the EU to say to the US: ‘If you will unravel sanctions, that will prompt Iran to become more moderate.’”

In other words, Iran could play simultaneous “games of subterfuge,” and its strategy does not need to be rolled out “sequentially,” clearly choosing only one path: concessions or loudly leaving the deal and publicly rushing for a nuclear weapon.

With the August set of sanctions only weeks away, Seener’s and others’ predictions about Iranian behavior and the impact of sanctions are about to be tested.