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Iran’s oil market facing the new sanctions era: What to expect

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After an expected hiatus in Iran’s oil exports to some of the country’s main customers following the reimposition of the US sanctions, once again the country’s old buyers are coming back to take advantage of the 180-day window which has been presented by the waivers granted in November.

Although it took some of these buyers more than a month to make necessary arrangements or to contemplate on the matter, it seems that finally the convenience of buying oil from Iran has outweighed the skepticism overshadowing Iranian oil industry.

With the customers coming back everything was seemed to be, once again, in favor of Iran’s oil industry, however the US government’s disappointing comments last weekend could change all the equations for Iran’s oil market in the months to come.

“The United States is not looking to grant more waivers for Iranian oil imports after the reimposition of US sanctions.” Brian Hook, the US special representative for Iran, told an industry conference in the United Arab Emirates capital Abu Dhabi.

Considering this new stand, the immediate question which comes to mind is what would become Iran’s oil market after the 180-day period is over? To answer this question two main aspects should be taken into account, one is the consideration of Iran’s ability to bypass the sanctions and the second is the possibility of Iranian oil customers being pushed away in the wake of difficulties resulted from the sanctions.

Iran’s capabilities

Even though at first the markets were almost certain about the severe impact of Trump’s plans on Iranian oil industry, but the surprising decision on granting eight countries waivers to continue buying Iranian oil significantly mitigated the harsh outlook.

Now, nearly three months after the reimpostion of the US sanctions on Iran, the market has witnessed that the Iranian oil exports are not plunged as much as expected.

Although due to the confidentiality of Iran’s crude oil sales data, especially in the sanctions era, there is not an exact report for the level of the country’s oil exports in recent months, however based on the estimations presented by institutes which track Iranian oil vessels, the country’s oil exports stood at near 1.1 to 1.3 million barrels per day in November and December.

Furthermore, considering the exempted countries which are going to resume their oil purchasers from January, and the new approaches which Iran is taking to sell its oil like offering oil at energy exchanges or finding new customers, the country can definitely maintain an even higher level of exports in the months to come.

According to a FGE report, Iran will ship 1.08 million barrels per day in January and exports 1.115 million barrels per day in February.

We should not also forget Iran’s experience in bypassing sanctions to sale its oil. As I mentioned before, Iran has acquired certain ways to bypass sanctions and sell its oil even during the sanctions.

Iranian oil buyers

Nearly two months after the US granted eight countries waivers to continue purchasing oil from Iran, recently some of the Asian buyers have signaled willingness for resuming oil imports from the country.

China, India and South Korea have placed orders for loadings in January or February and Japanese refineries have also expressed hope to resume shipping in Iranian oil as from late January provided that some final clearance and paperwork were made.

As reported by S&P Global, the presidents of Japan’s JXTG Holdings and Cosmo Oil stated that they aim to load Iranian barrels at the end of January upon making some final clearances.

“Cosmo Oil aims to load around 1.8 million barrels of Iranian crude at the end of this month” the report read.

Last week, head of South Korea’s SK Innovation, which owns South Korea’s biggest oil refiner SK Energy also told Reuters that South Korean oil buyers are expected to restart Iranian oil imports in late January or early February.

India’s Ministry of External Affairs has also stated recently that the Asian country will continue importing Iranian oil. According to data provided by FACTS Global Energy Group (FGE), four Indian refineries namely, Indian Oil, Bharat Petroleum, HMEL and HPCL have placed orders for 321,000 barrels of Iranian oil in February.

Regarding Greece, Italy, and Taiwan which were exempted from the US sanctions, no news has been officially out since November.

Even though Europe opposed Trump’s actions, and have reassured Iran’s government that they want the nuclear deal to continue, refiners in the green continent have had little choice but to comply with sanctions. The US can cut off access to their financial system for any company judged to be doing business with Iran.

The customer preferences

With all that said, there are still other considerations which should be taken into account to have a rather clear view of what to expect for the future of Iranian oil.

The fact that it took near two months for some of the Asian buyers of Iranian oil to make necessary arrangements to come back to Iran’s market, is an indication of the hardships that the customers of Iranian oil will be facing in trade with Iran.

The heavy bureaucratic process which the exempted countries have to go through in order to buy Iranian oil, could push some of the more cautious customers like Japan and even South Korea away from Iran.

Most Asian customers of Iranian oil are very sensitive and conservative in their relations with the United States, and this is likely to be a barrier in the way of their energy relations with Iran.

Japan is a clear example of this situation; despite being granted sanction waiver the Japanese refineries have conditioned the resumption of their purchases upon “making some final clearances”.

Regarding Iranian oil buyers’ future decisions, yet another fact that should be taken into account is the reality that with Saudi Arabia, Russia and US producing almost at their peak, and with prices hovering near $60 there is currently a lot of cheap oil in the market.

In such a market, it is natural that some of the Iranian oil customers prefer to purchase their oil from other oil suppliers instead of exposing themselves to the consequences of breaching the US sanctions.

So in the end, it all comes to the incentives which Iranian government is willing to provide to make its oil attractive enough to worth the risk.

It seems that the country has taken some steps in this regard, since earlier this month, the Iranian Deputy Oil Minister for International Affairs and Trading Amir-Hossein Zamaninia said despite the US. sanctions more oil buyers have approached the country for negotiations.

“Despite US pressures on Iranian oil market, the number of potential buyers of Iranian oil has significantly increased due to a competitive market, greed and pursuit of more profit.” Zamaninia said.

Mentioning “pursuit of more profit” indicates that Iran is probably going to provide its customers with remarkable discounts or provide them with long-term payment plans which considering the current situation in the market seems to be the best decision at the moment.

First published in our partner MNA

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Economy

Turkey and Trump’s sanctions-based “political economy”

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By the end of last year, the Turkish economy had slipped into a technical recession, boosting in 12 months by only 2.6%, despite the fact that a year ago the government expected GDP to grow by 3.8%. The slowdown is particularly striking against the background of sustainable development over the past seven years: in 2010, the country’s GDP grew by 8.5%, in 2011 – by 11.1%, in 2012 – by 4.8%, in 2013 – by 8.5%, in 2014 – by 5.2%, in 2015 – by 6.1%, in 2016 – by 3.2% and in 2017 – by 7.4%  This trend has turned Turkey into one of the fastest developing economies, earning it 17th position worldwide in nominal GDP and 13th in the GDP value regarding purchasing power parity.

The situation changed by the middle of 2018, when relations with Washington deteriorated to the point of a trade war. The Trump administration resorted to the much-practiced method of targeting the “dissenters”: it raised drastically customs duties on steel and aluminum imported from Turkey (which, however, did not prevent the United States from becoming the second buyer of Turkish metallurgical produce by the end of the year). On August 1 the US introduced sanctions against Turkish Interior and Justice Ministers. At that time, the main stumbling block (at least on the surface of it) was Turkey’s refusal to release American priest Andrew Brunson who was detained in 2016 on charges of  espionage and links to Fethullah Gulen’s movement along with the Kurdistan Workers ’Party. For some time Donald Trump’s propaganda slogans were dominated by the maxim “to save rank-and-file pastor Brunson”.

Turkey responded by slapping import duties on American goods: cars, alcohol, tobacco, cosmetics. And, of course, it put two US ministers on its sanctions list.

But the forces were clearly far from equal. As a result, the Turkish lira collapsed. At the beginning of 2018 one dollar traded for 3.8 liras, whereas by the end of the year it sold for 5.3 liras. Moreover, at the peak of the weakening of the national currency, the dollar cost almost 7 liras. The Central Bank of Turkey was forced to raise the interest rate, even despite opposition from the country’s omnipotent president. Today, the rate has climbed up to the red level of 24%. Consequently, there has been a drop in the sales of real estate, cars, and a number of other industrial goods. Prospects for inflation have materialized too – in October, inflation hit a fifteen-year high, exceeding 25 percent.

Recep Tayyip Erdogan put the blame for the crisis on Turkey’s foreign ill-wishers. This time – with a lion’s share of truth.

In October, the court sentenced Branson to imprisonment for exactly the time he had already served. The pastor returned home, mutual sanctions were lifted, which partly calmed the markets. But only partly.

According to the Turkish Statistical Institute (TSI), the country’s GDP increased by 2.6% by the end of the year. At the same time, the service sector grew by 5.6%, agrarian – by 1.3%, industrial – by only 1.1%. Exports, compared to the previous year, increased by 7% – to 168 billion dollars (a record figure in the entire history of the Turkish Republic). Foreign trade deficit, amid a boost of imports prices,  decreased by 28.4% to $ 55 billion, while imports proper dropped by 4.6% to 223 billion dollars. Tourism revenues increased by 12.3% to 29.5 billion

At first glance, the situation is far from critical, but, according to the TSI, over the year, per capita GDP dropped from $10,597 to $ 9,632; household expenditures, although going up by 1.1% on the year, went down by 8.9% in the fourth quarter. In December unemployment rate among the able-bodied population reached 13.5% – more than 4.3 million people.

Nevertheless, Berat Albayrak, Minister of Treasury and Finance of Turkey, sounded optimistic: “The worst days for the economy are over. The government is confident that the growth of the Turkish economy in 2019 will match the forecasts laid down in the New Economic Program. ”

In general, the above-mentioned program envisages the implementation of reforms that will protect export-oriented small and medium-sized enterprises, strengthen their competitiveness, stimulate the economy to secure a high level of added value. An important part of the document is a clause that stipulates cutting government spending on expensive infrastructure projects, often designed to foster the image rather than the economy.

Specialists differ in assessing the prospects for the Turkish economy: forecasts vary from a slight increase to a further decline. In particular, according to the Frankfurter Allgemeine Zeitung, “Economists expect the cooling to continue. The OECD forecasts a further reduction in the economic growth of (Turkey-author) for 2019 to minus 1.8 percent.” So far, the trend is as follows: industrial production, for example, in January 2019 fell by 7.3% against January last year.

Among the chronic illnesses of the Turkish economy is a deficit of the balance of payments, which the government traditionally tries to compensate with foreign loans and foreign investment – these primarily provided economic growth in previous years. Now this source seems nearly exhausted as investors worldwide are growing increasingly wary of developing markets. The position of Turkey is aggravated by the uncertainty of foreign capital about the independence of the Central Bank, its concerns about the unpredictability of the country’s policy and the adequacy of its economic course (first of all, its adherence to ambitious projects with questionable economic efficiency).

Also, potential investors are deterred by the strained relations between Ankara and Washington. For many, President Trump’s recent treat to “ruin” Turkey for its policy on Syrian Kurds and his recent decision to abolish customs preferences for a number of Turkish goods came as signaling the continuation of a trade war. Significantly, these statements were made after the Turkish leadership confirmed its determination to acquire Russian air defense systems, thereby making it clear that pursued a course towards independence in strategic decision-making.

For Turkey, the United States is a fairly important trading partner, which in 2018 accounted for almost five percent of Turkish exports ($ 8.3 billion) and more than five percent of imports ($ 12.3 billion).

The recession in the Turkish economy has a certain negative impact on Russian-Turkish economic results. Last year, Turkey became Russia’s sixth largest trading partner. In particular, it accounts for a considerable share of Russian exports of metals, grain and, most importantly, energy carriers (the second, after Germany, importer of oil in the world). In February, according to Gazprom, the export of Russian gas to non-CIS countries decreased by 13% in annual terms. The company said the main reasons behind the decrease were the warm weather in Europe and the crisis in Turkey.

The Russian economy has succeeded in adapting to the extensive sanction pressure from Washington and, it looks like the Trump administration has now chosen to “attack from the flank”, targeting one of Moscow’s major foreign economic partners. It would not be a mistake to assume that the ability of the Turkish leadership to resist pressure from its “strategic ally” and NATO partner in the near future will largely determine not only economic, but also political relations between Moscow and Ankara. 

First published in our partner International Affairs

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Economy

Ambiguity in European economic leadership

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Europe’s economic situation remains uncertain! The European economic crisis and austerity policies remain in place. On the other hand, there is no sign that the EU is passing through the current situation. Two conservative /Social Democrats in Europe have not been able to effectively counteract the economic crisis over the last few years.

 This same issue has led to anger by European citizens from traditional European parties. Subsequently, the trend of European citizens to nationalist and extremist parties has increased in recent years.

The events that have taken place in France in recent months have led to disappointment with the eurozone leaders over the current deadlock.The most important point is that Macron was planned to assume the title of the Europe’s economic leader in the short term, and that was to be after succeeding in creating and sustaining economic reforms in France and the Eurozone.

 Meanwhile, European citizens expressed their satisfaction with the election of Macron as French President in 2017. They thought that the French president, while challenging austerity policies, would strengthen the components of economic growth in the European Union. Moreover, EU leaders also hoped that Macron’s success in pursuing economic reforms in France would be a solid step in pushing the entire Eurozone out of the economic crisis.

 In other words, in the midst of anti-Euro and extremist and far-right movements in Europe, Macron was the last hope of European authorities to “manage the economic crisis” which was raising inside the Eurozone: the hope that has soon faded away!

The main dilemma in France is quite clear!”Failing to persuade French citizens” on his economic reforms, and Macron’s miscalculations about the support of French citizens for himself, were among the important factors in shaping this process. Macron had to give concessions to protesters to prevent further tensions in France.

 After the country’s month-long demonstrations, Macron was forced to retreat from his decision on raising the fuel price. Besides, he had no way but to make promises to the French citizens on issues such as raising the minimum wages and reducing the income tax. This had but one meaning: Macron’s economic reforms came to an end. Right now, European authorities know well that Macron is incapable of regaining his initial power in France and the Eurozone by 2022 (the time for the France general elections).

 Therefore, Macron has to forget the dream of EU’s economic leadership until the last moments of his presence at the Elysees Palace. Of course, this is if the young French president isn’t forced to resign before 2022! The European authorities and the Eurozone leaders have no alternative for Macron and his economic reforms in Europe. That’s why they’re so worried about the emergence of anti-EU movements in countries such as France and Germany.

 For example, they are well aware that if Marin Le Pen can defeat Macron and come to power in France during the upcoming elections, then the whispers of the collapse of the Eurozone, and even the European Union, will be clearly heard, this time with a loud voice, all over the Europe.

First published in our partner Tehran Times

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Economy

Economic integration: Asia and the Pacific’s best response to protectionism

Armida Salsiah Alisjahbana

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Deepening economic integration in Asia and the Pacific is a longstanding regional objective. Not an end in itself but a means of supporting the trade, investment and growth necessary to achieve the 2030 Agenda for Sustainable Development. It is a priority for all member states of the United Nations Economic and Social Commission for Asia and the Pacific (UN ESCAP). China has a valuable contribution to make so I am beginning 2019 with a visit to Beijing. One to discuss with Chinese leaders how we can strengthen our collaboration and accelerate progress.

The case for deeper integration in Asia and the Pacific is becoming increasingly apparent. Recent trade tensions highlight Asia and the Pacific’s vulnerability to protectionism from major export markets. UN ESCAP analysis shows how regional supply chains are being disrupted and investor confidence shaken. Export growth is expected to slow and foreign direct investment to continue its downward trend. Millions of jobs are forecast to be lost, others will be displaced. Unskilled workers, particularly women, are likely to suffer most. Increasing seamless regional connectivity – expanding the infrastructure which underpins cross border commercial exchanges and intraregional trade – must be part of our response.

We should build on the existing Asian transport infrastructure agreements UN ESCAP maintains to further reduce regulatory constraints, costs and delays. For instance, UN ESCAP members are working to improve the efficiency of railway border crossings along the Trans-Asian Railway network. There is great potential to improve electronic information exchange between railways, harmonise customs formalities and improve freight trains’ reliability. The recent international road transport agreement between the governments of China, Mongolia and the Russian Federation grants traffic rights for international road transport operations on the sections of the Asia Highway which connect their borders. We should expand it to other countries. There is also huge opportunity to develop our region’s dry ports, the terminals pivotal to the efficient shipment of sea cargo to inland destinations by road or rail. A regional strategy is in place to build a network of dry ports of major international significance. UN ESCAP is looking forward to working with China to implement it.

Sustainable energy, particularly cross-border power trade, is another key plank UN ESCAP member States’ connectivity agenda. Connecting electricity grids is not only important to meet demand, ensure energy access and security. It is also necessary to support the development of large-scale renewable energy power plants and the transition to cleaner energy across Asia and the Pacific. The fight against climate change in part depends on our ability to better link up our networks. ASEAN’s achievements in strengthening power grids across borders is a leading example of what political commitment and technical cooperation can deliver. At the regional level UN ESCAP has brought together our region’s experts to develop a regional roadmap on sustainable energy connectivity. China is currently chairing this group.

For maximum impact, transport and energy initiatives need to come in tandem with the soft infrastructure which facilitates the expansion of trade. UN ESCAP analysis ranks China among the top trade facilitation and logistics performers in our region. This expertise contributed to a major breakthrough in cross-border e-commerce development and ultimately led to a UN treaty on trade digitalisation. This has been adopted by UN ESCAP members to support the exchange of electronic trade data and documents and signed by China in 2017. Now, UN ESCAP is working to support the accession and ratification of twenty-five more countries who recognise the opportunity to minimise documentary requirements, promote transparency and increase the security of trade operations. Full implementation of cross-border paperless trade in Asia and the Pacific could reduce export costs by up to 30 percent. Regional export gains could be as has high as $250 billion.

As we look to the future and work to accelerate progress towards the 2030 Agenda’s Sustainable Development Goals, economic integration must remain a priority. A strong UN-China sustainable development partnership is essential to take this agenda forward and strengthen our resilience to international trade tensions and economic uncertainty. Working with all the countries in our region, we have a unique opportunity to place sustainability considerations at the heart of our efforts and build seamless regional connectivity. That is an opportunity, which in 2019, UN ESCAP is determined to seize.UNESCAP

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