On May 8, 2018, President Donald J. Trump announced that The United States would unilaterally withdraw from the July 2015 JCPOA Treaty.
The P5 + 1 Treaty had defined a strong limitation of Iran’s production of fissile material, in exchange for a partial lifting of trade sanctions, not only in the oil sector.
On November 5, 2018, the USA reintroduced a vast series of sanctions against Iran, with the obvious and immediate effect of pushing the Brent barrel price to 73.17 US dollars.
It should be recalled that the Brent Crude is one of the three oil price benchmarks, which derives from the trading criteria of the oil extracted in the North Sea, for which there are other types such as Forties, Osemberg and Ekofisk, known with the generic name of BFOE.
Brent is the easiest oil to refine and also to transport and is therefore the most commercialized type.
The other benchmarks are the West Texas Intermediate (WTI) and the Dubai-Oman. But there are also others, which are less widespread and commercialized.
Hence the criterion of US sanctions against Iran – which have never been so harsh – is eminently political.
This happens despite the fact that the International Atomic Energy Agency (IAEA) – the UN agency located in Vienna, which monitors the proper implementation of the JCPOA, from which the USA has unilaterally walked out -maintains that, before the US withdrawal, Iran did not infringe the rules of the 2015 agreement on the extraction and production of enriched uranium and plutonium.
Therefore the United States wants to reach an economic crisis of such intensity that the Iranian people themselves cannot fail to turn against the Shiite regime to overthrow it definitively.
Hence an “Arab spring” in a non-Arab country, triggered not by returning jihadists – as happened in Cyrenaica against Gaddafi’s Libya – but by a very severe economic crisis.
What if the oil sale crisis triggered a new production mechanism in Iran? And what if the energy geopolitics of Central Asia were not so prone to US wishes?
As certified by the International Monetary Fund, Iran went into recession precisely because of renewed US sanctions.
Can we believe that, in the Internet era, the Iranian people do not know it?
Vaste programme en effet, as General De Gaulle used to say. A vast program indeed was the one of the “Arab spring” induced by the economic crisis – like all the others, which failed miserably. As demonstrated by Germany in the 1930s, by the USA after 1929, by Italy after the Euro, by Argentina after Economy Minister Domingo Cavallo and by many other dollarized and later abandoned countries, the political effects of a severe recession are never predictable.
President Trump and his ruling class said they wanted “to reduce Iranian oil exports to zero”.
Well, but how? Preventing the USA, China, Russia and India from buying the Iranian oil, right now that oil contracts denominated in renmimbi are starting in China – some of them precisely with Iran?
What would happen if – as history has taught us, even recently – the people united even more with the Iranian political elite?
This could also happen, considering that the sanctions enable the Iranian Shiite regime to become the only de facto distributor of prebends, income and support for all the Iranian crowds.
Only with tolerance for the parallel shadow economy, which is already thriving in Iran, can the Shiite regime stay in power without much trouble.
On top of it, the project of the Iranian Shiite regime could be to widen the already great divide between Europe and the United States, so as to later use the EU to avoid the US sanctions altogether.
France, Germany and Great Britain have recently registered a Special Purpose Vehicle (SPV) to avoid the US sanctions.
How does this SPV work? In essence, it is a company specialized in a securitization operation.
The SPV becomes the transferee of groups of homogeneous securities to be allocated to the service of what it issues to fund the operation itself.
The INstrument in Support of Trade EXchanges (INSTEX) concretely operates to provide services that favour trade between the EU and Iran.
It is not a bank, but it coordinates all EU payments to Iran, given that the Iranian exporters want and buy Euros to trade, obviously, with the EU, but the European banks are very reluctant to accept Euro funds originated in Iran.
Considering that the US sanctions affect anyone who trades with Iran, the EU banks are in fact afraid of being totally excluded from the North American market, as would actually be the case according to the rules recently enacted by President Trump.
Certainly the European States, which are always so fearful of the USA, even when it would not be needed, have not set up such a company for nothing.
And indeed, in early 2017, European food exports to Iran were worth 298 million euros, while EU similar imports from Iran totaled 292 million euros.
EU medicine exports amounted to 951 million euros and imports were slightly lower.
In short, INSTEX should work well, although for small amounts. However it will operate, above all, as a mask for EU contracts with Iran and as supplier of euros to Iran, after the creation of derivatives.
Will this be enough? We do not believe it.
But let us revert to oil.
With the new US sanction regime, the United States has accepted – with a six-month renewal to be negotiated at each expiry date – that only six countries can still buy oil and its by-products from Iran.
These countries are China, Japan, South Korea, Taiwan, India, Turkey, Greece and Italy.
Italy – a diligent child with some need for US funding and political support to avoid being sanctioned – has already canceled purchases from Iran.
Iraq hasalso been given a specific 90-day time limit, as from March 2019, to keep on buying energy from Iran, considering the stable electricity and energy crisis in that country.
It should be recalled that, in 2017, the above mentioned six countries received over 75% of Iranian oil and by-products exports of that year. Nevertheless, after the second cycle of US sanctions, only three countries have continued to buy much oil from Iran, namely Turkey, China and India.
Thus Iranian oil production fell from 3.8 million barrels a day in May 2018 to 2.7 million barrels a day in December 2018.
We will analyze the current data, which has strong geopolitical relevance.
Cui prodest? Probably only Russia.
In all likelihood, the growth of oil exports requested to OPEC by President Trump will be accepted both by Saudi Arabia, which always needs to sell, and – above all – by the Russian Federation, which follows the fluctuations of the Saudi OPEC and also needs to cash fresh liquidity quickly.
Japan, however, is satisfied with the pace of oil imports from Russia.
Furthermore, China is also right in expecting an increase in Russian natural gas imports via the “Power of Siberia” pipeline.
We cannot still rule out the possibility of a further pipeline bringing Russian gas from the North, through North Korea, to South Korea.
Another piece of the Iranian puzzle, given the excellent relations between North Korea and Iran – also at military level.
The bank assets frozen as a result of the current US sanctions are above all 1.9 billion US dollars of the Central Bank of Iran in US banks, as well as additional 50 million US dollars strictly owned by diplomats. Also the proceeds of the British Assa Company, which controls the interests and stakes of Bank Melli in New York, are still frozen in the United States, with many real estate properties owned in various US States, as well as the funds to compensate the victims of Iranian terrorism – an asset which is worth 46 billion dollars.
After the second and current cycle of sanctions, in the USA there are still 38 entities, mainly dealing with oil and gas, which are officially and collectively named Execution of Imam Khomeini Order (EIKO).
However, the “policy line” of Iran’s Revolutionary Guards that dominate much of the Iranian economy is still in place.
It should be recalled that the Pasdaran policy line is to widen the economic and political gap between the EU and the USA.
In fact, shortly the Iranian government will announce that it has granted to Iran’s Revolutionary Guards as many as five of the seven oil exploration areas not yet officially disclosed.
One of these areas will be a substantial portion of the large oil site of Yadavaran.
With Sinopec, China has already stopped oil exploration in Yadavaran, because it wants Iran to pay all the fines that may possibly be imposed by the USA for any breaking of sanctions.
Obviously the funds coming from the exploitation of the new section of the Yadavaran oil site can be used by the Pasdaran to finance the Hezbollah and all the other Shiite guerrilla activities in the Middle East and in the rest of the world.
It should be recalled that the Pasdaran control as many as 27 Iranian oil companies and the Revolutionary Guards’ network also controls as many as 200 Iranian companies, which have many different goals.
The idea of the above mentioned European “vehicle” will be the main instrument of the Pasdaran operation on oil and natural gas.
They will accumulate euros in the EU importers’ coffers to reach such a level of EU currency to be received in bilateral trade as to stimulate Iran’s economy, including the oil-based one.
From the substitution of imports to the substitution of the trading currency – this is the Revolutionary Guards’ project.
The EU, however, has always maintained that Iran has never broken the terms of the JCPOA Treaty and this is what also CIA states.
The triangular trading system, however, has already been organized.
The USA has promised Germany – the actual EU leader – that, if Europe accepts US sanctions on Iranian oil, it will never impose sanctions on Iran’s natural gas, which is also the EU’s real commercial target.
Hence if the gas and petchem trade between Iran and the EU increases, the likelihood of a US military attack against the Islamic Republic of Iran will decrease proportionally, unless the USA materially closes the strategic route of the Iranian oil and gas trade, namely the Strait of Hormuz.
Otherwise, the way out for Iran would be standard sales to Russia, with a 50 billion US dollars of annual payments by the latter, to have preference over Iran’s entire oil and gas sector, as well as increase military collaboration, and finally achieve Russia’s de facto control over Iran’s oil and gas production.
Iranian exports, however, keep on rising.
In March, Iranian oil exports reached 1.7 million barrels a day, with a 70% increase compared to the previous three months.
The peak was reached in April 2019, with 2.8 million barrels a day – an average of 2.4 million crude oil barrels per month over the previous three months.
One of the main reasons for this peak in Iran’s oil is the Chinese demand – oil that China can now buy at a discount thanks to the US sanctions.
With the second cycle of US sanctions China is allowed to buy 360,000 crude oil barrels.
Obviously it will continue to buy what it needs even after the US sanctions being fully effective.
However – as the Saudi intelligence services claim -whatever happens, at the end of the sanction regime, the reduction in Iranian oil sales is expected to be40% on oil and by-products.
This is a minimum, but stable limit for the Iranian Shiite regime to stay afloat.
But this will not substantially change the relations between the Shiite government and the big crude oil importers that will still be able to change, divert and silence the new US sanctions.
China Development Bank could be a climate bank
Development Bank (CDB) has an opportunity to become the world’s most important
climate bank, driving the transition to the low-carbon economy.
CDB supports Chinese investments globally, often in heavily emitting sectors. Some 70% of global CO2 emissions come from the buildings, transport and energy sectors, which are all strongly linked to infrastructure investment. The rules applied by development finance institutions like CBD when making funding decisions on infrastructure projects can therefore set the framework for cutting carbon emissions.
CDB is a major financer of China’s Belt and Road Initiative, the world’s most ambitious infrastructure scheme. It is the biggest policy bank in the world with approximately US$2.3 trillion in assets – more than the $1.5 trillion of all the other development banks combined.
Partly as a consequence of its size, CDB is also the biggest green project financer of the major development banks, deploying US$137.2 billion in climate finance in 2017; almost ten times more than the World Bank.
This huge investment in climate-friendly projects is overshadowed by the bank’s continued investment in coal. In 2016 and 2017, it invested about three times more in coal projects than in clean energy.
scale makes its promotion of green projects particularly significant. Moreover,
it has committed to align with the Paris Agreement as part of the International Development Finance
Club. It is also
part of the initiative developing Green Investment Principles along the BRI.
This progress is laudable but CDB must act quickly if it is to meet the Chinese government’s official vision of a sustainable BRI and align itself with the Paris target of limiting global average temperature rise to 2C.
What does best practice look like?
In its latest report, the climate change think-tank E3G has identified several areas where CDB could improve, with transparency high on the list.
The report assesses the alignment of six Asian development finance institutions with the Paris Agreement. Some are shifting away from fossil fuels. The ADB (Asian Development Bank) has excluded development finance for oil exploration and has not financed a coal project since 2013, while the AIIB (Asian Infrastructure Investment Bank) has stated it has no coal projects in its direct finance pipeline. The World Bank has excluded all upstream oil and gas financing.
In contrast, CDB’s policies on financing fossil fuel projects remain opaque. A commitment to end all coal finance would signal the bank is taking steps to align its financing activities with President Xi Jinping’s high-profile pledge that the BRI would be “open, green and clean”, made at the second Belt and Road Forum in Beijing in April 2019.
CDB should also detail how its “green growth” vision will translate into operational decisions. Producing a climate-change strategy would set out how the bank’s sectoral strategies will align with its core value of green growth.
CDB already accounts for emissions from projects financed by green bonds. It should extend this practice to all financing activities. The major development banks have already developed a harmonised approach to account for greenhouse gas emissions, which could be a starting point for CDB.
Lastly, CDB should integrate climate risks into lending activities and country risk analysis.
One of the key functions of development finance institutions is to mobilise private finance. CDB has been successful in this respect, for example providing long-term capital to develop the domestic solar industry. This was one of the main drivers lowering solar costs by 80% between 2009-2015.
However, the extent to which CDB has been successful in mobilising capital outside China has been more limited; in 2017, almost 98% of net loans were on the Chinese mainland. If CDB can repeat its success in mobilising capital into green industries in BRI countries, it will play a key role in driving the zero-carbon and resilient transition.
From our partner chinadialogue.net
Oil-Rich Azerbaijan Takes Lead in Green Economy
Now that the heat and dust of Azerbaijan’s parliamentary election on February 9thhas settled, a new generation of administrators are focusing on accelerating the pace of reforms under President Ilham Aliyev, who has ambitious plans to further modernise its economy and diversify its energy sources.
Oil and gas account for about 95 percent of Azerbaijan’s exports and 75 percent of government revenue, with the hydrocarbon sector alone generating about 40 percent of the country’s economic activity. Apart from providing oil to Europe, Azerbaijan successfully completed the Trans-Anatolian Natural Gas Pipeline (TANAP) with Turkey in November 2019 to transfer Azerbaijani gas to Europe.
Yet, with an eye on the future, the country has also begun to take huge strides in renewable energy. Solar and wind power projects have been installed, with their share in total electricity generation already reaching 17 percent. By 2030, this figure is expected to hit 30 percent.
Solar power plants currently operate in Gobustan and Samukh, as well as in the Pirallahi, Surahani and Sahil settlements in Baku.
The potential of renewable energy sources in Azerbaijan is over 25,300 megawatts, which allows generating 62.8 billion kilowatt-hours of electricity per year. Most of this potential comes from solar energy, which is estimated at 5,000 megawatts. Wind energy accounts for 4,500 megawatts, biomass is estimated at 1,500 megawatts, and geothermal energy at 800 megawatts.
President Aliyev has supported the drive for renewable energy. He signed a decree in 2019 to establish a commission for implementing and coordinating test projects for the construction of solar and wind power plants.
Azerbaijan’s focus on renewable energy has drawn interest from its European partners, with leading French companies seeking to invest in the country’s solar and wind electricity generation.
Azerbaijan is France’s main economic and trade partner in the South Caucasus. According to French ambassador Zacharie Gross, “the French Development Agency is ready to invest in Azerbaijan’s green projects, such as solid waste management. This would allow using new cleaner technologies to reduce solid waste. This is beneficial for the environment and the local population.”
“I believe that one of the areas that have greatest development potential is urban services sector. An improved water distribution system can reduce the amount of water consumed, improve its quality, and also solve the problem of flood waters in winter,” the French ambassador added.
Azerbaijan is currently a low emitter of greenhouse gases that contribute to climate change. According to the European Commission, the country released 34.7 million tons of CO2 into the atmosphere in 2018, i.e. just 3.5 tons per capita. This is lower than the norm adopted by the world: 4.9 tons.
In contrast, in 2018 Kazakhstan generated 309.2 million tons of CO2, Ukraine generated 196.8 million tons,Uzbekistan101.8 million tons, and Belarus 64.2 million tons.
And the amount of carbon dioxide emitted by Azerbaijan has been consistently falling. In 1990, Azerbaijan emitted 73.3 million tons, but in 2018 this had dropped to 34.7 million tons. By 2030 the country plans to reduce its annual greenhouse gases emissions by a further 35 percent.
Measures taken by the government include the early introduction of Euro-4 fuel standards in Azerbaijan, with A-5 standards to be introduced from 2021. An increasing number of electric buses and taxis are now transporting passengers in the main cities.
Another key step is the clean-up of the environmental degradation caused by over 150 years of oil production. Azerbaijan’s state oil company SOCAR is helping to recover oil-contaminated lands in Absheron Peninsula, particularly in the once critically contaminated area around Boyukshor Lake. This involves the removal of millions of cubic metres of soil contaminated with oil.
Azerbaijan is also reducing the amount of gas it wastes in flaring. In a study funded by the European Commission, Azerbaijan ranks first among 10 countries exporting oil to the EU in the effective utilisation of associated petroleum gas.The emission of associated gases decreased by 282.5 million cubic meters from 2009 through till 2015. This is expected to fall further to 95 million cubic meters by 2022.
The government is also encouraging large-scale greening of the land. In December 2019, a mass tree-planting campaign was initiated by First Vice President Mehriban Aliyeva to celebrate the 650thanniversary of famous Azerbaijani poet Imadeddin Nasimi. 650,000 trees were planted nationwide, including 12,000 seedlings that were delivered by ship to Chilov Island.
A 2018 survey, carried out in cooperation with Turkish specialists, found that forest area is 1.2 million square meters in Azerbaijan, i.e. 11.4 percent of the total area of the country.A new requirement was introduced last year to halt deforestation and to reduce the negative impact of business projects on the environment.
For a country with the 20th largest oil reserves in the world, Azerbaijan could well have chosen to stick to a hydrocarbon future. But it has instead dared to think beyond oil and gas in its energy, transportation, economy and environment. The country is setting a template that should inspire other large oil producers to emulate.
China-US: How Long Will the Phase One Agreement Hold?
Although the recently signed Phase One agreement between the US and China has put a halt to the ongoing trade war between the two global economic superpowers, it cannot be viewed as a long-term solution. At its best, it is a temporary truce. The language of the eighty-six page document, including its ambiguities and the unrealistic promises upon which the entire agreement is based, suggests that it is based on two unreconcilable compromises between the two parties.
Some of the main highlights of the deal include: China must give an action plan on “strengthening intellectual property protection” and it must reduce the pressure on international companies for “technology transfer.” China has promised to increase the purchase of goods and services from US by $200 Billion over two years. Other key points include easy access to Chinese markets. The 15th December tariffs of $160 Billion have been delayed in December 2019. Tariff rates on $120 bn of goods (imposed on September 01, 2019) have been reduced from 15 to 7 percent although tariffs of $250 Billion at a rate of 25 percent will remain.
The 86 page document, when analyzed, displays an ambiguity in its language, as well as the absence of any enforcement plan and dispute settlement process. Therefore, whenever an issue might arise (and it will) there is a likelihood the deal may implode. For instance, whilst mentioning enforcement of payment of penalties and other fines, the word “expeditious” remains unclear. What is the time period and how will enforcement be accomplished? At another point, while referring to China to send a case for criminal enforcement the word “reasonable suspicion” which can be based on “articulable facts” makes it very abstract. Chad Brown, a trade expert in an article for Business Insider, says that there is no specific way mentioned in the document to penalize the party who violates any provision. Moreover, there is no body (like WTO) that will take decisions but is rather left to the USTR and discussions with Chinese counterparts – a recipe for confusion.
Then there are the promises. But we have to consider different variables. But if it turns out that China carries out its promise to buy crude oil, LNG and coal, the global commodity markets will feel the heat – in a negative way. Under the agreement China will buy an additional $52 bn of energy products in the span of coming two years- 418.5 Billion in 2018 and $33.9 in 2021. This year China will have to buy about $27 Billion energy purchases from U.S. To put this in context, China imported 14 million barrels of oil in November 2018 which is its highest ever. Assuming that China buys the same amount for 12 months it would yield only $9 to $10 billion in revenue! In a similar calculation for coal and LNG, Clyde Russell, in an article for Reuters, concludes that in order to fulfill the above target (of $27 Billion) China would have to double the amount of these imports from US!
Moreover, the Phase One agreement has a snapback clause which implies that upon quarterly reviews if the Chinese side isn’t holding true to their promises the agreement can become null and void.
Even if China fulfills its promise, the purpose wouldn’t be served: the US. deficit won’t reduce significantly. The US trade deficit with China for the first 10 months of 2019 was $294 Billion – in other words, roughly 40 percent of the country’s total trade gap. However, for the same period, Chinese sold goods more than four times that amount (or about $382 bn). China will need to half its exports to the U.S. for a “meaningful” drop in the deficit – something that seems highly unlikely.
Also, the US might even end up more dependent on China. Increased demand for US oil will spike its prices and might trigger other suppliers of China to increase their output in order to fight for the market share. The global energy and commodity markets could face disruption. Similarly, Brazil and other countries, beneficiaries of this trade war, can decrease soy bean prices in order to retain their market share, giving farmers in the US a tough time.
As the U.S. Treasury Secretary, Steven Mnuchin, said that tariffs can remain in place even after a Phase Two agreement, we, therefore, have to be patient and observe the trajectory of Phase One trade agreement carefully. Chinese promise of $200 bn purchases, the lack of a proper dispute resolution mechanism and technical loopholes in language puts the future of the agreement in doubt.
Both sides are keeping some cards in their deck; we have yet to witness the end of this trade-war saga.
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