The US and EU sanctions against the Islamic Republic of Iran

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.

Giancarlo Elia Valori
Giancarlo Elia Valori
Advisory Board Co-chair Honoris Causa Professor Giancarlo Elia Valori is a world-renowned Italian economist and international relations expert, who serves as the President of International Studies and Geopolitics Foundation, International World Group, Global Strategic Business In 1995, the Hebrew University of Jerusalem dedicated the Giancarlo Elia Valori chair of Peace and Regional Cooperation. Prof. Valori also holds chairs for Peace Studies at Yeshiva University in New York and at Peking University in China. Among his many honors from countries and institutions around the world, Prof. Valori is an Honorable of the Academy of Science at the Institute of France, Knight Grand Cross, Knight of Labor of the Italian Republic, Honorary Professor at the Peking University