Author: Kent Moors, Ph.D.
The Biden administration has taken initial steps to ascertain whether it is possible to bring the Iranians back to the table on a renewed JCPOA (Joint Comprehensive Plan of Action). JCPOA was the landmark accord by which the permanent members of the United Nations Security Council, the EU, and Germany said they would phase out earlier sanctions in return for an Iranian agreement to scale back nuclear development activities that could lead to weapons programs.
However, on May 8, 2018, the Trump administration announced a unilateral US departure from JCPOA, throwing the accord into disarray. In tandem with the departure, the White House reimposed sanctions against Iran with the intention of removing Iranian crude oil from the international market.
Trump intended to expand any agreement with Teheran to include restricting missile testing and support for terrorism. Neither of these is part of JCPOA. This means the US reneged on an international agreement for reasons having nothing to do with its compliance.
Under the accord, the International Atomic Energy Agency (IAEA) had been provided with unparalleled access to Iranian nuclear facilities. IAEA monitors acknowledged that Iran had abided by the dictates of JCPOA. Teheran subsequently restricted IAEA access and reopened its weaponing research program.
Toward the end of 2018, Washington increased the pressure by requiring a “zero barrel” approach from both US and foreign oil buyers, intending to cut off Iran from its main source of hard currency revenue. Failure to comply would result in the application of secondary US actions against violators.
When considering the declaration’s impact on US end users, it was almost entirely a public relations play. The American market receives virtually nothing in oil imports from Iran. Elsewhere, it is another matter. And that is where the pushback intensified. Because all other signatories (the UK, EU, France, Germany, Russia, and China) rejected the US approach and continued to abide by JCPOA.
Any attempt to bring Iran back into the fold will be a test of what is now a frazzled US posture in world affairs. As Classified Intelligence Brief readers will remember, my latest meetings with the Iranians and other interested parties indicated there is much damage to repair (“The Iranian Gambit,” October 19, 2020; “The Persian Gulf ‘Threshold’ and Earlier Times,” October 21, 2020; “Recalling a ‘Brown Snake’ as I Mark Time in Abu Dhabi,” October 23, 2020; and “It Feels Like the Lull Before a Storm,” October 26, 2020.
Well, my next meeting on the Persian Gulf crisis and posturing toward Iran is now scheduled to take place as early as late next month (pending the location of an European base for the meetings that overcomes the ongoing continental COVID lockdowns). I’ll have more to say about what is at stake when we are a bit closer.
But some contentious matters surrounding the US sanctions against Iran, which remain in force, are intensifying. Along with the continuing opposition, parties have managed to circumvent the impact of the sanctions altogether.
On one front, Europe met (sort of) a deadline from Teheran to fashion ways of avoiding the renewed US oil sanctions.
Moves already approved include direct connections between European central banks and Bank Markazi (the central bank of Iran), provisions to provide sovereign support to currency access, EU “blocking sanctions” (legislation intended to protect member nation businesses from the imposition of US secondary sanctions), and some sovereign nation credit guarantees.
The jury is still out on whether a combined London/Paris/Berlin/Brussels approach will be able enough. Everybody I know in the loop will acknowledge that a JCPOA without involvement from Washington cannot succeed in the long run.
None of my European, Russian, Chinese, Asian, or Middle Eastern contacts (other than some in the United Arab Emirates, at the time tied at the hip to the US) regarded the Trump objective of achieving a “better” nuclear accord with Iran than the JCPOA from which the US departed achievable. “You cannot scrap an agreement supported by all the other signatories and expect to negotiate a better version,” one noted. It’s a view widely shared elsewhere.
The predominant opinion saw the US sanctions moves as an attempt at regime change in Tehran. “This has zero chance of success,” an Iraqi source said. I do not have a single source from among the dozens involved in my discussions who would disagree with that assessment.
Nonetheless, European importers of Iranian crude hedged their bets by replacing with volume from other sources. Moscow had expected benefit from the switch. But, while some improvement has occurred, the prolonged Russian suspension of exports via the massive Druzhba pipeline because of throughput contamination and lingering concerns over follow up problems, tempered the advantage.
However, the other main battleground has been shaping up more clearly. China is taking a different approach – deciding to take on the US sanctions more directly.
More to the point, China’s route is one of defiance.
First, Beijing expanded imports of Iranian crude to multi-year highs in advance of the sanction renewal announcement. These were levels much beyond what the domestic market required short-term, necessitating rising storage expenses.
That was then followed by an import hiatus, at least in direct shipments. That ramped up again in mid-2018 and continued thereafter. The real test here was whether a new passthrough network fashioned by the Chinses administration could operate successfully.
That is the second point. US secondary sanctions against shippers, insurers, and financial intermediaries stymied Chinese imports of Iranian crude during the earlier episode of sanctions. Of course, then the sanctions had included moves by EU and the UN paralleling US action.
This time around, the UN had dropped its restrictions following the 2015 signing of JCPOA. Meanwhile, the EU openly opposed Washington on the sanction renewal.
Over the past two years, Beijing has been developing a system using its own tankers (or those that can be leased from others under Chinese guarantees, with some subject to a temporary reflag or reregistration), Chinese banking (supplemented by Singapore, Doha, Turkish, and other based fiduciary houses), and Chinese insurance.
This last aspect may be the most interesting change since the last sanction battle. Shipping insurance in China is largely covered by one monopoly, an insurer controlled by the main Chinese shipping lines themselves and, thereby, under heavy government leverage.
Last time, in the face of a combined US, EU, UN attack, the Chinese insurer threw in the towel. It told the Chinses tanker companies (i.e., the insurer’s own parents) that it could not cover liability. That would require the shippers themselves to shoulder the risk.
Iran attempted to use its own tankers and offer insurance provided by the Iranian national insurance network. But aside from a few short-haul arrangements, that alternative collapsed. Now, China may have had enough time to design a more sustainable domestic alternative than what it had in 2014 and the last collision with US policy.
Third, China retains an advantageous trading situation with Iran, as well as several of Iran’s other oil trading partners. It carries a trade surplus, the current payments account portion of which reducing the effective cost of evading the sanctions.
Much of Iranian oil can be purchased in kind with Chinese goods rather than hard cash. Surpluses with other countries likewise allow a broader connection to barter for oil, potentially evading much of what US secondary sanctions could counter.
Already, barter has been a prominent component in the Chinses approach to importing Iranian oil. That has been expanded to other importing markets, especially in the face of an ongoing trade war with the US.
Fourth, anecdotal indications have emerged that Chinese national oil company production abroad (in Kazakhstan and Iraq in particular) is being employed in contract swaps to facilitate Iranian crude movement into the international market under a “false flag” approach.
In Iraq, this is becoming increasingly paired with Iranian volume being smuggled out as Basra grade crude from southern Iraq. This was a problem in the last sanctions regimen as well. Both grades of crude are essentially the same with pipeline access currently in operation across the Shatt al Arab between the two countries.
These pipes had been intended to move raw material and finished product volume between fields and refineries on both sides. With the heavy Shiite population in southern Iraq, much of this business is effectively controlled by families residing on both sides of the border.
Additionally, broader contract swaps are being orchestrated using those producing countries having heavy debt obligations to Beijing. These combine loans provided to central governments and national oil companies. In some cases (e.g., Ecuador and Venezuela), these credit lines have resulted in the home government losing control over its own oil export revenue flow.
Fifth, several Asian and European sources have confirmed that Chinese sovereign credit and central bank protection has been surfacing in other markets on behalf of Iranian exports.
It remains uncertain how expansive these initiatives can become. Beijing does not want to be the global banker or risk underwriter for a massive international attempt to undermine US sanctions. The Chines domestic economy may be showing signs of slowing down and taking on such a preeminent position will put renewed pressure on the domestic currency.
Leading to a related, and sixth point. When Trump declared a resumption of the sanctions, debate started circulating over how energetically China wanted to replace dollar-denominated oil trade with trades denominated in yuan.
The primary advantage from so doing is called “seigniorage.” This is the reward occurring when other countries use your currency as the exchange mechanism for trade. The US has benefitted for more than four decades from “petrodollars,” dollars retained in foreign bank accounts to finance oil trade.
This amounts to an interest-free loan to the US. It allows for an increase in the printing of currency which, since the dollars are not repatriated to circulate within the American economy, is not inflationary (at least in the US).
But increasing the use of yuan in international oil import-export also carries the potential to distort the genuine value of what remains a government controlled (and artificially supported) currency backed by significant amounts of suspect domestic market credit.
All these elements result in an environment less efficient than direct trading, increasing Chinese import costs and reducing Iranian export revenues.
Also, as Beijing focuses on placing restrictions and tariffs on the import of US oil, oil products, and liquified natural gas, the worsening trade war may also impact on how far China is prepared to move in supporting Iran.
Beijing is watching developments in Europe closely to determine if there will be a breakthrough in structuring opposition to the US. If there is, there will be a Chinese (and Russian) move to latch on.
And then there is an even bigger issue facing Washington, one involving a rapidly developing national market even more dependent upon Iranian oil imports than is China.
Any Biden move to bring back JCPOA, therefore, will need to consider two overarching factors. First, the Trump sanction renewal, while still on the books, has been largely a failure. Second, all other participants have a right to question what the shelf life will be of any change. After all, such policy revisions seem to emerge at the whim of US elections. It took almost 13 years to negotiate JCPOA. The White House election cycle is at best only four years long.
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