US Sanctions On Iran Oil Exports – Reactions And Implications

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On the last night of 2011, US signed some of the toughest sanctions to date in a bid to coerce Iran into abandoning its nuclear program. The sanctions have wide-reaching impact as they target Iran’s crucial oil sector, and also the financial institutions of any country doing business with Iran’s Central Bank. Financial institutions that do business with the Iranian Central Bank will be barred from operations in the US, and not many countries are able to risk exclusion from the world’s largest economy, or angering its only superpower. This has led to a scramble by countries around the globe who import Iranian oil to either find an alternative oil supplier, or negotiate with Washington for a waiver from the sanctions.

In retaliation, Iran has threatened to close the vital oil lane of the Strait of Hormuz. While this would be a disaster for world oil supply and international trade if the Strait was permanently or even impaired for a short period, the reality is that the Strait is just as vital for Iran as the rest of the world.

Analysis

The European Reaction

The EU, pushed on by France and Britain, has also considered a new round of sanctions on Iran, just stopping short of an all-out embargo on Iranian oil. Iran responded to the threat from the EU with anger, likening the “bullying” by other nations and the new sanctions to “economic war.”

Spain, Italy, Greece and the Netherlands are some of the EU’s largest importers of Iranian oil and are pushing for a “phased approach” to an oil embargo, as the delicate economies of these countries could not weather an oil price shock if an embargo were to be suddenly enforced. For Italy especially a phased approach is essential, as Iranian oil imports serve to repay huge debts owing to Italy’s national oil company Eni from Iran. Britain, who has suffered a souring of relations with Iran in recent months, is especially prominent in the voices calling for stronger action against the country.

Despite the push for sanctions and an embargo, the EU is also awaiting an official response from Tehran over an invitation sent in October 2011 to resume negotiations on Iran’s nuclear program. While Iran has unofficially stated it is willing and even eager to return to negotiations, many are viewing the lack of formal reply as a bid to gain time and continue with the nuclear program before entering into another round of negotiations. Turkey is the most likely mediator for any future negotiations held between Iran and the EU.


However, Russia has been displeased by the unilateral sanctions imposed by the US, stating that negotiations alone were sufficient to deal with the Iranian nuclear question. In a defiant move, Moscow has gone ahead with plans to phase out the use of the US dollar in its trade relations with Iran, using instead the ruble and rial for trading with Iran.

 

 

The Asian Reaction

The reaction to new sanctions from the US has been mixed in Asia, where a large portion of Iranian oil is imported. China has opposed the US sanctions, saying it will continue to trade directly with Iran, although they have significantly downgraded the amount of oil they are importing in the last week. This could be seen as a bid to let the sanctions squeeze Iran, after which China will be in a good position to bargain for cheap oil prices on the promise of increasing the import orders.

For most countries that import oil from Iran, the threat of being excluded from the US market and angering the US are too great to ignore. However, China has been enraged by the unilateral US decision which it says places US domestic law above international law, and is coercive and impinges on the free functioning of other country’s foreign and trade relations.

India is said to be applying for a waiver from the US as well, although Indian efforts to reduce reliance on Iranian oil began last year after India had trouble finding a payment route for trade with Iran.

Pakistan’s foreign minister Hina Rabbani Khar stated that neither UN nor US sanctions on Iran will affect its deal of import of gas. She said though ‘Pakistan is bound to accept UN sanctions but has not accepted any pressure in this connection’. She clarified that different kinds of sanction have been imposed by UN, US and European Union and that the import of gas does not fall under the UN sanctions. She said Pakistan is suffering from acute gas shortage and will utilize all option to meet its needs.

Japan and South Korea are especially concerned, as both countries are heavily reliant on energy imports and are also in no position to oppose the sanctions, as China has done. Japan relies on the US for most of its national defense, so has no real option but to comply with the sanctions, however much it may hurt the Japanese energy market, especially since most of Japan’s nuclear energy production was halted after the earthquake and tsunami of March 2011. Japan and South Korea are set to enter into negotiations with the US for a waiver from the sanctions in order to minimize the impact of weaning themselves off Iranian oil.

The Middle East

Saudi Arabia was quick to offer its services with filling any supply gap created by the reduction in Iranian oil imports created by the sanctions and pending EU embargo. It similarly shored up oil supply when Libyan oil was unavailable during the military operations in 2011. The Saudi’s view Iran as their biggest threat for dominance in the region, particularly in the shifting landscape of a US-free Iraq, now dominated by a Shiite majority and the threat of continuing civil unrest.

Iran has used the turmoil in the Middle East to further its influence, particularly through proxies Hamas and Hezbollah which are widely viewed as the shadowy hand of Iranian control in Lebanon and the Palestinian Occupied Territories.

Conclusion

It is clear that the sanctions are not only going to impact Iran, but any country continuing to have dealings with Iran. The sanctions have also created an economic leverage for US, in addition to the hard power, which it can use over other countries based on its interests. While European powers, such as France and the UK, have supported tougher sanctions, the emerging powers of Russia and China prefer a negotiated settlement. The budding economies of the BRIC need to have a consisted supply of energy to maintain the trend.

Additionally, as PoliTact has previously pointed out, the harsher economic penalties against Iran prove that the security concerns are taking precedence over the potential benefit of International trade, in every region of the world. This trend is resulting in serious complications for nations like Pakistan that can benefit greatly from trade with India, Afghanistan and Iran. The Iran-Pakistan gas pipeline project could also ultimately fall prey to the new sanction regimes against Iran.