Complex Made Simple

A blow by blow of Iran’s debacle as the Nov. 5 deadline looms

Ever since US president Donald Trump pulled out from the Joint Comprehensive Plan of Action (JCPOA) in May, the international agreement regarding what Iran can and cannot do with its nuclear programme, the country has been deliberating how to get out of this mess.

Now, some major companies are pulling out of the country in response to these sanctions. If Iran’s oil exports are halted, the biggest damage that the region will witness is the volatility of future oil prices and at best an unstable economic environment.

What do the sanctions entail?

Iran’s economy has been under strenuous strain throughout the decade. Prior to JCPOA, sanctions were put in place by the UN, US and EU in an attempt to make Iran halt its nuclear programme. This proved devastating for the economy, costing the country more than $160bn in oil revenue from 2012 to 2016 alone, the BBC reports.

Now, Trump has plans for several sanctions on the country, the first phase of those having been reinstated as of August 7. Another sanctions phase will follow on November 5.

The August sanctions, according to the US Treasury Department and reported by CNBC, are as follows:

– Sanctions on Iran buying or acquiring U.S. dollars

– Sanctions on Iran trading gold and other precious metals

– Sanctions on Iran’s sale, supply or trade of metals such as aluminum and steel, as well as graphite, coal and certain software for “integrating industrial processes”

– Sanctions on “significant” sales or purchases of Iranian rials, or the maintenance of significant funds or accounts outside the country using Iranian rials

– Sanctions on issuing Iranian debt

– Iranian auto sanctions

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The November sanctions entail:

– Sanctions on Iran’s ports, as well as the country’s shipping and shipping sectors

– Sanctions on buying petroleum and petrochemical products with a number of Iranian oil companies

– Sanctions on foreign financial institutions transacting with the Central Bank of Iran and other Iranian financial institutions

– Sanctions on the provision of certain financial messaging services to Iran’s central bank and other Iranian financial institutions

– Sanctions on the provision of underwriting services, insurance, or reinsurance

– Sanctions on Iran’s energy sector

 Major corporations pulling out

Trump announces his intention to withdraw from the JCPOA nuclear agreement. Source: Reuters

Last week, and on the cusp of the reinstatement of the sanctions, CNN reported that Daimler, the maker of Mercedes-Benz cars, has suspended its activities in Iran “until further notice according to applicable sanctions.” The German manufacturer had announced plans in 2016 to return to Iran after the implementation of JCPOA that year.

The automotive industry is among those addressed by Trump’s sanctions, so this move by Daimler does not come as a surprise.

Peugeot proceeded to quit its business dealings in the country as well, closing down its joint ventures with local Iranian companies starting in June.

Analyst firm S & P Global reported that French oil giant Total is also reconsidering its investment in the country, currently holding a dominant 50.1% stake in the vast South Pars gas field. Total is considering whether to relinquish its share of the project to China National Petroleum Corp. (CNPC), which holds a 30% stake.

Energy giant General Electric is also expecting to pull out of the country by November, the Washington Examiner reports.

Several other big names such as Siemens, Boeing and Maersk are all pulling out, Forbes reports.

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Oil sector to take a hit?

Iran’s oil sector could stand to take the greatest hit in the country. CNN estimates that Iran pumps out 3 million barrels per day.

Following the US’ sanctions, the Times of India reports that analysts are predicting that Iran could still see its oil sales drop by around 700,000 barrels per day (bpd) from their current level of around 2.3 million. This would prove catastrophic, especially given the civil unrest that has arisen recently in response to a sanction-influenced economy.

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Currently, Iran’s bpd rate has dropped by 430,000 bpd from April, Bloomberg reports.

It is important to remember that while Trump could be throwing his weight around in regards to Iran and JCPOA, the US is not the only country involved in the agreement. China, France, Germany, the EU, Iran, Russia, and the United Kingdom are all members, and not all of them agree with Trump’s decision. The EU, for one, has opposed the US move.

China and India (which is not part of JCPOA) account for roughly half of Iran’s oil sales, the Times of India reports. China ranks first, and India second. As it currently stands, two industry sources told Reuters, “(India) has asked refiners to be prepared for any eventuality, since the situation is still evolving. There could be drastic reduction or there could be no import at all.” If India does falter, Iran could see a huge loss in its fossil fuel revenue.

To counter this, Iran is selling oil and gas at a discount to Asian customers as it prepares for the return of US sanctions, Iran’s national news agency IRNA announced yesterday based on information from a knowledgeable source. The agency has not mentioned the sanctions as the cause of this drop in sale price, with the source saying that “Discount is part of the nature of the global markets being offered by all oil exporters.”

China, for one, has not halted the purchase of the country’s oil.

A decrease in the export of Iranian oil would surely benefit the GCC’s local production, as countries bailing on the country’s oil look to power their energy grids from another source.

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