Tension has been building following the US decision to withdraw from their nuclear deal with Iran last year. However, in recent months this tension has turned into threats. Washington has refused to extend sanction waivers for Iranian oil, which has seen huge impacts on the oil industry and wider Iranian Economy.
Accusations have been made by the Iranian Foreign Minister Mohammad Javid Zarif against US National security adviser John Bolton, stating that he is trying to incite war between the two countries. Bolton hit back against these claims however accusing Iran of spreading “Disinformation” and “Propaganda”
What has happened?
The US placed sanctions on Iran in an attempt to get them to align with the US vision on certain policies such as the nuclear deal and missile programmes.
When the US announced these sanctions, they placed waivers allowing the major eight countries they traded with to continue importing oil from Iran for 6 months, allowing them sufficient time to find a new seller. Three of those buyers did so, but five did not: China, India, Japan, South Korea and Turkey. It was thought that the US would allow a further 6 month extensions, however, this has not happened. From the 2nd of May, those countries won’t be covered by waivers anymore and could face sanctions if they continue to import Iranian oil beyond that date.
These sanctions that have been implemented bar US companies from trading with Iran, but also threated foreign firms and countries that are dealing with Iran.
What are the goals of the sanctions?
President Trump declared that he “Intended to bring Iran’s oil exports to zero” when he decided to allow the SRE waivers expire on 2 May.
US Secretary of State Mike Pompeo said on Monday, “The goal remains simple… to deprive the outlaw regime of the funds it has used to destabilise the Middle East for four decades, and incentivise Iran to behave like a normal country”.
Why are sanctions required?
The sanctions were aimed at cutting off Iran’s economic lifeline (Oil) in order to compel Tehran to listen and accept American demands. These demands included Tehran agreeing to sign an amended version of the nuclear agreement by giving up its right to enrich uranium and closing down all nuclear facilities. This is not only nuclear weapons programmes but also those engaged in research for peaceful purposes such as energy.
Washington also demanded that Iran significantly reduce its ballistic missile program. White House officials also expected Iran to change its policy in the Middle East. They have a history of supporting terrorist groups around the world including “al-Qaida, Hizballah, Hamas, the Taliban, and others”. The US has also designated Iran’s Islamic Revolutionary Guard Corps (IRGC) as a Foreign Terrorist Organization, putting the private sector on notice not to conduct business with them.
It is known that Iran has long used their oil revenues to destabilise the region including funding conflicts in Iraq, Syria, Lebanon, and Yemen, all condemned by the US government as against their interests.
How important is oil to the Iranian Economy?
As a result, Iran’s GDP contracted by 3.9% in 2018, according to estimates from the International Monetary Fund (IMF). They also estimate that GDP could see a crash of over 6% in 2019.
Iran’s petroleum exports were worth $52.7bn last year, (or 47.6% of their export revenue) according to Opec, and its total exports brought in $110.8bn. It also makes money from exporting chemicals and metals, among other things.
The Financial Times reports that as well as the 1.3m barrels of oil that continue to be (officially) exported from Iran every day, more are being shipped out under the radar.
Foreign direct investment and business activity in Iran have fallen off as the private sector realizes the risk of doing business with Iran.
More than 100 companies decided to cease doing business there.
Although John Bolton had said that while the US was not “seeking war” with Iran, it was “fully prepared to respond to any attack, whether by proxy, the Islamic Revolutionary Guard Corps, or regular Iranian forces”.
Subsequently, it has been announced that the US will be sending the USS Abraham Lincoln Carrier Strike Group and bombers into the middle east region as a “Clear message” to Iran.
This is potentially in response to the potential of Iran to block and disrupt the narrow Strait of Hormuz, which could cause huge disruption to worldwide trade.
Only time will tell the full extent of the sanctions and its repercussions. It is unlikely that these actions will lead to a full-scale war as this would benefit neither nation, however, it seems that China continues to support Iran by buying their oil which could lead to further tensions between China and the US, which could be cause for greater concern.