Trump and the art of the Iranian deal

Extreme bluster followed by a calmer acceptance seems to be a regular Trump tactic, one he also used in trade negotiations with North Korea, Canada, Mexico and even the EU.

NEW US sanctions on Iran’s oil industry, set to begin tomorrow, were supposed to exert maximum pressure on Iran’s economy. Since the pullout from the Iran nuclear deal was announced in May, the Trump administration has claimed a goal of cutting Iran’s oil exports to zero. Officials have repeatedly said that they expected customers to halt all Iranian oil imports and that no waivers or exceptions would be forthcoming. Markets took this rhetoric very seriously. Oil prices shot up by US$11 (RM45.80) per barrel between July and October on news that as much as 1.5 million barrels of Iranian oil per day could be eliminated from the global supply.

But then came a bombshell: the State Department will be offering “temporary” exemptions to up to eight countries and jurisdictions to import Iranian oil. Japan, India and South Korea are apparently among that group, while the unnamed jurisdiction is probably Taiwan. While the exemptions allow these nations to continue to buy Iranian oil, they must gradually cut those imports in the months ahead or possibly face US punishments.

The number of exemptions – which differ from the Obama administration's sanctions both in being called temporary and in mandating far more significant reductions in imports over time – came as a shock to many experts in both national security and the oil industry. But in fact, anybody paying close attention should have come to the realisation that the inflexible and unwavering stance from the Trump administration was likely a negotiating tactic – that extreme bluster followed by a calmer acceptance of some exports was always the president’s plan. Call it the Art of the Iran Deal.

The question now is whether the administration can or will change its mind and turn its original tough talk into actual policy if need be.

In May, when Trump announced his plan to reinstate sanctions, Iran was exporting a record 2.8 million barrels per day at market prices. Secretary of State Mike Pompeo said the US foreign policy goal was to force Iran to “behave like a normal nation.” This means forcing it to withdraw from its adventurism in Syria, Iraq and Yemen; to stop supporting Hezbollah and global terrorism; and to end its nuclear ambitions. US leverage was increased by Iran's economic collapse and ensuing popular protests.

Specifically, the Trump administration insisted that countries that purchased oil from Iran and financial institutions that facilitated the transfer of funds for Iranian oil would be subject to fines and other penalties. Washington said it might also enforce so-called secondary sanctions on institutions that do business with Iran, meaning it would restrict US businesses from interacting with institutions that, for example, process payments from Chinese refineries to the Iranian central bank.

These secondary sanctions work because the US economy is large enough that countries and global businesses fear losing access to the American market more than they need cheap Iranian oil. This threat even had one immediate effect: the French oil giant Total pulled out of its partnership to develop an Iranian gas field almost immediately.

Then, as the sanctions date grew near, everything changed: it became clear the administration was willing to negotiate for the best deal it could get with Iran’s customers. Even though refineries in India, China, Turkey, Japan and South Korea had indicated that they planned to stop import- ing Iranian oil, the numbers told a different story.

According to TankerTrackers.com, China, India, Syria, the United Arab Emirates and Turkey each still imported more than 100,000 barrels per day of Iranian oil, while China and India each bought at least 700,000 daily.

This was a reduction from previous highs, but still a significant amount of oil. One reason for it was that Iran made things more enticing to customers to buck US sanctions by discounting its oil prices and offering to pay the shipping costs. This cuts into the Iranian government’s profit, but still brings in much-needed money. And it was a clear indication that the world suspected the Trump administration was wavering in its no-exports stance.

Another tipoff came on Wednesday, when National Security Adviser John Bolton acknowledged that the zero imports goal would not be achieved immediately. And today's news that eight of Iran’s present and past customers will be getting exemptions is the ultimate proof that talking tough and going soft was the Trump administration’s plan from the outset.

This is a tactic Trump has used in trade negotiations with North Korea, Canada, Mexico and even the EU. The administration employs a harsh and unwavering initial stance that later gives way to a negotiated settlement in which the US achieves some of its stated aims, but not all. In this case, the goal is to drastically decrease Iran’s revenue, and the harsh stance was a tool to ensure much lower exports at heavily discounted prices, resulting in significantly decreased profits for Iran.

Not only will the exemptions keep some important US allies happy, but by keeping more Iranian oil on the market than previously expected, the administration helps prevent oil prices from rising too high, so American consumers do not suffer from price shock. The exemptions will bring additional volatility to oil markets, because how much Iranian oil stays of the market will depend on word from the Trump administration. Exemptions could be revoked or changed with little signaling to the market.

To some extent, this approach makes sense: It is not clear whether even the toughest economic sanctions possible could cause Iran “behave normally.” But, unlike cutting a deal with Canada, the repercussions are more severe. If Iran continues to make money from its oil exports, it can continue to build up its military, and perhaps re-start its nuclear program.

If the Trump administration wants to cut off Iran’s revenue to the point where the Iranian government cannot afford to fund military activity abroad, it will have to keep up the pressure on Iran’s customers. Exemptions will need to be re-evaluated monthly, with accurate data on Iran’s crude oil and condensates exports.

But the Trump administration still has a fine line to walk between squeezing Iran’s oil and pushing up global oil prices too quickly. For example, it needs a breakthrough with the fraught negotiations between Kuwait and Saudi Arabia to put their shared oil fields back into production, and with the Iraqi government to allow more northern Iraqi oil to be exported through the Kurdistan Regional Government’s pipeline to Turkey. The Trump administration has bought itself several months of reprieve. But it has to keep a close eye on the effect of the exemptions on both Iran and its customers and, if called for, actually take the hard line it promised for so long.