Perspective: Freezing Iran out of oil markets won’t work as deterrent to nuclear program
The Trump Administration, having withdrawn the United States from Joint Comprehensive Plan of Action last May, is threatening U.S. trading partners over doing business with Iran and attempting to freeze Iran out of global oil markets. It won’t work — and will indirectly strengthen the United States’ principal rivals, China and Russia, in the process.
The freeze-out began with the re-imposition of U.S. sanctions against Iran and businesses operating there, and the Trump administration set November 4 as the target date for U.S. allies to zero out their purchases of Iranian crude. With some armtwisting, NATO allies like Turkey and Asian security partners South Korea and India have agreed to curb Iranian imports. Fearful of being caught up by U.S. sanctions, major European firms Total, Allianz, and Maersk have vowed to wind down operations in Iran in advance of the November 4 deadline.
The goal of these sanctions is to drive down Iran’s exports, crippling its main source of foreign exchange and revenue and forcing Iran to abandon its nuclear ambitions. This approach stands in contrast to the more incentive-based approach of the Joint Comprehensive Plan, which eased sanctions for Iran eliminating its stockpile of enriched uranium and putting in place a moratorium on creating heavy-water facilities.
This approach won’t work for several reasons. First, attempts to freeze producers out of oil markets in order to punish bad behavior are difficult to implement in the absence of truly global collective action. The sanctions imposed by the UN Security Council against Iraq between 1990 and 2003 were effective at crippling the Iraqi economy because they were enacted and enforced by an essentially global coalition. This time around, the world’s biggest crude importer — China — is not on board. And while U.S. and EU sanctions were successful in pushing Iran to agree to the Joint Comprehensive Plan in the first place, U.S. withdrawal from the agreement means the implied carrot — normalization of relations with the West — will not be forthcoming.
This is not to say the sanctions-based approach will have no effect. Far from it — the sanctions will roil global oil markets and strengthen the hands of the United States’ two main rivals. Cutting Iran out of the global oil trade will mean markets will have to make up roughly 2 million barrels of Iranian output. Markets will be operating with very little cushion. That puts oil markets one natural disaster or civil war away from a price spike. And even if the Saudis can make up the difference, whether they want to is a more open question. Saudi Arabia, like all oil-exporting economies, benefits from higher prices.
Who benefits from this state of affairs? Chiefly, Russia and China. Russia benefits two ways: 1) higher prices and hungrier markets for its crude exports, and 2) lower-cost investment opportunities in Iran’s economy. By forcing U.S. and European firms to stop developing projects in Iran, U.S. policy is paving the way for politically connected Russian firms to occupy the vacuum.
China stands to benefit as well. U.S. sanctions will reduce demand and therefore prices for Iranian crude and force Iran to become more dependent on the Chinese market. As a dominant consumer, this will give China lots of leverage — leverage that will extend to the political and security realms as well. In 2016, China and Iran signed a pledge to deepen cooperation around security issues. As China becomes more reliant on Iranian crude, its ambitions in the Persian Gulf and Arabian Sea will deepen.
The Trump administration has spent significant time and energy twisting allies’ arms and threatening U.S. and European companies that do business with Iran in hopes that it will curb Iran’s nuclear ambitions. It won’t — and will strengthen the hands of US rivals.