Sanctions on Iran could cost companies billions
European and American companies could lose billions of dollars in commercial deals canceled and a major new export market undercut by the U.S. decision to re-impose sanctions on Iran.
President Donald Trump’s decision will likely most hurt aircraft makers, oil companies and auto manufacturers. The final impact, however, remains unclear because of possible exemptions for some companies and even new negotiations on a revised Iran nuclear agreement, experts say.
Since the Iran nuclear deal was struck in 2015, it has been mostly European companies that moved back in to sign deals with Iran. Europe traditionally has had closer business and diplomatic ties than the U.S., where the legacy lingers from the seizure of hostages at the American embassy in Tehran nearly 40 years ago.
The leaders of Britain, France and Germany tried but failed to persuade Trump to stick with the deal. The reaction from some in Europe was bitter. Carl Bildt, the former prime minister of Sweden who is now co-chair of the European Council on Foreign Relations, said in a tweet that new U.S. sanctions “are hardly hitting any U.S. companies, but aim primarily at European ones.”
Trump fulfilled a campaign promise by announcing that he will withdraw the U.S. from the nuclear deal. As a consequence, companies worldwide must stop doing business with Iran or risk U.S. fines or other punishment.
U.S. sanctions bar U.S. banks and companies from doing business with Iran. The sanctions also limit foreign companies from dealing with Iran by prohibiting them from using American banks in their operations if they do not sever links with Iran.
Aircraft manufacturers stand to be big losers, with the pain shared between Chicago-based Boeing and Europe’s Airbus. U.S. Treasury Secretary Steven Mnuchin said the companies’ existing licenses to sell planes to Iran would be invalidated. Airbus falls under U.S. rules because its planes include U.S.-made components.
Airbus has already delivered three planes out of a 100-jet order placed in December 2016 by Iran’s national carrier, Iran Air. The planes are worth around $19 billion at list prices.
Boeing later announced deals with Iran Air and Aseman Airlines totaling 110 planes said to be worth $20 billion. However, list prices are routinely exaggerated, and aviation consultancy Avitas valued the deals at $9.5 billion, given normal discounts.
The aircraft makers will avoid serious damage. The Iranian deals represented a blip in Boeing’s business. Boeing never added the planes to its backlog — and if it had, they would have represented less than 2 percent of its 5,800 orders.
Boeing prepared investors for the setback. CEO Dennis Muilenburg said last month that losing the Iranian sales wouldn’t slow down production.
“Airbus booked the orders and started delivering planes. Boeing played it safe and did neither, which may have been smart,” said Richard Aboulafia, an analyst with airline-industry consultant Teal Group near Washington, D.C. He also said that Iran’s demand for new planes was vastly overrated all along.
In the long term, however, “Iran is the big hope of aviation manufacturers” because of its large population — about 80 million — and middle class, its oil assets, and an aging aircraft fleet in need of upgrades, said Adam Pilarski, an Avitas analyst.
The U.S. says the sanctions will also sharply curtail sales of oil by Iran, the world’s fifth-largest oil producer. There will be a 180day period for countries to wrap up existing contracts and achieve “significant reductions” in their purchases of Iranian crude, although Mnuchin did not spell out what the administration meant by the term.
French oil company Total SA has been the most aggressive Western oil company to move back into Iran, signing a $5 billion, 20-year agreement there in July. A Chinese oil company also has a deal to develop the country’s massive South Pars offshore natural gas field. Total did not respond to requests for comment.
France’s Total, AngloDutch Royal Dutch Shell and Italy’s Eni were more active in Iran than U.S. companies, which were still limited by other sanctions unrelated to Iran’s nuclear program, including a trade embargo.
The price of oil rose sharply on Wednesday to its highest since 2014 on expectations that the new sanctions will crimp Iranian exports. Brent crude, the standard for pricing international oil, rose $2.11, or 2.8 percent, to $76.96 a barrel in London. Benchmark U.S. crude gained $2, or 2.9 percent, to $71.06 a barrel in New York, the highest level since late 2014.
Analysts estimate that the re-imposition of sanctions could reduce Iran’s exports by between 200,000 and 600,000 barrels per day. That might seem insignificant in a global supply of about 98 million barrels a day. Oil prices have been rising, however, as a worldwide glut of crude is burned off by strong global demand and limits on drilling by Saudi Arabia and other major producers. Any crimp in supply is likely to drive prices higher.
Saudi Arabia immediately pledged to help offset the loss of Iranian crude, saying it “remains committed to supporting the stability of oil markets, benefiting producers and consumers alike.” Analysts also expect that U.S. companies will respond to higher prices by drilling more.