Iran may try diplomacy but it could circumvent Trump sanctions with help from China and Russia

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As the U.S. drops out of the Iran nuclear deal, Iran may first try diplomacy but could also seek help skirting U.S. sanctions from other parties to the deal, particularly Russia and China.

Iranian President Hassan Rouhani on Tuesday said Iran would speak with China, Russia and European countries to see if the 2015 deal can be maintained without the U.S. However, if the deal collapses, Iran could return to its nuclear program.

President Donald Trump withdrew the U.S. from the agreement, calling it “disastrous,” and promising the “highest level of economic sanctions against Iran.” After the move by Trump, companies would have 90 to 180 days to wind down existing contracts with Iranian companies.

Longer term, analysts also say the bigger issue is the schism in Iranian internal politics, and who ultimately gains the upper hand.

“Rouhani doesn’t control the nuclear field. The supreme leader does. What does the supreme leader do now? I think the biggest risk is the hard-liners in Iran get the upper hand, and Iran resumes their nuclear program. I think Rouhani may have been discredited today,” said Helima Croft, global head of commodity strategy at RBC Capital Markets.

But as analysts assess whether renewed sanctions will be successful, they point to the fact that China is unlikely to curtail its purchases of Iranian oil, and may in fact increase them. Iran may also find an ally in Russia, also under U.S. sanctions.

Iran could first explore diplomatic channels after Trump’s decision to resume sanctions on Iran based on evidence from Israel that Iran is continuing a nuclear program and its support of terrorist organizations in the Middle East. But while it could go to the United Nations General Assembly, the U.S. sits on the Security Council.

“I think Iran does nothing in the short run … I don’t think they want to invite anyone to start bombing the country,” said Edward Morse, global head of commodities research at Citigroup. Morse said Iran will likely seek abitration under the terms of the nuclear pact.

Iran entered the agreement in 2015 with the U.S., China, Russia, the U.K., Germany and France to end its nuclear program in exchange for a waiver of harsh financial sanctions that hampered its ability to export oil.

Analysts expect European companies that do not want to be prohibited from dealings with the U.S. to comply with the renewed sanctions, but European leaders are expected to continue to work to find a way to keep the pact in place.

“While there is considerable debate over the effectiveness of unilateral U.S. action on Iran, we think that a revival of the threat to lock non-compliant corporates out of U.S. capital markets provides the White House with a pretty powerful stick,” notes Croft. “While Chinese compliance is probably a nonstarter, we do anticipate a high degree of cooperation from European, Japanese and South Korean corporates despite their host government’s opposition to the U.S. move.”

French President Emmanuel Macron tweeted that there will be a continued effort to work on a broader framework to include lengthening the nuclear agreement; curbing ballistic missiles and Iranian activity in Yemen and Syria.

Carlos Pascual, a former U.S. diplomat and the State Department’s top energy official when the sanctions were first imposed, said one way forward could be a parallel set of sanctions that the U.S. could agree to with Europe on the topics mentioned by Macron.

“I imagine what will happen is the administration will continue some form of discussion or dialogue with the Europeans on whether there are supplementary sanctions that could be put in place on ballistic missiles. It’s unclear what might be done to constrain Iran in the region,” said Pascual, senior vice president at IHS Markit.

He said Iran’s activity in the region extends to Hezbollah and Hamas, and into places like Syria, Libya, Lebanon and Yemen.

“Sanctions on Iran’s involvement in the region become complicated because they are so extensive, and they are hard to measure and verify. It would be extremely difficult to implement,” said Pascual.

Iran learned to get around sanctions the last time, and it could do so again but more successfully, analysts said. Instead of the more than 1 million barrels a day that were kept off the market in the last round of sanctions, the result is likely to be more little more than 300,000 since U.S. allies do not support ending the deal, known as the Joint Comprehensive Plan of Action.

Source: RBC

“They’ve learned a lot over the last two years so it will be back to the cat and mouse game that they played all over the world,” said Henry Rome, Eurasia Group Iran researcher.

“The past is prologue so you return to Iran’s resistance economy posture from five years ago, when they tried to survive while being cut off from international trade. I think they proved to themselves that they were able to survive,” he said. Rome said Iran limped through the period of sanctions and “still came out in tact. They are masters at playing a long game.”

Pascual said there are significant differences between now and when the sanctions were first imposed that could make it much easier on Iran.

“In 2012, the Europeans issued a regulatory action that required all European states to completely stop or ban the import of Iranian crude oil within six months. In 2012 Europe went from 600,000 [barrels a day] to zero,” he said. “In this case the Europeans don’t want to end the deal. The higher probability is the Europeans will take some reduction of 20 percent.”

But as for China, it may not see a reduction at all. Instead it may buy more crude and Iran may be forced to see it at a discount, he said.

Pascual said China’s Kunlun Bank and a trading firm worked with Iran during the past period of sanctions, and even with sanctions it was able to sell oil into China. It’s possible Iran could again work with “entities that are isolated from any contact with [the] U.S. financial system and most likely will continue to import Iranian crude oil which is in the range of 600,000 barrels a day.”

He said its unknown how India will respond and it’s also unclear whether other countries will allow similar situations with banks and trading concerns to deal with Iran.

As for Russia, where U.S. sanctions are stinging a number of resources companies, Pascual said entities there could buy Iranian crude and swap their own back on to the world market.

“It’s those types of leakages from Russia and China that are the most obvious ones where the Iranians could still find outlets to be able to export their product,” he said.

But longer term, Rouhani faces his own challenges, since the pact was a promise to restore the economy after it was crippled by the 2012 sanctions in an effort to get it to end its nuclear program.

“Everything you read about Iran indicates the people are very unhappy and restive and people are not cut off from the rest of the world’s communications. People are violating restrictions,” said Morse. “It could be well be this is what happened under the shah.” The shah of Iran was overthrown in 1979 after years of unrest.

Rome said he expects Rouhani to remain until his term ends.

“Rouhani still has a few more years left in his term and I think he’ll finish it out like a lame duck, like many of his predecessors, and the supreme leader will milk it and let it string out as a way to discredit Rouhani and people who share his views,” Rome said.

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