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National Security Desk / Apr. 27, 2019

The Strategic Implications of Sanctions on Iranian Oil

Trump's move to not renew waivers affects some important allies, but for good reasons.

The Trump administration announced on Monday that it will not renew waivers on U.S. sanctions for nations purchasing Iranian oil. Those waivers were granted after the United States withdrew from the Obama administration’s bogus Iran deal in May of 2018. Five nations in particular will be affected by the end of the waivers: Japan, South Korea, Turkey, China, and India. These nations represent roughly 70% of Iran’s oil exports, and China, Japan, and South Korea are highly dependent on Iranian oil. Japan and South Korea are critical U.S. allies in Asia, while China is the leading U.S. adversary in Asia and indeed in the world. The United States is also in the final stages of negotiating a major trade deal with China. Managing the fallout of the move will therefore be challenging, to say the least.

The key player in managing the impact to world oil markets (and thus the world economy) will be Saudi Arabia. The Saudis have long been the only oil-producing nation with any significant spare production capability, as most other oil producers already operate at their maximum capacity (or in the case of Venezuela and Libya, their oil industries are in a shambles). The Saudis and indeed all the Persian Gulf’s Arab nations have grown more and more wary of Iranian influence over the last decade, and the Saudis in particular have been mortal enemies of Iran since the 1979 Islamic Revolution. The Saudis have stated publicly that they will increase production and ensure the oil market “does not go out of balance.”

Another challenge will come from our notional allies in Europe. All of them, including even our closest ally in the world, the United Kingdom, have grown more and more liberal-pacifist since the end of the Cold War. Readers will recall the extraordinary lengths the Bush administration went to between 2003 and 2008 to get the Europeans onboard to put pressure on Iran, even letting the Europeans take the lead for a while when the effort was taking place at the International Atomic Energy Agency. By 2008, the U.S.-led effort to pressure Iran was showing strong positive results and might have achieved its aim of forcing Iran to meet all of its Non-Proliferation Treaty obligations had not the Obama administration come to Iran’s rescue with its new Iran deal. The Europeans leapt at the opportunity to resume trading with Iran and pretending Iran could be reformed with carrots rather than sticks, and the Iran deal was unanimously endorsed at the United Nations Security Council (although not in the U.S. Senate, where it should have gone for approval).

Since the 2018 U.S. withdrawal from the Iran deal and our announcement that sanctions would be re-imposed, our European “allies” have gone so far as to establish a non-cash mechanism for Iran to provide its oil to Europe. Now those same allies say they will continue to follow the terms of the Iran deal, and have openly encouraged Iran to speed up efforts to implement the non-cash trading mechanism, known as the Instrument in Support of Trade Exchanges, in order for European companies to evade U.S. sanctions.

The Trump administration thus has its work cut out for it. Trump will have to hold firm against European efforts to cheat, and be willing to apply punitive measures to friendly nations. He will have to assist key Asian allies in meeting the oil shortfall produced when they can no longer buy Iranian oil. He may even have to take active steps to protect Saudi and Kuwaiti oil exports through the Strait of Hormuz, as we did in the late 1980s. And he will have to do all of these things while still managing the three-ring circus that is our national politics.

But anyone who believes, as we do, that Iran’s nuclear ambitions must be stopped should applaud this step, and hope that additional measures will be taken in the future both to curb Iran’s nuclear ambitions and to rein in Iran’s actions around the Middle East. It also adds another point of interest in the coming 2020 election, as Democrats have shown a dismaying willingness to side with tyrannical regimes such as Nicolas Maduro’s Venezuela, and a future President Biden or Harris would doubtless make reinstating the Iran deal one of their first acts after taking office. Stay tuned…

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