AnAnalysisoftheTrumpAdministrationsdecisiontopullawayfromtheJCPOA9thofMay2018ByOzanOzkural

So now that Donald Trump’s decision to pull out of the JCPOA (Joint Comprehensive Plan ifAction–akathe‘IranDeal’)hasbeenannounced,whatwillcomenext,whataretherisks,andthewinnersandlosers?Itsfairtosaythatthedecisionismorefarreachingthanmostpeoplethought.Whereasbeforetheannouncement therewasadebateonwhether itwouldbehardor softwithdrawal (andalmostallagreedthatsomesortofwithdrawalwouldcome),notmanythoughtTrumpwouldgoalltheway–asmakenomistakethisisaVERYhardwithdrawal.Itwaseffectivelyadecisionto restoreallUSsanctions thatwassuspended in JCPOA.Decision toendallparticipationonJCPOA.UnilaterallybytheUS,whichwasthecreatorandguarantoroftheJCPOA.Mostof thesanctionswillbe imposedaftera90daywinddown ‘graceperiod’.Thekeyone-whichisthesanctiononacquiringIranianoil -willbereimposedaftera180daywinddown‘grace’period.The oil element of the JCPOA, section 12.45, was initially designed as a financial sanction,imposingsanctionstoanyonedoingbusinesswiththeCentralBankofIranunlesstheyreduceacquisition of Iranian oil significantly over a 180 day period. Where as the impact of theoriginal sanctions in 2012/13 periodwas significant – taking out 1.2million barrels/day ofIran’sthen3.8mb/dproductionaftera6monthperiod,thistimetheimpactisestimatedtobearound0.5mb/dshortageonahigherproductionbase.Butwhy?Essentially,whentheoriginalsanctionsledbytheObamaadministrationwereformed,UShadboth Europe and key international players, particularly China, to comply and support theJCPOA.Infact,theresultingshortageofoilsupplythenwasmetquicklybyChina,whenatthetime they increased their output by 50%. Now China is content with JCPOA, they believe itworkedandtheyresenttheUSdecisiontoterminateit.ThesameistrueofEurope.Backin2012,EuropereduceditsIranianoilimportsfrom0.7mb/dto 0. This time, European government are scrambling around (namely Uk, France, andGermany)topromiseIranthattheywillkeeptheirendoftheJCPOAagreement.Inessence,andtechnicallyspeaking,JCPOAcanstillsurvivewithouttheUS.Butinrealityandpractically it is dead, as – regardless of how European governments say they will supportEuropean banks and firms to continue doing businesswith Iran, ultimately these banks andfirmswillbeforcedtochoosebetweendoingbusinessinIranor(viathesecondarysanctions)tobebarredfromdoingbusinessintheUS.Itdoesnottakearocketscientisttoseewhotheywillsidewith(noonewantstobebarredfromtheUSbankingandfinancialmarkets).Iraniansarefullyawareofthis,andwillusethiswithdrawalandtrytodriveawedgebetweenUSandEuropeasasilverliningattheirside

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Indiaistheotherkeyplayerhere.WhereasIndiawontbeaswillingasChinatoofferrelieftoIran, they do have a long commercial and energy related linkswith Iran, and there are alsoother local and geopolitical factors to consider. India needs Iran to reach Afghanistan, sincetheycannotgothroughPakistan.Furthermore,Indiaimports80%ofitsoil,andIranisthe3rdlargestsuppliertoIndia.(ChinaandIndiacombinedaretop2purchasersofIranianoil).Finally,Indiaisinafragileelectioncycle;votersarealreadysusceptibletohigherthanbeforecostofoil,andModhiwillwanttoavoidafurtherincreaseoffuelprices.Iranislikelytofloodthemarketwithoiloverthenext180days(thegraceperiod)andmayofferdeepdiscountstoChinaandIndiatoincentivisethemtocontinuebuyingIranianoil.Sowhatwillbethelikelyimpactonenergyprices?Formostpart,themarketshavefactoredinthiseventualitytothealreadyhigherthanbeforepriceofoil.Also,duetotheRussia+OPECdialogue,thereissomesparecapacityinthemarketthatcanabsorbthepredictedshortfallinoilsupply.TheKingdomofSaudiArabia(“KSA”) isvocalonhighoilprices– itneedsat least$80usdoilprice to balance the budget and is also sensitive to the price of oil as this will effect thevaluation of the looming Aramco IPO. The same goes for Russians. What could make thisshortfallinsupplymoreimpactfulisifVenezuelacollapsessoonerthanpricedin(asthemarketispricinginamediumtermcollapseoftheCountry).USmaymakeupforthedifferenceintheprospectiveshortfallinsupply.Questionhereiswilltheybeabletorespondasquicklyastheywant.Itsanunknownfornow.Otherimportantfactorsare:Iranianswillforcethistoplayoutverypubliclyandinternationally.Theyarereadytorampuptheir nuclear program. The head of their atomic agency indicated they have the relevantoptions. Theywill be careful not to provoke, butwillmost likely start shedding someof themost intense verificationprocess of the JCPOA (which goesbeyond the InternationalAtomicAgencyprocesses).Sotheywilltacklethemonitoringarrangementsfirstbeforeaprospectiveramp-upoftheirnuclearprogram.TheywontbesoaggressiveastheyrealisethatbothIsraelandUScanandmaybelookingformilitaryaction.HowwillKSArespond?KSAwelcomesthisdecision,togetherwithIsraelandtheUnitedArabEmirates.KSA’sprimaryconcernwith Iran isnot its ambition to achievenuclear capability, but rather thebarrageofIranian missiles the Houthi rebels have been shooting over to Riyadh.So far, the Americanpatriotmissiledefencesystemshavebeensuccessfulinshootingthesemissilesdown,butthatmaynotlastiftheattacksintensify.Needlesstosay,asuccessfulhitonaKSAorEmiraticiviliantargetbyIranianbackedforcesintheregionwillbemorethanenoughtostartanalloutwarinanalreadytenseregion.ItisnotsurprisingtohearthatRussiawilltrytoexploitthissituationtothemaximum,andwilllikely benefit financially from an increase benefit Russian enterprises will see with thewithdrawalofUSandEuropeanfirms.

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Iranian government is most sensitive about containing possible panic in the Country. Theeconomyisalreadysufferingfromasignificantlydevaluedcurrency,andIraniancabinetwentontotelevisiontoassurethepublicthateverythingwascontained.Iraniangovernmentcannotafforda riseofprotests (like theyhadback in January)andapossibleassaulton the regimeitself.EvenintheabsenceoftheJCPOAwithdrawal,aregimechangeismorelikelythanmostthink;asrecentlythetalkonthestreetsisnot‘who’willcomenextbutrather‘what’willcomenext.Whoarethebiglosers?Asfarasfirmsgo,Totalisamajorloser.Theyhavemadesignificantinvestmentsindevelopingoff-shoreIraniangasfields.From the countries, Iraq is a potential big loser. The only area where US and Iran are in apartnershipwasinIraq.Inparticular,theyweretheguarantor’softheIraqiCentralBank.ItsmorethanlikelythatIranwillwithdrawfromthis,creatingsignificantfinancialinstability,anditsalsolikelythatUStroopsinIraqmayfindthemselvesunderfirefromIranianbackedrebels.Theotherbig loserwillbePakistan;PakistaniparliamentdefiedKSArequesttoputbootsonthe ground in Yemen –which is essentially a proxywarKSA is havingwith Iran (there is awiderWahabivsShia Islamsectarianbattle there).KSAhasbeenby largePakistan’sbiggestfinancialsupporter.Nowthatthebattlelinesarebeingdrawn,PakistanfindsherselfinvariablysidedwithIran.Whoarethebigwinners?ChinaandChinesefirms.UndoubtedlyChinawillusethisopportunitytomaximiseitsinfluenceinIranandtheregion–especiallygiventhatUSunilaterallybackedawayfromtheagreement.Allinall,thisisprobablythemostconsequentialdecisionoftheTrumpadministrationsofar,and will have major implications for the transatlantic partnership. Trump believes that thethreatofmorepressurewill force Iranon to the table tonegotiatea ‘better/biggerdeal’ likeBoltonclaims.Trumpwants to achieve a better dealwithout boots on the ground. Iranianswillmake thisimpossibleas theywill counter thisUSmovewithon thegroundactionaroundglobalproxywarswhereverUSisengaged.ConsideringthatIranianshaveastrategicmaximof‘youneedtomeetforcewithforce’andthatthesesanctionswillnotbeaspowerfulastheoriginal2012/13sanctions,Trumpadministration is asking Iran tomakemore concessionswith less leveragethantheyhadbefore;thesegoalsareunrealistic.Whatiscertainisthatwenowliveinanevenmoreunstableanddangerousworldthanwedidyesterday.OzanOzkural

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