America’s second stage sanctions will come into effect on Monday, prohibiting transactions with Iran’s ports and shipping companies; the purchase of petroleum and petrochemical products from Iran; transactions between foreign financial institutions and the Central Bank of Iran and other Iranian financial institutions; and the provision of underwriting services, insurance, or reinsurance.
As the US implements its second round of harsh sanctions on Iran, the ability of Tehran’s neighbors to cut trade ties becomes paramount. What is the current situation with America’s efforts with the countries around Iran? After all, the airtight noose is the intent, but reality on the ground will need a further push.
The US is pushing hard to have Iran’s neighbors cut their trade links in order to break financial ties and deny Tehran continuing access to these bordering markets.
While on a trip to the South Caucasus last week, US National Security Adviser John Bolton made it a point during his visits to Armenia, Azerbaijan and Georgia to encourage his hosts to downgrade and cut financial and trade ties with Iran. Naturally, this request is not so simple given the historical connections between these countries, whether during peacetime or battles over empire. All three countries of the South Caucasus maintain ties to Iran, which will fall under sharper US scrutiny in this second phase of sanctions. Obviously, America’s relationships with all three countries are different, in that Georgia is aligned with the West, Armenia is tied to Russia, and Azerbaijan plays a special role in the middle of everyone.
In Iraq, the new government’s ties with Iran, led by Barham Salih, Adel Abdul Mahdi and the Sunni Arab speaker of Parliament, Mohammed Al-Halbusi, is seen as a very positive development by the US, yet the ties that bind Baghdad and Basra to Tehran remain the same. Qassem Soleimani is still calling the shots. Naturally, cross-border trade and transit will continue. As Iran is squeezed in the second round of American sanctions, the possibility of Tehran smuggling oil into Iraq rises significantly, given the probability that the northern Gulf may be unsanctionable territory. The new government may be unable to halt Iran’s oil exports or transactions and obviously will need to be watched carefully in this regard.
In Pakistan, the on-off Iran gas pipeline is not moving anywhere fast, especially under Prime Minister Imran Khan. The new Pakistani government is prepared to enforce America’s sanctions in whatever way possible given the local security environment.
Significantly, Iran has developed a resilience to withstand such sanction pressures despite severe economic difficulties. It has forged closer alliances with Russia, China and Turkey to overcome the forthcoming difficulties in bilateral trade, especially the export of Iranian oil. In the defense arena, Russia and China would be ready to meet Iran’s requirements. Tehran is joining the Shanghai Cooperation Organization, which will bring a closer bond between the three countries in security matters. In theory, membership brings Russian or Chinese military assets to the shores of the Arabian Gulf.
More important is the fact that Iran is ready to de-dollarize in order to conduct currency swaps or transactions. It appears Turkey, which is a neighbor of Iran and has an annual trade of $10 billion with it, is going to continue its business with Iran uninterrupted. That issue, one of many between the Trump administration and Turkish President Recep Tayyip Erdogan, will be a factor in their testy bilateral relationship.
There is no doubt that Tehran’s de-dollarization move is meant to blunt the coming sanctions. Iran’s move away from the dollar plays directly into the hands of traditional trade partners who have maintained good business relations with Iran. There are indicators that some EU countries may declare their intent to trade with Iran despite American sanctions and to use the euro as a business currency, although this idea may fall flat with pressure from the US. Finally, Iran has approximately $60 billion or the equivalent of this amount staked in international banks as proceeds of oil and gas sales, which can support the country’s rising import debt. Given this trend line, Iran being rescued by several of its neighbors would thereby present challenges to the Trump administration’s sanctions plan.
Iran’s neighbors in the Gulf are adhering to Trump’s sanctions or are moving quickly to find breathing space. The UAE has passed strict laws regarding Iranian trade, especially in the country’s free-trade zones. Other Gulf states are currently looking for ways to receive some type of waiver, given planned pipeline construction in the Gulf of Oman or other connections. Qatar is a question mark.
Further abroad, China is buying more oil from Iran and India has reportedly received an exemption from the US State Department. The idea of a concentric ring around Iran to monitor, restrict and shut down trade is in effect.
Overall, the Trump administration’s second round of sanctions is the harshest yet and the impact on the Iranian economy will be massive. But, as the above demonstrates, there are various levels of enforcement of this second round that have political dimensions to them, which means further pressure on those countries not adhering to the White House’s policy.