January 3, 2014 | National Post

Tehran’s Windfall

Co-authored by Saeed Ghasseminejad

How much sanctions relief will Iran truly get from the interim deal signed late last year in Geneva?

In his recent appearance before the U.S. House of Representatives’ Foreign Affairs Committee, U.S. Secretary of State, John Kerry was adamant that the Administration’s original assessment of $7-billion over six months was accurate and that other, much larger assessments, were “outlandish.” “We have red teamed and vetted and cross examined and run through all the possible numbers through the intel community, through the Treasury Department, through the people in charge of sanctions,” Kerry said, “and our estimates are that at the end of the six months, if they fully comply, if this holds they would have somewhere in the vicinity of $7-billion total.”

All the same, there seems to be an excess of optimism in the Administration’s assessments.

Take sanctions’ relief for Iran’s oil sales. The agreement suspends U.S. oil sanctions, which required current Iran customers to further reduce their oil purchases from Tehran, and it allows oil sales at current levels – which, according to the International Energy Agency, were slightly up, at 850,000 barrels per day (bpd) in November 2013. The Administration’s fact sheet claims that Iran will be able to repatriate $4.2-billion in installments over the six-month period, provided they are compliant. But this figure does not account for the additional revenue Iran will recoup as a result of the suspension of sanctions agreed upon in Geneva. That is worth $4.5-$5-billion, depending on oil prices. Technically, this money will be paid in largely restricted escrow accounts, but given recent revelations from Turkey about how Iran managed to transfer billions through middle men, these restrictions have proven hollow.

How did we get to such figure? Under sanctions Iran’s oil buyers could still purchase some Iranian oil legally, provided they offered evidence of considerable reductions. In the 19 months since the U.S. oil sanctions’ implementation, those reductions diminished Iran’s production by 1.65 million bpd, approximately 87,000 bpd monthly or 2,900 bpd daily. We thus assume a gradual reduction of 2,900 bpd every day: In a six month period, every day Iran would sell 2,900 barrels less than the previous day, ending up losing a total of 47.24 million barrels.

With sanctions’ relief, it will sell those 47.24 million barrels. Assuming a median oil price of $95 per barrel, this equals $4.487-billion, which increases to $4.724-billion if one assumes a median oil price of $100. Combined with the other sources of relief, this puts the total two billion higher than Mr. Kerry’s red teamed figure, and it does not include gold, petrochemical, and automotive industry sanctions’ relief.

It also does not include the possibility that Iran will successfully circumvent the remaining oil sanctions by selling more crude under the table. In fact, courtesy of Iran’s new president, Hassan Rouhani, we know that Iran has no intention to stick to a production quota imposed by Western sanctions — the 2014 budget he just submitted to Iran’s parliament is based on the assumption that Iran will sell 1.5 million bpd of its oil, rather than 850,000 or even one million. That means that Iran is announcing its intention to cash in on an additional 500,000 barrels a day in declared revenue during the next fiscal year starting on March 21, 2014. – to which one should add that oil smuggling by Iran’s Revolutionary Guards, the smugglers-in-chief of the regime, will not only continue, but probably grow.

Why should the ability of Iran to continue circumventing sanctions be incorporated in the sanctions’ relief calculus? Very simply because there will be laxer international scrutiny and a basic assumption among Iran’s oil customers that relief will continue and US waivers will be renewed.

Then, there is the matter of relief on “related services,” which add more value. Iran’s insurance premiums on legal shipments will not only go down, but there is a reasonable chance that Iran will manage to insure more than it is allowed to export. And the six world powers will unlikely jolt the negotiations on account of a few thousand barrels more here and there. And with Iran able to sell more of its oil at market prices, the steep discounts it offered under the table during the oil embargo will diminish, increasing Iran’s overall revenue.

Whatever the outcome of the ongoing negotiations, at the very least, the Obama administration would be wise to revise its estimate as to how much it’s paying for the opportunity.

Emanuele Ottolenghi is a senior fellow at the Foundation for Defense of Democracies; Saeed Ghasseminejad is a Ph.D. Candidate in finance at City University of New York.


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