August 29, 2018 | The Wall Street Journal

You Can Run, but You Can’t Hide From Iran Sanctions

August 29, 2018 | The Wall Street Journal

You Can Run, but You Can’t Hide From Iran Sanctions

As the U.S. begins to reimpose tough sanctions on Iran, defenders of the 2015 nuclear deal are peddling myths. They say Russia, China and India will evade sanctions. They claim oil prices will skyrocket. And they predict Europe will establish a “sanctions free” payment channel to Iran. None of these warnings should slow President Trump’s campaign to impose maximum pressure on the Islamic Republic.

Since the U.S. withdrew from the Joint Comprehensive Plan of Action in May, major companies like Siemens , Total and Maersk have announced their intention to stop doing business with Iran. But not only European firms must avoid the risk of sanctions. Chinese banks are highly exposed to the U.S. financial system. With China’s economy cooling, and the country’s banks potentially overextended on credit, state planners in Beijing can ill afford additional risk.

As the U.S. considers financial sanctions on Russia for its use of a nerve agent on British soil, Prime Minister Dmitry Medvedev recently declared that sanctions targeting his country’s banks would be considered a “declaration of economic war.” Why then would Russia seek to trigger mandatory U.S. sanctions on Russian banks by conducting transactions with Iran? The State Bank of India , meanwhile, has announced it will stop processing payments for Iranian oil beginning in November.

If JCPOA supporters are pegging their hopes on these countries conspiring to violate U.S. sanctions, they’re going to be sorely disappointed. Their only hope is to persuade Mr. Trump not to impose the two most effective sanctions in November: one attacking Iran’s largest source of revenue—oil—and the other attacking Iran’s connection to the Swift financial messaging service.

JCPOA defenders think they can force Mr. Trump to back down on oil sanctions by spreading fear of higher prices. But the sanctions coming back in November are the same sanctions Congress enacted in 2011. At the time, the Obama administration urged Congress to reject the legislation, also claiming it would drive up oil prices.

What happened? In 2011, the average Brent crude oil price was $111 per barrel. The following year, Brent’s average remained $111 despite U.S. sanctions taking 700,000 barrels per day of Iranian crude off the market. Iranian oil exports fell another 42% in 2013 while the Brent average fell slightly, to $108 per barrel, before falling below $100 in 2014.

Left alone to scare the markets, uninformed voices can produce brief upticks in oil prices. Accordingly, the Trump administration appears to be taking steps to calm the market’s fears. In May the president issued a determination required by the sanctions law that “there is a sufficient supply of petroleum and petroleum products from countries other than Iran” to allow for a “significant reduction” in Iranian oil exports.

In June, Saudi Arabia, which strongly supports Mr. Trump’s decision to reimpose sanctions on Tehran, pledged to increase oil production by as much as two million barrels a day to replace Iranian crude. Recent reporting shows Saudi Arabia and Iraq attempting to make up Iran’s market share. Last week the Trump administration announced a release of 11 million barrels from America’s strategic petroleum reserve.

If Mr. Trump stays the course, Iran’s only hope of withstanding the pressure rests in a German plan to keep the Central Bank of Iran connected to Swift and dare the U.S. to impose sanctions on a European central bank for processing oil payments. But with the threat of financial sanctions looming over the banks represented on Swift’s board—including two American banks, Citi and JPMorgan —the German scheme looks doubtful. Last week Sen. Ted Cruz (R., Texas) and 15 of his colleagues urged Treasury Secretary Steven Mnuchin to enforce U.S. sanctions against these banks if Swift fails to disconnect Iran by the November deadline.

Facing the likelihood that Swift will comply, German Foreign Minister Heiko Maas urged Europe to establish an alternative to Swift that could act outside of American influence. But given the current strength of the U.S. dollar and the deterrent power of secondary sanctions, no legitimate actor will want to use a payment channel that cannot do business in dollars and subjects all participants to a total cutoff from the U.S. financial system. Instead, Mr. Maas’s Swift alternative would become a black market for rogue nations and illicit groups. Chancellor Angela Merkel, perhaps coming to terms with the futility of evading U.S. sanctions, threw cold water on the Maas proposal.

JCPOA defenders will continue to scorn renewed American efforts to pressure Tehran. But scorn cannot stop companies from fleeing Iran’s risky business environment. Nor should it impede President Trump’s resolve to reimpose and vigorously enforce the second, heavier batch of sanctions slated for November.

Richard Goldberg is a senior advisor at the Foundation for Defense of Democracie, where Behnam Ben Taleblu is a research fellow. Follow Richard on Twitter @rich_goldbergFollow the Foundation for Defense of Democracies on Twitter @FDD. FDD is a Washington-based, nonpartisan research institute focusing on national security and foreign policy.

 

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Issues:

Iran Iran Sanctions Sanctions and Illicit Finance