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Iran: JCPOA Fallout Continued

June 13, 2018

Iran: JCPOA Fallout Continued

 

After aggressively criticizing the Iran Deal (JCPOA), Trump announced on May 8th America’s withdrawal from it. The JCPOA had been signed in Vienna in 2015 between Tehran and the (5+1). Trump based his justification for his withdrawal on Iran’s lack of respect for the “spirit of the deal”. The spirit of the deal makes reference to at least two factors: 1) Iran’s regional adventures in Syria, Yemen, and Iraq as well as the support it renders to Hezbollah 2) Iran’s continuous efforts at developing ballistic missiles. While Trump’s withdrawal has been met with criticism by Iranian and European officials ever since, it has been welcomed by Israel.

 

Can the Iran Deal survive without the US?

Despite the Americans’ withdrawal, E3—France, Germany, and the United Kingdom—have been striving to keep deal alive. However, the prospects of the deal’s survival without the Americans appear to be quite dim. Already, the fallout from Trump’s arrival in power had weighed heavily on the Iranian economy. While the 2015 deal envisaged a progressive lifting of comprehensive sanctions by the EU and the US, the banking sanctions imposed by the US have never been lifted. As a result, the post-2015 economic recovery has been short-lasting. At the moment, the prevailing climate of uncertainty has had a negative impact on the Iranian economy. The RIAL’s loss of value has been amplified. On the black market in early May, after Trump’s decision to pull out of the deal, the Iranian rial plummeted to a record low level of 75,000 per one dollar from the official rate of 42,000; ever since, the currency has recovered to around 64,000 per dollar. Yet, the currency has lost more than 50% of its value since the beginning of the year due to prolonged economic woes in the country. Currently, the Iranian currency still trades at above 70000 rials against dollar.

 

Meanwhile, the French Minister of Economy, Bruno Le Maire, has recently suggested that Europe should be able to act independently of the US threat of sanctions on EU companies dealing with Iran; he raised the notion of the “economic sovereignty of Europe” whereby the EU should act as an independent entity against the US. It remains to be seen if this idea will materialise. The immediate fallout from sanctions has already impacted the prospects of foreign direct investment in Iran. EU companies like Maersk and TOTAL have announced that they were pulling out of Iran. Airbus and Boeing will also have to withdraw from signing a promising deal to renovate Iran’s aging fleet. Their withdrawal is expected to cost both companies an estimated 39 billion on losses on new contracts.

 

Banking Options Available to Iran

 

Due to the impending sanctions, various banks around the world which are connected through the SWIFT system, are likely to be reluctant to be involved in dealings with Iran for the sake of not being cut off from the United States. Banking restrictions imposed by the US have especially made it difficult for Tehran to have access to dollars and the country’s central has already been subjected to a fresh set of sanctions by the US for Iran’s role in financing Hezbollah. Different options have been on the table for Iran in order to circumvent the limitations. For instance, India and Iran have agreed upon a barter-like system whereby Iran would allow India to make a portion of oil payments in Rupee through the state-run UCO Bank, which has no exposure to the US. As for China, the Bank of Kunlun is another financial instrument enabling Iran to sidestep sanctions. In fact, the Kunlun Bank is known to have worked with Iran even during the Obama era sanctions and it was able to handle the transactions related to oil sale to China. Finally, Iran’s Fars news agency reported that several Russian banks such as Mir Business Bank, TransKapitalBank, and Gasprom as well as Iranian lenders such as Bank Pasargad, Eghtesad Novin Bank, Mellat Bank, and Bank Melli Iran have been handling transactions and the banking relations going unhindered between both countries.

Current Oil Production

 

Iran’s production capacity increased after the lifting of sanctions in the early 2016 from 3.5 million barrels per day in May 2016 from less than 2.9 million barrels per day in late 2015. This upward trend continued into 2017 with output averaging 3.70 million barrels per day in the first half of 2017 and about 3.8 million barrels per day in the second half.

Amongst the most productive oilfields is West Karun, where Production reached 345,000 b/d by December 2017 and is expected to reach 380,000 b/d by mid-2018. The production more than doubled in less than two years in this oilfield. Moreover, as of February 2018, production from South Yaran, Azar oilfields and South Pars oil layer had exceeded 63,000 barrels per day.

 

Vahid Yucesoy for iStrategic