Thursday, November 8, 2018

US Policy On Iran After The Midterm Elections

A curious coincidence is that the US midterm elections happened one day after the US reimposed its second round of illegal economic sanctions on Iran, with the focus on oil, shipping, and banking, along with some other sectors.  Despite all but a handful of governments  around the world supporting Iran in this matter (despite apparently two attempted assassinations of opponents of Iran's government in European nations recently) against the US out of a hope to keep Iran following the JCPOA nuclear agreement as it has by all reports been doing, the impact of the midterm elections is probably to reinforce support for Trump's policy, even as mostly he lost support in the election.  The reason is that the most important location for serious critics of a president's foreign policy usually come out of the Senate, not the House of Representatives or governors.  So, even though the Dems have taken the House and gained governorships, the GOP gaiined in the Senate, and some of the GOPs leaving included the few Trump critics, notably departing Foreign Relations committee Chair, Robert Corker of TN.  This is the case, even as those GOP gains may only amount to a net two (Dem Sinema now ahead in AZ) or even only one (Nelson in FL may yet pull it out too).

Yet another reason the gains by Dems will probably not lead to much more pressure on Trump on this is that many Dems at least somewhat support his policy, especially those strongly influenced by the Israeli government.  Thus in today's Washington Post, a lead editorial (presumably by neoconnish Fred Hiatt) said there may be reasons for imposing some sanctions because of "malignant" policies by Iran, notably supposedly supplying missiles to the Houthis in Yemen, plus the Syrian government, and Hezbollah in Lebanon (there are doubts on the extent of all this), even as WaPo opposes the US withdrawing from the JCPOA and is highly critical of Saudi Arabia due to the murder of their journalist, Jamal Khashoggi, probably on orders of KSA Crown Prince MbS, a main enemy of Iran.  Indeed, members of both parties in the Senate have become unhappy with the Saudi war in Yemen and may move to cut US military support of the Saudi war effort there.  But this will probably have little to no effect on the reimposed economic sanctions on Iran.

As it is, the ultimate impact of the new sanctions is quite complicated with various cross-cutting effects that are already damaging the Iranian economy, but may end up having less impact than Trump would like.  The most important part of the sanctions involves Iran's oil exports, which US officials claim they would like to see go to zero.  Early forecasts had those falling to about a third of the about 2.8 million bpd of a few months ago, which anticipation helped push oil prices up substantially, with Brent crude topping $80 per barrel while West Texas intermediate crude topped $70 per barrel.  But the Trump administration has granted temporary waivers to 8 countries allowing them to continue importing Iranian oil for awhile, supposedly to avoid excessive disruption of global markers (while not officially announced, the Japan Times claims the 8 waivered nations are China, India, Japan, South Korea, Taiwan, Turkey, Italy [only EU nation on list]. and UAE [yes, that big anti-Iran oil exporter imports oil from Iran]).  As it is, with surging oil inventories in the US, prices have fallen sharply in the last two weeks, with Brent down to nearly $70 and WTI to nearly $60 , with some commenters today claiming that oil is turning into a "bear market."  While this clearly allows Iran to export more oil than previously thought for now, the price decline will hurt Iran.

A fundamental clash in this is between governments and the businesses based in their nations.  Only a handful of national governments officially support Trump in this policy, basically the odd group of Saudi Arabia, Israel, UAE, Bahrain, and apparently Egypt, with a few others sort of semi-supportive, such as Jordan, if with little enthusiasm.  Russia, China, Turkey, and the major EU nations all oppose Trump's policy.  While businesses in Russia in particular go along with their government's view, nearly all of those that are reasonably large in the EU nations are obeying the demands of the US government to cut back business relations with Iran, with poster  boys for this being Total and Peugeot from France out of fear of losing markets in the US or facing sanctions from the US government.  All of this has led to efforts in both China and the EU to set up alternative payment systems to avoid using US dollars and going through US-controlled financial intermediaries, a big conflict over this involving the SWIFT payment system, which the US would like to prevent Iran from using while the major European nations oppose this move by the US.  As it is, given the ongoing efforts by they EU nations to help Iran out, it seems especially unwise of Iranian intel agencies to be attempting to assassinate people in France and Denmark as they have reportedly done, albeit unsuccessfully so far.

A final point is that it is extremely unlikely that this policy by Trump will lead to Iranian leaders kowtowing to him and entering into any negotiations.  If anything, they might get pushed into pulling out of the JCPOA or create trouble for their enemies in various ways.  OTOH, it may be that the sanctions will not lead to as harsh impacts on the Iranian economy as forecast, whether this is due to the Europeans and Chinese setting up alternative payments systems, or due to Iran wriggling out of the sanctions whether due to waivers or through such maneuvers as barter transactions involving oil or the use of "ghost ships" that do not use any radio communications, something reportedly already going on.  We shall see how this all turns out, but for now Trump probably has gotten a modest boost of support for his policies within the US as a result of the midterm elections, much as I am not pleased to see this.

Barkley Rosser


Peter T said...

Unless they are really tight, sanctions could actually help the Iranian economy. A resource economy is a fragile thing, prone to booms and busts and to kleptocracy. Keeping oil revenue tight and imports low encourages diversification and builds self-reliance. Iran is an exporter of steel products, makes cars and trucks and is now a mid-sized industrial nation. It operates its own tanker fleet. It has also put considerable resources into its rail net, taking advantage of its positions as a crossroads - rail connections to Pakistan, Kazakhstan, Turkmenistan, new line to Azerbaijan, new line planned to Turkey, new port at Char Bahar to service Afghanistan and Central Asia... said...

Apparently the new port where the rail line to Afghanistan comes out of is exampt from the Trump sanctions. Some of those other sectors you mention, such as shipping, are subject to the sanctions.

Barkley Rosser said...

This should probably be an addendum, but I am putting it as a comment. In today's WaPo I read that SecState Pompeo is considering designatingg the Houthis in Yemen a terrorist group, mostly to be able to get at their foreign supporters and suppliers. This looks like a spit in the face to the bipartisan group in Congress that wants to cut aid to the Saudis for their awful war in Yemen, which seems to be ramping up more. Needless to say, this is more pro-Saudi and anti-Iran action by the Trump administration, even as Iran's aid and support of the Houthis has long been exaggerated by both the Saudis and the Trump administration.

Peter T said...

I'm not saying sanctions don't hurt. Just that they put a country which would otherwise have a natural resource political economy, with the distortions that entails (small middle class, low level of internal development, small industrial sector, low level of political mobilisation) on a different path. Iran is in a position analogous to Britain 1688-1815, a country whose elites see an existential threat and are prepared to sacrifice a great deal to maintain internal support and external allies.

Also, Iran has played a clever diplomatic and military hand. It's defence spending is low, it spends comparatively little on aid to allies such as Syria, it has solid ties with most neighbours and has managed to get Russia, China and the EU on side. It's an impressive achievement.

Barkley Rosser said...


I think that whatever comes out of Trump's efforts, apparently fairly successful in the short run, will not last all that long for one reason or another. Either a successor will undo them or Iran and the nations that oppose the sanctions (the vast majority) will indeed develop ways to get around them, as they seem to be working to do. So talking about Trump putting Iran on a "different path" is pretty premature. For better or worse, nations with lots of oil tend to be pretty stuck on mostly exporting it for well-known reasons (see Dutch disease), not to mention that Trump is putting sanctions on sectors besides oil as well, so not exactly helping them to move off oil. Heck, MbS in KSA's Vision 2030 is to get it off oil at least somewhat, and I say to that one, fat chance.

Heck, back in the early 1980s my wife was on the Soviet long-run planning group looking at 25 time horizon. They were trying to figure out how to get the Soviet economy off depending on oil exports. Guess what? The Russian economy continues to be heavily dependent on oil exports, and they have more alternatives than do the Iranians.

Peter T said...

My comment about a "different path" relates to the whole post-1979 trajectory. The Shah tried to build a post-oil Iran (in a half-assed kind of way). The Iraq war, UN sanctions, US enmity have pushed Iran to take this seriously, and they have built functioning medium-sized industrial and transport sectors. Still dependent on oil income, but less so, and not nearly so structured around that cash flow.

Contrast Australia, where resource income has tended to displace industry.

Procopius said...

I find I'm skeptical of the reports of "attempted assassinations" of Iran critics in the EU. Just as I am hyper-skeptical of the Skripal stories from the UK. It makes no sense for Iran or Russia to do what they are accused of, while we know from history that often the nation making the accusation actually was the culprit, e.g. the CIA campaign to overthrow Mossadegh. Hope this does not qualify as a gaslight comment.