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Iran Sanctions

Why the Iran sanctions are unlikely to be effective this time around

Source: Trading Economics

The US sanctions on Iran became effective from 05th November but the markets hardly reacted. On the contrary the price of Brent Crude dipped below the $70/bbl mark. What went wrong?

Too many exemptions

The US has granted exemptions to 8 countries from the ban on oil imports from Iran. These include India, China, Japan and Korea. The first 3 Asian giants consume 1.7 million bpd out of the 2.6 million that Iran exports. If Turkey and Greece are also added, the impact of sanctions is going to be minimal. Obviously, the Trump team was worried about loss of face after China, Russia and India openly refused to abide by the sanctions. With China already throwing its weight around in the South China Sea and ignoring the impact of US trade war, the US did not have too many choices. This plethora of exemptions will ensure that the Iranian sanctions are ineffective. 

Practical problems for the US

Most countries affected by the sanctions have placed large arms orders with the US. Trump was not keen to lose out on the good will. Secondly, the US was also skeptical that Russia would purchase oil from Iran and sell as its own oil. Russia has been a long term ally of Iran. With published output of nearly 12 million bpd, Russia could easily absorb another 2 million bpd from Iran and increase its own exports. Thirdly, Iran had already started negotiations with private oil dealers to directly sell the oil to them so as to circumvent the US sanctions. Such funds had been used in the past to fund instability in the region as Iran has been doing through the Hezbollah in Lebanon and the Houthis in Yemen. Above all, Trump was worried that the Iran sanctions should not mark the Suez Canal moment for the US. In the 1950s, UK lost hegemony after the US spoke up against the blockade. Trump will not been keen on history repeating!