Around the halls: How Trump’s latest Iran sanctions decision could affect markets and key countries

By Samantha Gross, Ryan Hass, Tanvi Madan, Suzanne Maloney, Jeffrey Feltman

On April 22, the Trump administration announced that buyers of Iranian oil would need to stop purchases by May 1 or face sanctions. The move is intended to reduce Tehran’s oil revenues to zero. What does the decision mean for oil markets, for key consumers like China and India, for U.S.-Iran relations, and beyond? Brookings experts explain.

Samantha Gross (@samanthaenergy), Fellow in the Cross-Brookings Initiative on Energy and Climate: President Trump clearly wants to have it both ways with respect to oil prices. He is using sanctions to reduce oil exports from Iran and Venezuela, tightening global oil markets. At the same time, he complains bitterly when U.S. gasoline prices rise.

This week brings a new chapter in this ongoing drama. Since November 2018, five countries— China, India, Japan, South Korea, and Turkey—have taken advantage of waivers that allowed them to continue purchasing Iranian oil despite the U.S. sanctions regime. Secretary of State Pompeo announced on Monday that these waivers will expire on May 2 and that the United States aims to bring Iranian oil exports down to zero.

The White House has said that growing production from Saudi Arabia and the United Arab Emirates would make up for the loss in Iranian oil. I’m certain that the Saudis and Emiratis would be delighted to bring in more oil revenues at their regional rival’s expense. However, oil markets are unconvinced—oil prices on Monday, April 22 reached their highest level this year, just ahead of the summer driving season. Even if other producers cover all the oil volume lost from Iran, the oil market will be operating at a lower level of spare capacity than it would otherwise have been, keeping upward pressure on prices.

This policy change raises the question of where Iran lies in the administration’s overall policy goals. China has been the largest consumer of Iranian oil and has indicated its opposition to unilateral U.S. sanctions. As the United States works to finalize a crucial trade agreement with China, tightening Iran sanctions could be a sticking point. China, South Korea, and Japan are also important partners in the ongoing effort to rein in North Korea’s very real nuclear program.

This whole affair demonstrates that policy decisions require trade-offs. Low fuel prices can be at odds with foreign policy goals, even though the United States has become the world’s largest oil producer. It’s not clear what the administration’s endgame is for Iran, but at least for today, it seems to be ahead of other important policy goals.

Ryan Hass (@ryanl_hass), David M. Rubenstein Fellow in the Center for East Asia Policy Studies and the John L. Thornton China Center: From a U.S.-China standpoint, the Trump administration’s decision to forego further waivers for China to continue purchasing Iranian oil at diminishing levels will inject stress on the bilateral relationship. The current waiver for China to purchase Iranian oil at reduced levels will expire May 2, concurrent with expected end-game trade negotiations between United States Trade Representative Robert Lighthizer and Chinese Vice Premier Liu He.

If the United States sanctions Chinese financial institutions facilitating oil transactions with Iran after the waiver expires, there could be spillover effects on trade negotiations. Any unilateral American sanctions on Chinese financial institutions could limit Beijing’s self-perceived room for compromise on U.S. trade concerns.

It is unlikely that China will zero-out imports of Iranian oil. China is the largest buyer of Iranian oil. Iran is a key strategic node connecting Asia and the Middle East as part of China’s Belt and Road Initiative. Additionally, the Chinese are allergic to the appearance of subordinating the conduct of their relations with Iran to the demands of the United States.

China was helpful, albeit often reluctantly, in applying pressure on Iran to negotiate the Joint Comprehensive Plan of Action (JCPOA). China voted for six United Nations Security Council resolutions targeting Iran, cut oil imports from Iran considerably, and played a largely constructive role in negotiations. China viewed itself at the time as a key player within a multilateral coalition to counter proliferation and maintain regional stability. The same does not hold true today. Instead, Beijing perceives the Trump administration as acting unilaterally to unwind progress that China played a hand in achieving through the JCPOA. 

In sum, by pursuing an all-or-nothing approach with China in lieu of a steady reduction in Chinese imports of Iranian oil, and timing the decision to coincide with high-stakes trade negotiations, Washington could find itself exposed to downside risks with Beijing without offsetting gains.

Hass: Beijing perceives the Trump administration as acting unilaterally to unwind progress that China played a hand in achieving through the JCPOA.

Tanvi Madan (@tanvi_madan), Director of the India Project, Fellow in the Project on International Order and Strategy: As I describe in more detail elsewhere, the Trump administration’s decision not to extend waivers from Iran sanctions will not be welcome in New Delhi. India imports over three-quarters of the oil it consumes, and Iran has long featured in the list of its top sources.

As a U.S. strategic partner, India had hoped to get another waiver—even if that required further import reductions on its part. The administration’s decision will therefore irk Delhi, particularly since Washington has also imposed sanctions on another of India’s top suppliers, Venezuela. India will likely find other sources of oil, including perhaps Saudi Arabia, the United Arab Emirates, and the United States.

The Trump administration’s step comes at an inopportune time for the Modi government, which is seeking re-election and will likely face opposition accusations that it has caved to American pressure. For that reason, and to maintain relations with Iran, it will likely seek to continue to import some quantity of oil from Iran using the rupee payment mechanism it had developed (even though it might upset the United States).

Three broader concerns should also be kept in mind: First, the Iran and Venezuela sanctions problems have come at a time when other irritants in the U.S.-India relationship have come to the fore; second, this week’s Trump administration decision is counterproductive to the goals outlined in the administration’s National Security Strategy, giving India common cause with China and Russia; and third, these developments will reinforce the Indian quest for strategic autonomy, which is in no small part based on a sense that the Unites States is not a reliable partner. 

Let’s not exaggerate the impact of the Trump administration’s move. For one, India has its own differences with Iran. In addition, New Delhi does have that alternate supply options today that it did not before. Finally, the United States continues to be useful to India for a number of reasons, particularly Delhi’s external and internal balancing strategy vis-à-vis China.

Suzanne Maloney (@maloneysuzanne), Deputy Director of Brookings Foreign Policy, Senior Fellow in the Center for Middle East Policy and the Cross-Brookings Initiative on Energy and Climate: As I wrote yesterday, the Trump administration has taken another dramatic step toward disrupting the status quo in and on Iran with the abrupt halt of all waivers for U.S. sanctions targeting Iranian oil exports. The decision places Washington on a collision course with China, India, and Turkey—whose continuing crude imports from Iran would be subject to U.S. penalties after May 2—and appears designed to push Iran’s leadership to the brink. But to the brink of what? The intended outcome of the administration’s campaign against Iran remains somewhat uncertain and even contested. And thus far, Tehran appears to be muddling through: There is little evidence that the Islamic Republic is approaching either a collapse or a capitulation.

There little reason to believe that the current constellation of American decisionmakers has engaged in a prudent consideration of the second and third-order consequences to U.S. interests and allies that may flow from its escalation of economic warfare against Iran. General Alireza Tangsiri, commander of Iran’s Islamic Revolutionary Guard Navy, reiterated the energy security formula that Tehran has observed for the past 30 years, warning that if Iran is prevented from exporting oil, its neighbors will face similar impediments. Tehran has a variety of well-tested instruments—from undersea mines to terrorist proxies to cyberwarfare—to deliver on that threat, and added incentive to do so, given the explicit Saudi and Emirati coordination with today’s announcement. Perhaps Trump, who regularly tweets his displeasure at gasoline price spikes, should ponder how the last American president fared in managing a full-fledged oil crisis in the Persian Gulf that erupted in the midst of his re-election campaign. 

Jeffrey Feltman, John C. Whitehead Visiting Fellow in International Diplomacy: As the White House revealed only on Friday, April 19, President Trump days earlier called Khalifa Haftar, the Libyan general who deployed his motley forces to assault Tripoli, to praise Haftar’s “significant role in fighting terrorism and securing Libya’s oil resources.” This turned U.S. policy, articulated by Secretary of State Pompeo a week earlier, on its head: The United States dropped calling for an end to the fighting and for a political solution in favor of egging on Libya’s would-be strongman ruler, despite the potential human and economic costs of a prolonged battle over Tripoli.

In light of the administration’s decision not to extend the waivers to countries importing Iranian oil, the reference in the call read-out to Libya’s oil resources deserves attention. The proximate cause of Haftar’s decision to attack Tripoli seems to be two-fold, to pre-empt a mid-April U.N.-facilitated national conference to chart a path toward elections (and with an outcome Haftar could not unilaterally control) and from a March 28 meeting between Haftar and Saudi Crown Prince Mohammed bin Salman, in which the latter is assumed to have extended Saudi “generosity” for Haftar’s move on Tripoli. 

What provoked Trump’s decision to throw U.S. rhetorical weight behind Haftar probably stems from Trump’s meeting with Egyptian President Sisi a few days earlier. Sisi, approving Haftar’s anti-Muslim Brotherhood credentials, likely sold Trump on the prospect that Haftar would defeat terrorism and stabilize Libya. The Saudis and Emiratis, who have facilitated Haftar’s rise in eastern Libya, or White House staff may have reinforced Sisi’s message with the oil argument: At a time when the United States is about to end the policy of waivers, having a strongman overseeing the largest oil reserves in Africa might help stabilize prices and markets.  

With resistance fiercer than he anticipated, Haftar—more of a poseur than an actual strongman—may fail in conquering Tripoli. But the Trump administration may not care whether he succeeds or whether Tripoli is destroyed in the process of trying. Haftar, after all, already controls the territory containing Libya’s major oil fields. An authoritarian-minded friend of the Saudis, Emiratis, and Egyptians, holding oil fields: What could be better at this moment?

from International Affairs https://brook.gs/2Uxs4eh