Iran Pulse No. 94
No. 94 June 11, 2019
U.S. 'Maximum Pressure' Creates Opportunity to Roll Back Iran's Regional Influence
Micha'el Tanchum*
The expansion of Iranian hegemony across the Middle East in recent years has fundamentally shifted the strategic balance of power more in Tehran's favor at the expense of its regional rivals. With the new U.S. policy of 'maximum pressure', Iran's outsized advances in the region may be about to come to an end. The greatest determining factor in whether or not Iran's influence can be whittled down to size is Washington's ability to maintain international compliance with its new complete ban on Iranian oil purchases. The complete ban was implemented by Washington's termination of waivers it had previously granted to eight countries to purchase Iranian oil. Thus, the success of America's maximum pressure policy Iran hinges on the compliance of these eight — Greece, Italy, Turkey, Taiwan, Japan, South Korea, India, and China. After a month of the policy being in force, the signs indicate that the U.S. has obtained that compliance with its policy creating the opportunity to force a retreat of Iranian influence in the region.
Exploiting the chaos resulting from the 2003 invasion of Iraq and the civil wars in Syria and Yemen following the 2011 Arab Spring, Iran has carved out a formidable sphere of influence by using proxy forces – the Shia militias in Iraq and Syria, Hezbollah in Lebanon and Syria, and the Houthi movement in Yemen. Under the direction of the Iranian Revolutionary Guards Qods Force, Iran and its proxies now surround the Kingdom of Saudi Arabia and the United Arab Emirates. They also have created an overland supply corridor that reaches from Iran to the border of Israel. However, the price tag for Iran's strategic accomplishments is an estimated $16 billion that Tehran paid for through the sale of oil and other hydrocarbon revenues. The cost is even higher when Iran's energy contributions and financial support for its allied regimes are factored into the calculation. The re-imposition of U.S. sanctions on Iran's energy industry since November 4, 2018 have rendered it impossible for Tehran to sustain all its operations across the Middle East.
With onset of partial U.S. sanctions against Iran’s energy industry during the first six-month sanctions round from the beginning of November 2018 to the end of April2019, the Iranian economy began to buckle from the crippling financial strain due to Tehran's expenditures beyond its borders. By the end of the first six-month period, U.S. policy had caused Iran's oil exports to plummet from 2.8 million barrels per day (bpd) to, at most, only 500,000 bpd. The financial cost for Tehran has been a staggering $10 billion loss in oil revenues. The result was achieved despite the U.S. having granted waivers to eight nations for continued, albeit limited, oil purchases.
Adopting a policy of 'maximum pressure', U.S. President Donald Trump surprised Tehran as well as the international community by announcing that it would not renew the waivers previously granted to Greece, Italy, Turkey, Taiwan, Japan, South Korea, India, and China during the second six-month round of sanctions beginning on May 2, 2109. Of the eight nations granted waivers, five of them – China, India, South Korea, Japan, and Turkey – accounted for 70 percent of Iran's crude oil and condensate exports purchased in 2017.
U.S. NATO allies and EU members Greece and Italy terminated their purchases of Iranian oil with the November 2018 onset of sanctions. The fact that they never even used their sanctions waiver prompted Tehran's ire. On February 5, 2019, Iranian oil minister Bijan Zanganeh complained that “Greece and Italy have been granted exemptions by America, but they don’t buy Iranian oil and they don’t answer our questions.”
Similarly, the America’s closest Asian allies have complied with the oil sanctions. Like Greece and Italy, Taiwan never used its sanctions waiver. Taiwan's Formosa Petrochemical, which had a long-term contract with the National Iranian Oil Company to purchase 2 million barrels of Sirri crude oil every quarter, entered into a contract with Iraq's Oil Marketing Company purchase Basra Light Crude to replace its Iranian imports. Japan lifted only 86,430 bpd with its sanctions waiver and then terminated all Iranian oil imports prior to end of the waiver period with sufficient for banks and insurance companies to complete their transactions.
South Korea likewise suspended Iranian oil purchases on May 2, 2019 when the U.S. terminated of waivers. The case of South Korea illustrates of the difficulties countries face when attempting find alternative sources to replace Iranian oil imports in order to comply with U.S. sanctions. South Korea is that largest buyer of Iranian light condensate which is an essential input for South Korea's petrochemicals industry. South Korea's splitters, the processing units used in manufacturing petrochemical products, are designed to process Iranian condensate, which is low in sulphur and produces no residue. To fill the gap, the South Korean government spent approximately $9 billion to purchase and test up to 23 different types of condensate from 15 different countries to find possible substitutes for its Iranian imports.
Despite Turkey’s current imbroglio with the United States over Ankara’s decision to purchase the Russian S-400 air defense system as well as Ankara’s long-standing objection to American support for Kurdish forces in Northern Syria, Turkey has complied with the U.S. total ban on Iranian oil imports. In late April 2019, Ankara initially indicated its unwillingness to comply, with Turkey's Foreign Minister Mevlut Cavusoglu declaring to the press that, "We do not accept unilateral sanctions and impositions on the issue of how we will establish relations with our neighbours." Nevertheless, upon the termination of waivers, Turkey has closed its ports to Iranian oil.
Four days after the complete ban on Iranian oil went into effect, a tanker en route to Turkey loaded with 130,000 tons of Iranian crude oil changed its course in the middle of the Mediterranean Sea. Although the ship had turned off its tracking transponder, oil trade analysts observing satellite imagery have determined that the tanker offloaded its cargo at the Syria's Baniyas port, home to one of Syria's largest oil refineries. To make up for the lack of Iranian oil imports, Turkey has turned to increasing its oil purchases from Kazakhstan, sending Turkey’s imports from the Central Asian oil giant to a twenty-year high.
Similar to the case with Turkey, many observers believed that India would not comply with complete ban on oil purchases. In January 2019, Tehran and New Delhi agreed upon the opening of a branch of Iran's Pasargad Bank in Mumbai, providing India a means to deposit currency in an Iranian account. At the same time, India also began paying for Iranian oil in rupees. In April 2019, India's Iranian oil imports were cut by more than half. Facing nationwide parliamentary elections, these observers assumed India's reduction was temporary and reflected Prime Minister Narendra Modi's desire to avoid a dispute with United States in the midst of his re-election campaign.
Despite widespread speculation that that India would continue to purchase Iranian oil once the national elections returned the Modi government to power, on the day after Prime Minister Modi's convincing May 23, 2019 re-election victory, India's Ambassador to the United States, Harsh Vardhan Shringla confirmed that India had ceased all purchases of Iranian Oil. The decision has apparently caused great consternation for Tehran, especially after the generous terms Iran had granted India and the complicated payment mechanisms negotiated between India and India.
The extent of Tehran's dismay can be gleaned from Iranian Foreign Minister Javed Zarif's suggestion to connect the Indian-built port of Chabahar with Chinese administered port in Gwadar, Pakistan. The Chabahar port forms the critical node of India's ambitious International North-South Corridor project, an Indian Ocean-to-Europe commercial transit corridor intended to break India's isolation in Eurasia and offset China's Belt and Road Initiative. Tehran's suggestion the Chabahar port could form part of China's commercial transportation network was intended to send a strong signal to New Delhi.
Despite Beijing's vocal objections to U.S. sanction on Iran and its own trade war with Washington, China has also complied with the sanctions. China top two refiners, China National Petroleum Corp and Sinopec suspended purchases of Iranian oil in May. For now, China's energy majors do not want to risk being subject to U.S. sanctions that would prevent them from functioning in the global financial system.
Although Iran continues to sell oil through "unconventional" means," the revenues from such volumes are sorely insufficient to maintain Iran's economy, let alone its military activities beyond its borders. Iran's inability to sustain its activities in Iraq, Syria, Lebanon, Yemen and elsewhere is exacerbated by the recent addition of US sanctions on Iran's revenue-earning metals and petrochemical industries. Simply, Iran's expanded sphere of influence is an empire beyond its means. Requiring heavy investments far beyond Iran's borders, Iran's activities in Syria would likely be the first to be reduced. While it is unclear how long the U.S. will be able to maintain compliance with its maximum pressure policy, Washington has created a window of opportunity to roll back Iranian influence in the Middle East.
*Dr. Micha’el Tanchum is a Fellow at the Truman Research Institute for the Advancement of Peace, Hebrew University and non-resident, affiliated scholar with the Center for Strategic Studies at Başkent University in Ankara, Turkey (Başkent-SAM).
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Iran Pulse No. 94 ● June 11, 2019
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