What happened?
Donald Trump announced last week that the US is pulling out of the UN-backed P5+1 deal on Iran's nuclear programme, meaning that America's sweeping pre-2015 trade and economic sanctions against Iran will take force again with immediate effect, blocking new contracts with the Iranian government and businesses. But in addition, the US has gone considerably further. It says that all companies not just American ones must "wind down" existing contracts with Iran in either 90 or 180 days, depending on the sector, or face penalties. From 6 August (the 90-day limit), Washington is to reimpose curbs on Iran's purchase of US dollars, while global trading in Iranian gold, coal, steel, cars, currency and debt, and imports of Iranian carpets into the US will be banned. From 4 November the US will reimpose its sanctions on Iran's oil exports and the rest of its energy sector, plus shipping, port operators, central bank dealings and insurance. In addition, Washington has halted sales of aircraft by Boeing and Airbus (whose aircraft include US components) and is considering the reimposition of targeted sanctions on about 600 individuals.
Why is the US doing this?
Trump's stated aim is to use the reimposition of sanctions to renegotiate a nuclear deal under which Iran makes further concessions. Many commentators, though, believe that is unlikely. The Washington Post says Trump's decision to dump the deal without a clear alternative strategy is a reckless move that makes the prospect of a nuclear Iran, and wider war in the Middle East, much more likely. In effect, Trump is gambling that renewed sanctions will wreak such economic damage that the Iranian regime if it doesn't collapse will be forced to slash its lavish spending on foreign military involvements (in Syria, Iraq, Yemen and Lebanon) and renegotiate from a position of weakness.
How has Iran's economy been doing?
Terribly. The currency has plunged in recent weeks in expectation of new sanctions. Inflation remains high at around 10%. Mismanagement and corruption remain endemic, with key industries and businesses dominated by the Revolutionary Guard Corps, a powerful branch of the armed forces. Banks are weighed down by bad loans, and a shortage of hard currency (US dollars) is hurting businesses and traders. A recession could be on the cards, and unemployment is above 10%, even on the official measure. All this helps explain why Iran has said it will abide by the accord for now, hoping that the EU will stick with the deal and extract sanctions concessions from the US.
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
Sign up to Money Morning
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Don't miss the latest investment and personal finances news, market analysis, plus money-saving tips with our free twice-daily newsletter
Was the 2015 deal working?
The Trump administration says not, but international inspectors say Iran is meeting all its obligations under the 2015 nuclear deal. Meanwhile, that agreement has also brought Iran some of the benefits it hoped for: although the economy is weak, the country is currently exporting about 2.5 million barrels of crude and condensate daily, more than double what it sold when sanctions were at their height in 2012-2015. Tourism has also picked up significantly. The deal was not a panacea for the Middle East's problems, but critics say that abandoning it will bring no benefits.
Why might the sanctions be ineffectual?
First, there's no multilateral interest in backing the sanctions this time. Unlike the previous set of sanctions (when, for example, the cut off of Iran from Swift, the global financial payments messaging system, was an EU initiative, not an American one), many countries including key European allies see this as outrageous bullying. Those countries, tired of dancing to Trump's capricious tunes, will be determined to circumvent them, whether formally via licences and waivers, or otherwise. In other words, this is potentially a pivotal moment in the fracturing of the Western alliance. Second, by far the biggest purchasers of Iranian oil are China and India, which will be least inclined to co-operate. Third, Washington's ability to enforce sanctions on the regime has been compromised under Trump: the hollowed-out State Department disbanded its sanctions implementation team last year, while the Treasury has also lost sanctions staff.
What's the impact on markets?
Clearly, the Iran sanctions create big headaches for some big European businesses (the likes of Total, Airbus, Siemens and Renault, for example). But many of those big European and Asian firms that decide to comply, for fear of expensive entanglement with US regulators, are those very companies that are already risk-averse due to the perennial threat of sanctions, and have minimal exposure to Iran. More broadly, the sanctions regime and the lack of international consensus creates other risks. Oil prices are already rising in anticipation of tighter supply.
Will this decision hurt the US?
Quite possibly, says Elizabeth Rosenberg in Foreign Policy. For example, the sanctions will directly enrich and empower Russia, as a key alternative oil supplier thus damaging the efficacy of sanctions on that country as well as Saudi Arabia (whose influence is arguably just as much a source of Middle East tensions as Iran). They introduce a new source of unwanted geopolitical tension into the US relationship with China. But perhaps the most strategically important unintended consequence is that if the new measures don't work well, they will weaken the strength of sanctions as a tool of US statecraft against security threats. "Ultimately, this unintended legacy of the present reversal in Iran policy may be among the gravest and most debilitating for US national security."
-
ScottishPower launches half-price electricity at weekendsNews ScottishPower is offering 50% off electricity at weekends, which could slash hundreds off your bill. We look at who can get it and how to apply
-
Trump calls “tariff” the “most beautiful word in the dictionary”, but investors may disagreeDonald Trump has promised to slap Mexico, Canada and China with new tariffs on day one of his presidency. What does it mean for the economy and investors?
