Analysis 06-01-2018

Iran and Europe Prepare for Sanctions

Trump’s abrogation of the Iranian nuclear deal has European governments and companies scrambling. Should they side with Iran and keep their Iranian business? Or, should they recognize the sanctions and reap the benefits of siding with the US?

One practical issue is what is going to happen to European investments in Iran. The most high profile example is French energy company Total’s investment in a giant Iran gas field. Total said this month it would pull out of Iran and its development of the giant South Pars gas field unless it is specifically protected from US penalties and related sanctions.

Tanker owners are also taking the cautious approach. They are watching the situation closely, anticipating Europe’s move, but acknowledging that the reinstatement of sanctions could have “significant ramifications” for the maritime transport industry.

Everyone is waiting for Europe to make its move even as European companies in Iran are beginning to prepare their exit from the country. Everyone remembers the previous sanctions and they don’t want to be caught off guard.

Earlier this month, an adviser to French President Emmanuel Macron said that Europe’s response to the threat of U.S. sanctions on Iran will be “an important test of sovereignty.” Indeed, unlike the last time there were sanctions against Iran, the European Union did all it could to save the nuclear deal and has signaled it will continue to uphold it.

There’s also the sticky problem of international financial transfers, which are done in dollars. If Washington takes a hard line, such as claiming US jurisdiction as regards dollar transfers between two sovereign countries as was the case in 2014 with the $9 billion fine levied on French bank BNP, then a confrontation is seemingly inevitable and, as a result, growing questions about US financial hegemony and whether a new monetary system is needed.

No wonder French finance minister Bruno Le Maire said on May 9 that it was not acceptable for the US to be the “economic policeman of the planet”.

There’s also the problem of additional sanctions. US Secretary of State and former CIA boss Mike Pompeo made an ultra-aggressive speech threatening Iran with escalating sanctions. In his first major foreign policy address as Secretary of State, Pompeo stated,

“Sanctions are going back in full effect and new ones are coming… This sting of sanctions will be painful if the regime does not change its course… These will indeed end up being the strongest sanctions in history when we are complete.”

Who is more important for Europe, Iran or the US?

The importance of Europe for Iran can be seen in the fact that Iran’s exports to Europe have surged almost ninefold since the end of sanctions in January 2016.

Thus, Iran’s exports to the EU have risen from US$1.3 billion in 2015 to US$11.4 billion in the 12 months to January, according to the IMF Direction of Trade Statistics.

There is also of course the growing trade between Iran and China. Iran’s total trade with China rose by 18% to US$27.5 billion in the 12 months to January 2018. All this makes Iran a good example of the increasingly multi-polar world where American influence and interests appear to be fading.

There is still no foreign bank in Iran and therefore a lack of money transfer protocols.  Indeed, despite the 2015 nuclear deal, it is still not possible to use foreign credit cards to pay for hotel bills or any other transaction.

While some doubt there is a lot the EU can do against U.S. sanctions, there is one 1996 law dubbed a blocking statute that will ban European companies from complying with U.S. sanctions, which would put companies such as Total between a rock and a hard place.

European Commission President Jean-Claude Juncker said two weeks ago the commission will amend the statute to include the U.S. sanctions again Iran and that the amendments should be completed before the first round of sanctions starts in early August.

However, the fact is that the US government can severely restrict any country or company that does business with Iran.

Iran’s Gold Option

So how can Iran beat the sanctions? Gold. Iran’s gold option looks even better as part of the nuclear deal was the repatriation of 13 tons of Iranian gold from America.

Several years ago, Iran used gold funneled though Turkey and the UAE to avoid American sanctions. In fact starting in 2010, Iran was able to earn $100 billion by using gold instead of traditional electronic transfers. According to some US and Israeli sources, the gold was then used to support its missile and nuclear program.

And, it looks like they may do it again.

Gold is traditionally the money of last resort, and it isn’t tied to any financial system. Jeff Christian of the CPM Group says, “If you go back to the period before 2015 Iran was one of the largest places for gold demand at times.” He explains, that before sanctions on Iran were lifted under the Obama administration, Iran’s oil company, which is state-owned, sold oil to traders in exchange for Turkish lira and then used the lira to buy gold.

Now it seems more likely that Iran would go straight to selling oil directly for bars of gold. That’s because the value of the Turkish lira has been plunging lately due to the poor policies being pursued by the country’s president Erdogan.

Gold traders in Turkey may also be reluctant to supply metal to Iran because of a U.S. sanctions case against a Turkish banker involving gold, he said. The banker was convicted earlier this year of helping Iran evade U.S. financial sanctions. His dramatic trial revealed that tens of billions in dollars and gold moved from Turkey to Iran through a complex network of businesses, banks, and front companies.

This time, the sanctions avoiding scheme may also include Russia and China. Russia and China are facing US imposed sanctions and both have major gold reserves. Between them and Turkey and Iran, they are an ideal partnership for avoiding US sanctions. Iran needs to sell oil, China needs to buy oil, Turkey borders Iran and can act as a middleman, and Russia has high tech weapons that it wants to sell to Iran.

What makes the system work is gold. They’re not using the dollar payment system, or the SWIFT payment system or anything that the U.S. can interdict or even trace. They’re in effect bypassing U.S. sanctions by using physical gold.

To prove this, a few months ago, Turkey moved 26.8 tons of gold from New York’s Federal Reserve to the Bank of England and the Bank of International Settlements. In 2017, Russia added 214 tons of gold to its reserves and currently holds 1,891 tons of gold – the 5th largest central bank reserves. China’s reserves are the 6th largest.

Although US sanctions will hamper Iran – especially in terms of European business deals – Iran has experience in using gold to make billion dollar deals in oil and allegedly WMD transactions.

Expect European business with Iran to drop off in the coming months. However, expect some business (especially oil related business) to pick up with other Middle Eastern nations as they are used as middlemen for Iran. Also don’t be surprised if countries like Turkey and the UAE suddenly become major importers of gold (before it disappears into Iran.

Ironically this type of trade isn’t unknown to the US. During early days of WW II, when the US was neutral, it would sell arms to both Germany and Britain, but require payment with the delivery of physical gold to US ports.

This time, the US will not benefit.

The biggest beneficiaries will be Russia, China, and Turkey, which will use gold transfers to avoid US sanctions. Iran will continue to sell oil and able to buy forbidden items like nuclear or ballistic missile technology.

Little will change.