As flagged several times by OilPrice.com in recent weeks, most recently at the end of July, the U.K., France, and Germany (the ‘E3’) last week started the process of triggering the ‘snapback’ mechanism of restoring sanctions on Iran. These are the broad and deep range of sanctions that were in place before the Joint Comprehensives Plan of Action (JCPOA, or colloquially ‘the nuclear deal’) was agreed between Iran and the P5+1 group of nations (the U.S., U.K., France, Russia, and China, ‘plus’ Germany) in 2015. The move by the E3 comes well before the 18 October official deadline that marks the latest point at which the snapback mechanism could be triggered. U.S. Secretary of State Marco Rubio subsequently stated that Washington will work with the E3 and other members of the UN Security Council to complete the snapback sanctions process in the coming weeks. However, he added that the U.S. is still available for direct talks with Iran. So, what will happen from here, and what does it mean for oil prices?
Although the U.S. has left the door open for a resumption of talks with Iran, Europe is deadly serious about reimposing the full weight of pre-2015 sanctions on the Islamic Republic, a very senior security source who works with the European Union’s security complex exclusively told OilPrice.com last week. “Iran is playing an increasingly active and dangerous role in existential threats against European security, in tandem with Russia, especially, but also China and North Korea, as intelligence has confirmed in recent months, and it cannot be allowed to continue,” he said. “Scores of leading Russian nuclear scientists have been sent to Iran since June last year, and three top missile experts from North Korea have also been in Tehran since around the same time, and we are told that the progress on weaponisation know-how has been expedited to critical levels,” he added. “Verified multi-source intelligence also show that Iran is becoming ever more active in the Russia-Belarus campaign of eroding NATO’s eastern flank defences particularly along the vulnerable northern and southern border defences that are most vulnerable, with the last delivery of mid- and long-range missiles from Tehran to Moscow including Etemad [a late generation ballistic missile], and Fath 360 [a multi-lunch ballistic missile launching system], with most of the latter to be positioned by Moscow near the Belarus border with Poland,” he underlined. “Even more recent intelligence received from Iran of its newest missile capabilities confirm successful testing of the new generation of solid fuel missiles with a range of 4,200 kilometres carrying a payload of 700 kilogrammes – and this range could be enhanced to 4,700 kilometres if the payload is reduced to 450 kilogrammes – effectively allowing Iran to target most of the major cities in Europe,” he told OilPrice.com. “So, the [European] Troika has now included a new condition for any further JCPOA discussions that requires Tehran to restrict its missile range to 1,000 kilometres, which Tehran has already flatly refused to do,” he highlighted.
The existing pre-2015 sanctions on Iran are not just based on its weapons capabilities and nuclear weapons aspirations but also include a wide range of financial and other sanctions that are designed to cripple the country’s economy over time. They had been working so well before 2015 that they were the key reason why the JCPOA was struck at that point by then-President Hassan Rouhani who used the prospect of the sanctions-easing deal to ultimately secure two presidential electoral victories from an austerity-weary public. In the short term, the snapback mechanism – which the UN Security Council has 30 days from the day it is triggered to decide whether to continue sanctions relief or allow it to lapse — would broadly see Iran placed back under Chapter VII of the UN Charter as a threat to international peace and security. This, in turn, would herald the reimposition of six major UN resolutions introduced between 2006 and 2010, including direct sanctions on lists of Iranian individuals and entities connected in any way to Iran’s nuclear and missile programme. Additionally, Resolution 1929 hits a much wider range of targets including an arms embargo on countries from supplying Iran with any military equipment of note (including tanks, artillery systems, combat aircraft, attack helicopters, warships, and missile systems, among others), prohibitions on countries supplying it with any equipment, technology, or material that might be deemed in any way useful for its nuclear weapons programme or for missile development, and Draconian limitations on its financial and banking systems. Of particular note in this latter regard are measures that relate to the Financial Action Task Force (FATF). The FATF has 40 active criteria and mechanisms in place to prevent money laundering — an activity that is vital to Iran’s Islamic Revolutionary Guards Corps’ (IRGC) activities across the world. It also has nine criteria and mechanisms in place to do the same for the financing of terrorism and related activities — again, a core of the IRGC’s role in promoting Iran’s brand of Islam around the globe. The FATF also has swingeing powers to wield against individuals, companies, or countries who transgress any of its standards and is extremely aggressive in using them by degrees, depending on whether the sanctioned entity is on its ‘grey’ or ‘black’ list.
The IRGC knows full well that these sanctions, if implemented effectively – as Europe will certainly be doing this time around, judging from several senior security and legal sources in the E.U. spoken to by OilPrice.com over the past few weeks and months – could spell the end of its multi-layered control over Iran. This would require the U.S. to fully support the E.U.’s full reintroduction of sanctions, as it has promised, and to step up sanctions against China’s ongoing purchase of Iran’s oil, which remains its key financial lifeline, as it has started to do. “The economy is already close to collapse, and the public mood towards the IRGC especially has become even worse in the past few months, to such an extent that support for the West’s preferred replacement for [Supreme Leader, Ali] Khamenei [the U.S.-based exiled Crown Prince Reza Pahlavi — the eldest son of Farah Diba and Mohammad Reza Pahlavi, the last Shah of Iran] has increased substantially,” said the E.U. security source. If the ability of the IRGC to enforce Iran’s brand of Islam at home and spread it across the world dwindles, then so would the grip on power of Supreme Leader, Ali Khamenei, and indeed the very future of the 1979 Islamic Revolution. On the other hand, nor can they accept and adhere to the U.S.’s alternative, which would be a no-nonsense, hardline, take-it-or-leave it JCPOA, which would also include Iran joining the FATF and allowing the full dismantling of its nuclear weapons programme. “The only choice they [the Supreme Leader and IRGC] have is to do what they have been doing since 2015 – which is to agree to a new [JCPOA] nuclear deal and then continue as before [with the nuclear programme and IRGC-sponsored Islamic pressure in Western allies] as best they can,” said the E.U. security source. “In the short term, we might also expect some attempted disruption of oil supplies, as and when the sanctions are fully reintroduced,” he highlighted.
One option for doing this would be to disrupt oil supplies passing through the key global chokepoint of the Strait of Hormuz, which was suggested last week by Hossein Shariatmadari, a representative of Supreme Leader Khamenei. Around the same time, Alaeddin Boroujerdi, a member of the Iranian parliament’s national security and foreign policy council said that Iran is considering calling again for support from other Islamic oil exporters to halt their own oil exports too. This was suggested before at the time of the Israeli escalation of hostilities directly against Iran, but garnered no support from such countries at that time. That said, the World Bank did supply a range of possible price impacts on oil prices at the time when those hostilities were on the rise, which can be used as a gauge for such eventualities. A ‘small disruption’ in global oil supply – reduced by 500,000 to 2 million bpd (roughly the same as the decrease seen during the Libyan civil war in 2011) – would see the oil price initially rise 3-13%. A ‘medium disruption’ – involving a 3 million to 5 million bpd loss of supply (roughly equivalent to the Iraq war in 2003) would drive the oil price up by 21-35%. And a ‘large disruption’ – featuring a supply fall of 6 million to 8 million bpd (like the drop seen in the 1973 Oil Crisis) – would push the oil price up 56-75%.
Source: By Simon Watkins from Oilprice.com