As both the U.S. and Iran harden their positions, and as each looks for leverage and partners, there are chances for miscalculation, but not many opportunities for a diplomatic solution in the short-to-medium term. The future of Iranian crude imports is uncertain, but we expect the two biggest importers to continue importing.
The shape of the ongoing confrontation between the United States and Iran is becoming clearer as Washington and Tehran detail their policies and individual companies make decisions about how they respond to the re-imposition of U.S. sanctions. A few key decisions remain to bring even more clarity into what will be a drawn-out struggle over Iran’s nuclear programs and other behavior. As each side hardens its position, and as each looks for leverage and partners, there are chances for miscalculation, but not many opportunities for a diplomatic solution in the short-to-medium term.
U.S. National Security Advisor John Bolton, a hard-liner when it comes to Iran, further articulated U.S. policy recently when he stated that Washington wanted to go further than the measures – including sanctions – that were in place before the 2015 Iran nuclear deal. As a practical matter, this means fewer waivers for either companies or countries doing business with Iran. Washington has only issued two limited waivers after the first set of sanctions wind-downs. The remaining sanctions go into place in November. In the meanwhile, companies are making decisions based on these announced policies. British Air and Air France announced that they were halting flights to Tehran next month although both companies stressed that it was not due to sanctions but rather profitability – the latter likely due to sanctions. The big questions remain as to whether large importers of Iranian crude oil such as China and India will – in a government-to-government agreement — set up a scheme whereby they can avoid the sanctions. Washington is pressing other oil producers to increase production to provide an alternative to Iranian products. However, it is not clear whether that alternate supply will be sufficient or price-competitive with a motivated Tehran.
In addition to a question of price, the Chinese government has other objectives that may cause it to aid Tehran and complicate Washington’s goals vis-à-vis Iran. Washington and Beijing are in spiraling trade war, and the Trump administration just cancelled talked with North Korea and blamed the lack of progress on China. China may use issue linkage – foiling Washington on Iran in order to negotiate more favorable terms on issue more important to it such as its nuclear-armed neighbor and trade that keeps Chinese workers employed and content. Moreover, Beijing is looking to continue its global rise and may look at this as an opportunity to begin setting up mechanisms for trade and financial interaction outside of Washington’s influence. As we indicated in our recent Middle East Watch, we expect China to generally maintain Iranian imports while India seems to be hoping for a deal that cuts imports by roughly half.
Tehran, for its part, has continued to state that it will neither buckle to Washington’s pressure nor negotiate with the Trump administration. Iran’s supreme ruler scoffed at the idea of talking with the Trump administration, but he also said that there would be no war with the United States, seemingly setting limits on what Iran may do to counter Washington’s pressure. News reports of social media companies finding and shutting down fake accounts linked to Iran and aimed at the U.S. elections could indicate one path Tehran would take to counter Washington’s pressure. However, it is not clear that those accounts were sanctioned by the Iranian government or linked to U.S. sanctions rather than simply the day-to-day sparring
Both Tehran and Washington are likely to pursue a “wait and see” attitude. The Trump administration believes that the Iranian economy is tanking and domestic pressure is increasing on Iran’s leaders. Tehran may believe that the increasing domestic political pressure on the Trump administration coupled with China, Russia, and Europe wanting to keep the nuclear deal going could allow it to ride out any economic pressure and its political ramifications.