Total’s retreat from Iran illuminates the gravitational force business pragmatism exerts on high-altitude geopolitics. The European Union passed a “blocking statute” on Aug. 7 providing legal cover for companies ignoring sanctions reinstated after the US withdrew from the Joint Comprehensive Plan of Action (JCPOA) on Iranian nuclear development. But the US still can limit access to its markets and banks.
Forced to choose between American business and its 50.1% operating interest in 11th-phase development of supergiant South Pars gas field, Total—like several other European companies also fleeing the Islamic Republic—made the ground-level decision.
Curtailed oil exports
Capital flight represents one problem for Iran occasioned by US withdrawal from the JCPOA. Another problem is curtailed exports of perhaps 1 million b/d of crude oil and gas liquids starting Nov. 4. Iran has experienced this before, of course. Atop US sanctions long in effect, the country endured the more-damaging international measures imposed in 2012 and relaxed when JCPOA took effect in January 2016. In addition to restricting oil exports, those sanctions hobbled financial transactions and froze $120 billion of Iranian reserves in foreign banks. The Iranian economy contracted by an estimated 9%/year. Economic distress made domestic pressure for sanctions relief the dominant motive for President Hassan Rhouani in negotiations with China, France, Germany, Russia, the UK, and the US that produced the JCPOA.
Whether reinstatement of sanctions will exert comparable pressure is unclear. External conditions have changed. The 2012-15 sanctions had international support; now, the US is acting unilaterally. Also, as European companies decamp from Iran, China and Russia will fill whatever business voids they can; indeed, China National Petroleum Corp., with 30% of South Pars 11, is rumored to be negotiating to replace Total. And China and India will crave Iranian oil needing new buyers. China might seek oil-price concessions in exchange for South Pars investment. India can use Iranian exports as a lever in negotiations with the US over waivers of indirect sanctions against Indian companies working in Iran.
If those were the only considerations, Iran might be able to parry the US economic assault. As always, however, internal politics shapes events as much if not more than outside manipulation. Politically, Iran seems more strained than usual.
Iranians are said generally not to support the oppressive and corrupt Islamic regime. They’re disappointed that Rhouani’s agreement to freeze nuclear development hasn’t yielded genuine prosperity—a failure that has provoked open criticism from Supreme Leader Ali Khamenei. And in protests that began last December in Mashhad and spread to other cities in January, discontent focused not on foreign antagonists but on diversion of Iranian treasure needed by Iranians to expansionism in Gaza, Syria, and Lebanon (OGJ, Jan. 15, 2018, p. 25).
Politically, therefore, Iran might be less resilient to the economic disturbance from sanctions today than it was in 2012. So how will it respond, and how might that response affect geopolitics and oil markets?
Writing for Foreign Policy, Dennis Ross of the Washington Institute suggests Iran ultimately will be as pragmatic as the companies now leaving under American coercion. “When the regime feels truly squeezed,” he writes, “its historic pattern is to adjust its behavior.” As domestic discontent rises, the regime will “look for a way out and be willing to talk.”
Escape route: Russia
And it’s likely to find that escape route in Russia, the mediation of which, Ross thinks, Iranian leaders will seek early next year. “They see how [US President Donald] Trump relates to [Russian President Vladimir] Putin, and with Putin’s interest in demonstrating Russian clout on the world stage, he will gladly be the arbiter between the United States and Iran.”
Two more questions, then: Whose interests might most be served by such a resolution? And by how much should the answer be influenced by recognition that Iran, Russia, and the US together account for 32% of global production of crude oil?