Iran Deal Doesn’t Mean a Green Light for Business
The agreement reached between Iran and the P5+1 countries offers the sanctions relief that Tehran demanded. But that won't translate into a stampede of fresh investment or a gusher of Iranian oil exports anytime soon.
The framework deal to limit Iran’s nuclear program, reached Thursday, April 2, opens the door to an eventual return of Iranian oil to the world market and offers a huge shot in the arm for the Islamic Republic’s beleaguered economy. But unwinding the web of overlapping financial and energy-related sanctions will take months after the deal’s full implementation — meaning it’s unlikely that a huge flood of extra Iranian oil will flow into the market this year.
The deal lays out a path to a phased removal of the most punishing economic and financial sanctions that hammered Iran’s economy and helped push the country to the negotiating table. But relief depends on a final deal being reached this summer and international inspectors confirming that Tehran is complying with all its commitments.
Plenty of hurdles remain for Iran. International banks and businesses, wary after years of limits on doing business in Iran, are still gun-shy about leaping back into what has essentially become an international pariah state. And the U.S. Congress could also throw a wrench in the deal by passing new legislative sanctions on Iran.
Crude oil prices slumped sharply Thursday on news of the interim deal, falling as much as 5 percent in London trading, after having inched lower all week on expectations that a breakthrough would add extra crude to an already glutted market. Western diplomats made clear that sanctions relief is contingent upon Iranian cooperation. U.S. President Barack Obama said that “sanctions can be snapped back into place” if Iran cheats on the terms of the deal.
While the agreement makes clear that Iran will be welcomed back into the international oil market and financial system if it complies with the agreed-upon nuclear restrictions, it’s unclear how long that rehabilitation will take.
Once changes to Iran’s nuclear program have been verified by international inspectors, the European Union will lift all financial sanctions, European Union foreign-policy chief Federica Mogherini said Thursday. European sanctions put in place in 2012 blocked Iranian banks from using SWIFT, the messaging system banks use for cross-border transactions. The United States will also lift the secondary sanctions that currently threaten to blacklist any foreign bank that does business with Iran.
Current U.S. and European restrictions also limit Iran’s oil exports to about 1 million barrels per day, or less than half of what Iran previously exported.
The press statements in Lausanne, Switzerland, didn’t make clear exactly what time frame would be required for that compliance verification. Obama referenced the heavy lifting remaining until the final accord is signed in June, noting that “nothing is agreed to until everything is agreed.” The U.S. fact sheet listed the spate of Iranian commitments needed to secure sanctions relief, including the destruction of thousands of centrifuges, the reduction of uranium stockpiles, and the removal of spent nuclear fuel that could serve as raw material for a bomb.
American companies are expected to be last let back into Iran because they’ve been subject to restrictions on business with Iran for decades longer than other international companies. Even if nuclear-related sanctions are lifted, the United States won’t lift human rights and terrorism sanctions against Tehran that in many cases date from the 1990s. That holds true as well for U.S. sanctions that limit investment by U.S. and Western oil firms in Iran’s oil sector.
“Honestly, I don’t think there’s much breath-holding in relevant sectors of the U.S. business community,” Richard Sawaya, head of trade group USA*Engage, said in an email on April 1.
Sanctions relief is an interlocking puzzle that could delay Iran’s upside in the near term. Iran will need access to the financial system in order to reap the benefits of any other sector opening up. Without a broad rehabilitation of the banking sector, companies that want to do legal business with Iran may find it hard to find a bank willing to transfer their money. That has been the case under the interim agreement, which was signed in November 2013 and relaxed constraints on the trade of things like automobiles and airplane parts.
And that, in turn, could affect the speed and scope of Iran’s return to the global oil market. Since 2012, Iranian oil exports have been sharply curtailed by sanctions, a financial handcuff that has cut Tehran’s revenues and pushed it to negotiate. In pushing for sanctions relief, Iranian officials have insisted that they can quickly scale up crude production from 2.7 million barrels a day to 4 million barrels a day and thus channel more exports to customers in Asia. Indeed, potential buyers in China and India have expressed interest in gaining fresh access to discounted Iranian crude. In the meantime, Iran has about 30 million barrels of oil (about 10 days’ worth of production) stashed away on tankers waiting to be poured into the market.
But with the tricky fine print of the accord still waiting until the final deadline of June 30, the specter of a gusher of Iranian oil flooding into an already oversupplied market looks very unlikely. Oil-market analysts figure it will take months to unwind the oil sanctions, jump-start tired Iranian oil fields, and line up fresh contracts with buyers in Asia.
And at a time when the global oil market is still oversupplied — prices have fallen more than 50 percent since last summer — there’s not that much room for Iranian crude to elbow its way into the room. OPEC oil production is at its highest level since last fall; Saudi Arabia’s output is flirting with all-time records of 10 million barrels a day. Oil producers everywhere are still scrambling for market share at a time when demand for their product has yet to rebound.
Simply producing additional Iranian oil will already be a tall order for an industry that has been blocked from Western investment and technology for years and that needs billions of dollars and years to reach its full potential.
“Oil markets seem to believe that the crude glut would be quickly exacerbated with or without an Iran deal,” wrote Citigroup oil analyst Ed Morse on March 30. “Nothing could be further from reality, even if there is an agreement this week.”
Just meeting the terms of the deal and securing verification by the International Atomic Energy Agency will likely push Iran’s oil return to 2016, said Richard Mallinson, an analyst with Energy Aspects in London. Even then, hurdles remain in Iran’s investment-starved oil sector that won’t be solved anytime soon. That limits the amount of extra oil that Iran could pump and export to a few hundred thousand barrels a day over the medium term.
“It’s extra oil, but not a flood,” he said.
Photo credit: FABRICE COFFRINI/AFP/Getty
Keith Johnson is a senior staff writer at Foreign Policy. Twitter: @KFJ_FP