How the biggest oil buyers tackled US sanctions on Iran before
As US President Donald Trump renews sanctions against Iran, Asian buyers have to curb purchases again, and here are some of the ways they tackled the constraints last time around
Singapore: For the world’s biggest oil buyers, the imposition of US sanctions on Iran will be a case of deja vu.
Earlier in the decade—before the crude market was roiled by a global glut, before prices were rocked by the biggest crash in a generation, and before American oil began getting shipped all over the world—refiners in Asia had to contend with international financial measures aimed at curbing the Islamic Republic’s nuclear program.
By seeking exemptions and getting creative with payments and shipping, they managed to keep buying limited volumes. Now, with US President Donald Trump renewing sanctions against Iran, the third-largest producer of the Organization of the Petroleum Exporting Countries (Opec), they’re going to have to curb purchases again. Here are some of the ways they tackled the constraints last time around.
At the heart of the problem for Iran’s biggest customers was a law that cut off access to the US banking system for foreign financial institutions that settled trades with Middle East nation’s central bank. That meant that even though there were no direct restrictions on buying the Persian Gulf state’s crude, the refiners faced hurdles paying the Opec member for purchases.
Still, countries were given exemptions by the US—reviewed every 180 days—if they “significantly” reduced imports from the Islamic Republic. While a specific quantity of reductions that would make buyers eligible for waivers wasn’t announced, a slew of nations including China, India and South Korea received them. Iran’s exports dropped, and so did its output, until a 2015 deal with world powers that placed limits on its nuclear program.
The US is going pursue efforts to reduce Iran’s crude sales again during and following a 180-day wind-down period, but once again has left the door open for countries to seek “significant reduction exceptions” at the end of the period if they reduce the volume of purchases during that time.
The US will assess each country’s efforts “including the quantity and percentage of the reduction in purchases of Iranian crude oil, the termination of contracts for future delivery of Iranian crude oil, and other actions that demonstrate a commitment to decrease substantially such purchases,” according to the Treasury Department. The State Department expects to consult with nations currently buying from the Middle East producer during the 180 days.
Countries such as China, now the world’s biggest oil importer, and India, where demand is growing faster than anywhere else, had last time around repeatedly expressed disapproval over the US measures that effectively forced them to curb Iranian crude imports even though broader UN sanctions did not.
China’s crude trade with Iran didn’t breach UN Security Council resolutions or cause harm to the international community, and was “completely lawful and reasonable,” the nation’s foreign ministry said in 2012, after it was initially left out of a list of countries that received exemptions from the sanctions.
Their desire to defy the US and press ahead with purchases may be stronger this time around, given the global trade frictions that have been spawned by the Trump administration’s policies. Additionally, the US pull-out from the nuclear accord is unilateral, so the pressure may not be as strong as last time.
With benchmark oil prices recovering from their crash and surging to levels last seen in 2014 as a global glut disappears and demand picks up, Asian refiners may welcome any perks Iran offers to lure buyers in spite of the sanctions.
The Islamic Republic had provided 90 days of credit for crude purchases, at least thrice the amount of time given by other producers, and flexibility with grades offered and loading dates to some refiners when it was last under sanctions.
As the nation’s crude production and exports recovered in 2016 and it sought to recapture lost share in the prized Asian market, Iran also offered bigger discounts on some of its oil compared with Saudi Arabia’s prices for the first time in a decade.
Buyers were also roiled in 2012 after European Union restrictions on insurance of Iranian oil affected about 95 percent of the global tanker fleet, because the ships were covered under rules governed by the region’s law.
To get around the problem, nations such as India and Japan offered state-backed insurance to ships, helping carriers resume shipments from the Persian Gulf state with protection against risks including oil spills and collisions. Additionally, processors used tankers operated and covered by Iran to receive supplies.
In the current scenario, the refiners may be spared the insurance hurdle because European nations such as the UK and France are sticking with the nuclear accord, saying the deal has been essential to reining in Iran’s atomic program.
Currencies and banks
In order to skirt the US financial system, Asian buyers could also resort to using currencies other than the dollar to pay Iran for their oil purchases. Payments may be routed through either local or foreign banks that don’t have close ties to America.
India initially paid Iran via a Turkish bank before routing payments through a domestic financial institution the last time sanctions were in place. The nation, along with China, also sought to get around the restrictions by trading oil with the Persian Gulf state for local currencies and goods including wheat, soybean meal and consumer products. Bloomberg
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