Pedestrians pass a mural depicting Ruhollah Khomeini, founder of the Islamic republic of Iran, in Tehran. Photographer: Simon Dawson/Bloomberg

What Iran's Ultimatum Means for Europe, Oil and Diplomacy

(Bloomberg) -- Iran said Wednesday it’s scaling back commitments under the landmark 2015 nuclear deal after the U.S. abandoned the pact and reinstated sanctions. Tehran imposed a 60-day deadline for other signatories to salvage the accord by facilitating oil exports and trade.

President Hassan Rouhani’s warning that Iran may take the further step of no longer limiting uranium enrichment, a key component of the deal, puts pressure on European nations to find a compromise and ratchets up tension with the U.S. The Trump administration earlier dispatched an aircraft carrier strike group and B-52 bombers to the region.

Some questions and answers on the latest developments:

What does Iran’s stance mean for Europe?

France, Germany and the U.K., as well as the European Union itself, will now scramble to prevent the nuclear pact from collapsing entirely.

Europe has remained a strong supporter of the deal in the face of U.S. pressure, but efforts to ensure Iran’s economy benefits -- as stipulated in the accord -- have achieved little. An independent financial mechanism known as Instex, designed to keep trade flowing, isn’t yet operational, and may prove unpopular with companies and banks concerned they might run afoul of U.S. penalties.

How will it impact Europe’s ties with the U.S.?

The EU and its three biggest economies have long said the Iran nuclear deal, reached under President Donald Trump’s predecessor Barack Obama, was key to stability and security in the Middle East, and routinely reaffirmed their commitment to it.

France, the U.K. and Germany condemned the Trump administration’s withdrawal from the deal and generally resisted U.S. pressure to take a more confrontational path. Some European officials, however, including a number in France and the U.K., agree with Trump’s position that Iran’s missile program and its influence in the Middle East must be contained. Europeans may now be forced to take sides.

What does this mean for oil?

Iran’s 60-day ultimatum is an attempt to force Europe into something its companies have been unwilling or unable to do: buy the Islamic Republic’s oil. Even if the EU starts its special mechanism to finance business with Iran, oil buyers like France’s Total SA and Italy’s Eni SpA would face U.S. sanctions for resuming purchases.

Italy and Greece, both of which had waivers on the initial, six-month round of U.S. sanctions, haven’t bought any Iranian crude since October, according to Bloomberg data. Saudi Arabia said it would replace Iranian oil exports and is already pledging more supplies to customers in Asia. That will help contain price spikes. A less likely scenario is that the Europeans resume buying, keeping Iranian oil flowing.

Oil futures traded little changed in London following the Iran announcement.

What is the likely impact on the region?

U.S. allies in the Middle East opposed the nuclear deal from the outset: Saudi Arabia feared a rapprochement between its regional rival and the Obama administration, and Israel worried the agreement was too lenient, handing Iran revenue to spend on its proxies in the region.

The Trump administration, on the other hand, has made isolating Iran a centerpiece of its strategy. While Saudi Arabia and Israel back that approach, any escalation of tensions between Iran and the U.S. would heighten risks in an already volatile region.

If Iran blocked International Atomic Energy Agency inspectors from its facilities, or decided to withdraw from the agreement altogether, other nations would have less visibility on Iran’s nuclear program. That could prompt Israel to strike Iranian facilities to prevent the possible development of a nuclear bomb.

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