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Here's How the Biggest Oil Buyers Can Tackle Trump's Iran Action

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(Bloomberg) -- For the world’s biggest oil buyers, the imposition of U.S. 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 U.S. President Donald Trump renewing sanctions against OPEC’s third-largest producer, they’re going to have to curb purchases again. Here are some of the ways they tackled the constraints last time around.

Waivers

At the heart of the problem for Iran’s biggest customers was a law that cut off access to the U.S. 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 U.S. -- 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 U.S. is going to pursue efforts to reduce Iran’s crude sales again during and following a 180-day wind-down period, but once more 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.

READ: U.S. Seeks to Quickly Curb Iran Oil After Scrapping Deal

Japan is one of the first countries to confirm that it will seek a waiver. The nation plans to find out whether its current import volume is enough to get an exception or whether it needs to further reduce purchases, said Takashi Yamada, director of petroleum policy at the Ministry of Economy, Trade and Industry.

Rebel

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 U.S. measures that effectively forced them to curb Iranian crude imports even though broader United Nations 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.

While nations such as China, India and Turkey may oppose the U.S. move and keep current levels of Iranian crude purchases, American allies including Japan and South Korea may comply because of concerns of they could lose a security umbrella against North Korea, according to MUFG Bank.

READ: Trump Seen Facing Rebellion From Iran’s Biggest Oil Customers

Their desire to defy the U.S. 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 U.S. pull-out from the nuclear accord is unilateral, so the pressure may not be as strong as last time.

China has always opposed any country imposing unilateral sanctions against another nation, Foreign Ministry spokesman Geng Shuang told a regular news briefing Wednesday. Beijing is committed to maintaining and implementing the Iran nuclear deal, and will continue its cooperation with the Persian Gulf state, he said.

Crude Perks

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.

Insured Tankers

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 U.K. 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 U.S. 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.

The EU could seek to protect its entities operating in Iran by offering currencies other than the U.S. dollar through institutions including the European Investment Bank, MUFG’s Khoman said. Indian oil buyers said they can continue to make payments in euros as long as the European Union doesn’t impose sanctions on the Persian Gulf state.

Buy Something Else

Last time around, buyers in Asia switched to purchasing from Nigeria, Saudi Arabia, Kuwait, Iraq and Angola, according to the U.S. Energy Information Administration. China increased its buying from Angola and Iraq and other Asian countries imported from Nigeria.

READ: Saudi Arabia Ready to ‘Mitigate’ Impact of Iran Oil Sanctions

This time, they still have all those options. And another choice: American crude. Just about two years after a ban on U.S. oil exports was lifted, varieties ranging from West Texas Intermediate to Thunderhorse and Mars Blend have reached Asia, making it the biggest buyer of oil from the nation.

Taiwan’s Formosa Petrochemical Corp. said on Wednesday that it can “easily” buy crude from the spot market to cover for Iranian barrels lost to U.S. sanctions.

©2018 Bloomberg L.P.

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