Trump's ‘Zero’ Pledge on Iran Oil Sales Tests Key Relationships

(Bloomberg) -- President Donald Trump has warned other countries for months that they must choose between doing business with Iran and the U.S. Now, the president will show how serious he is about a decision to deny any exceptions from his ban on Iranian oil exports.

The move puts the administration in direct conflict with Iran oil customers that are important to the U.S. in different ways, and it risks hampering important initiatives on trade and security, from China to South Korea, India and Turkey.

A central question for oil traders -- and political analysts -- is just how willing the U.S. is to test those relationships for the sake of choking off Iran’s economy and just how likely the administration is to take advantage of some potential loopholes.

“When prices are where they are, the administration has to balance the need to appear tough on Iran and the reality as Brent edges toward $75 that it may have to show some flexibility when it comes to sanctions enforcement,” said Scott Modell, managing director at Rapidan Energy Group.

The Chinese and U.S. economies are interdependent -- and at a crucial point in sensitive trade negotiations -- while South Korea is a key ally, India is a growing one and fellow NATO member Turkey has shown signs of drifting closer to Russia.

Living up to the vow of “zero” Iran oil exports could lead to higher prices at the pump in the U.S. as Trump’s re-election campaign gets under way, jeopardize his hope to sign a trade deal with China’s Xi Jinping as soon as May and strain ties with South Korea as the U.S. seeks a nuclear disarmament deal with North Korea.

Still Buying

Some countries continue to rely on Iranian oil a year after Trump withdrew from the 2015 Iran nuclear deal and warned he was intent on ending all of the Islamic Republic’s oil exports in his effort to force it to stop backing groups the U.S. considers terrorists. There was an expectation that some countries, such as China, India and perhaps Turkey, would get extensions when their waivers from U.S. sanctions expired in early May.

Trump's ‘Zero’ Pledge on Iran Oil Sales Tests Key Relationships

The administration’s message this week seemed unambiguous: Secretary of State Michael Pompeo and his aides said flatly on Monday that if countries don’t abide by the decision, “there’ll be sanctions.” The administration’s authority to do so comes from the 2012 National Defense Authorization Act, which directs the U.S. to sanction other governments’ central banks if they facilitate oil transactions with Iran.

“You can do business with the United States or you can import Iranian crude oil, but you can’t do both,” Brian Hook, Pompeo’s special representative for Iran, told reporters on Tuesday. “We don’t think it’s in any nation’s interest to even risk that because the cost benefit is simply not there.”

Iranians Scoff

Iranian leaders scoffed Wednesday at the Trump administration’s zero-oil vow. Supreme Leader Ayatollah Ali Khamenei said on his website that “we can export as much oil as we need and as much as we intend to. Foreign Minister Javad Zarif said in New York that “we will continue to find buyers for our oil.”

Oil steadied near a six-month high as an industry report showing a gain in U.S. crude inventories partly offset concern over America’s campaign to halt Iranian crude exports.

Behind the U.S.’s tough messaging, there’s wiggle room that could let the Trump administration sidestep a confrontation if it chooses: Countries that barter for Iranian oil -- with no cash changing hands -- could avoid sanctions designed to punish transactions with Iran’s banks.

Major Chinese oil firms already have joint ventures under which they receive tens of thousands of barrels of Iranian oil as payment.

And China’s not alone.

By some estimates, Iran exports 200,000 to 500,000 barrels of oil a day through barter or other cashless arrangements. Enforcing punishment for those deals would be difficult.

“If Iran continues to ship oil to China or India, I don’t think the administration will object to Iran either receiving goods in return like barter transactions or allowing oil revenues to pile up in foreign banks for cash repatriation down the road,” Modell said.

Pompeo appeared to allude to that potential loophole in his comments Monday, when he said buyers “almost always” need to use financial markets for Iran oil transactions. Hook was similarly careful on the call with reporters on Tuesday, when asked if the U.S. was ready to punish any Chinese company that breaks U.S. sanctions.

‘Sanctionable Behavior’

“I didn’t say that,” Hook said. “You’re putting words in my mouth. What I said was that we’ll sanction any sanctionable behavior.”

Either way, discussions over what to do next aren’t final. In a statement on April 22, South Korea, which depends on a type of ultra-light oil from Iran, said it was still in talks with the U.S. for an extension and would continue to seek a waiver until the current one expires on May 2.

Even the law that the administration is using to threaten sanctions says the president may lift them if he decides the oil market isn’t well enough supplied. That could be invoked if it proves difficult to deliver on the U.S. assurance that it will maintain global oil supplies with promised help from its anti-Iranian allies Saudi Arabia and the United Arab Emirates.

On Tuesday, a spokesman for China’s Foreign Ministry said his government “firmly opposes” the sanctions and urged the U.S. “to earnestly respect China’s interests and concerns, and refrain from taking wrong moves that will undermine our interests.” On Friday, Prime Minister Shinzo Abe of Japan, which also buys Iranian oil, will be in Washington and plans to meet with Trump.

American officials also have declined to say whether they’ll allow a grace period for countries to complete delivery of oil purchased before the waivers expire. That ambiguity may be intentional, according to Meghan O’Sullivan, a former deputy national security adviser now at the Harvard Kennedy School.

“They’re going to have to take some action, but if it’s going to be sanctions against the central banks of those countries on May 2 -- that’s a real hard-line policy,” O’Sullivan said. “The objective is to get as many countries as possible down to zero. so I don’t think there’s a lot of room for them to signal otherwise because the whole policy also becomes moot.”

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