The old Iran deal is dead. Now what?
Oil futures are up a buck. The SPDR Energy Select Sector (XLE) is up 1.8% Wednesday morning, and the S&P 500 is up a half a percent. No chaos. No explosions. The Iran nuclear deal is dead from Washington’s perspective. Will this latest move be effective in getting a “better deal,” as President Trump believes the outcome will be.
“We will need to wait for the full Iranian response. I expect that they will try to continue to appear the reasonable partner and work with Russia and the Europeans, playing them off against the U.S. But if they take a more aggressive stance, oil, gold and the dollar will go considerably higher,” says Tom Elliott, International Investment Strategist at deVere Group in London.
As of Wednesday morning, gold was trading flat. The SPDR Gold Shares (GLD) exchange-traded fund, one of the biggest funds in the world, was down 0.07% within the first hour of trading on Wednesday.
President Trump withdrew from the Joint Comprehensive Plan of Action (JCPOA), also known as the Iran nuclear deal, on May 8. In its simplest form, the deal allowed Iran to enrich uranium for commercial use in nuclear power plants. Sanctions were lifted on the promise that Iran would never enrich uranium to weapon grade. By vacating JCPOA, the U.S. reinstates all U.S. nuclear-related sanctions.
Treasury Secretary Steven Mnuchin stuck to Washington foreign policy talking points yesterday in his statement about the decision.
“The United States will cut off the Islamic Republic Revolutionary Guard Corp’s access to capital to fund Iranian malign activity, including its status as the world’s largest state sponsor of terror,” Mnuchin said in a statement. He also called out Iranian support for Bashar Assad, the leader of Syria, and Iran’s “human rights violations against its own people.”
The Departments of State and Treasury will now establish a 90-day and a 180-day wind-down period for activities involving Iran that were consistent with the U.S. sanctions relief provided for under the JCPOA. In other words, all previous lifting of restrictions against the Iranian economy will go back into place as early as August for U.S. companies and investors.
According to Treasury’s Office of Foreign Assets Control, the sanctions below will be reinstated as early as August, barring a shift in strategy or improved dialogue between Tehran and Washington:
- Sanctions Iran on the purchase or acquisition of U.S. dollars
- Sanctions Iran’s trade in gold or precious metals
- Sanctions the sale, direct or indirect, of graphite, raw or semi-finished metals including steel and aluminum, coal and certain software used in industrial processes
- Sanctions certain transactions related to the purchase or sale of Iranian currency, or holding that currency off-shore
- Sanctions the purchase and the underwriting of Iranian sovereign bonds
- Sanctions on Iran’s automotive sector
After 180 days, certain licensing agreements will be banned.
“These sharp regulatory changes will certainly affect a range of U.S. and non-U.S. companies, particularly but not exclusively in the commercial aircraft industry and its supply chain, in banking and finance and in the energy sector, too,” says Nelson Dong, a senior partner with international law firm Dorsey & Whitney. He says some of the licensing agreement codes will be enforced by August, with the remainder being back in force as early as November 4 unless the position in Washington changes before then.
See: Don’t Let Iran Turn You Into An Oil Bull — Forbes
The U.S. stands alone.
U.K., France, Germany, China and Russia—all signatories to the deal—are not walking away. For its part, Iran’s government said it would continue following the agreement.
Barclays Capital’s commodity analysts said back in October that should sanctions return, the European Union may rely on its 1996 Blocking Regulation , exacerbating the risks of trade wars. The Blocking Regulation refers to measures that European policymakers take to “block the global nature” of U.S. sanctions. They did this following the passage of the Iran and Libya Sanctions Act signed into law by Bill Clinton in 1996. Both Libya and Iran are oil and gas exporters to the EU.
Critics have noted that Trump and the Republicans have offered no alternatives to the existing deal, with Democratic leader Chuck Schumer in the Senate comparing the move to the failed Affordable Care Act rewrite. To date, there has been no change to that law other than the right to opt-out.
Back to Iran: Some in the market also think Trump has offered no real alternatives to the existing deal signed by former president Obama.
“A snap back to U.S. sanctions are likely to increase tensions on both sides of the Atlantic ,” say Barclays analysts led by Michael Cohen on the commodities desk in New York.
The EU is now faced with a difficult balancing act between its Iran deal commitments and protecting major companies like Total, the French oil giant that inked a multi-billion dollar deal with Tehran once the sanctions were lifted by Obama.
Washington is unlikely to fret over Total’s concerns regarding future sanction actions. Obama banned Exxon from its $720 million joint venture deal with Russia’s Rosneft in the Kara Sea because of sanctions. And Trump’s Treasury department fined Exxon a couple million dollars last year simply for having signed documents with Rosneft CEO Igor Sechin.
Vacating the deal was the most hawkish option on the table, and Trump took it yesterday. He had campaigned on the promise to pull the U.S. from the Trans-Pacific Partnership trade agreement, the Paris Climate Accord, and the Iranian nuclear power agreement. He has now delivered the trifecta. NAFTA is next in line.
Coming off the high of getting North Korea to talk thanks to big-stick rhetoric and sanctions pressure, Trump’s chief diplomats probably believe they can do the same with Iran. Their only allies on this are perennial Iran foes Israel and Saudi Arabia.
“This withdrawal will test the effectiveness of U.S. sanctions,” Cohen-and-company at Barclays wrote in a note sent to clients after market hours yesterday. “Not only are European countries unlikely to re-impose nuclear-related sanctions, they may also rely on existing or enact new regulations to protect their companies from the extraterritoriality of U.S. sanctions,” they wrote.
The signatory nations of U.K., France, Germany, China and Russia may take the risk of U.S. sanctions and see what happens. Europe is already facing sanction threats from Washington because of a proposed pipeline connecting Germany to Russia, known as Nord Stream II. Should they use their blocking powers, it might also protect them from sanction threats related to Nord Stream II.
Japan is also seeking a waiver to exempt it from the return to sanction-era requirements that limit imports of Iranian oil.