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New world order: a hard place

At July’s in camera Australian-US ministerial meeting at Stanford University’s Hoover Institution (AUSMIN) Foreign Minister Julie Bishop and Defence Minister Marise Payne voiced Australia’s private concerns about increased tensions with Iran, including disruptions to the oil market.

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Pic: Yaszd, Iran Source: Sander van Dijk

These talks came on the eve of the US re-imposition of sanctions against Iran after Washington announced in May it was withdrawing from the Joint Comprehensive Plan of Action (JCPOA) under which Iran agreed to freeze its nuclear program and subject itself to International Atomic Energy Agency (IAEA) inspections.

"From an Australian perspective… further Middle East tensions accompanying US attempts to strangle Iran’s economy are not risk free.”

From an Australian perspective, even though bilateral trade is minimal, further Middle East tensions accompanying US attempts to strangle Iran’s economy are not risk free.

Disruptions caused by the US withdrawal from JCPOA, including the re-imposition of sanctions, is shaping as one of the world’s most contentious issues in the latter part of 2018 adding significantly to strains on the western alliance and spooking markets.

The US and Europe are split on the question, with European participants insisting they will maintain their commitment to the joint comprehensive plan of action.

This divergence will inevitably cause tensions over the re-implementation of a sanctions regime, depending on the extent to which the US is prepared to go to enforce these new measures.

Sanctions will be imposed in two stages, beginning in early August, with the more far-reaching measures set to come into effect on November 4.

In the initial phase, the US would sanction transactions with US dollar banknotes; trade in gold and precious metals; direct or indirect sales of graphite, raw and semi-finished metals and Iran’s automotive sector.

Licenses for the sale of commercial aircraft to Iran, as well as related parts and services, are also set to be revoked. This has prompted a flurry in in aircraft purchasing and licensing agreements in recent weeks.

Both Boeing and Airbus will be materially affected. Billions in aircraft sales will be put on hold. Boeing had reached agreement to sell $US40 billion worth of aircraft to Iran Air to update its aged fleet.

In the second phase Iranian oil exports - the country’s lifeblood - will be targeted. Disrupting crude shipments will encounter a strong pushback from Tehran, where leaders have warned of retaliatory measures including interrupting exports from the Gulf if Iran is pushed to the wall.

Iran is in a position to stop shipments through its Strait of Hormuz ‘chokepoint’ at the entrance to the Gulf if provoked.

Among Organisation of Petroleum Exporting Countries (OPEC) Iran ranks fifth behind Saudi Arabia, Iraq, the United Arab Emirates and Kuwait.

Iran’s crude and condensate exports form about a quarter of those of Saudi Arabia. Oil sales account for around one-third of government revenues.

Impact

In Washington, proponents of a new sanctions regime contend it is already having an impact. Since the US announced its withdrawal from JCPOA the Iranian riyal has halved in value against international currencies.

A dramatically weaker riyal pushing up prices of imports and fueling inflation will exert pressure on the regime.

One of the negative side effects of a tightening of sanctions on places like Iran is such actions tend to benefit those who are able to profit from disruptions to normal economic activity.

In Iran, the Revolutionary Guard Corps (RGC) controls wide swathes of the economy and therefore is in a position to further tighten its grip. Conversely, attempts to isolate Iran will inevitably weaken moderates led by its president Hassan Rouhani and undermine a more-open economy.

Rouhani finds himself under increasing pressure from regime hardliners. This is one of the perverse and likely negative side effects of US policy aimed at bringing the Iranian economy to its knees.

In Canberra officials are worried about US strategy towards Iran. This is threatening a wider conflict in the Middle East, prompted by bellicose statements by administration officials.

Bishop herself has, more than once, expressed scepticism about the US approach, most recently in a Chatham House speech in London on July 19 where she raised concerns about a US commitment to a ‘rules-based’ international order.

“Our closest ally and the world’s most powerful nation is being seen as less predictable and less committed to the international order it pioneered,’’ she said. ‘’There is an increasing for nation to take a one-sided, unilateral approach to some of their international interest, including economic interests.’’

Washington seems intent on ramping up pressure on Iran. Secretary of State Mike Pompeo has accused Iran’s leadership of running a “40-year kleptocracy’’.

Pompeo has also announced the US is launching a Farsi-language channel on TV, radio, digital and social media platforms, to help Iranians get around internet censorship. American strategy is clearly aimed at destabilising the regime. 

However, in another example of whipsawing American foreign policy Pompeo’s remarks were contradicted by an offer last week by President Donald Trump to meet Iranian leaders “without preconditions’’. This offer was quickly rejected by Tehran.

What all this signifies is US policy towards Iran is ragged, to say the least, against a background of the lack of an international consensus about how to deal with Iranian provocations, including its meddling in places like Syria.

Dismay

It is not overstating things to say European signatories to JCPOA - Germany, the United Kingdom and France – are dismayed over a threatened unravelling of the nuclear deal, a centrepiece of  Obama-era diplomacy.

Risks of an Iranian breakout from its undertaking to freeze its nuclear program have increased as a consequence.

At this stage there is no clear line of sight as to how a two-stage re-imposition of sanctions will play itself out. What is the case however is Washington’s ability to enforce its sanctions regime globally will meet significant resistance.

China and India, the largest recipients of Iran’s oil, have indicated they will continue to trade Iranian crude, and may well increase shipments. On the other hand other big oil importers like Japan and Korea have been scaling back in anticipation of the re-imposition of a new sanctions regime.

Washington has indicated it may issue waivers on Iranian crude exports to certain countries, including China, but these will need to be negotiated adding to uncertainties in the oil market.

All this contrasts with a relatively coherent global consensus on measures to deal with North Korea. By contrast there is little agreement on how to exert pressure on Iran.  

As part of its attempts to increase pressure on Iran, the US is encouraging the establishment of an Arab ‘NATO’. This would include the six gulf states of the Gulf Cooperation Council countries, led by Saudi Arabia, Egypt and Jordan. This would set Sunni Arab states, supported by Israel, against Shia Iran.

This would not seem to be a recipe for peace and stability in the world’s most volatile region. Rather, it risks increasing tensions.

It is not clear whether the US itself would be a participant in an ‘Arab NATO’. Australia would not have much enthusiasm for deeper engagement in the region - after all, it has been seeking to wind back its commitments in Middle East and in Afghanistan.

In 2017 Australian two-way merchandise trade with Iran reached $A200 million. Trade in services added another $A250 million. 

Investment is minimal. It doesn’t show up in Department of Foreign Affairs and Trade statistics. The direct economic impacts may be relatively small the implications of yet more geopolitical volatility are much more significant.

Tony Walker is a vice chancellor’s fellow at La Trobe University and a former China correspondent for the Financial Times

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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