Iran: Beating sanctions

Iran's Master Plan To Beat U.S. Sanctions

Zero Hedge,

8 May, 2019

Authored by Simon Watkins via OilPrice.com,

One key foreign policy goal of the current U.S. government is to initiate regime change in Iran by crippling its economy to such a degree that popular unrest removes the current power structures in the country, particularly the near-omnipresent IRGC. To this end, the past few weeks have seen the U.S. end all waivers on importing oil from Iran, designate the Islamic Revolutionary Guard Corps (IRGC) as a foreign terrorist organisation, and sanction 14 individuals and 17 entities linked to Iran’s shadowy Organization of Defensive Innovation and Research. All of this followed the U.S.’s momentous withdrawal last May from the Iran nuclear deal.

The IRGC believes that its only chance of avoiding this fate is to widen the existing divisions between the U.S. and the European Union (EU) so that it can generate export revenues from Europe, in addition to those it can rely on from the historically sanctions-busting states of Asia. Consequently, the IRGC has come up with a last-ditch strategy to do achieve this, a senior source who works closely with Iran’s Petroleum Ministry exclusively told OilPrice.com earlier this week.

The catalyst for IRGC’s plan will be a detailed announcement in the next few weeks that Iran has awarded production and exploration contracts on five as yet officially undisclosed sub-sections of major oil fields to five Iranian firms connected to the IRGC. One of these, though, the source told OilPrice.com, will be a portion of the supergiant Yadavaran site. Only last week, the National Iranian Oil Company announced that its contract with China’s Sinopec to develop the second phase of Yadavaran has been halted.

“This was due to China demanding that the Sinopec contract be changed to make Iran liable to pay for all fines up to half  a billion [US] dollars that might be levied on Iran by the US Treasury for any perceived breach of sanctions,” the Iran source told OilPrice.com.

To the U.S., this would mean that funds would flow directly into IRGC coffers from Iranian oil still being sold to Asia and other destinations, either via Iranian tankers or via Iraqi export sources, as has been the arrangement since the last set of international sanctions was increased in 2012. These funds could then be used to fund the terrorist activities of Iran’s military proxies, Hezbollah and Hamas, among others, for which the IRGC has just been sanctioned by the US.

The IRGC still has extensive links with all major sectors of Iran’s economy, including oil, gas, petrochemical, banking, automotive, telecommunications, construction, metals and mining. Just before sanctions were removed from Iran in 2016, testimony to a sub-committee of the U.S. House Committee on Foreign Affairs highlighted that the IRGC had significant ownership shares in 27 companies that were publicly traded on the TSE. In just the first year after the nuclear deal was agreed in principle in 2015, OilPrice.com understands that nearly 110 agreements worth at least US$80 billion were made with companies owned or controlled by IRGC-related entities. As it stands, according to the Iran source, the IRGC has close connections with at least 200 Iranian businesses.

Despite this, the EU has always been of the opinion that Iran has never broken the terms of the nuclear deal – a view also taken by the CIA, incidentally. At the time of U.S. President Donald Trump’s initial criticism of the nuclear deal last January, the EU’s foreign policy chief, Federica Mogherini, stated: “This is not a bilateral agreement,... so it is clearly not in the hands of any president of any country in the world to terminate [it],...The president of the United States has many powers, but not this one.” After the U.S. withdrew from the deal last May, the EU invoked the ‘Blocking Statute’ that effectively bans European companies from following the U.S.’s sanctions on Iran. Concomitant with this, Mogherini said that Brussels would not let the nuclear deal with Tehran die, adding that:

“We are encouraging small and medium enterprises in particular to increase business with and in Iran as part of something that for us is a security priority.”

Shortly afterwards, the EU – under the leadership of Germany – moved to solve the problem of how to deal with payments accruing from business between the EU and Iran, without incurring the wrath of the U.S. The upshot was the Instrument for Trade and Exchanges (INSTEX), in which three of the original signatories of the nuclear deal - the UK, Germany, and France - created a special purpose vehicle (SPV) along the lines of a clearing house that cut Iran out of the financial loop completely. It would use an accrued credit and debit system to avoid any currency issues. The major problem with this was that no single country wanted to be the home of the vehicle, given the chance of retribution by the U.S., irrespective of the illegality of the new sanctions.

The solution agreed between the originators of the idea was that Iran will be paid in euros deposited in a number of accounts in banks across EU countries for gas, derivatives and petchems that they import, and Iran can withdraw the money in euros, according to the Iran source. In order to keep the EU on the right side of the U.S., two conditions were added. The first was that money could not be withdrawn by any company or individual mentioned in the blacklists held either by the U.S. or the EU in connection with the nuclear deal. Second, there would be EU auditors who monitor the payments, placing an initial total cap of €50 million that Iran could withdraw.

This could then be raised, depending on whether Iran was abiding by the conditions, to a second phase ceiling of €65 million, and then to the third and final phase of €100 million, but this could be withdrawn multiply up to the total amount in the Iranian accounts. In response, at the end of April, Iran announced the creation of the Special Trade and Finance Institute (STFI), which has been designed in tandem with technical and financial experts from the UK, France, and Germany to dovetail into Europe’s INSTEX system.

In the IRGC’s reckoning, then, the EU has the means and the motive to defy the U.S. and only needs the opportunity catalyst to do so. The IRGC believes that this opportunity catalyst for complete EU defiance lies in what will happen when the U.S. is told of which five firms are involved. The IRGC has been tipped off that it is certain that U.S. Secretary of State, Mike Pompeo, will expand sanctions on Iran to include its gas and petrochemicals products exports as well, according to the Iran source. These, together with oil, account for around 88 percent of all Iran’s export revenues.

“The key point is that the US promised Germany – as the de facto leader of the EU – that in return for the EU going along with the US sanctions on importing Iranian oil, the US would never sanction Iranian gas, which the EU absolutely needs,” the source told OilPrice.com.

“If the US breaks this promise then Germany will view the deal with the US on all Iran sanctions as finished, meaning that Greece and Italy in the first instance will be given the nod to resume oil imports, regardless of the end to their waivers by the US,” he added.

In either case, he underlined, the IRGC believes it cannot lose. If the EU complies with extended US sanctions then it believes that it will be able to use the economic tumult to tighten its grip over Iran sufficient to take it back to the ‘ideal’ of the Islamic Republic in 1979. If the EU does not comply then Iran will see increased revenues from oil exports to Europe, in addition to those from gas and petchems. The IRGC does not believe that, at this time, the U.S. will launch military action against Iran, unless it closes off the strategically vital oil chokepoint, the Strait of Hormuz. This is despite the placement earlier this week of the U.S. aircraft carrier battle group in the Persian Gulf region.

It is no coincidence that the sowing of such discord between these two power blocs would be in the interests of Russia.

“The essence of Russia’s foreign policy under [President Vladimir] Putin is to create chaos amongst vested interests in a country or region into which it can then project itself as an economic and political saviour,” said the Iran source.

“The only thing holding Russia back from fully implementing the agreement last year that would turn Iran into a client state was fear of what the US might do to it but the prize of further destabilising the US-Europe relationship now means it is willing to risk it,” he added.

This deal involves Russia giving Iran US$50 billion every year for at least five years. In exchange for this, Iran would give Russia preference in the oil and gas sector and increase military co-operation. In addition, Iran would not be able to expel any Russian firm from any oil and gas field development, and Russia would also have complete say over exactly how much oil is produced from each field, when it is sold, to whom it is sold, and for how much it is sold.