April 26, 2019

Washington Ends Waivers for Iranian Oil

On Monday, US President Donald Trump announced that the waivers granted to eight major importers of Iranian crude oil and condensate would end as of May 2, 2019. China, India, Japan, South Korea, Taiwan, Turkey, Italy and Greece had all previously received waivers. Washington has an explicit goal of reducing Iran crude exports to zero in an effort to exert “maximum economic pressure” on Iran.

Oil exports to Iran account for 80% of the country's foreign exchange and 40% of the state budget. The US sanctions decided in November 2018 already led to a 50% drop in Iranian exports, which went from 2.3 MB/d to 1.2 MB/d in March 2019. The White House wants to see exports fall to zero, in an effort to provoke an economic crisis severe enough that Iran returns to the negotiating table.

While three of the eight countries had already reportedly reduced imports to zero, others have been more resistant. China, India, and Turkey had all expressed an expectation or desire that the waivers continue. These countries are also the most likely to actively seek a workaround and continue importing Iranian volumes. Beijing alone buys 50% of Iranian exports and could lean on domestic banks that are disconnected from the US financial system in order to complete transactions with Iran.

How Has Iran Been Impacted?

According to the International Monetary Fund, Iran entered a recession in 2018 and is likely to see GDP fall 6% in 2019. The Iranian government has lost 20% of its budget and proposed a 2019 budget at 47b billion USD when the 2018 budget was around 104 billion USD. The government with this budget encompass the current and upcoming loss because of the sanction. The government has enacted broad social programs in an effort to protect the poorest citizens (and head off civil unrest) but citizens are still feeling the impact of the economic slowdown.

The loss of waivers could reduce Iranian exports from their current ~1mmb/d to 500 mb/d but even higher oil prices will not be enough to compensate for the loss of revenue. Iran appears to be adopting a wait-and-see approach in the hopes that a new US President will be more willing to negotiate. To that end, the country is limiting spending and working to protect what oil revenues it can. Supreme Leader Ali Khamenei recently declared that victims of the recent flooding that killed 76 and displaced 200,000 will not be compensated from the sovereign wealth fund.

Regarding the Iranian electoral calendar, the Islamic Republic will complete legislative elections in 2019 and presidential elections in 2020. Unlike in previous years, a beleaguered middle class is unlikely to show up at the polls. Middle class citizens tend to vote for reforms, and their absence increases the likelihood that conservatives see an election boost. Moreover, the Trump administration's rhetoric and the unilateral withdrawal of the JCPOA by United states gives arguments to the conservatives who have always been suspicious of the negotiated agreement with Washington. It is thus very likely to see the conservatives come back to power which will further complicate negotiations with Iran.

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