In May of this year, the Trump administration announced their intent to withdraw from the Obama-era Iran-P5+1 nuclear disarmament deal and plan to re-impose prior sanctions placed on Iran’s oil sector. Earlier this November, these new sanctions began taking effect. It is important to note that Iran, as far as the interested parties are concerned (including Iranian adversary Saudi Arabia), was abiding well within the parameters of the agreement; furthermore, the participation of the US is not essential to the continuation of the agreement. Although there is much speculation as to the ultimate motivation for this move (with Trump critics claiming it to be the further erasure of Obama’s legacy), the officially issued reasoning is that the temporary nature of the agreement and its supposedly limited scope necessitates a renegotiation: although at present, it is unknown whether Iran and the remaining countries in the deal intend to even enter into negotiation, especially in response to these new sanctions. If anything, the proposed response to these new sanctions has nothing to do with renegotiation, but rather has other, more unclear aims.
What is of concern to us now is the nature of the new oil sanctions on Iran (and its potential trading partners) that began this November, their implications on the global economy and future Iran non-proliferation deals, and of particular emphasis here, the aforementioned reaction that the EU is formulating to circumvent the sanctions: a barter system. This response raises new questions: will this barter system be effective? Are there ulterior motives for this EU effort? Is it even necessary at all? In short, the European workaround appears to do little to offset the effects (if any at all) of the oil sanctions, and may perhaps only serve as an international political statement on behalf of the EU to the United States.
The Trump administration announced the beginning of the new sanctions on November 5th. The sanctions prevent nations, financial institutions, and businesses that purchase oil from Iran from accessing the American financial system. In anticipation of the sanction, a number of British and French oil companies have already begun to phase out their production in Iran. Interestingly, however, Trump has issued a number of “waivers,” which exempt certain countries from economic consequences (effective for 180 days), allowing them to import oil from Iran freely.
The EU, spearheaded by its foreign policy chief Federica Mogherini, is developing a circumventing trade mechanism, ascribing it the designation of “Special Purpose Vehicle” (SVP). This SVP, in essence, is supposed to allow the EU to continue trading for Iranian oil while avoiding the purview of the American sanctions by way of a barter system. A barter system is an economic exchange system wherein goods are traded directly for other goods (or services), as opposed to utilizing money as an exchange intermediary. There is little contemporary precedent for such practices, with the exception of the less-than-successful foreign trade practices of the Soviet Union during the Cold War, which placed them in considerable debt. It is unclear whether such a scheme would violate the terms of the U.S. sanctions, but, hypothetically, this proposed alternative would consist of the EU importing Iranian oil by directly exchanging for other goods and services of equal value. Historical and economic precedent have established barter systems as inefficient, stemming from the difficulty economic actors have in matching the values of the goods they wish to barter.
There are a number of theories as to why the EU would go to such lengths to maintain the import of Iranian oil: it could be an attempt to minimize the potential spike in oil prices, a gesture of good faith to the continuation of the nuclear agreement by minimizing damage to the Iranian economy, or – most plausibly – a signal to the U.S. that they are unable to dictate the trading behaviors of other sovereign nations.
While Trump claims that the sanctions will not cause oil prices to rise (which would result from a diminished supply, with Iranian oil accounting for 2% of all of the world’s crude oil), there is concern that other area exporters, such as the Saudis, will be unable to compensate by increasing production. Conversely, it is also certainly possible that because the countries receiving exemption waivers from punishment from this sanction account for about 75% of the exports targets for Iranian oil (namely China, Turkey, Japan, and India), these sanctions will have a negligible effect on both the Iranian economy and the global price of oil. In other words, the Iranians will still have major outlets for their oil, and other oil producers/exporters in the region won’t have to increase their exports to satisfy the increased demand. The diversified nature of the Iranian economy, especially in comparison to the oil-dependent economies of the Persian Gulf, is further suggestion of their ability to survive independently, despite sanctions like these.
If this SVP is an unnecessary measure to minimize global and regional economic consequences, it must serve some other interest. Is it to keep Iran in the nuclear deal? No, surely not, if the sanctions eventually have no effect. Iranian President Hassan Rouhani has even stated an intent to remain in the deal, despite the United States’ departure and the impending sanctions. Then what is the motivation for this SVP? The answer may not actually have anything to do with Iran. The EU’s Mogherini is on record as stating that “no sovereign country or organization can accept that somebody else decides with whom you are allowed to do trade,” obviously taking a jab at the perceived audacity of the U.S. sanctions. I contend, then, that the ulterior motivation for the barter system is a subtle act of resistance against the United States’ recent global imposition, but not so overt that it falls in direct violation of the sanction terms.
It is anachronistic for the most traded commodity in the world to be traded on a barter system. Considering the fact that Iran has demonstrated no attempt to leave the standing nuclear deal with the other non-U.S. participants (even in light of the sanctions), the damage to the Iranian economy may be largely negligible, and that a spike in the global price of oil is potentially unlikely as a result of the issued waivers, perhaps it is not in the best interest of European powers to go this route. Also, given the potential for harm to the already strained U.S.-EU relations, this alternative trade mechanism may be more than just ineffectual, it may be downright damaging. Unless, of course, the EU indeed does want to put action to Mogherini’s words and take a stand against American attempts to control the international economic system – at whatever potential cost to future U.S.-European relations.