Trump's Iran Sanctions Create a Triple Threat to the West

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Photo Illustration by Gluekit; Source Images: LUDOVIC MARIN/AFP/Getty; Lintao Zhang/Getty; Aurelien Meunier/Getty; Pool/Iranian Religious Leader Press Office/Anadolu Agency/Getty

The South Pars gas field in the Persian Gulf was an offshore discovery that, for oilmen, is the stuff of dreams. The largest natural gas field in the world, it stretches across the maritime border between Iran and Qatar. American economic sanctions, however, had kept it off-limits to Western energy companies for years. When the U.S. and other world powers negotiated the 2015 nuclear deal, that unlocked the potential bounty. The French oil giant Total soon signed a deal to help develop a key portion of the field and started work last year.

Then Donald Trump was elected. His administration pulled out of the deal and, in late November, imposed severe economic penalties—again.

Facing the threat of "secondary sanctions"—U.S. sanctions on any foreign companies doing business in Iran—Total withdrew from the South Pars, deciding, as many European companies have, that access to the U.S. market remains more important than deals in Iran. In Total's wake, though, came the China National Petroleum Corp., a state-owned giant based in Beijing. "It's a gift to China," says a longtime Total adviser not authorized to speak publicly, "and a self-inflicted wound for the West."

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North Dome field is a natural gas condensate field located in the Persian Gulf. It is the world's largest gas field, shared between Iran and Qatar. Alireza Firouzi/Getty

The Trump administration's post–nuclear deal policy on Iran is straightforward: increase the economic pain on the regime until it comes back to the table to renegotiate a better agreement. Critics of the original deal (several of whom now hold key positions in the Trump administration) argue that this approach was working under the Obama administration—until it let Tehran off the mat. This time, they vow, that won't happen.

But as the Total retreat and the Chinese advance at South Pars illustrate, it's not going to be easy to get Iran to tap out. As U.S. relations with Tehran, Beijing and Moscow continue to deteriorate, those three governments have banded together to try to stymie U.S. sanctions, which they all believe, despite Trump administration denials, are aimed at regime change in Iran. The intensifying economic relationship between Iran, China and Russia is the latest, most obvious signal that the U.S. is now in a de facto Cold War with those nations.

Secretary of State Mike Pompeo signaled as much in a speech in Brussels earlier this month. The administration's foreign policy goal, he said, is to build a "new liberal order," which includes "lawfully exiting or renegotiating outdated or harmful treaties, trade agreements and other international arrangements that don't serve our sovereign interests or those of our allies." The Iran deal is Exhibit A in that policy, Trump advisers say.

But Cold War 2.0 is very different from Washington's standoff with the Soviets. Unlike the leaden state-dominated Soviet economy, whose weakness was a critical factor in the USSR's demise, China's economy is the second largest after the U.S., and the country has close to world-class capabilities in industries from technology to manufacturing to oil and gas. Today, goods made by scores of medium-sized Chinese exporters are found all over Iran. Secondary sanctions mean nothing to these companies; they do no business with the U.S.

Russia is also in the process of boosting its direct investment in Iran, by $50 billion in the oil and gas sector alone, with additional funding to help Tehran upgrade a dilapidated electricity grid and other infrastructure. The Russian companies also "have nothing to lose," says Igor Delanoe, an analyst at the Franco-Russian Observatory group, a Moscow-based think tank.

From its years of laboring under Western economic sanctions, Iran has also gained experience in how to flout them. In November, less than two weeks after the Trump administration's new sanctions went into effect, Tehran's Iran Energy Exchange did two large-scale oil deals, each involving over 700,000 barrels of crude. The exchange has set up a system that enables customers to remain anonymous when they buy oil from Iran. "The sales were a victory [for Iran] in that sanctions busters around the world can now see a possible way around U.S. restrictions," says Saeed Ghasseminejad, an adviser on Iran to the Foundation for the Defense of Democracies, a U.S. think tank supporting stricter Tehran sanctions.

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Iranian President Hassan Rouhani gives a press conference on May 22, 2017, in Tehran, Iran. Responding to criticism of the Islamic Republic from U.S. President Donald Trump, Rouhani said on Monday stability could not be achieved in the Middle East without Tehran's help. Majid Saeedi/Getty

The Trump administration itself is part of the reason its new sanctions regime may not be as effective as it desires. After what administration sources say "was intense debate," Trump issued waivers to eight countries—mainly, but not exclusively, to allies. They include Turkey—who in October released U.S. evangelical pastor Andrew Brunson, as Trump had sought—as well as South Korea, Japan and India, all big buyers of Iranian oil. After a bitter debate, the Trump administration also granted China an exemption, hoping the move might make Beijing more amenable to an overall deal on trade.

Iran hawks in the Trump administration, led by Pompeo and national security adviser John Bolton, also worry that exemptions granted to a few Iranian banks to conduct international wire transfers expose an additional weakness. The exemptions are supposed to be for "humanitarian" transactions, but Iran has used such waivers in the past to run massive sanctions-busting schemes.

To be sure, the new sanctions have had some impact: Iran's foreign exchange reserves are shrinking, as is its access to hard currency. At the same time, though, the value of Iran's currency, the rial, has increased relative to the dollar, and its stock market is actually up. Contrary to the Trump administration's desire, the efforts so far "are not sufficient to change the Iranian regime's behavior," says Ghasseminejad. Privately, administration hawks agree. They are already seeking further sanctions and stepped-up enforcement of those now in place.

Bolton said in November that oil sanction waivers are "temporary" and he expects allies like Japan and South Korea to make other arrangements for their crude supply. "Easier said than done," says a Japanese trading company executive, noting that contracts are in place and it's not clear where else Japan can go for supply; a recent Russia-Saudi agreement to cut production means higher crude prices.

Meanwhile, diplomats in the U.S., Europe and East Asia expect China and Russia to continue to invest in Iran. And that's no matter what the U.S. says.

Trump's Iran Sanctions Create a Triple Threat to the West