For four long years, between 2012 and 2015, Asian companies were held hostage by U.S. demands to reduce their business dealings with Iran and throttle back their crude imports -- or face sanctions from Washington.
Less than three years after the restrictions were lifted by a landmark multilateral nuclear agreement with Tehran, they are poised to return.
This time around, Asian governments should push back with all their diplomatic might instead of simply succumbing again.
The fact that the U.S. has reneged on the nuclear deal, formally known as the Joint Comprehensive Plan of Action, despite the world's nuclear energy watchdog consistently certifying that Iran has been fully compliant with the restrictions on its nuclear program, is a bargaining chip. So is the reaffirmation by the remaining five signatories - Britain, France, Germany, Russia and China -- that they remain committed to the accord.
The European Commission has decided to use its "blocking statute" to forbid European companies from complying with U.S. sanctions against Iran. Regardless of how effective it proves to be, the U.S. must understand that unlike the previous sanctions regime, which had broad support from the international community keen to keep Iran from developing nuclear weapons, this time it is acting alone.
Asia's four largest oil consumers -- China, India, Japan and South Korea -- together consume nearly three-quarters of Iranian crude exports of about 2.2 million b/d. Their combined purchases from Iran have climbed by almost 500,000 b/d since the sanctions were lifted. These countries will likely come under U.S. pressure again to "significantly reduce" their purchases.
Asian governments are already suffering the unintended consequences of the U.S. pullout from the Iran deal in the form of higher oil import bills and increased foreign exchange outflows as crude prices have hit their highest levels since November 2014. Refiners in Japan and India are suffering a double whammy due to a substantial weakening of the yen and the rupee against the U.S. dollar in recent months.
The U.S. is also expected to prevail on countries to pare back their investments in Iran's upstream oil and gas sector, which has been slowly limping back to life since 2016, mostly with the participation of Chinese, Indian and European companies. Oil companies are used to navigating geopolitical uncertainties but major policy U-turns and the loss of equity partners midstream can wreak havoc on project timelines and budgets for those that choose to remain.
U.S. secondary sanctions that will target entities dealing with Iran's oil and shipping sectors as well as its central bank are due to take effect Nov. 4, giving companies the next six months to "wind-down" their trade with the country. Such sanctions can lock the targeted company out of the U.S. financial system and bar it from doing business with U.S. entities -- a risk few international players are willing to take.
European companies, including buyers of Iranian crude, investors in its oil and gas sector and some of the world's largest shipping lines and shipping insurers have already turned cautious and may start retreating from Iranian business. But at least the EC has taken a stand against the U.S. decision.
That may not be an option for Asia, least of all because it is not a unified bloc of countries. During the previous round of sanctions, U.S. allies Japan and South Korea were more compliant with Washington's demands to cut back their Iranian crude imports, while China and India were relatively more defiant. Under consistent pressure, though, the latter two also pared down their purchases. All four managed to secure rolling six-month waivers from U.S. sanctions.
While Japanese and South Korean imports tanked by as much as 40% over the sanction years, the deepest Indian and Chinese cuts were around 22%. China's reduction was not consistent through the years and it also stepped up purchases of fuel oil from Iran, taking advantage of the fact that they had not been specifically mentioned in the U.S. sanctions list.
The Asian buyers circumvented the U.S. financial system by paying Iran in their own currencies as well as by boosting bilateral barter trade. Their governments helped insure Iranian oil shipments as the European Protection and Indemnity Clubs had pulled out due to European sanctions against Tehran. They received additional discounts and favorable contract terms from Iran as a goodwill gesture. But it was inconvenient for the buyers and economically debilitating for Iran.
Now they face the same pain again.
Returning to the old workarounds on payment and shipping insurance may involve a shorter adjustment period this time around. Iran has been paid in euro for its crude since the sanctions were lifted, but that may no longer be possible if European banks retreat from Iran-related trade. Asian buyers may have to revert to paying in their own currencies.
But the Asian governments need to adopt tough diplomacy in resisting Washington's demands to curtail Iranian crude purchases this time around. China was a signatory to the 2015 nuclear deal and has reiterated its commitment to it after the U.S. withdrawal. India was not party to the deal but also affirmed its commitment to it during President Hassan Rouhani's visit to India in February. The time has come to walk the talk.
When the U.S. engages them in bilateral discussions on Iran, as was the norm during the last round of sanctions, the governments should reject a reduction in Iranian crude imports as contravening their foreign policy goals and commitments to Tehran. They should also point out to Washington that they will be paying the price for the U.S. walking out of the Iran deal in the form of substantially higher crude import bills as well as additional costs for their refiners in making alternative arrangements for shipping insurance and payments.
Unlike Europe, it is hard to imagine a united front in Asia. Japan and South Korea, being more reliant on U.S. support, will likely bow to its demands with regard to Iran. That makes it incumbent on Beijing and New Delhi to take a tough stand. Combined with the pressure from Europe, it might just persuade Washington to return to finding a diplomatic route to negotiating its demands with Iran.
Vandana Hari is founder of Vanda Insights, which tracks energy markets. She has two decades of experience providing essential intelligence on the energy commodities sector.