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Thu 10 May 2018 11:03 AM

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Explainer: US withdraws from the Iran nuclear deal

Ehsan Khoman, MUFG's head of research and strategist on what the possible reimposition of sanctions mean for business

Explainer: US withdraws from the Iran nuclear deal

What happened last week?

As widely expected, President Trump announced the US withdrawal from the Joint Comprehensive Plan of Action (JCPOA), by declining to sign the nuclear waiver extension, which in effect leads to the reimposition of all statutory sanctions on Iran. In addition, President Trump has announced additional penalties at the “highest level”, and the US Treasury has given guidance on the size and magnitude of those sanctions against Iran.

Will the deal be renegotiated?

This was “hard exit Trump” rhetoric and fits with the president’s broad animosity of the Iranian regime. By declaring that not only is the US leaving the JCPOA with the re-imposition of all statutory sanctions, but in fact the US will also be instituting the highest level of sanctions against Iran (adding that any country that aids Iran will also be sanctioned), President Trump is clearly articulating that he has minimal desire in an alternative agreement with Iran.

What are the next steps?

It is unclear what Iran's broader response will be. It might itself withdraw from the agreement, although it may attempt to buy time and gauge options before making a dramatic move. Or it may decide to take the high road and stick to its commitments under the JCPOA.

And what of the sanctions?

The EU has already drawn up plans to shield its entities operating in Iran should the US withdraw from the JCPOA. This could be achieved by offering non-USD denominated currencies, namely, EUR finance, through institutions such as the European Investment Bank (EIB). Or this could be achieved through via bilateral deals, for instance, the €5bn credit agreement that Italy signed with Iran in January 2018 for Italian corporates to invest into Iran.

However, it is unclear whether the potential use of non-USD denominated finance lines will offer much protection to European entities, and thus such a move could be largely symbolic. Indeed, we remain sceptical about how effective such moves can be, given the global reach of the US financial system and the footprint most large conglomerates have in the US.

There are also questions over how willing financial institutions would be to support European efforts, as many are still cautious of doing business with it, even with sanctions suspended under the existing deal.

What are the implications for oil?

From a pricing perspective, we continue to view that there are now upside risks of Brent rising above $80 and WTI above $75, given that President Trump’s language was hawkish in tone with the scale and scope of sanctions being instituted at the “highest level”.

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