By Robert Berke
Trade wars and sanctions are economic weapons against rival regimes, and like actual military warfare, often lead to unanticipated and sometimes devastating blowback from the targeted regimes.
A prime example was President Obama sanctioning Russia over its annexation of Crimea. The sanctions were designed to block Russia from any access to western financing, aimed at causing a dire financial and economic crisis in Russia that would force it to relinquish Crimea and end support for Ukraine’s breakaway territories.
In fact, the sanctions did cause Russia to enter a short-lived recession. But it also had other, much more drastic results for the West. It forced Russia to move closer to China, and Moscow saw Beijing as a great alternative to western financing for Russian industries.
At the same time, western companies were forced to withdraw from Russian mega-deals because of sanctions. The best-known example was Exxon, forced by sanctions to walk away from an Arctic joint venture with Russia’s state-owned oil giant, Rosneft, where it had invested $3.2 billion. In their very first effort, the partners successfully drilled oil wells containing 750 million barrels.
As noted by Reuters, the withdrawal was costly:
“Exxon will post an after-tax loss of $200 million as a result of pulling out of the Rosneft deal, but the true costs for the company run much deeper. Exploring and developing giant offshore fields in Russia was supposed to provide long-term growth for the company, and, in recent years, has seen falling reserves.”
But the opportunity losses are likely to be far higher for Exxon, the company that famously missed the US shale revolution. The long-term deal with Rosneft, expected to continue for decades, included exploration for oil in the Black Sea, enormous shale resources in Western Siberia, and the development of three large blocks in the Arctic (Kara Sea).
The trade war with China that has led to tariffs on billions of dollars in Chinese exports to the US, and as a result, Russia and China have moved even closer. It remains an absolute mystery why no one in the west had foreseen the blowback from economic warfare leading to an alliance between two of its most powerful adversaries.
China’s major state-owned oil companies and its Silk Road fund each became 10% partners in Russia’s first major Arctic LNG (liquified natural gas), project in the Yamal Peninsula, undertaken with Novatek, Russia’s largest independent gas producer. The project offers great prospects for enormous expansion.
The US acts as if it has been blind-sided by the Russian/China moves, even though years before it undertook economic warfare against them, China, the world’s largest energy importer, agreed to finance oil and gas multi-billion-dollar pipelines in neighboring Russia. Now Russia has become China’s largest energy supplier, equaling or perhaps even surpassing its energy supplies to Europe.
A similar scenario is taking place in the Persian Gulf where the US has withdrawn from the Iran nuclear deal, while imposing economic sanctions on Iranian oil exports. The French energy giant, Total, that in recent years has been a leading international oil company in that country, was forced to withdraw because of sanctions, just like Exxon in Russia’s Arctic, it left billions of dollars on the table.
This may also answer the question as to why French Prime Minister Macron was so intent on inviting the Iranian Foreign Secretary to the recent G7 meeting in France. It’s also no secret that French carmakers Peugeot and Renault are the main suppliers to Iran’s auto assembly plants.
As stated by Global Village Space (GBS), China and Russia rushed to aid Iran, with China replacing Total, in a 25-year deal estimated to be worth some $400 billions. With that, China inherits a bonanza, providing much needed finance and technology to a country that was and could again become one of the world’s leading energy producers. China is looking to finance $280 billion to develop Iran’s gas, oil and petrochemicals industries, along with $120 billion to improve transport and manufacturing, making it a key partner in China’s Road and Belt program.
The deal also gives China the right to buy any or all Iranian oil, gas, and petrochemicals products at a minimum guaranteed 12% discount to global benchmarks, plus an additional discount of 6-8% for risk adjusted compensation. Financing will proceed using local currencies, avoiding the costs of converting to a hard currency like the US dollar or the Euro, giving the Beijing yet another 10% cost advantage.
GBS further reports that the security for these projects will include up to 5,000 Chinese security personnel on the ground in Iran to protects Chinese projects and to safeguard the transit of energy products from Iran to China, including security for the very strategic Hormuz Straits.
In direct defiance of US sanctions against Iran, China has stepped into the breach, increasing its oil purchases from Iran while becoming Iran’s major energy trade and finance partner. Like Russia, it seems that Iran is moving towards a military alliance with China. If the west worries about China’s expansive moves in the South China Sea, along China’s own borders, what to make then of China moving in on Hormuz, where some 30% of world oil is transited each day?
If these are considered winning policies for the West, one has to ask what failure looks like.
The West is already slowly becoming aware of the blowback this disastrous policy has caused. Evidence for this can be found in Macron’s efforts to persuade Trump towards a peaceful resolution with Iran.
It is well known that the US has been in secret meetings with Iran representatives, much to the dismay of the Saudi Arabia and Israel. As Bloomberg reports, after the G7 meeting, Trump publicly and repeatedly stated he was ready to meet with Iran’s President, Hassan Rouhani. Bloomberg also reported that in a meeting with his Cabinet, Trump announced that he was ready to ease sanctions as a possible way to open negotiations between the two countries. Treasury Secretary Mnuchin agreed with the President, while National Security Advisor Bolton voiced strong opposition, that only one day later, led to his firing. Secretary of State Pompeo stated that Trump may meet on the sidelines of the upcoming UN meeting with Iran’s President.
The firing of Bolton was immediately followed by a fall in the price of oil and gold. Allowing Iran to continue to increase supplies into already well supplied oil markets will add downward pressure on oil prices. For the Trump administration, this is not necessarily a bad thing… unhappy consumers at the gas pump make for unhappy voters.
Similarly, the Trump Administration badly needs to move towards ending the trade war with China in order to calm global markets. The recent announcement of the resumption of trade talks between the US and China in October may provide an opportunity for a similar easing of tariffs and a path towards further resolution.
Although these actions could help to quell global tensions, it may be too late to reverse some of the serious damage caused by US-led economic warfare. Once China positions itself in Iran, it will not likely be interested in withdrawing from its new strategic position in the Middle East, that it gained as a result of US near sighted foreign policy.
Prior to the election, we may see a breakthroughs in the trade war, and the alleviation of sanctions with Russia, Iran, China, and perhaps even North Korea, but the US will almost certainly see the negative consequences from adversaries it helped to expand and strengthen.
By Robert Berke for Oilprice.com