Risks of foreign policy by tariffs and sanctions

Risks of foreign policy by tariffs and sanctions

Financial and economic sanctions have become an important strategic tool for Washington to attain its foreign policy goals without engaging in destructive wars and courting messy outcomes. The Trump administration is leaning heavily on sanctions to induce regime change in Venezuela and Iran, which hold about a third of the world's oil.

In Venezuela’s case, the White House uncharacteristically followed the previous administration’s actions in 2015, when it imposed sanctions and declared the country a national security threat. In March this year, the Trump administration went even further by targeting financial institutions, freezing gold reserves, trade credits and remittances from CITGO, a subsidiary of Venezuela’s oil company, PDVSA.

In addition, Caracas’s ability to conduct routine financial transactions was severely impeded, coupled by restrictions on Americans doing business with PDVSA. These efforts to financially strangle the Maduro regime have culminated in Washington pressuring major oil-buying allies such as India to isolate Venezuela completely. As a result, it is estimated that the Venezuelan economy will shrink by more than a third, with conditions likely to keep worsening as a result of hyperinflation coupled with prolonged political turmoil.

In Iran’s case, oil sanctions are part of a “maximum pressure” campaign to either force Tehran to renegotiate the JCPOA on terms palatable to a Republican White House, or bring about regime change. Other concerns are the Islamic Revolutionary Guard Corps’ trans-border insurgency activities supporting the Assad regime in Syria, the Houthis in Yemen, Hamas in Gaza and Hezbollah in Lebanon. To that end, the White House announced that it would no longer grant sanctions waivers that allowed eight countries to continue buying Iranian oil. The Trump administration remains undeterred in its quest to bring Iran’s oil exports to zero, even if it means about 1.1 million barrels will disappear from global oil markets.

The potency of sanctions lies in the willingness of other countries to acquiesce to Washington’s demands. Already, China, a major buyer of Iranian oil, has resisted reducing its imports. Beijing will probably resume past attempts at sidestepping sanctions by using a non-monetary barter system to settle payments for crude oil, or promising to pay once sanctions are lifted.

In Iran’s case, oil sanctions are part of a “maximum pressure” campaign to either force Tehran to renegotiate the JCPOA on terms palatable to a Republican White House, or bring about regime change.

Hafed Al-Ghwell

In early May, Iran resumed illicit oil shipments of oil to Syria, where the IRGC remains an influential force. Even Washington’s staunchest allies, Germany, France and the UK, are exploring ways to establish a sanctions-resistant non-bank barter system to facilitate Iranian crude exports. This mechanism has also attracted Russia’s attention and talks are under way to include Moscow.

There are additional concerns that Iranian oil shipping vessels have resumed an old tactic of switching off their transponders to avoid tracking, a tactic also employed by Venezuela.

Sanctions on Venezuela and Iran have sent the price of oil inching upwards. Analysts believe there is sufficient spare capacity in OPEC oil production to offset any shortfalls.

However, China-US trade tensions and escalatory rhetoric from Trump Have left the oil market in doubt. Should China and the US ratchet up their trade war, a global downturn will ensue that will drive down oil prices. There are additional concerns over the potential impact of a "No Deal" Brexit, which would lead to a two-year recession in the world's 5th largest economy.

It remains challenging to accurately predict how the Trump administration’s paint-by-sanctions approach to foreign policy will affect the global economy, amid failed trade negotiations and escalating tariff wars. Furthermore, talk of regime change in Caracas and the dispatch of a carrier strike group to the Arabian Gulf adds a complex dynamic to tracking any potential oil shocks.

Granted, oil markets have some spare capacity and extra potential to stave off the fallout from Washington’s maximum pressure campaign against Iran and the Maduro regime in Caracas. Unfortunately, should war break out in the Gulf, threatening Iraq’s supplies and the 18.5 million bpd that flow through the Straits of Hormuz, there is a good chance that crude prices could hit between $200 and $250 per barrel. This is further buoyed by risks of civil war in both Libya and Venezuela, given repeated failures to reach consensus, government unity and power-sharing between the most prominent political forces in those countries.

  • Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell
Disclaimer: Views expressed by writers in this section are their own and do not necessarily reflect Arab News' point of view