Isfahan is one of the true wonders of the world. Its golden palaces, elaborately tiled mosques and gracefully carved minarets are testimony to Iran’s ancient civilisation and its rich multi-ethnic heritage. Armenian and Jewish communities, which settled under the wise Shah Abbas, are still thriving today, represented by its MPs in the Majlis, the Iranian Parliament. To stroll through the ancient bazaars feels like stepping into One Thousand and One Nights.
It would be tempting to buy one of the many ancient rugs piled up by friendly traders, offered for a bargain. Yet to do so may have grave consequences: no matter if you are Maltese or Chinese, Uncle Sam will come after you. You are not allowed to pay with a credit card, you are banned from using US dollars, you cannot pay by bank transfer and you cannot ship the old rug home or insure it en route without violating US embargo restrictions. And you are explicitly banned from buying carpets after the latest round of embargo tightening.
On your next trip to a country with a US extradition agreement, you might be arrested and sent to jail, as happened to the unlucky heiress of the Chinese telecom empire Huawei in Canada.
It all started, if not with the second Gulf War, then with the Sword Dance ceremony, when US President Donald Trump hopped forwards and backwards along with Saudi Arabia’s King Salman and his murderous crown prince, wielding awesome scimitars in preparation of yet more war mongering to come.
‘Advised’ by his boyish son-in-law Jared Kushner, Iran-hawks like ‘security adviser’ John Bolton, who is unrepentant about the Iraq war disaster and now wants to nuke Iran, and Trump’s latest Secretary of State Mike Pompeo, he sort of agrees with Saudi Arabia that Iran “is the biggest sponsor of terrorism”.
Pompeo adamantly refuses to acknowledge that Saudi Arabia had anything to do with the chainsaw massacre inflicted on Washington Post columnist Jamal Khashoggi in the Saudi consulate in Istanbul.
What was decided early in Trump’s presidency, and on the occasion of this male-only, ring-a-ring-a-roses, was that Israel can occupy the rest of Palestine and degrade Arab citizens on condition that the US is supportive of a sectarian war aimed at annihilating Shia Islam in the Middle East, whether in Bahrain, Yemen, Lebanon, Syria, Iraq or the entirety of Iran.
The aim is ‘regime change’ in Iran – as radical as in Libya, as meaningful as in Egypt and as thoroughly successful as in Syria. The means to achieve that, short of nukes, is a total embargo more thorough than ever imposed on the Soviet Union.
One of the tools is the imposition of ‘secondary embargoes’. It threatens countries that do not wish to sign up to yet another US-induced fiasco and prefer to continue buying Iran’s heavy crude which is essential for the smooth functioning of refineries designed for such feedstock.
After the collapse (and yet another attempt of regime change) in Venezuela there’s not much of that gooey stuff around anymore. India, Turkey, South Korea and Japan, after China Iran’s biggest customers and traditional US allies, were advised that ignoring a US embargo on grounds of imagined sovereignty would be punished, well, with yet another embargo.
In fact, not a single country is allowed to work with Iranian banks, to buy goods other than pistachios, to pay, to release funds already deposited, to ship or insure Iranian wares, or, indeed, to buy Persian rugs. Equally punishable are all exports other than food and medicine. Boeing 737s are grounded because they lack spares, not software updates.
This is not to claim that Iran’s mullahs stand for an enlightened, tolerant regime, even though they may look like a paradigm of liberal democracy when compared to Saudi Arabia. They wish death to the US and announce the erasure of Israel on every public occasion.
Illiberal trade restrictions do not work. They never do
The point is that illiberal trade restrictions do not work. They never do. Even a population highly contemptuous of its regime will be forced to rally behind it when attacked from the outside. The country’s elites will financially prosper in deficit economies, paranoid hardliners will gain ground. Capital flight will be reversed. New and harmful alliances will be formed. The regime will become irreversibly entrenched while the population will be impoverished.
It is difficult to argue that embargoes against South Africa or the Soviet Union were ever strategically effective, or will yield significant results today against Russia and North Korea. Surgical sanctions are a diplomatic rebuke and a threat. A total embargo takes that threat off the table. It is the strategic equivalent of burned bridges. Retreat becomes impossible. What the US seems to hope therefore is to provoke confrontation rather than to negotiate. It is not confronting Iran with choices but delivering ordered goods to Saudi Arabia and Israel.
This is cynical and reckless. When the US unilaterally reneged on the ‘Joint Comprehensive Plan of Action’, the Iran nuclear deal it had signed – after years of painstaking negotiations – with the permanent members of the UN Security Council, Germany and the EU, it demonstrated that a US signature is essentially worthless. This will haunt us all for years to come.
China, in its ‘trade negotiations’ with the US, and North Korea too will have learned their lessons, and so will have Russia and indeed Iran. The EU, spearheaded by France, the UK and Germany, is trying to salvage the potsherds. At the end of January it set up the ‘Instrument in Support of Trade Exchanges’ (Instex), an SPV designed to facilitate trade with Iran on the basis of a ledger system, avoiding money transfers – a truck of pistachios for a container with proteases, for instance. There’s no website and no operative office yet. Iran will have to set up a special vehicle too, as even its central bank is afflicted with a US embargo.
Pistachios do not reach far, and proteases are not the only essential needed in the Islamic Republic. Spare parts are more important for factories and refineries to keep going, raw materials like non-ferrous metals and electronics too. The hope is that countries brave enough to defy US threats of punishment, like China and Russia, will sign up to Instex, as crude exports make up 80 per cent of Iran’s foreign currency income, and the world’s mayor oil traders like Vitol, Trafigura or Glencore will not wish to risk alienating the US. Banks could be offered to transfer their sizable Iranian deposits to Instex too, helping to defreeze idle money.
A major difficulty to cope with is the reluctance of Western manufacturers to deal with an EU embargo avoidance mechanism when they have sizable operations in the US too. As we have seen, for key managers even to spend holidays in America could be dangerous. Only the very dedicated would wish to follow our Pilatus Bank into close confinement. If the EU became more pronounced in enforcing its ‘blocking statute’, prohibiting compliance with unilateral US sanctions, exporters could become increasingly emboldened.
As retail investors we will have to understand that world economic growth has become increasingly brittle. Any US settlement will only last a short while – to hope that the US-China ‘trade agreement’ negotiated at the moment will bring lasting calm and solid solutions would be irrational. The world is becoming a Wizard of Oz place, where illiberal regimes like China and Russia will look at times like saviours.
War conflicts in the Middle East will not be confined to Libya, Yemen, or Syria anymore. Oil prices could fluctuate violently, turbo boosting the share price of majors who operate outside crisis areas. Investments in the Gulf States may become meaningless and shipping insurance risky like catastrophe bonds. Even Israel, one of the world’s most dynamic and advanced economies, will enter rocking waters.
It is a strange time to make meaning-ful long-term decisions – better to act opportunistically.
Andreas Weitzer is an independent journalist based in Malta. He reports on the economy, politics and finance. The purpose of his column is to broaden readers’ general financial knowledge and it should not be interpreted as presenting investment advice or advice on the buying and selling of financial products.
andreas.weitzer@timesofmalta.com