US-Iran Spar in Trade War- False Flags, Weak Sanctions

The United States has pressured countries to curtail their imports of Iranian crude oil and is now threatening to penalize banks that participate in oil deals with Iran. In keeping with the U.S. sanctions campaign, the European Union on July 1 implemented an oil embargo against Iran. The bloc already has begun banning European countries from reinsuring tankers carrying Iranian oil.

Journalists have painted a dire picture of hyperinflation in Iran and plummeting oil revenues. But Iran's response to sanctions deadlines has been relatively nonchalant. Contrary to the sanctions lobbyist narrative, this response does not suggest Iran will halt its crude oil shipments, nor does it portend a popular uprising in the streets of Tehran.

The sanctions applied thus far certainly have complicated Iran's day-to-day business operations. However, Iran is well versed in deception tactics to allow itself and its clients to evade sanctions and thus dampen the effects of the U.S. campaign.

One way in which Iran circumvents sanctions is through a network of front companies that enable Iranian merchants to trade under false flags. To enter ports, merchant ships are required to sail under a flag provided by national ship registries. Tax havens, such as Malta, Cyprus, the Bahamas, Hong Kong, the Seychelles, Singapore and the Isle of Man, profit from selling flags and company registries to businesses looking to evade the taxes and regulations of their home countries. Iranian businessmen rely heavily on these havens to switch out flags, names, registered owners and agents, and addresses of owners and agents.

Many of Iran's clients turn a blind eye to these shell practices to maintain their crude oil supply at steep discounts. Notably, the past few months have been rife with reports of countries cutting their Iranian oil imports under pressure from the United States. However, after factoring in the amount of crude insured and traded via shell companies, the shift in trade patterns is likely not as stark as the reports present.

The United States already has exempted China, Singapore, India, Turkey, Japan, Malaysia, South Africa, South Korea, Sri Lanka, Taiwan and the 27 members of the European Union from the sanctions. Many of these countries imported higher than average quantities of Iranian crude in the months leading up to their announcements that they had cut down their supply of Iranian crude. China, South Korea, India and Japan also are finding ways to provide sovereign guarantees in lieu of maritime insurance to get around the latest round of sanctions. Even though many of these countries claim to have reduced their oil imports from Iran to negotiate an exemption, falsely flagged tankers carrying Iranian crude likely compensate for much of Iran's officially reduced trade.

The United States has tried to maintain a foothold in Iraq, but there is little question that Iraq now sits in an Iranian sphere of influence. With Iraq now practically conceded to Iran, the other components of the negotiation are largely reduced to atmospherics.

Iran's biggest deterrent rests in its threat to close the Strait of Hormuz. The leverage Tehran holds over the strait allows Iran room to negotiate over its nuclear program. Of course, the United States would prefer that Iran abandon its nuclear ambitions and will continue efforts to impede the program, but a nuclear Iran might in the end be tolerated as long as Washington and Tehran have an understanding that allows for the free flow of oil through the strait.