Iran sanctions: how will they affect the global economy?

Iranian rial has collapsed by more than two-thirds since Trump declared he would pull out of the nuclear agreement in May

The last round of sanctions to be implemented target more than 700 businesses (EPA)

The US will reinstate all sanctions on Iran that were removed under Barack Obama’s presidency as part of a 2015 nuclear deal.

President Donald Trump’s administration on Friday named eight countries that will not be penalised if they continue to import Iranian oil, including South Korea, Japan and India

Mr Trump withdrew from the deal between Tehran and other global powers in May, describing it as “defective at its core”.

But what are sanctions is the US imposing and what are the economic implications of the president’s latest unilateral move?

The last round of sanctions to be implemented target more than 700 businesses, individuals and other entities primarily involved in Iran’s oil and banking industries.

The Iranian rial has collapsed by more than two-thirds since Trump declared he would pull out of the nuclear agreement in May while Iran’s oil exports have plummeted from 2.7 million to 1.6 million barrels a day in just six months sending oil prices surging.

Iran’s economy shrank more than 6 per cent in 2012, the last time sanctions were imposed and another shock is likely this time around.

This is of course the Trump administration's aim. It wants to punish Iran to compel it to permanently end its nuclear ambitions, as well as its “malign behaviour” in the region.

The penalties are “aimed at depriving the regime of the revenues it uses to spread death and destruction around the world,” Mr. Pompeo said.

Mr Trump made the point by tweeting a poster of himself with the word “Sanctions are Coming”

Shortly after the new penalties against Iran — and the waivers — were announced, Mr. Trump posted on Twitter a poster of himself with the words “Sanctions Are Coming”, on a background taken from Game of Thrones.

But the effects on the global economy have been softened by the waivers. The primary global oil price benchmark, Brent crude, has fallen about 15 per cent from more than $85 a barrel last month as speculation grew that some countries would be exempt.

So the huge range of products and services which rely on oil for their manufacture and transportation will not be as badly affected as the might have been.

“Our laser-focused approach has succeeded in keeping prices stable with a benchmark Brent price right about where it was in May of 2018, when we withdrew” from the agreement, said US Secretary of State Mike Pompeo.

“Not only is this good for American consumers and the world economy, it also ensures that Iran is not able to increase its revenue from oil as its exports plummet.”

Ashley Kelty, oil & gas research analyst at Cantor Fitzgerald Europe said the only certainty for oil prices in the near term was that they would be volatile.

"We could see Brent retreating below $70 in the near term, although we would anticipate that it will not dip much below $65, as Opec production will struggle to increase much further due to the lack of physical spare capacity, and the sanctions on Iran and plummeting output from Venezuela continue to take further physical product from the market," he said.

While eight countries have been given waivers, they will still have to pay any money for Iranian oil into an escrow account. The funds can then only be used to buy food, medicine or other non-sanctioned goods from its crude customers.

The US stressed that these arrangements are only temporary and that it still expects all nations to continue to reduce imports of Iranian oil, which will further squeeze the country.