Sanctions on Iran have failed. The weakness of the U.S. position in the oil markets is now complete. Donald Trump’s Energy Dominance strategy has failed.

The announcement by Secretary of State Mike Pompeo (R – The Eschaton) that no more sanctions waivers will be granted to importers of Iranian oil. Those that do so will face sanctions.

But let’s look at what is actually on the table. Waivers will be extended to a year from now during a ‘wind-down’ period. But, I thought these past six months were the ‘wind down’ period Don?

I told you these would get extended the minute they were granted. Because three of these countries — India, Turkey and China — are in open revolt over the policy.

And they have built plenty of infrastructure to get around these sanctions when or if they are ever implemented.

Three of the eight countries granted waivers — Italy, Greece and Taiwan — do not need waiver extensions as they’ve already cut their imports to zero.

No Disruptions

But the main issue here is the extension. It’s clear that Trump and his merry band of neocon handlers are afraid of further disruption of the oil supply and demand, otherwise the extensions wouldn’t have been granted at all.

They talk tough about UAE and Saudi Arabia adding supply but the reality is it isn’t that easy to spin up new supply. And the year-long waiver extension is proof of this. They’ll certainly sell all they can but there are those pesky OPEC quotas to deal with.

No one was willing to go along with the Saudis OPEC+ plan where they and Russia would be pigs more equal than the others this winter, so it’s unlikely that will happen now that Trump has helped them push prices back towards $75 per barrel.

Gas prices here in the States are approaching $3 a gallon ahead of the summer driving season. That’s a big no-no for Orange Obama’s re-election bid.

All he has to run on is his ‘greatest economy ever’ and ‘no collusion,’ because his foreign policy is a disaster. He needs the price to come down while he undercuts both Saudi Arabia and Iran with ultra-cheap tight oil in oversupply from the U.S. I’m sure he’s trying to woo China on this front.

The Brent/WTI spread has tightened but it’s still more than $8/bbl. At these prices, however, Iran can undercut the market in off-exchange sales like they always do and still maintain exports.

So, the real story is similar to what was communicated to the market last month that the U.S. can expect to push Iran’s exports down to a low of 800,000 barrels per day. Current exports are around 1 million.

Pomposity, Not Diplomacy

This announcement comes after Pompeo’s disastrous Middle East visit which resulted in Lebanon and Syria inking port deals with Iran and Russian, respectively. Egypt pulling out of Trump’s Arab NATO and Moscow inking a deal to sell even more SU-35s to Egypt.

Pompeo does a lot of Trump’s talking for him now, if you notice. Trump isn’t actually allowed to talk on foreign policy at all. and when he does it’s just barely coherent tweets.

As I said on Stategic Culture last week:

If a US Secretary of State bloviates in public and no one actually listens to him does he even matter?

Unfortunately, for the time being, yes. Because while there is a petrodollar system, the US dollar still dominates world trade and the servicing of debt around the world, leverage will be applied. The problem comes when there that leverage dissipates and those trade dollars are not used to fund new debt to keep the financial screws tight.

This gets me back to why the U.S. can’t actually drop Iran’s exports to zero. China, India and Turkey will evade sanctions like they did under Obama.

Back in 2013 it was difficult but it still happened. Today, the playing field has changed.

Between China and Russia’s SWIFT alternatives, special treatment of banks trading with Iran (India), and the Shanghai oil futures exchange, control over Iran’s access to the oil markets is assured, if impaired.

Russia and Iran have an oil-for-goods arrangement that moved more than 100,000 barrels per day in 2018. That program can be expanded especially as regional trade expands. At this point there is a perfect conduit from Iran to Turkey and/or China, for example, with Russia acting as the middle man.

And if you failed to notice it, every one of these countries have pledged to drastically increase trade with Russia over the next few years. And sanctioned Iranian oil can be the very thing that lubricates it and accelerates de-dollarization of these countries’ economies.

The Turkey Leg

The weak link is Turkey. The screws are ratcheting down on the lira and Turkish banks as President Erdogan’s future is in doubt after disastrous elections. His former Prime Minister is now speaking out against him, so things could accelerate quickly again.

If Erdogan isn’t removed from power soon, and the Turkish economy stabilizes with increased travel and trade thanks to an ultra-cheap lira, I expect a full revolt from him over U.S. policy before year-end. This could include revoking NATO’s access to the Incerlik Air Base.

That would put a real dent in the U.S.’s ability to attack Iran.

To that end, last week, Turkey announced that Russia’s Mir cards would be accepted at major banks. It was a major win for Russia’s national payment system (NSPK) and will be usable in twelve countries by year end, according to its head Vladimir Komlev.

From Reuters:

Komlev projected Mir cards would be operational at some banks in 12 foreign countries by the end of the year. He would not, however, disclose which countries those might be.

NSPK is not subject to Western sanctions, but some foreign companies are wary of doing business with Russian firms in case further restrictions are put in place.

Turkey will have to decide just how far they are willing to take their revolt against U.S. geopolitical ambitions. Erdogan is a loose cannon who used to import 200,000 barrels a day from Iran. Imports in 2018 under sanctions threats were down to 60,000.

Given how both countries are dollar-starved at this point bi-lateral trade through Russia and China as intermediaries is the most likely course. The more widely accepted Mir is to process payments the more likely we’ll see general sanctions evasion via it and other national systems outside of the U.S.’s purview.

And that’s where everything comes together. The risks of doing business through China and Russia are not the same as they were in 2012 or 2014.

China will use this as a card in trade negotiations with Trump. They will continue to funnel dollars into both Iran and Turkey to keep the banking situation under control.

At 1 million barrels a day, Iran’s exports are just $26 billion a year. This is not a lot of money to hide in global shadow finance system.

The higher Trump ratchets up the cost of doing business in dollars the lower the barrier to people using other means to settle trade.

Beyond that there is what I talked about last week with respect to North Korea. Bitcoin and other cryptocurrencies will find expanded usage by sanctioned businesses and nations to process payments and build trading reserves.

This is why Trump didn’t end the waivers starting next week. He knows he’s failed to achieve his goal. And by next year all of the systems I’ve just talked about will be that much more mature and trusted.

And this policy will either be quietly abandoned or brought back for election season gaslighting. Either way it won’t actually be effective.

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