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Damon Evans

Damon Evans

Damon Evans is an independent journalist, editor, and analyst. Damon has covered global energy markets for more than 15 years with a focus on the…

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This Strategic Asian Nation Helps Iran Skirt Oil Sanctions

As tensions rise between the U.S. and Iran, Malaysia has sought to strengthen ties with Tehran, and seems to be acting as a conduit for Iranian oil exports as a way round the Trump administration’s tightening sanctions.

Iranian efforts to avoid U.S. energy sanctions remain very opaque and difficult to track. However, analysis of data on ship movements suggests Malaysia is assisting Iran sustain its oil exports to Asia, particularly China, reported the Nikkei Asian Review.

On 2 May, the U.S. put a stop to oil sanction waivers for countries – including major customers in China, India, South Korea and Japan – that had been allowed to buy Iranian barrels despite the U.S. ban on exports.

As a result, oil exports have fallen sharply, from near 2 million barrels per day in March to as low as 400,000 bpd in May, the bulk of which is heading to Asia, according to shipping data, reported Reuters. This compares with a high of 2.7 million bpd exported in November 2018 before U.S. sanctions were re-introduced. Already, the Iranian regime is losing several billion dollars in much-needed revenue every month.

It is no surprise then that Iran is trying to keep up oil sales through “unconventional” means to circumvent U.S. sanctions, as oil minister Bijan Namdar Zanganeh said in an interview published by the oil ministry’s SHANA news agency on 6 June.

Indeed, it is plausible that Malaysia is acting as a conduit for Iranian oil, particularly given the historic friendly bilateral relationship between the two nations, said Yingdi Lei, senior Asia analyst at global risk consultancy Verisk Maplecroft.

Vandana Hari, founder and chief executive of Vanda Insights, a Singapore-based provider of oil markets research and analysis, agreed that “it is entirely feasible and expected that Iran will use intermediaries to try and sell its crude”.

If a shipment can be re-labelled along the way to hide Iran as its origin, it can effectively evade U.S. sanctions, said Hari.

Significantly, shipping data suggests that Malaysia, led by Prime Minister Mahathir Mohamad, who has a long and deep relationship with Tehran, is acting as an intermediary for Iranian oil. Related: Failing Trade Talks Could Send Oil To $30

Hari said crude shipments from Malaysia to China had jumped 86% month-on-month in May. “This can’t be explained as higher flows of Malaysian crude to China, especially as Malaysian oil output is stagnant,” she told the Nikkei Asian Review.

“That, combined with reports from ship-tracking agencies that Iranian oil is being stored in vessels offshore Malaysia suggests a new triangular route. It is circumstantial evidence, but pretty compelling,” added Hari.

Still, the whole process is tedious, as well as risky for all parties involved, so the volume of barrels exported this way will likely remain small for the moment.

But Mahathir, the 93-year old Malaysian leader, who made a surprise political comeback after his Pakatan Harapan (PH) coalition won the country’s May 2018 general election, will not be worried about angering the U.S. Therefore, there is scope to deepen the alliance between Malaysia and Iran.

“Mahathir will relish upsetting the U.S. by acting as a conduit for Iranian oil exports. He believes nations should speak together and negotiate in order to solve their differences, which explains why he is very unimpressed with Donald Trump and the general posture of the West,” said Simon Littlewood, a geopolitical specialist and energy industry adviser at Singapore-based consultancy AGC Global.

“His relationship with Iran, which goes back nearly 40 years, is sort of born out of his view that the West has no place in Asia or the Middle East,” Littlewood told the Nikkei Asian Review.

“He has taken a rabidly anti-colonialist stance. Although that does not mean that he won’t create and maintain relationships with Western countries,” added Littlewood.

Mahathir was one of the first statesman to establish relations with post-revolutionary Iran in the early 1980s at a time when the West was trying to punish Tehran. The countries have enjoyed close relations ever since, particularly during Mahathir’s premiership from 1981-2003.

Despite Malaysia’s adherence to the U.S-led Iran-Libya Sanctions Act (ILSA) in 1996, Malaysia did not stop its trade with Iran then, especially with regards to oil, Rowena Abdul Razak, an academic at Oxford University wrote in her paper Escape from Isolation: Iran-Malaysia Relations during the Mahathir years, 1981-2003.

Razak believes that it is quite feasible that Malaysia, a former British colony, is again helping Iran evade sanctions on oil exports, especially with Mahathir back in charge.

Under the current circumstances, the Iranians will be offering even bigger price discounts than usual for their oil, because of the risk of secondary U.S. sanctions involved. Still, the threat of sanctions is unlikely to deter Mahathir’s support of Iran.

But, as Lei warns, Mahathir’s government is facing domestic political opposition and the prospect of stagnant economic growth, making unconditional support of Iran difficult in the longer-term, especially if the U.S. starts exerting economic pressure on Malaysia.

Nevertheless, Mahathir is already talking about the establishment of a regional currency system for trading to reduce Asia’s reliance on the current U.S. dollar-backed financial order. A move away from U.S. dollar trade would restrict Washington’s ability to punish countries that fall foul of its foreign policy with economic and financial sanctions.

For now, Iran is forced to export oil by offering barter terms, deferred payment, as well as using vehicles to take local currencies and not dollars. However, these have severe limitations for Iran, said Hari. The bartering option reaches its limits as there is only so much Iran can buy from its customer country. Similarly, it can only use the buyer country’s currency for buying goods from that country.

Citing Western intelligence officials, Israeli newspaper Haaretz claims that Iran funnels funds from oil and gas sales through Malaysian banks. Much of that assistance, which sources claim will expand following the complete ban on Iranian oil exports in May, is reportedly facilitated through Malaysia’s state-backed oil company Petronas. Although, outside of the cited Western intelligence sources, there seems to be no firm evidence publicly reported to support this.

Still, as the Nikkei Asian Review reported back in 2017, the rise of China’s crude oil futures contract priced in yuan could be a game changer for countries, such as Iran and Russia, as it will allow them to circumvent U.S. sanctions by trading in yuan. Related: Is Hydrogen The New LNG?

To entice trade, China, the world’s biggest oil importer, has created mechanisms that allow the yuan to be fully convertible into gold on exchanges in Shanghai and Hong Kong.

This will appeal to oil exporters that prefer to avoid using dollars, and that are not ready to accept that being paid in Yuan for oil sales is a good idea either.

For example, by creating a gold contract settled in yuan, Iran or Russia, may now sell oil to China for yuan, then take whatever excess currency they earn and buy gold in Hong Kong. Therefore, countries, such as Iran, do not need to buy Chinese assets or switch the proceeds into dollars.

China is also making efforts to set other commodity benchmarks, such as gas and copper, as Beijing seeks to transform the yuan into the natural trading currency for Asia, added the publication.

Interesting then, that Mahathir proposed a common trading currency for East Asia that would be pegged to gold, describing the existing currency trading in the region as manipulated, reported Reuters on 30 May, 2019.

Perhaps, the prospect of de-dollarizing parts of the global financial system is the real reason that Washington is increasingly ratcheting up the trade war with China and putting more sanctions on countries like Iran.

Nevertheless, if history is anything to go by, Malaysia, under Mahathir, will help countries that fall foul of U.S. foreign policy, particularly Iran.

As a result, expect more oil flows to be triangulated from Iran to China and other buyers via Malaysia.  

By Damon Evans for Oilprice.com

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