Lifting of sanctions on Iran: what does it mean for Ukraine

Author : Fedir Popadiuk

14:24, 18 January 2016

Lifting of sanctions on Iran: what does it mean for Ukraine

Author : Fedir Popadiuk

Ukraine's prices for pertol will not reduce significantly, but Russian economy would be disadvantaged

14:24, 18 January 2016

Fedir Popadiuk, Economichna Pravda, presented main perspectives of lifting of sanctions on Iran.

January 16, remaining international sanctions on Iran has been lifted.

International Atomic Energy Agency (IAEA) in its report declares that Iran has fulfilled all conditions of the agreement about freezing of its nuclear program.

The agreements between Iran and the "six" (the U.S., United Kingdom, France, Germany, Russia, and China) have been achieved in the summer of 2015.

According to them, Tehran refused to develop its nuclear program in exchange for the lifting of international sanctions.

Which kind of sanctions?

A series of sanctions against Iran began after the Islamic revolution of 1979, during which the monarchy was abolished, and Iran has become Iranian republic.

Then the protesters seized the U.S. Embassy with 52 diplomats because of rumors that the escaped Shah would get asylum in the United States. The U.S. government froze all Iranian assets.

Oil sanctions are related to the same Iran's nuclear program, resumed in 2005.

The U.S., Western Europe and Israel had fear that Iran was developing nuclear weapons, and were persuading Iranian government to give up its nuclear program.

Western countries have used economic sanctions to put pressure against Teheran, including an embargo on oil supplies from the Islamic republic.

Oil sanctions against Iran have been launched in 2012, when Iran stopped selling oil to the U.S. and the United Kingdom. Since 2013, the Iranian oil stopped coming and the rest of the EU.

What did Iran do to get rid of the sanctions?

Most of Iran's enriched uranium was exported.

An agreement meant that the fuel enrichment plant "Fordo" would be the research center of Nuclear Physics without uranium enrichment capabilities.

The IAEA would got access to all nuclear facilities in the country for some 20 years, which would allow the organization to be sure that the Iranian nuclear program was entirely peaceful.

Related: Putin: Western sanctions against Russia are “foolish and harmful decision”

Are all the sanctions lifted?

Iran gets rid of sanctions and restrictions, but not all. Only economic and financial constraints related to its nuclear program are lifted.

In addition to removing the oil embargo, Iran also enabled access to $ 50 billion in the accounts.

Sanctions related to the situation of human rights in Iran, with the support of terrorism and other circumstances that are not part of an overall action plan, remain in force.

In addition, the next day after the cancellation of "oil sanctions", the United States announced new sanctions against Iranian companies and individuals linked to Iran's missile program.

How much Iran’s oil can go for export?

Before Western sanctions has been launched, Iran was able to produce about 4.2 mln barrels a day, and exported 2.5 mln barrels per day. After announcing the restricting, foreign shipments decreased to 1.1 mln barrels a day, and this oil went to the Asia-Pacific region.

Now Iran's production is less than 3 mln barrels per day. According to the Minister of Oil of Iran, the daily supply of oil will increase by 500 thousand barrels, and after 6-7 months, exports may grow by one million.

Related: White House expands sanctions against Russia

What’s the threat?

The main danger is another great glut and a further decline in prices. Now a proposal on the oil market exceeds demand by 1.5-2 mln barrels per day.

In addition, Iran will likely sell oil at great discount prices to regain market occupied by competitors.

According to the Russian experts, prices could fall to $ 15-20 a barrel and such a situation might remain during the year.

At the same time, experts note, the Iranian factor, aggravating glut in the market, does not allow prices to rise above $ 40.

Who will be disadvantaged the most?

Of course, the countries whose economy is tied to oil exports. Most of all, it concerns Saudi Arabia and Russia.

Saudi Arabia has declared its readiness to sell oil at $ 16 a barrel. It means lowering the price to cost price in order to keep the oil companies afloat.

At the same time, the price of 15 dollars per barrel of oil is critical for Russian oil companies.

Major oil companies will benefit from the price of 15 dollars per barrel, but the budget revenues in the event of this threshold will fall by the order. In this case the tax rate on mining (MET) and export duties is automatically reset to zero.

It might lead to tax burden on Russian oil companies, cuts in benefits for state employees and health care, science and education.

How will it affect Ukraine?

In terms of impact on the economy of Ukraine, this message is ambiguous, although dominated by the positive expectations.

Taking into account that Ukraine is almost 90% dependent on imported oil, the news concerning reduction of the cost of raw materials, of course, sound good.

If the dollar rate remains the same and the oil becomes cheaper, then and petrol will fall in price.

Now we can see only a slight increase in prices. Experts believe that the Ukrainians should not hope for significant decline in gasoline prices.

The second essential factor for the Ukrainian economy might be the reduction in gas prices, which are tied to oil quotations.

The contract of 2009 linked the gas price formula to the price of fuel oil and gasoil, and their value depends on the price of oil. However, it took only first three quarters for the calculation.

Related: Nuland: Sanctions are holding Russia accountable

That is, if the oil is cheaper in the next three quarters, the price of Russian gas will be reduced.

In addition, the position of Russia are weakening, because it continues to undermine the situation in Ukraine. Former World gas station, the budget of which is held exclusively on the raw dollar bear huge losses from the reduction in price of oil.

There is also a negative impact on the collapse in prices of "black gold": other raw materials become cheaper along with oil.

Falling of oil quotations on the exchanges means reducing of quotes on grain and metal. And these are the main products that provide foreign exchange earnings in Ukraine.

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