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Azerbaijan Said Suspends Gas Swap Via Iran As U.S. Re-imposes Sanctions On Tehran

Fuad Muxtarlı Analysis 5 November 2018
Azerbaijan Said Suspends Gas Swap Via Iran As U.S. Re-imposes Sanctions On Tehran

The U.S. has reimposed all sanctions against its arch enemy Iran, hitting all core sectors of its economy - oil exports, shipping and banks.

Pro-regime supporters took to the streets in solidarity with the government, chanting "Death to America" slogans, vowing to overcome hardships and rejecting calls for talks. For his part, President Hassan Rouhani vowed to sell oil and break the sanctions with the military pledging to beef up the country’s defense capabilities in order to water down the enemy’s plan.

Shortly after a fresh round of the strongest anti-Iran sanctions took effect, President Hassan Rouhani rushed to assure the nation that Tehran will break the U.S. sanctions against Iran and countries that do business with it. In an obvious sign of bolstering the nation and strike a chord with the regime supporters, President Rouhani said that "we should break the sanctions very well, and we will do that".

"With the help of the people, and the unity that exists in our society, we have to make the Americans understand that they must not use the language of force, pressure, and threats to speak to the great Iranian nation. They must be punished once and for all," the Iranian president said.

The meeting and remarks came shortly after a new round of U.S. sanctions took effect. The new sanctions target, among other things, Iran's oil sales and Central Bank and more Iranian individuals.

The U.S. measures also include so-called secondary sanctions - punitive measures against third countries doing business with Iran. U.S. President Donald Trump introduced a first round of "primary" and "secondary" sanctions against Iran and its trade partners in August.

In May, he unilaterally pulled the U.S. out of the multilateral nuclear deal with Iran. Two months later, footage reportedly came out in which Israeli Prime Minister Benjamin Netanyahu claimed he had personally convinced Trump to withdraw from the Iran nuclear deal. Iran struck the deal with originally six world powers and the European Union (EU) back in 2015, agreeing to curb its nuclear program in return for the lifting of restrictions mainly on its oil sales.

Despite the U.S. withdrawal, Iran has stayed in the deal but has stressed that the other parties to the agreement have to work to offset the negative impacts of the U.S. pullout. Europe has been taking a range of measures to meet the Iranian demand for practical guarantees.

Azerbaijan suspends gas swap

Ahead of the U.S. sanctions on Iran, Azerbaijan suspended the purchase of gas through Iran. In 2016, Azerbaijan, Iran and Turkmenistan agreed on a gas swap and Azerbaijan began the import gas from Iran in exchange for gas from Turkmenistan. In 2017, Azerbaijan’s oil major SOCAR imported 1.8bn cu. m. of gas from Iran, bringing this amount to 0.7bn cu. m. in the three quarters of 2018.

Azerbaijan has succeeded in obtaining guarantees from the U.S. that the involvement of the Iranian company NICO with 10% stake in the Shah Deniz gas project will not affect the implementation or the export of gas from the Caspian sector.

According to the e-notification of the US Treasury, published on November 2, 2018 in the US federal registry, "renewable (November 5) anti-Iranian restrictions are not applied to persons committing or facilitating transactions related to projects <...> aimed at developing [deposits] natural gas and the construction and operation of a pipeline to transport natural gas from Azerbaijan to Turkey and Europe."

The document also states that the United States has excluded from anti-Iran sanctions projects that ensure energy security and energy independence of countries, such as Turkey and European countries. NICO is not included in the pipeline projects of Azerbaijan, and its revenues from the export of the Shah-Deniz hydrocarbons are channeled into a separate special account in a European Bank.

As for operations with Iranian oil, SOCAR Trading kept low profile in trading with Iranian oil due to restrictions on directions of export, as well as on the form of payment. Also the sale of gasoline from Azerbaijan to Iran has been frozen for 10 years and Baku has not been selling diesel to Tehran for several years due to previous international sanctions.

Sources in SOCAR said that the parties also suspended the implementation of the memorandum on mutual understanding between the Azerbaijani Energy Ministry and the Iranian Oil Ministry on joint development of blocks in the Caspian Sea signed on March 28, 2018 in Baku. These deposits include the Araz-Alov-Sharq. In July 2001, Iran, with the help of military boats, blocked the work on the Araz-Alov-Sharq oil and gas block.

Answering a question of Turan news agency on how Azerbaijan will react to the re-imposition of U.S. sanctions on Iran, Azerbaijan’s Energy Minister Parviz Sahbazov said: "Unfortunately, there are many political processes in the world that have an impact on the oil industry and international oil policy - new situations have emerged and we have to reckon with and take appropriate measures. If sanctions against Iran come into force, they will be taken into account by oil-producing countries in the OPEC + format. Gas production in 2018 is projected at 30.2bn cu m., in 2019 – 36.9bn cu. m. In 2017, oil production in Azerbaijan amounted to 38.7m tons, gas – 28.4bn cu m.

Russia does not recognize U.S. sanctions

Bloomberg news agency reported that the U.S. agreed to allow eight countries, including Japan, India and South Korea, to continue purchasing Iranian oil after the second part of the sanctions against Iran came into force. China is in this group, but negotiations are still ongoing. Exemption from sanctions was granted to eight countries so as not to contribute to the growth of prices for raw materials, the American official said. In exchange, eight countries pledged to reduce oil imports from Iran.

For its part, Russian Energy Minister Alexander Novak said on November 2 that "Russia does not recognize sanctions imposed unilaterally without a resolution of the UN Security Council, and considers these methods, in fact, illegal."

"We believe that we should look for mechanisms that would allow us to continue developing cooperation with our partners, with Iran. The oil-for-goods mechanism, created to increase trade between Russia and Iran, allows Tehran to use part of its oil revenues to pay for Russian goods. We have historical trade with Iran. Iran needs our technology and services," Novak said.

Another close trade partner of Iran - Turkey also stated that it is purchasing energy resources from Iran legally and is not going to freeze ties with this country. Turkey annually purchases 9.5bn cu. m. of gas from Iran - the second on the list after Russia with Azerbaijan being the third supplier. Turkey imports Iranian gas on the basis of a contract that is to expire in 2026 and Ankara believes it would affect the country’s energy security if it stops buying Iran’s gas.

On Monday in his remarks, President Rouhani blamed U.S. President Donald Trump for lawlessness, high-handedness, and for violation of international laws.

"I don't recall a group assuming power at the White House that was racist as these," the Iranian president said. "This is not [just] us who wish for the life of this incumbent administration in the US to become shorter and shorter; their (the Americans') own European allies have told me in [private] meetings that that is one of their wishes," President Rouhani said.

"They (the Americans) saw that they couldn't replace [Iranian oil on the market]; and even assuming they did not concede defeat and did not grant waivers to countries, we would still be able to sell our oil [because] we have adequate capabilities to do that," the Iranian president said.