South Africa Ponders Cost Of Iran Sanctions

South Africa has a healthy trade relation with Iran, importing a third of its oil from that country and with billions of dollars of investment in Iran’s coal industry. All this has now been put in jeopardy following the US-imposed sanctions against Iran.

“When two elephants fight, it is the grass that suffers”, is a proverb from Africa come true in the showdown between Western powers and Iran. South Africa and its garland of neighbours are being trampled in unruly fashion as the US and its allies punish Iran for its tampering with the atom. Iran says its nuclear research is for peaceful purposes; the West suspects a more sinister intention of making nuclear weapons.

As it is, South Africa’s fuel and transport sectors are in upheaval and the Iran sanctions issue is something it can do without. The same goes for South Africa’s neighbours because the ills that beset Pretoria knock them for a six as well, being so economically interlinked. It is from South Africa that at least four adjoining smaller economies import their economy-turning refined petrol and petroleum products.

South Africa, sourcing nearly 30% of its crude oil refinery stock from Iran, is faced with the Hobson’s choice of either drastically cutting its Iranian imports or finding itself barred from the globally powerful US banking network.

Azar Jammine, director and chief economist at Econometrix in Johannesburg, says South Africa has in the last few months suspended almost all of its oil imports from Iran, and intends to abide by a US request to make significant cuts in supplies. Confirmation has come from Deputy Foreign Minister Ebrahim Ebrahim with Energy Minister Dipuo Peters reporting that South Africa is considering stockpiling crude oil “to prepare for any eventuality” should shipments from Iran, the country’s biggest supplier be permanently reduced. Jammine said recently that “to my knowledge, no Iranian oil is flowing into our country”.

Peters did not rule out the possibility of continuing oil purchases from Iran, stating that “as government, our responsibility is to ensure security of supply”.

This discourse sums up South Africa’s official attitude to the oil from Iran contretemps and the country’s reluctant involvement in it. Such high level lack of enthusiasm for abiding by the US sanctions diktat was amplified by President Barack Obama signing a law on 31st December that denies foreign banks doing business with the Central Bank of Iran access to the US financial system. The US can bar access to its banking network should a country not make “significant” reductions in its Iranian crude oil purchases during the first half of this year. In early March Minister Peters visited Iran for discussions with government officials there.

“I suspect that this (cut in Iranian oil imports) was done with Iran’s acquiescence or some kind of agreement was reached whereby South Africa said to Iran, ‘Listen, we are under tremendous pressure from America, please understand’,” speculates economist Azar Jammine. “‘Can we try and come to some kind of agreement and restore supplies at some future date or something?’ – something of that order.”

According to the South African Petroleum Industry Association, Iran supplied 5.5m tons of oil to South Africa in 2010, 29% of its total imports. Iranian crude trades at a discount to global market prices.

It’s complicated

The Iranian situation is complicated for Southern Africa in a number of ways; South Africa’s reliance on Iran for nearly a third of its oil imports is just one them. South African refineries supply by road and rail virtually 100% of petrol and petroleum products, such as lubricants, to Botswana, Lesotho, Swaziland and Namibia. Disruption of deliveries of crude to the South African refineries would have serious economic implications for the region as a whole. Last year, labour-strife-induced refinery shutdowns jolted the region with stop-start petrol deliveries, prompting Botswana to start planning alternative fuel supply routes from Maputo in Mozambique through Zimbabwe, bypassing South Africa.

A radical change in supplies from Iran will mean ratcheting up South African production costs and these will be passed on to the consumer at a time of rapidly rising petrol and diesel prices, when the government has already hiked fuel levies and motorists are facing steep new road toll fees. Highway users are becoming increasingly and openly hostile. They are supported by labour union confederation Cosatu, the Automobile Association and other travel and transport organisations, the anger manifesting in a wave of rebellion. More unrest on the roads caused by the Iran issue is the last thing the government needs.    

“Alternative options of supply come at a premium,” says Peters. “We’re concerned about the cost implications this will have.” Decisions, answers and a clearer indication of the government’s intentions are expected at the end of May. The US government has said it will help consumers of Iranian oil to respond to the new sanctions, although the detail of how this will be done is still awaited.  

A further difficulty is the fact that Sasol, South Africa’s giant CTL (coal to liquid) industry, has a sizeable presence in Iran and an economic squeeze by the global community on Teheran would be uncomfortable for South African operations in Iran. Speculation is strong that Sasol will withdraw from Iran quite soon. It’s uncertain what will happen to the processing plant and apparatus, worth billions of dollars. Best guess is that it will be mothballed until the storm blows itself out.

Risk of overstating the issue

Jammine, however, warns about overstating the problems complying with the sanctions might bring. “One must bear in mind that even though we are talking about 30% of South Africa’s oil coming from Iran, in the context of global oil supplies it’s less than 0.1%,” he points out. “That can easily be made up from other sources.”

On the financial impact of switching suppliers, Jammine says it’s unclear whether or not new providers would charge a premium and make South African motorists pay extra, and if they do, “I cannot believe it will be more than marginal”, he says. “And I guess any of these impacts might be rather minuscule, when compared to the impact of not agreeing with the US request.”

One such is South Africa’s dependence on the US as a buyer of most of its platinum production. “A huge proportion of our platinum exports find their way to the United States,” he says. “If they were to stop importing platinum that would have a massive impact on South Africa’s trade balance and current account balance, and it would be a form of sanctions such as we were used to in the apartheid era.”

Sanctions measures were announced three months ago and are scheduled for full effect on 28th June, by which time countries are expected to have reduced their purchases of Iranian oil substantially.

Labour confederation Cosatu, a component of the governing tripartite alliance with the ANC political party and the Communist Party, is deeply resentful over “the United States’ unilateral sanctions against Iran and its attempts to bully countries to cut imports of Iranian oil, with threats of sanctions against them as well”.

Cosatu spokesman Patrick Craven describes as “blatant blackmail” threats to cut off access to the US banking system against states that don’t comply: “Cosatu demands that the South African government stop this kowtowing to the US imperialists and adopt only policies that are in the best interests of this country and the developing world”.

South Africa is aware of a possible ‘get-out’ clause that might allow it to circumvent the US-led Western nations’ boycott of Iran. Trade and Industry Minister Rob Davies maintains that the sanctions order does not carry the same weight as a ruling by the UN Security Council, a measure already tried and defeated by Russian and Chinese vetoes in February.

“I think that we all broadly agree with the proposal, the terminology that was made, that if there are UN Security Council sanctions then we are all bound by that, but if there are sanctions that are imposed by other countries unilaterally, they shouldn’t have to apply to us,” says Davies. “But we’ve also got the power relations to contend with, and whether we like it or not the decision will impact on us in the form of higher oil prices and possibly even shortages of supply. So those are all going to be big challenges that we’re going to face.”

South Africa is already eyeing the safety net provided by BRICS, the trade bloc comprising Brazil, Russia, India, China and recently admitted South Africa. With South Africa on the fence the other four members have all publicly rejected the sanctions action.  

South Africa is yet to make up its mind which way it will jump: to go with the West or defy it. Right now it’s erring on the side of caution by complying with the Western position to cut Iranian supplies.