New Iran Sanctions – now what?

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Boeing has an $16.6bn deal with Iran for 80 aircraft.  Many in the industry were wary of the deal’s next steps after the change of government in Washington, DC.    President Trump imposed a temporary travel restriction that included Iran.  Then news emerged that Iran had test fired a ballistic missile last Thursday, which was seen by Washington as a provocation.  On Friday, following a missile test masquerading as an orbital test flight, the US imposed new economic sanctions against several Iranian officials and entities involved in Tehran’s missile testing program.  On Sunday, Iran fired another missile.

From the Iranian perspective, their independence from the US became a priority decades ago, after the UK MI-6/US CIA-led coup of 28 Mordad that overthrew the democratically elected Prime Minister Mohammad Mosaddegh in 1953, replacing him with Shah Reza Pahlavi, whose regime became increasingly authoritarian before the counter-coup in 1978.  The antagonistic nature of the Iran-US relations is between the current Iranian regime and the United States is well known and long established.

This background is highly volatile.  It’s not just the US expressing concerns at the rising Iranian assertiveness. Saudi Arabia, Jordan and Israel have expressed displeasure at Iran’s missile tests, as they fear a nuclear Iran with weapons delivery capabilities.

Scenario 1: Despite the war of words, neither side cancels the aircraft deal, because it is in each country’s interest to continue.  The US needs the jobs (and cash) at Boeing, and Iran needs to replace its aging fleet.  Political posturing continues, but nothing disruptive happens.

Scenario 2: Iran cancels the Boeing deal: if Iran decides to cancel the Boeing deal, it does not solve the core problem for Iran’s beleaguered airlines, unless Iran can obtain more aircraft from Airbus or other sources.  The Trump administration could react by rescinding the export licenses granted by the US Treasury to both Airbus and Boeing issued in September 2016.

Iran’s commercial aircraft are relatively ancient, by any standards.  Iran’s airlines typically do not fly full loads and have a mechanic on board in addition to the flight crew.  Iran has suffered crashes with terrible loss of life due to sanction-related limitations on new aircraft and spare parts.  The last 747-200 in passenger service is operating in Iran, as are older Airbus A300s that date to the 1970s.

Iran can’t turn to Airbus for a total solution because Airbus aircraft may depend on US-origin parts and an export license from the US Treasury, especially in avionics and engines.  Because there is significant US content on Airbus aircraft (Airbus spends 42% of its aircraft-related procurement in the U.S.). The US could restrict Iranian access to these technologies and seriously limit Airbus as a solution.  Iran can turn to Russia or China for a regional aircraft interim solution either. Neither can deliver the category Iran badly needs for another five or more years.

Scenario 3: The US cancels the Boeing deal: the US could restrict the export of commercial aviation articles to Iran. Although this would be a counterproductive reversal from last year’s engagement approach.  We know that Boeing, Airbus and their associated supply chains want these deals to go through.  Moreover, President Trump has made “America First” a cornerstone policy.  It would be tough to cause economic and job losses among the myriad US firms in the supply chain.  These are not only well paying jobs but they are also impact highly skilled people.  These people vote.  President Trump has turned union members, previously pro-Democrat into pro-Trump, if not pro-Republican.  CNN Money reported the Iran deal was worth ”thousands of  jobs”.

Even if President Trump does not directly cause the deals to fall apart, he could make them tough to complete by not easing the US-Iran banking limits.  Financing these mega aircraft orders, which came fortuitously as other orders were slowing, will likely end up touching the US banking system.

So, the US faces a conundrum, cutting off commercial aerospace to Iran hurts Iran significantly.  But it is a two-edged sword that also hurts the US and its allies.  Interfering with the commercial aerospace deals will exasperate more people across the globe outside Iran than within Iran.   Even if President Trump can be persuaded to leave the commercial aerospace business out of his sanctions toolbox, he will also have to work around those members of Congress determined to upset them.  There are rules in place that can be activated starting with 31 CFR Part 650 from 2012. These were updated in 2013,   in 2015 and 2016.

Meanwhile within Iran, the situation is already unclear. We are advised that “Except some OFAC licenses for Iran Air (18 Boeing and 17 Airbus) there is no improvement for other airlines”.  There is apparently “no part or component support”.  OFAC approvals have been a problem even for engine repairs.  One airline has been waiting for a year to get an OFAC approval for an engine repair.  Indeed, how can Iran’s airlines do any marketing without even an estimated delivery plan for new aircraft?   There is therefore no definite plan to train crews or maintenance teams either. Airlines can’t even budget because access to financing is unclear.  Airline managers are “waiting and praying to receive OFAC licenses”.  One airline reports it has lost its access to A320 maintenance data due to an OFAC license issue.  These issues are acting as a “hidden sanction” against Iran’s private airlines in particular. Iran Air’s first A330 appears to have been originally intended for Avianca Brasil.

The Bottom Line:
The aerospace part of any renewed sanctions on Iran is highly complex and it reaches across the global industry.  And it is as sensitive as it is complex and, as 2017 suggests, a highly volatile issue.

© 2017, Addison Schonland. All rights reserved.

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