THE ECONOMIST: Donald Trump’s blockade after failed Iran talks pushes Strait of Hormuz crisis to tipping point

When America and Israel began their war on February 28, it was widely expected that Iran would choke off shipping in the Strait of Hormuz.

Few would have predicted that, less than two months later, Donald Trump would impose a blockade of his own, targeting traffic to and from Iranian ports and coastal areas. It went into effect on April 13.

Mr Trump hopes economic strangulation might force Iran to open the strait where bombardment has failed. It is a dangerous gamble that could compound the global energy crisis and lead to fresh escalation.

America’s rationale is simple. Iranian threats have drastically reduced tanker traffic through Hormuz.

But Iran has continued to export its own oil, albeit at reduced levels. It has also allowed some ships to pass if they pay a fee; two large Chinese state-owned tankers carrying Iraqi and Saudi oil proceeded through the strait on April 11, as did a Liberia-flagged tanker.

Mr Trump’s message is that if neutral cargo cannot pass unhindered, Iran’s can’t either. The military aspect of the plan is “absolutely feasible”, says Mark Montgomery, a retired rear-admiral.

America can board and seize ships relatively easily; it seized ten tankers linked to Venezuela between December and February.

“You don’t have to catch every ship,” he adds. “Just enough ships to send the message.”

The economic and political aspects are trickier.

The aim, presumably, is to sever Iran’s economic lifeline and force the regime to make concessions in peace talks, particularly over its nuclear programme. In theory, Iran is vulnerable.

Given its current crude-oil storage levels, it may be forced to curb production within 20 days of a full, effective blockade — and potentially within ten, reckons Ernest Censier of Vortexa, a data firm.

“As Iran’s oil exports collapse, there’ll be no cash for imports, so activity implodes, the currency goes into a devaluation spiral and hyperinflation ensues,” argues Robin Brooks of the Brookings Institution, a think-tank.

“There’s no doubt in my mind this’ll bring the mullahs to the negotiating table in good faith.”

Others are less sure. Iran had assumed its oil exports would be disrupted, says Esfandyar Batmanghelidj, the chief executive of the Bourse & Bazaar Foundation, a think-tank.

Any wartime exports, such as to India, have been a “bonus”, he says. Iranian crude exports dropped below 400,000 barrels per day (b/d) in 2020 when Mr Trump tried to crush the country’s economy, down from 2.2m b/d in 2018. Iran survived that.

It can endure maybe six months of pressure by printing money, selling 100m or so barrels of oil in floating storage off Malaysia and China, and securing informal credit from suppliers of imports.

Iran does depend on some seaborne imports. One-fifth of its wheat purchases — the staple crop — used to arrive from the United Arab Emirates. Most of its maize comes from Brazil and Ukraine via ports in or near the Gulf.

Some of the grain could be replaced by Russian and Kazakh supplies through Caspian ports or overland via Turkey or central Asia, albeit at higher cost.

The bigger vulnerability, says Mr Batmanghelidj, is soyabeans: nearly all of Iran’s animal feed and vegetable oil is made from imported inputs.

Any disruption would turbocharge food prices. These were already 110 per cent higher in March than a year earlier.

That leaves two big questions. One is the impact on energy markets, including in America, where Mr Trump faces plunging polls and midterm elections in seven months.

The loss of Iranian output alone is not catastrophic. But it compounds the far larger volume of Gulf supply trapped by the largely closed strait.

With the ceasefire looking shaky, Iran has little incentive to reopen the passage.

It will almost certainly restart attacks on neutral shipping.

Such attacks would pose a serious problem for countries like Iraq, which on April 5 sent a vessel through Hormuz, bound for Malaysia, for the first time since the war began.

Importers would be forced to draw down already limited stocks, potentially pushing Brent crude futures towards $US150 a barrel ($212) by the end of April.

Factor in the risk of Iranian strikes on Saudi, Emirati and other Gulf production facilities, pipelines and ports — Iran has already threatened to hit back if the blockade comes into force — as well as the possibility of attacks on Red Sea shipping by Iran’s Houthi allies in Yemen, and the measure looks unlikely to survive a few weeks without triggering another mighty price surge.

The second issue is which countries might be caught in a blockade.

India, for instance, has denied paying a fee to get its ships through, which Mr Trump said on April 12 would be the trigger for interdiction.

But on the same day America’s Central Command said that the blockade would be enforced impartially — a requirement in international law — against ships from all countries that had passed through Iranian ports or coastal waters.

That would cover the Indian vessels. Oil bound for China, Pakistan and Thailand also moved out of Hormuz in the days after the ceasefire. France and Turkey, both American allies, had sent their ships through prior to that, apparently with Iranian consent.

America might only need to board a handful of ships to deter others from attempting to break out. But even that could anger some friendly countries in the process.

At least eight tanker deals were under discussion last week for non-Iranian crude exports — all of which broke down when the talks appeared to stall, says John Ollett of Argus Media, a price-reporting agency.

And although some American officials think China will not challenge the blockade, accepting it would set a dangerous precedent.

China has long worried about the prospect of a blockade around the Strait of Malacca in the event of a war in the Pacific.

If Mr Trump can choke off Iran’s hard currency and generate an economic crisis, all while curbing the impact on oil prices and commodity flows, limiting the military escalation that follows and managing the fraught diplomacy of a blockade against multinational shipping, he might return to the negotiating table on better terms.

But Iran’s regime believes it won the first contest of wills with America, having survived the war, hung on to its nuclear material and kept a tight grip on Hormuz. It has reason to believe it can outlast Mr Trump again.

“It’s long-term or nothing,” says Kevin Rowlands, who ran the Royal Navy’s think-tank until last year, and now edits the RUSI Journal, a military publication.

“You don’t blockade for a week.”

More broadly, Mr Trump’s decision to impose a blockade, which came after he toyed with the idea that he might “jointly” control Hormuz with Iran’s regime, a practice that would upend international law governing such waterways, suggests that the very principle of freedom of navigation is coming under enormous stress.

It is, concludes Mr Rowlands, “another nail in the coffin for any pretence that there is such a thing as a rules-based order or international law”.