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EU ministers have agreed to place a ban on new contracts for Iranian exports of crude oil and petroleum products. Existing contracts will be allowed to run on until July.

The embargo is expected to have implications for not only the exporters of oil but also institutions involved in the shipping, financing and insuring of Iranian oil.

The ban intends to push Iran into resuming negotiations surrounding its nuclear programme. The decision was made despite the growing tension surrounding Iranian threats to shut down the Strait of Hormuz at the entrance to the Gulf. These shipping lanes see around 20% of the world’s exports pass through them.

It is expected that the sanctions imposed will be similar to those imposed on Syria in September last year.

This previous embargo prohibited the provision of insurance and reinsurance as well as the financing or financial assistance for the export of crude oil or petroleum products from Syria. It also banned the transport of crude oil from Syria.

Reflecting on the impact of the Iranian ban, Ben Knowles, partner at Clyde & Co believes that most European banks “won’t go near any money going in or out of Iran in any circumstances now”, irrespective of whether their business is specifically affected by the ban.

Increasingly wary of being fined by US authorities, Knowles observes that most European banks are imposing far more “stringent” conditions than those required by sanctions.

Even those countries outside the EU will be affected by the ban, including Turkey, which is the fifth largest importer of Iranian oil.

“If there is a non-EU company with a long-term agreement with Iran, what happens if they usually get insurance through the EU. They may be struggling to get insurance,” explains Knowles.

The embargo could also have a negative impact on the Southern European countries such as Spain, Italy and Greece; all of which import large quantities of cheaper oil from Iran.

These eurozone countries which are already struggling with their indebted economies will have to source oil from other destinations and will end up paying more for the oil and the increased cost of shipping.

Greece in particular voiced its concerns about the implications of the ban, with Greek officials asking the EU to make some concessions to the embargo last week.

Inevitably the price of oil is likely to rise globally, with Saudi Arabia already increasing what they think a suitable long-term price for crude oil should be to US$100 per barrel.

The sanctions will further ensure that Iran will rely even more on its trading partner in Asia. China already accounts for 20% of Iran’s oil exports, while India imports 16%, according to US Energy Information Administration.

It is unlikely these growing Asia trade flows will be financed by European banks but rather by Asian institutions.

“Non-EU banks have been involved in assisting to perform contracts where the financing element has been prohibited to European banks, or where they have declined to do it,” Knowles remarks.