Global Sanctions on Iran Intensify

Peter Crail and Matt Sugrue

Following on the heels of a fourth round of UN sanctions on Iran in June, several countries, led by the United States, have adopted their own national penalties to place additional pressure on Tehran. Many of these punitive actions go beyond the nuclear- and missile-related sanctions required by the United Nations and are intended to have a broader impact on Iran’s economy (see table 1).

The most significant of those national steps was wide-ranging U.S. legislation primarily aimed at penalizing foreign firms that provide refined petroleum to Iran. The Comprehensive Iran Sanctions, Accountability and Divestment Act of 2010, which was signed into law July 1, followed more than a year of congressional efforts to augment existing U.S. law sanctioning foreign companies that invest in Iran’s oil and gas sector. During the time in which Congress considered those sanctions, a number of foreign firms agreed voluntarily to restrict business dealings with Iran’s oil and gas sector, thereby avoiding U.S. penalties.

In another critical move the same month, the European Union, Iran’s largest trading partner, adopted a wide variety of sanctions affecting the trade, energy investment, and financial relationships between the bloc’s 27 countries and Iran, as well as implementing the latest UN penalties against Iran’s proliferation activities.

A number of other countries, including Australia, Canada, and Norway, similarly went beyond the requirements of the UN sanctions in June and July and restricted investment with Iran’s oil and gas sector, in line with U.S. and EU sanctions. On Aug. 3, Japan approved measures to implement the UN sanctions and indicated that it would consider further measures.

The Obama administration insists that its efforts to convince private firms abroad not to invest in Iran’s oil and gas sectors have garnered success and are poised to impact Iran’s economy. According to an Aug. 5 White House summary of the recent sanctions, Washington has “convinced a significant number of companies” to reduce their energy investment in Iran, adding that “[b]ecause the Iranian economy depends so heavily on oil revenues, this will adversely impact Iran’s long term economic situation.”

U.S. lawmakers also have touted the impact of the sanctions. In an Aug. 3 statement, House Foreign Affairs Committee Chairman Howard Berman (D-Calif.) and ranking member Rep. Ileana Ros-Lehtinen (R-Fla.), co-sponsors of the House sanctions bill, said the U.S. law “has already had a significant impact on Iran’s access to international markets and its ability to acquire refined petroleum.”

Congress Strengthens Iran Sanctions

The U.S. sanctions legislation was adopted by a 99-0 vote in the Senate June 24 and a 408-8 vote in the House later the same day. The House adopted its version of the bill in December and the Senate in March, but the two versions of the legislation contained key differences that had to be reconciled in a conference committee. (See ACT, April 2010.) The June vote was on the text that the conference committee had worked out.

The legislation amends the 1996 Iran Sanctions Act, which requires the president to sanction foreign firms found to have invested more than $20 million in Iran’s oil and gas sector in a given year. Iran’s oil exports account for about one-half of its government revenues. In addition to targeting oil and gas investments, the new law levies sanctions against foreign firms that provide Iran with refined petroleum products or help Tehran develop its refining capacity.

Iran, which currently imports 30 to 40 percent of its gasoline due to limited refining capacity, has been working to expand its domestic refining capacity to reduce its import needs.

Beyond the petroleum sanctions, the new law includes a variety of measures to restrict trade and investment in Iran. These measures include extending the Iran Sanctions Act restrictions to U.S. firms whose subsidiaries violate that law; codifying Department of the Treasury asset freezes and trade bans against Iran; and prohibiting U.S. government contracts with firms that export sensitive communications monitoring and jamming equipment to Iran.

The new law extends the Iran Sanctions Act to December 2016. It was previously set to expire in December of next year.

In floor statements during the vote, proponents of the legislation characterized it as the strongest sanctions Congress has passed on Iran. Sen. John McCain (R-Ariz.) said that foreign firms would need to choose: “Do you want to do business with Iran, or do you want to do business with the United States?”

Berman said he did not know if the sanctions would bring Iran’s leadership “to its senses,” adding, “But I do know this: doing nothing certainly won’t work.”

The opposition to the legislation, comprising six Democrats and two Republicans, cited concerns that the measure would harm the Iranian people, which the United States says it supports, while benefiting the Iranian leadership. “Not one member of the Iranian elite will lack for gasoline while ordinary Iranians will go without,” Rep. Earl  Blumenauer (D-Ore.) said during the House vote.

Enforcement Versus Flexibility

Even as lawmakers touted the strength of the sanctions legislation, many stressed that the sanctions depend on the administration’s willingness to punish violators. Sen. Carl Levin (D-Mich.) said during the Senate vote, “It is only from full implementation of this law and pressure from the international community that Iran may be dissuaded from this course.”

One of the most contentious aspects of the legislation was an effort by Congress to require the administration to cite companies that violate the law. Since the 1996 law was passed, U.S. administrations have opted not to cite potential violators, thereby avoiding the need either to sanction them and potentially harm U.S. diplomatic and trade relations or waive the sanctions and come under political pressure from Congress. In 1998, President Bill Clinton waived the sanctions for the only project determined to have been in violation of the law, a $2 billion contract by the French energy conglomerate Total and partners Gazprom of Russia and Petronas of Malaysia.

Citing ongoing efforts to secure a fourth round of UN sanctions on Iran, the administration sought to exempt countries cooperating with U.S. efforts in Iran from the sanctions legislation. Key lawmakers balked at the request, but when efforts to adopt a new UN resolution entered their final stages in May, Congress postponed finalizing the legislation until the UN and follow-up EU actions made progress. (See ACT, June 2010.) The UN Security Council adopted Resolution 1929 on June 9, and EU leaders outlined steps the bloc would take to extend sanctions on Iran June 17. (See ACT, July/August 2010.)

The new law requires that the administration investigate any companies believed to be in violation of the energy sanctions and report them to Congress. Also, it limits the waiver to 12 months, rather than allowing it to be in effect indefinitely, and stipulates that the president must report on what the country is doing to assist in efforts to address Iran’s illicit activities to provide justification for the waiver. “The waiver has the name-and-shame effect and a political cost for the White House,” Berman said in his June 24 floor statement.

President Barack Obama’s July 1 signing statement for the legislation also highlighted the waiver provision. Noting that the law provides “new authority” to address the issue of states cooperating in multilateral efforts on Iran, he said, “The Act appropriately provides this special authority to waive the application of petroleum-related sanctions provisions to a person from such a closely cooperating country, out of recognition for the key role such a country plays in ongoing multilateral efforts to constrain Iran.”

It is not the first time that Congress has sought to limit presidential waiver authority regarding the 1996 law, and numerous bills to that effect have been introduced in Congress over the past several years. In 2007, for example, legislation adopted by the House removed the waiver provision from the Iran Sanctions Act. (See ACT, November 2007.) The Senate never voted on a similar measure.

In order to stress sanctions enforcement, Berman and Ros-Lehtinen announced the creation of a bipartisan working group on sanctions implementation, outlining in an Aug. 3 statement that the group would help ensure that the sanctions were “fully implemented” and “effectively enforced.” The lawmakers indicated that the House Foreign Affairs Committee would hold hearings on the sanctions in the fall.

The working group will be focused primarily on efforts to implement the refined petroleum sanctions provisions of the legislation, a House staffer said in an Aug. 3 interview.

EU Adopts Sanctions

Meanwhile, the EU agreed July 26 on “a comprehensive and robust package of measures in the areas of trade, financial services, energy, [and] transport, as well as additional designations for [a] visa ban and asset freeze,” according to a statement by the bloc’s foreign ministers.

The measures closely align with the sanctions required by Resolution 1929, as well as the new U.S. energy-related sanctions.

European officials claim that Iran can obtain certain kinds of equipment and technology required for its oil and gas development only from Europe, and although Tehran can seek alternatives for other technologies in other countries, it would prefer the European imports it has traditionally used in these other areas as well. Likewise, former U.S. Deputy Assistant Secretary of State for Nonproliferation Mark Fitzpatrick told The New York Times July 26 that, “over the long term Iran’s output of oil and gas will continue to decline without European technology.”

In the past, the EU has adopted more stringent sanctions on Iran than those required by UN Security Council resolutions, but those sanctions have been aimed primarily at Iran’s proliferation-related activities, avoiding steps that would penalize regular commercial activity. Moreover, the EU has been wary of the possibility of falling under Iran Sanctions Act penalties due to the extensive business relations between European firms and Iran’s energy sector, threatening to bring the matter before the World Trade Organization in 1997 as an extraterritorial application of U.S. law.

In February, EU High Representative for Foreign Affairs and Security Policy Catherine Ashton sent a letter to Secretary of State Hillary Rodham Clinton reminding her of a 1998 agreement between the United States and the EU in which Washington pledged not to sanction European firms under the Iran Sanctions Act in return for increased EU cooperation addressing proliferation concerns about Iran.

Over the past several years, however, some European countries, in particular France and Germany, have warned their firms and financial institutions against continuing to do business with Iran. This effort has led many major European firms and banks to restrict their dealings with Iran voluntarily or abandon them altogether.

Yet, European officials and companies are wary of the cost of such efforts to reduce the bloc’s trading relationship with Iran because other countries, particularly China, might replace such lucrative trade. In recent years, China has surpassed Germany as Iran’s top national trading partner as German firms pulled out of Iran.

Recognizing these concerns, U.S. officials have indicated that Washington is seeking to address the issue directly with Beijing. Special Advisor for Nonproliferation and Arms Control Robert Einhorn, who coordinates U.S. nonproliferation sanctions efforts on Iran and North Korea, told the House Committee on Oversight and Government Reform July 29, “China has backfilled when a number of responsible countries have distanced themselves from Iran.” The U.S. government has “begun to raise this at the highest levels with Chinese leaders,” he said.