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– General John Shalikashvili
former Chairman of the Joint Chiefs of Staff
Global Sanctions on Iran Intensify
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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.

Table 1: Recent Iran Sanctions

Key provisions of recent UN, U.S., and EU sanctions against Iran are outlined below. Where appropriate, this list incorporates sanctions previously adopted by the three bodies that have been updated, revised, or otherwise augmented by the recent actions. Although the EU action was intended to implement the new UN sanctions, the U.S. sanctions were not directly related to the UN action, and other U.S. mechanisms are used to carry out UN sanctions mandates.

UN Security Council Resolution 1929 U.S. Iran Sanctions Act

July 26, 2010, European Council Decision

Financial Restrictions
Banking

Calls on states to “take appropriate measures” to prohibit Iranian banks from opening new branches or offices in their territory and conducting business with their own financial institutions if such activities might contribute to Iran’s “proliferation-sensitive nuclear activities” or its missile program.

Calls on states to take appropriate measures to prevent their banks from opening branches or offices in Iran if doing so may contribute to Iranian proliferation.

Prohibits U.S. entities owned or controlled by U.S. financial institutions from doing business with Iran’s Islamic Revolutionary Guard Corps (IRGC) or other proscribed entities.

Prohibits or restricts the holding of U.S. accounts by foreign banks that facilitate proliferation- and terrorism-related activities by Iran or provide significant financial services for the IRGC and its affiliates.

Requires U.S. banks holding accounts for foreign banks to monitor for prohibited activities.

Urges the president to sanction the Central Bank of Iran and other banks connected to Iran’s nuclear program.

Prohibits “new commitments for grants, financial assistance and concessional loans” for the Iranian government (except for humanitarian assistance).

Prohibits Iranian banks from opening new branches or offices in the EU and EU banks from opening new offices in Iran.

Requires increased monitoring of financial activities with Iranian banks.

Requires that any money transfers of more than 40,000 euros have prior authorization and that transfers of more than 10,000 euros be reported to the proper authorities.

Assets Freeze Requires that states freeze the assets of 118 persons and entities associated with Tehran’s nuclear program or its ballistic missile program, as well as select IRGC members and Islamic Republic of Iran Shipping Lines (IRISL) entities.

Freezes the assets of persons and entities associated with Iran’s nuclear and missile programs and international terrorism.

Separate Department of the Treasury sanctions freeze the assets of 245 persons and entities associated with Iran’s nuclear and missile programs.

Freezes the assets of a list of 246 persons and entities that are identified in UN Security Council resolutions on Iran, associated with Iran’s nuclear and missile programs, or affiliated with IRISL or are senior members and entities of the IRGC.
Trade No restrictions.

Codifies long-standing executive orders imposing a U.S. trade embargo on Iran.

Bans U.S. government contracts with firms that provide Iran with equipment and technology to monitor or censor Internet usage.

Requires restraint in entering new short-term commitments for public and private trade support, including granting export credits, guarantees or insurance, and prohibits similar medium and long-term commitments.
Oil and Gas Sector Restrictions
Refined Petroleum

No restrictions.

The resolution’s preamble notes “the potential connection between revenues derived from Iran’s energy sector and the funding of its proliferation-sensitive nuclear activities” as well as the similarity between petrochemical materials and equipment and those of certain sensitive fuel-cycle activities. At the same time, the council acknowledges that access to various forms of energy is necessary for economic development.

Imposes sanctions on foreign firms providing Iran with $5 million in refined petroleum exports or assistance in the development of Iran’s petroleum refining capacity in a given year. Prohibits the transfer of petroleum refining equipment or technology to Iran.
Trade and Investment

Imposes sanctions on foreign firms that invest $20 million in Iran’s oil and gas sector in a given year.

Requires foreign firms seeking U.S. government contracts to certify that they are not engaged in sanctionable activities in Iran’s oil and gas sector.

Allows states legally to divest from firms that invest $20 million in Iran’s oil and gas sector in a given year.

Prohibits the transfer of oil and gas equipment and technology to Iran related to liquefied natural gas exploration and production.

Prohibits granting loans to or creating joint enterprises with Iranian oil and gas industries or acquiring the shares in such firms.

Prohibits technical and financial assistance and services to Iranian oil and gas industries.

Strategic Trade Controls
Nuclear and Missile Technology

Requires states to prohibit the transfer of nuclear- and missile-related goods and technology subject to multilateral export control guidelines as well as technical, financial, or brokering assistance related to such goods and technologies, to Iran. Such goods and technologies intended for use in light-water reactors may be exempt.

Requires states to prohibit Iranian nationals and entities from investing in commercial activity in their territory involving uranium mining or the use or production of nuclear materials and technology, particularly uranium enrichment, spent fuel reprocessing, and heavy-water-related work, as well as ballistic missile technology.

Restricts the export of U.S. goods and technology that could contribute to Iran’s nuclear and missile programs to a country identified as allowing such U.S.-origin goods to be diverted to Iran.

Prohibits nuclear cooperation with a country whose nationals or entities contribute to Iran’s nuclear or missile programs unless that country was unaware of the assistance or has taken steps to counteract such activity.

Prohibits the transfer of nuclear- and missile-related goods and technology subject to multilateral export control guidelines as well as technical, financial, or brokering assistance related to such goods and technologies, to Iran. Such goods and technologies intended for use in light-water reactors “begun before December 2006” may be exempt.

Prohibits Iranian nationals and entities from investing in commercial activity in EU member states involving uranium mining or the use or production of nuclear materials and technology, particularly uranium enrichment, spent fuel reprocessing, and heavy-water-related work, as well as ballistic missile technology.

Conventional Arms Bans the sale or transfer of “battle tanks, armoured combat vehicles, large calibre artillery systems, combat aircraft, attack helicopters, warships, missiles or missile systems...or related materials or spare parts” to Iran, as well as related training and assistance. Restricts the export of U.S. military items to countries identified as allowing the diversion of U.S.-origin military goods to Iran. Prohibits the transfer of “arms and related materiel of all types” to Iran, except for armored noncombat vehicles intended solely for use by EU and member state personnel.
Shipping

Calls on states to inspect vessels in their jurisdiction suspected of transporting items to or from Iran that are prohibited by relevant UN resolutions and notes that states can request to do so on the high seas, consistent with international law.

Prohibits the provision of bunkering services, such as servicing or fueling vessels, to Iranian-owned or contracted vessels believed to be carrying items prohibited by relevant UN resolutions.

Addressed by other U.S. laws and sanctions.

Requires states to inspect cargo transported to or from Iran believed to contain items prohibited by the EU decision.

Prohibits the provision of bunkering services, such as servicing or fueling vessels, to Iranian-owned or -contracted vessels believed to be carrying items prohibited by the EU decision.

Provides for the request of ship inspections on the high seas, consistent with international law, of vessels believed to contain items prohibited by the EU decision.

Travel Requires that states ban the entry of certain listed persons due to their association with Iran’s nuclear and missile programs or other proliferation-related activities, as well as senior IRGC members. Imposes travel restrictions on IRGC members and those who provide IRGC members with financial or material support. Bans entry by certain listed persons due to their association with Iran’s nuclear and missile programs or other proliferation-related activities, as well as senior IRGC members.
Sources: UN Security Council Resolution 1929; the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010; EU Council Decision of July 26, 2010, concerning restrictive measures against Iran and repealing Common Position 2007/140/CFSP.