January 12, 2012 | The Jerusalem Post

Can EU Oil Sanctions Create a Turning Point in Iran?

January 12, 2012 | The Jerusalem Post

Can EU Oil Sanctions Create a Turning Point in Iran?

The significance of international sanctions on Iran took on new prominence this week, after a group of US senators sent a letter on Tuesday to Catherine Ashton, the EU's chief diplomat, urging the 27-member EU group to implement an oil embargo against Tehran.

The fast-moving nuclear events in Iran, including Tehran's decision to develop high-grade weapons uranium at its deep underground Fordow facility, appears to have prompted the EU to meet on January 23 instead of the slated January 30 foreign ministers meeting. The EU tentatively agreed last week to pull the plug on its imports of Iranian crude oil.

Leading US Senators Joe Lieberman (I-Connecticut), Mark Kirk (R-Illinois) and Charles Schumer (D-New York) wrote Ashton that “we believe that both [steps] are absolutely necessary if we are to prevent the Iranian regime from acquiring nuclear weapons and thereby foreclose either a regional war or a cascade of nuclear proliferation in the Middle East.” Senators Robert Menendez (D-New Jersey), Jon Kyl (R-Arizona), Bob Casey (D-Pennsylvania), Marco Rubio (R-Florida) and Kirsten Gillibrand (D-New York) also signed their names to the letter.

The two steps the senators refer to in the letter are cutting ties with the Central Bank of Iran and an oil embargo. Iran's main financial artery ­ – the CBI – ­ processes the bulk of the country's foreign energy payments.

The pressing question is: Can oil sanctions contribute to a radical change in Iran's recalcitrant behavior? In a show of defiance on Wednesday, Iran's Atomic Energy Organization said in a statement, “We will continue our [nuclear] path without any doubt… our path is irreversible.”

The EU move to sever ties with Iran's oil industry would have been largely unimaginable a year ago. A deeply anchored EU strategy of engagement with the Islamic Republic coupled with an annual bilateral trade volume of over 25 billion euros with Tehran impeded tough action from Brussels. The EU countries import roughly 500,000 barrels per day of Iran's 2.6 million bpd export production. Only Saudi Arabia produces more oil than Iran, with a daily turnout of 3.5 million bpd.

With a view toward not rattling oil markets and jolting fragile EU economies like Greece, Spain and Italy, which depend on vast amount of Iranian crude, the EU laid out on Thursday a staggered oil sanctions plan to take place over the next six months.

The view from European experts is optimistic. But the need to raise the financial and diplomatic sanctions bar remains on the table.

Daniel Schwammenthal, the director of the AJC Transatlantic Institute in Brussels, told The Jerusalem Post on Wednesday, that “we welcome that the EU has in principle decided to impose an oil embargo on Iran. But we hope that when foreign ministers meet later this month, they will impose that ban immediately and apply it to existing contracts.” Schwammenthal, however, wants the EU to further ratchet up the pressure.

“In addition, we urge European leaders to sanction Iran's Central Bank, as Great Britain and the US did. It is this combination of energy and financial measures that can create the sort of 'crippling sanctions,' to use the words of US Secretary of State Hillary Clinton, that may still have a chance to stop Iran's nuclear weapons program peacefully,” said Schwammenthal. “After years of Iranian deceptions and lies, nothing short of Tehran's total isolation, which should include travel bans for all regime officials, can convince the Islamic Republic of Iran that it's simply too costly to continue ignoring their international obligations.”

While some EU countries and US Treasury officials were initially concerned about oil sanctions spiking Iran's revenues and hurting economies, a surgical set of punitive measures targeting Iran's main source of income, its oil and gas sector, has produced the right efficacy.

The strategy of inflicting laser-like oil sanctions on Iran without disrupting global energy markets, and thereby reducing Iran's oil profits, was first developed by Mark Dubowitz, executive director of the Foundation for Defense of Democracies (FDD) and Reuel Marc Gerecht, a former CIA officer and senior fellow at FDD.

In a series of articles in The Wall Street Journal and The New York Times last year, Dubowitz and Gerecht outlined their approach.

Writing in the Times in November, the FDD experts argued “effective energy sanctions don't have to raise oil prices; they can actually do the opposite. Washington just has to learn how to leverage greed.”

They continued that “With fewer buyers to compete with, the Chinese companies would have significant negotiating leverage with which to extract discounts from Tehran. The government could lose out on tens of billions of dollars in oil revenue, loosening its hold on power. This approach may seem distasteful to some, because it does, in a sense, reward bad Chinese behavior. But the objective of sanctions is to cause real economic pain in Tehran, not to make Americans feel moral.” A telling result of the Dubowitz and Gerecht smart sanctions approach was cited in last week's International Herald Tribune.

According to the paper, “China, which imports about 11 percent of its oil from Iran, has actually reduced its daily purchases of Iranian crude, although estimates of the cutback range from as little as 15,000 barrels a day, or 3% of Chinese imports from Iran, to considerably more than that. It was hard to know whether Beijing was making a political statement or merely trying to buy the oil on better terms.” Dubowitz told the Post on Wednesday that “the EU oil embargo, even if it contains waivers and a slower than desirable implementation schedule, will be a critical first step. It is already setting off a cascade of oil market behavior as Japan and South Korea decrease their purchase of Iranian oil in order to be in compliance with US central bank sanctions, and China forces the Iranians to offer price discounts to compensate their refineries for the added political and legal risk of continuing their purchases of Iranian oil.”

He continued that “Saudia Arabia, Kuwait, the UAE and other oil producers are increasing their supplies to give Japan, South Korea, India and China the cushion to reduce their purchases and drive ruthlessly for price discounts. The goal of US sanctions and the EU embargo is to target Iranian oil revenue which is Khamenei's lifeblood.Countries should be considered as cooperating under US law if they help to decrease Iranian oil revenue through cuts in purchases of the oil, reductions in the price that they pay for every barrel, or both. This helps to calm oil markets as traders realize that sanctions are designed not to take 2.3-2.5 million barrels of Iranian oil immediately off the market, but to replace some of that oil with supplies from other sources, and to put downward price pressure on the remaining Iranian barrels.”

The next step in ratcheting up the oil sanctions pressure on Iran will be the vital Asian and Indian markets. The Saudis have agreed to supply 4 million barrels more to India in January, ­ about a 23-24% increase, which is designed to replace Iranian oil. Indian Foreign Minister SM Krishna, however, gave no indication of reducing his country's import of Iranian crude oil during his visit this week to Israel.

Benjamin Weinthal is a research fellow with the Foundation for Defense of Democracies.


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