Are Iranian Sanctions Working?

Despite all evidence that sanctions are hurting Iran's economy, four rounds of nuclear talks failed to prove that Iran's regime is now more malleable to a compromise. Diplomacy will continue, but with Iranian proposals falling short of Western minimum requirements, it is time to ask whether sanctions are working.

It is true that the U.S.-EU partial oil embargo that began on July 1 will cost Iran dearly, but so far sanctions failed to persuade Iran’s leaders to abandon its pursuit of nuclear weapons. Part of the reason is that the regime has managed to circumvent the sanctions by creating shell companies, both at home and overseas, with the sole purpose of taking over business that Iran's sanctioned entities can no longer handle. 

Whenever an Iranian company's ties emerge to proliferation efforts or to Iran's Revolutionary Guards, a new company is incorporated with a yet unblemished record to take over the business of the sanctioned entity. By the time the West catches up, Iran has already prepared the papers for the next front company.

Take for instance, Iran's main shipping line, the Islamic Republic of Iran Shipping Lines (IRISL). After the Bush administration hit IRISL with sanctions in September 2008, Iran sought to preempt a similar European move. In January 2009, IRISL incorporated a shell company called First Ocean Administration GmbH to handle its European business. First Ocean then proceeded to establish 20 subsidiaries—First Ocean, Second Ocean, Third Ocean, and so on—each of which owned and managed a single IRISL vessel. This tactic made it harder for Western governments to curtail IRISL activities and when it was uncovered, IRISL renamed vessels. When it got caught, it reflagged them.

The problem is that it takes months for Western officials to document the fraud, and it is always easier to commit a fraud than to prove it in a court of law. Moreover, in Europe, courts have determined that defense counsel for Iranian designated entities can see the evidence based on which the designation was made. Because intelligence agencies are reluctant to expose their sources to the scrutiny of a solicitor representing Iranian entities, governments have no choice but to designate companies only after abundant open source evidence becomes available to build their case.

Because designations do not automatically extend to subsidiaries, when they are hit by sanctions, Iranian companies proliferate their networks of subsidiaries both home and overseas. Nowhere is this more prevalent than in the energy sector.

Since Mahmoud Ahmadinejad became president of Iran in 2005, the Iranian Revolutionary Guards Corps (IRGC) penetrated the energy field, and began to extend direct control over NIOC, the National Iranian Oil Company. General Rostam Qasemi, the former CEO of Khatam al-Anbiya (KAA), the IRGC’s huge business conglomerate, is minister of petroleum. The minister of energy, Majid Namjou, is also an IRGC veteran, as is the minister of industries and mining, Mehdi Gazanfari. These three sit on NIOC's general assembly and ensure a strong IRGC influence over its decision-making.

Their influence protects IRGC businesses even as they are sanctioned. KAA's subsidiary Sepanir, for example, was part of a consortium in charge of developing Phases 15 and 16 of the development project for South Pars' giant gas field in the Persian Gulf. But on June 9, 2010, Sepanir was sanctioned by United Nations Security Council Resolution 1929.

U.S. and EU designations soon followed. With Western sanctions against Iran's oil and gas sector looming, Sepanir's presence was bound to cause damage to South Pars, so KAA announced its withdrawal to protect Iran's “national interest.” But to protect IRGC interests, Sepanir created a new company, Petro Karan Shafagh Kish (PKSK), that allowed it to circumvent sanctions. PKSK, and therefore the IRGC, gained easy access to Western technology, some of which might have dual-use applications.

In short, until a complete shutdown of all exports of technology is introduced and the oil embargo is enforced without discounts, waivers, and exceptions, the IRGC, guardian of Iran’s nuclear weapons program, will continue to thrive, and our efforts to block Iran's progress towards nuclear weapons will only make it costlier and more slowly for Iran, but will ultimately fail to stop its leaders from their deadly pursuit.

Emanuele Ottolenghi is a senior fellow at the Foundation for Defense of Democracies and the author of The Pasdaran: Inside Iran's Islamic Revolutionary Guards' Corps (FDD Press, 2011).