Energy Sector Waivers Would Undermine the Maximum Pressure Campaign against Iran

The State Department exemptions that allowed Iran to continue exporting oil in spite of U.S. sanctions expired on May 2. For the first time, Iran’s energy sector will have to bear the full weight of U.S. sanctions without any major waivers or exemptions.

The end of the oil export exemptions will block the primary source of income for the regime, and will likely have widespread impact on Iran’s non-humanitarian commercial trade as a whole. To enable payments for oil, the U.S. exemptions permitted importers to transact with the Central Bank of Iran (CBI) as long as those exporters deposited oil proceeds in special purpose accounts that only repatriated trade goods, not hard currency, to Iran.

The oil export exemptions mitigated tough sanctions in the 2012 National Defense Authorization Act, which directed the president to prohibit the opening of, or impose “strict conditions” on, U.S. accounts by foreign financial institutions that knowingly “conducted or facilitated any significant financial transaction” with the CBI or any other sanctioned Iranian financial institution. Any foreign financial institution that does not comply will likely have their assets in the United States frozen.

In addition to the prohibition on oil exports as of May 2, Iran’s energy sector has to contend with the debilitating sanctions contained in the Iran Freedom and Counter-Proliferation Act of 2012 (IFCA). The previous administration waived these sanctions as part of the nuclear deal with Iran, but President Trump reinstated them in 2018. Three sections of IFCA detail the main energy sanctions:

• Section 1244 mandates sanctions against entities that provide goods or services to the energy, shipbuilding, and shipping sectors (including ports) of the Iranian economy;
• Section 1246 extends these prohibitions to insurance or reinsurance for anyone sanctioned under multiple laws targeting Iran’s oil and energy support chain; and
• Section 1247 sanctions any foreign financial institution that knowingly engages in, or facilitates, a transaction for or on behalf of an Iranian designated by the Treasury Department.

Finally, the Iran Sanctions Act of 1996 (as amended) targets upstream investment in Iran’s oil and gas fields, the sales of refined petroleum or gasoline to Iran, equipment for energy sector production, and a range of other energy-related activities. These sanctions also returned in 2018 following their suspension as part of the nuclear deal. Their restrictions draw additional strength from supporting prohibitions on the purchase of Iranian petrochemical products, dealings in U.S. bank notes by the Government of Iran, and other financial sector prohibitions.

Putting an end to oil export waivers is consistent with the Trump administration’s pledge to put in place “the strongest sanctions in history.” By following through on its promises, the administration has demonstrated its credibility with regard to sanctions on the Iranian energy sector.

This credibility could be lost, however, if the administration were to issue new waivers for the energy sector at some point in the future in the absence of significant concessions from Iran. Any new waivers would likely signal weakness, opening the door for foreign states to openly defy U.S. sanctions more broadly. The administration must now stay the course.

Matthew Zweig is a senior fellow at the Foundation for Defense of Democracies (FDD), where he also contributes to FDD’s Center on Economic and Financial Power (CEFP). Follow FDD on Twitter @FDD and @FDD_CEFP. FDD is a Washington, DC-based, nonpartisan research institute focusing on national security and foreign policy.