D-Day for sanctions on Iran

By Mark Fitzpatrick, Director, Non-Proliferation and Disarmament Programme

Today is the day when biting US sanctions fully apply to foreign oil purchases through the Iranian central bank. But as yet there is little public gnashing of teeth. On Sunday, another sanctions deadline will fall when the EU ban on oil sales, and on the provision of insurance for tankers carrying Iranian oil, takes full effect.

On the buyer side, the US sanctions are supposed to fall on China, the top purchaser of Iranian crude, and Singapore, Indonesia, Pakistan and the Philippines. The 17 other countries that were potentially subject to US sanctions have all received six-month waivers, because they made significant cuts in their purchases – in the order of 10-20% from the previous year.

Under a sanctions provision adopted as part of a defence-spending bill and signed by President Barack Obama on New Year’s Eve, the financial institutions in non-exempt nations that settle petroleum trades through Iran’s central bank will be cut off from the US banking system from today.

It may be that the US has already struck deals with these countries to delay the practical impact of the sanctions. China should be technically eligible for an exemption because a pricing dispute with Iran reduced its imports during the first five months of this year by 20% or more compared with the previous year. And the barter arrangements increasingly used for Iranian crude purchases do not involve the central bank.

Singapore, a loyal US ally, does not consume much Iranian oil but it imports a fair amount for refining and onward sale. The Singapore government, which normally takes a hands-off approach to the oil trade, has been engaged in heavy negotiations with the US.

As a result of Sunday’s upcoming EU ban, South Korea – once Iran’s fourth-largest oil customer – has announced an end to purchases. Other nations may follow suit.

Contrary to many predictions, the total cutbacks have not had much impact on global oil prices; at US $94 per barrel today the price is considerably below the peak of $128 in March when talk of war entailed a high risk premium. Reduced global demand because of Europe’s economic downturn and increased output from Libya, Iraq, the US and especially Saudi Arabia have kept the market stable.

Iran purports to shrug off the losses. In January, President Mahmoud Ahmadinejad described the new sanctions as ‘the heaviest onslaught on a nation in history’. He was subsequently criticised for giving solace to the enemy by admitting pain. While oil sales have dropped 30-40%, Iranians today try to emphasise the bright side. They are still earning $40 billion a year from oil sales, twice the amount of a decade ago.  And Iran still has $80-100bn in foreign exchange and gold.

Inflation is running over 20% and the currency has not recovered from its calamitous 50% fall last winter, but the Iranians have endured much worse and their economy is not on the verge of collapse.

The sanctions bite is only going to get worse for Iran. The US waivers on the oil purchases through the Iranian central bank have to be renewed in six months, which will require further volume reductions. France and the UK have called for tougher EU sanctions.

Yet it’s hard to see sanctions alone bringing about a solution.  Diplomats on both sides need to get more creative.

---