Sunday, September 26, 2010

A Review of the Effectiveness of Iran Sanctions

By Nader Uskowi

In any discussion on the effectiveness of the current economic sanctions against Iran, the big elephant in the room is Iran’s oil exports. The sanctions imposed against Iran do not include the export of crude oil. Iran’s continued ability to sell its oil gives it the leverage of providing a strategic commodity to major European and Asian countries and in turn the ability to import needed goods and services from those countries to manage its economy. So sanctions that exclude crude oil are by definition non-effective. This generality aside, there are specific targets within the Iranian economy that have significantly been affected by the UN Security Resolution (UNSCR) 1929, US’s Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA), and the recent EU sanctions.

The UNSCR 1929 called on member states to be vigilant and to take measures against Iranian entities suspected to be involved in transactions prohibited by UN sanctions. The US Congress used the language to significantly strengthen Iran sanctions and passed CISADA, signed into law by President Obama in July. The sections of CISADA relevant to financial institutions and transport sector have particularly started to create havoc within the Iranian economy.

In August, for example, the US Treasury issued regulations to implement CISADA’s section 104 dealing with financial institutions. Known as IFSR (Iranian Financial Sanctions Regulations), they prohibit any US or foreign financial institution to deal with Iranian banks suspected to deal with IRGC and its affiliated companies or involved in transactions with Iranian entities on activities prohibited under UN and US sanctions. At face value, IFSRs seem to have limited scope. After all, foreign banks can deal with their Iranian counterparts not involved in financing IRGC projects, for example. But the Treasury has also identified 17 Iranian banks of processing transactions with entities under UN sanctions. The list includes all the country’s major banks. So the choice for the foreign banks has suddenly become very clear: conduct business with those Iranian banks, practically the country’s banking system, and loose access to US financial systems, or stop dealing with Iranian banks altogether. All major foreign banks and many smaller ones have chosen the latter. As a result, Iran is now unable to access financial services from major banks and increasingly unable to conduct major transactions in dollar and euro.

CISADA has also caused uncertainties for foreign companies about which Iranian entity is legitimate and which is illicit and subject to sanctions. For the private sector making such distinction on daily basis for their transactions is costly and risky. It’s become easier for them to cut their dealings with Iran altogether. Safer doing that than being subjected to US sanctions, penalties, and loss of access to the American markets! Among them: Toyota, Kia, Lukoil, Allianz, Lloyds, Shell, Total, Repsol, BP, Eni, Reliance, Glencore, Trafigura, and Vitol.

As already said, Iran’s oil export is not directly affected by the sanctions but investment in the oil and gas sector is. Iran’s oil industry is aging rapidly and for the country to continue the level of its oil production major investments in the sector are required. It is estimated that Iran would need some $150 billion in new investment in oil infrastructure to maintain its current production level. CISADA provide major penalties for any firms doing investment in Iran’s energy sector, and as a result we have witnessed an exodus of major oil companies from the country.

Iran chose IRGC’s Khatam-ol-Anbia to fill the void and act as the main investor in oil and gas projects, but the IRGC’s business arm had to pull out from those projects because it was blacklisted through sanctions and as a result could not obtain foreign financing and services needed to run those complex projects. The Iranian authorities then formed new companies literally overnight to replace Khatam-ol-Anbia. But those two companies before long would be subjected to the sanctions and blacklisted as well. Less oil produced due to lack of new investments, less oil revenues are generated. In the long run, this is curtailing the oil export without directly adding it to the embargo list.

CISADA also limits Iran’s shipping abilities. The Islamic Republic of Iran Shipping Lines (IRISL) has been subjected to the sanctions since 2008. IRISL, however, created many front companies, renamed and repainted its ships, and changed their nominal country of origin. But the Treasury has so far identified some 28 front companies and more than 100 ships as belonging to IRISL, subject to the same sanctions. The immediate result of Treasury’s move has been the reluctance of insurance and reinsurance companies to provide coverage for these ships, a development that can cripple Iran’s shipping, including its ability to deliver oil via its large tanker fleet. Recently three big, new ships belonging to IRISL were seized in Singapore because their insurance coverage were terminated by the insurers. The country’s National Iranian Tanker Corp (NITC), which owns 40 crude carriers and is scheduled to receive 22 VLCCs in the next two years, is also in immediate danger of loosing its liability coverage (“blue card”), making it impossible to operate in international ports.

The EU and some Asian countries have also adopted similar tactics, targeting Iran’s financial, energy, insurance, trade, and transportation sectors.

The UN, US, and EU sanctions are not expected to cause Iran to rapidly change course and its behavior. But they are making business with Iran and investing in the country increasingly difficult, so much so that major foreign banking and commercial institutions are beginning to abandon the Iranian market. This would severely hamper Iran’s development plans, something Tehran needs to ponder during the volatile times expected ahead.


Mr. K said...

Time for self reliance in all those sector

WMD said...

It appears the Iranian government had the clarity of mind a decade or so ago to allocate a substantial part of the country's gas production to domestic consumption (power stations, car CNG) in anticipation of future problems with gas exports by tanker or pipeline: denial of LNG technology by the west (no export by tankers) and deterioration of the security situation in existing and projected pipeline transfer regions (Afghanistan, Baluchistan, Turkish Kurdistan).

The west has also been promoting shale gas production to counter reliance on Russian and ME exports.

By substituting domestic oil consumption with gas Iran could free up more of its dwindling oil production for export. If the rise in refinery output will prove to be true (and not just propaganda) and subsidies and consumption can be reduced as well, even gasoline can be exported instead of oil. This is more profitable, not subjected to OPEC quota and can also be exported by road (to neighboring countries and beyond: smuggling has its benefits too... think sanctions!).

Precondition to this of course is that Iran can somehow manage to sustain or even enhance its oil production levels!