Jul 1, 2010 | 18:39 GMT

11 mins read

Iran: Sanctions and Smuggling

Three sets of sanctions against Iran, including one awaiting the signature of U.S. President Barack Obama, are in play. The measures target Iranian gasoline imports and oil infrastructure, and several corporations have announced a cutoff in trade with Iran because of them. However, these measures are difficult to effectively enforce, and the likelihood of a massive smuggling bonanza developing in response means they likely will have little strategic impact on Tehran.
U.S. President Barack Obama is expected to sign into law a fresh sanctions bill against Iran the evening of July 1, according to White House officials. The legislation aims to strengthen U.N. Security Council sanctions on Iran by applying pressure on companies with investment interests in the United States to curtail their gasoline trade and financial exchanges with Iran. Meanwhile, nearly every statement emanating from Tehran in recent days has consisted of self-congratulatory announcements on how the country has achieved self-sufficiency in various industries in order to insulate the Islamic Republic from sanctions. Though such announcements are designed to reassure the Iranian public that current U.S. and European sanction efforts are futile, there is little hiding the fact that the Iranian economy is far from self-sufficient. While sitting on the world's second-largest natural gas reserves, Iran is the world's fourth-largest producer of crude oil at roughly 3.8 million barrels per day, with oil exports accounting for more than 24 percent of the country's gross domestic product and roughly 75 percent of government revenues. Decades of neglect, mismanagement and lack of foreign investment, however, have left the Iranian energy industry in severe disrepair. As a result, Iran needs to import roughly 30 percent of its gasoline and relies heavily on Western technology, capital and services to stay in business. Iranian energy — in particular, its gasoline trade — is therefore at the top of the U.S. and European sanctions target list. Without the gasoline imports, technology and capital needed to keep Iran economically afloat, the country theoretically could be pressured enough to make concessions on its nuclear program in the interest of avoiding a social uprising that could unseat the clerical regime. The key word is "theoretically." Policymakers in Washington and Brussels hope that after years of hollow war threats from the United States and Israel and loop-around negotiations with the Iranians, the so-called crippling sanctions that are finally coming to fruition will force Tehran to bend on its nuclear ambitions. Yet this all assumes that vessels carrying goods destined for Iran will actually be stopped. Unless the United States attempts to enforce a physical blockade of either Iranian fuel imports or crude oil exports — the former appears to be off the table for now, and the latter has yet to be formally discussed — the issue of trade with Iran very quickly falls out of the hands of the policymakers and lawyers and into the hands of organized criminals and shell companies that are looking for a profit and are not afraid of taking risks. The 1996-2003 U.N. Oil-for-Food plan for Iraq is a perfect case in point. While the United Nations was supposed to monitor all oil sales by Saddam Hussein's regime, along with all goods bought with the oil proceeds, the member states were either unwilling or incapable of policing shipments to Iraq. As a result, a sanction-busting market took root in which even some of the most die-hard proponents of sanctions in the United Nations ended up making fortunes off blockade runs. Sanctions without a blockade may be ineffective at influencing an adversary to undergo a behavioral change, but they can certainly make life more difficult for the adversary when it comes to conducting everyday business. The Iranian business community has spent years setting up various banking outlets, shell companies and circuitous business arrangements to keep the lines of trade open to the Islamic Republic in countries such as Venezuela, Turkey, India, China, Malaysia and Indonesia. If Iran needs specific equipment or technology to refurbish its oil industry, for example, it could theoretically find an interested firm in Ecuador to order parts from a U.S. company. The equipment would then be assembled and sold as a finished product to Venezuela's state-owned PDVSA, which would then resell or lease the equipment to Iran. Monitoring for such activity is exceedingly difficult, and enforcement is nearly impossible in the vast majority of countries where customs officials are incompetent or can be bribed. Though setting up such elaborate smuggling and money-laundering schemes takes a great deal of time and effort and raises the cost of doing business with the target country, there is money to be made in every transaction along the way. And where there is money to be made, the politics of business — not government — take precedence.

The Status of Sanctions

There are three sets of sanctions in play against Iran:

U.N. Security Council Resolution 1929

Status: Passed June 9 with 12 in favor (notably including Russia and China), two against (Turkey and Brazil) and one abstention (Lebanon). This resolution beefed up the three previous sets of U.N. sanctions against Iran by restricting shipments that would aid Iran's nuclear weapons and ballistic missile programs and by imposing visa bans and asset freezes on the Islamic Revolutionary Guard Corps (IRGC). The resolution lists 41 entities targeted in the sanctions, with the most critical designations being the Islamic Republic of Iran Shipping Lines (IRISL) and the Khatam al Anbiya construction company (Ghorb), which is controlled by the IRGC. The resolution calls on states to enforce compliance and empowers them to seize and destroy illicit Iranian cargo, to which Iran has responded by threatening vessels transiting the Strait of Hormuz. The resolution also contains significant loopholes that allow Russia to continue work on the Bushehr nuclear power plant and keep alive a threat to sell Iran the S-300 strategic air defense system. Though the sanctions resolution on its own is weak on enforcement, it has been effective in exposing the inherent weakness of Iran's relationship with Russia.

Comprehensive Iran Sanctions Accountability and Divestment Act

Status: Passed by the U.S. Senate and House of Representatives and expected to be signed into law by U.S. President Barack Obama on July 1. The precursor to this bill, the Iran Refined Petroleum Sanctions Act, passed the House and Senate in December and January. The U.S. legislation attempts to exploit Iran's heavy reliance on gasoline imports by subjecting any company involved in the supply of gasoline to Iran, including producers, transportation companies and insurance providers, to sanctions. Two additional changes made in the conference committee are worth noting. One is the elimination of a sentence in the Iran Sanctions Act of 1996 that allowed companies to provide technology, goods and services to the Iranian oil and natural gas sectors without facing sanctions. The second is an additional clause that bars foreign companies that do business with the United States from entering into joint ventures, partnerships and investments with Iranian companies involved in energy projects outside Iran. Iran has been involved in energy joint ventures in countries such as Malaysia, Indonesia, Azerbaijan, the United Kingdom and Croatia in an attempt to gain the necessary technology and experience to develop its own fields and upgrade its refineries. Such sanctions, should the United States choose to impose them, could include denying companies access to the U.S. Export-Import Bank, restricting the ability of these companies to sell to the U.S. market and denying them U.S. government contracts.

EU Declaration on Iran

Status: Pending approval by EU foreign ministers. The EU Council of Ministers has unanimously approved the legislation and has passed the matter over to the Foreign Affairs Council to work out the details under its guidelines. Details of the legislation are expected to be released mid-July, and the Foreign Affairs Council is set to meet July 27. The EU foreign ministers will need to a pass the legislation with a two-thirds majority vote before they break for vacation in August. The additional EU sanctions attempt to place restrictions on the Iranian financial, energy, shipping and air cargo sectors, something that is no small detail considering that European companies have long served as middlemen and tech providers in exactly the sort of sanctions-busting activities that are so prevalent (regardless of the sanctions target). Specifically, the European resolution calls for barring "new investment, technical assistance and transfers of technologies, equipment and services related to these areas, in particular related to refining, liquefaction and LNG [liquefied natural gas] technology." Since Iran is believed to acquire the bulk of technology for its energy industry from Europe, most notably Germany, the EU sanctions address one of the bigger loopholes in the U.S. sanctions drive. Again, enforcement remains the key issue.

Enforcement and Intimidation

While the sanctions being pursued in the United States and European Union against Iran are the most comprehensive and targeted to date, they will probably do little to plug the enforcement hole. Even once the legislation is inked, it is extremely rare for the U.S. administration to actually follow through in sanctioning firms for noncompliance. Where the sanctions achieve greater success is in their ability to intimidate high-profile corporations into publicly withdrawing support for Iran. Many corporations concerned about safeguarding their reputation, avoiding the wrath of the anti-Iran lobbies in the United States and protecting their U.S. assets and investment interests have already announced that they have or will cut trade with Iran:
  • Spain's Repsol announced June 28 that it has pulled out of a development contract with Royal Dutch Shell for Iran's South Pars gas field.
  • France's Total announced June 28 that it has stopped gasoline sales to Iran.
  • Italy's Eni SpA announced April 29 that it pulled out of a project to develop the Darkhovin oil field in Iran.
  • Russia's LUKOIL announced April 7 that it would stop gasoline sales to Iran.
  • Malaysia's Petronas announced April 15 that it would stop gasoline sales to Iran.
  • India's Reliance Industries announced April 1 that it would not renew a contract to import crude oil in 2010.
  • Switzerland's Trafigura and Vitol stopped gasoline sales to Iran, according to March 8 reports.
  • Royal Dutch Shell announced in March that it no longer supplies gasoline to Iran but reportedly resumed shipments in June.
  • The United Kingdom's Lloyd's of London announced in February that it would comply with U.S. sanctions legislation against Iran.
  • Germany's Munich Re announced in mid-February that it would not renew business or enter new deals with insurance companies in Iran.
  • German reinsurer Hannover Re AG announced it would only do business with Iran if the Iranian government complies with EU and U.N. sanctions.
  • European insurer Allianz said in February that it would cease its operations in Iran.
  • Germany's Siemens announced in January that it would cease business with Iran.
  • Swiss firm Glencore stopped supplying gasoline to Iran, according to November 2009 reports.
The list may be impressive at first glance, but underneath these public statements, a black market thrives. Many of the firms that have made the list of complaints are also known to sell refined product to third parties, which is then resold to Iran. In some cases, gasoline trade with Iran may not even be that direct. Gasoline refiners can sell to a host of clients on the spot market, where shell companies could then resell refined product to Iran without the producer's knowledge. Companies such as Glencore, Vitol and Trafigura are well known in the industry for their sanction-busting expertise, and companies such as Reliance have been seen shipping gasoline to Iran through third parties like Malaysia's Petronas and Kuwait's Independent Petroleum Group. Though some companies like Repsol and Total recognized the warning signs with these sanctions and quickly decided to publicly bow out, others are waiting to see how serious the United States gets with these sanctions. Announcing a cessation of gasoline shipments to Iran often entails finding more creative avenues to ship to Iran, rather than cutting off trade altogether. The simple fact is that without an expensive enforcement mechanism, such as a naval blockade, these sanctions efforts will likely end up having very little strategic impact on Iranian decision-making when it comes to the nuclear question. At the very least, they allow the U.S. administration and the Europeans to buy time and give the illusion that they are addressing the Iranian nuclear problem beyond the rhetoric while causing some political heartburn in Tehran. In the meantime, the smuggling arena in the energy industry will have undergone a massive expansion.

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