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Feb 7, 2013 | 11:45 GMT

5 mins read

The Political and Legal Challenges Undermining Iran Sanctions


The U.S.-led global sanctions campaign against Iran is starting to unravel. The European Union's Court of Justice has removed two major Iranian banks from the sanctions list, and more de-listings are on the way. Though the U.S. Congress will try to compensate for the de-listings by passing additional sanctions, the perception of a slackening sanctions regime will make it very difficult for Washington to sustain the campaign politically on a global scale. This turn of events will have significant implications for negotiations between the United States and Iran in 2013.

Bank Saderat, one of Iran's largest banks with a significant international presence, was the latest entity to be removed from the EU sanctions list Feb. 6. Bank Mellat, Iran's largest private bank, was relieved of sanctions Jan. 30. A number of other entities accused of involvement in Iran's nuclear procurement efforts have been removed from EU sanctions. These include, among others, Sina Bank, Fulmen Group — who allegedly did the electrical work for a nuclear facility near Qom — Kala Naft, the procurement arm for the National Iranian Oil Company, and a National Iranian Oil Company subsidiary, Oil Turbo Compressor Company.

The list is likely to grow longer, with at least 50 outstanding legal cases pending in the EU Court of Justice. Among the pending cases is Europaisch-Iranische Handelsbank, which has been under sanctions since 2011 and was a significant financial conduit for Iran to import industrial goods and technology from Germany. 

An Important Legal Challenge

A legal technicality is behind this series of European de-listings. In 2010, the European Union sanctioned wealthy Saudi businessman Yassin Abdullah Qadi on allegations that he was an al Qaeda financier. Qadi challenged the European Court of Justice, saying the evidence against him was classified and therefore not accessible in the European court. Qadi's challenge was successful, and Iranian legal teams have since used it as legal precedence to fight the sanctions cases that have accumulated in the European Union in the past two years.
The United States, whose legal system has the flexibility to examine both unclassified and classified evidence, has maintained sanctions against firms with alleged links to Iran's nuclear program. But the European Court of Justice, which has to cull information from individual state intelligence agencies to build a case, has ruled that there is insufficient evidence to tie certain firms to the nuclear program. The European Union must pay millions of dollars in damages to these Iranian firms, which now have access to European financial and trading networks.

Political Obstacles

Sanctions campaigns, particularly on the scale of the one against Iran, typically run into substantial political difficulties. Iran's major trading partners, including Turkey, China, India and Japan, have consistently pushed against Washington and Brussels. These nations would rather protect their bilateral relationships with Iran and maintain a stable energy supply than follow a Western mandate. They view U.S. and EU threats to cut off access to Western financial markets as bullying tactics and argue that the sanctions do not apply to them unless the measures are approved by the U.N. Security Council (where China and Russia could play a blocking role).
Tehran's trading partners have reduced trade with Iran to the point that even Iranian officials have admitted their oil revenues have fallen by 40 percent due to sanctions. Still, many of those same partners have continued to work through creative mechanisms such as front companies and bartering arrangements to maintain trade. These moves come with risks, and there is a worldwide network of traders, insurers and shippers that closely monitor the pulse of the sanctions regime. If the United States is preparing for another round of sanctions and is looking for offenders, many governments and firms will openly demonstrate their cooperation with the sanctions to avoid ending up on a list and getting fined. But if the sanctions regime appears to be slackening, there is a great deal of money to be made in the smuggling networks built around any sanctioned market. Perception thus matters a great deal in the politics of sanctions, and the unraveling of the EU arm of this campaign will undermine the U.S.-led economic sanctions against Iran.
Iran regains valuable maneuvering space with each of these de-listings. Iranian businessmen and officials were already leading an intensive effort to circumvent sanctions, but now significant legal channels are opening that help Iranian firms resume business. This comes as the United States has re-extended an offer to Iran for direct negotiations. Iran could use this opening to seriously pursue these talks, or it could buy time and stall the negotiations, especially as the country prepares for elections in June.
The United States also has a decision to make. It wants to enter these negotiations from an unquestionable position of strength. With Iran on the defensive in Syria and trying to hold its position in Iraq, under heavy sanctions and facing a significant military presence in the Persian Gulf, the United States already carries far more leverage than Iran in pursuing these talks. The regional dynamics will continue to weaken Iran, but the new easing of sanctions pressure on Tehran may undermine the U.S. negotiating position.
Moreover, the U.S. Navy has reduced its carrier presence in the Persian Gulf to one, and U.S. defense officials, caught up in the ongoing political wrangling over the budget in Washington, are arguing that the Navy will not be able to deploy an additional carrier to the Persian Gulf as planned. Iran will be watching U.S. carrier movements closely, and Washington's decision over whether to send an additional carrier could influence Iran's willingness to negotiate. A number of factors could draw Tehran and Washington to the negotiating table, but there are just as many variables that could once again throw off the timing of these talks.
The Political and Legal Challenges Undermining Iran Sanctions
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