Can EU oil sanctions create a turning point in Iran?

Analysis: Tehran’s revenues drop as Chinese demand discounts.

Iranian Oil Minister Rostam Qasemi 311 (R) (photo credit: REUTERS/Heinz-Peter Bader)
Iranian Oil Minister Rostam Qasemi 311 (R)
(photo credit: REUTERS/Heinz-Peter Bader)
BERLIN – International sanctions on Iran have taken on new life after a group of US senators sent a letter on Tuesday to Catherine Ashton, the EU’s chief diplomat, urging the 27-member alliance to implement an oil embargo against the Islamic Republic.
The fast-moving nuclear events in Iran, including Tehran’s decision to produce weapons-grade uranium at its Fordow facility deep underground, appear to have prompted the EU foreign ministers to meet on January 23 instead of January 30 as had been scheduled.
The EU tentatively agreed last week to pull the plug on its imports of Iranian crude oil.
Leading US Senators Joe Lieberman (I-Connecticut), Mark Kirk (R-Illinois) and Charles Schumer (D-New York) wrote Ashton, “We believe that both [cutting ties with Iran’s Central Bank and embargoing its oil] are absolutely necessary if we are to prevent the Iranian regime from acquiring nuclear weapons and thereby foreclose either a regional war or a cascade of nuclear proliferation in the Middle East.”
Senators Robert Menendez (D-New Jersey), Jon Kyl (R-Arizona), Bob Casey (D-Pennsylvania), Marco Rubio (R-Florida) and Kirsten Gillibrand (D-New York) also signed the letter.
Purchasers of Iranian fuel pay through the Central Bank.
The pressing question is: Can oil sanctions contribute to a radical change in Iran’s recalcitrant behavior? In a show of defiance on Wednesday, Iran’s Atomic Energy Organization said in a statement, “We will continue our [nuclear] path without any doubt... Our path is irreversible.”
The EU move to sever ties with Iran’s oil industry would have been largely unimaginable a year ago. A deeply anchored EU strategy of engagement with the Islamic Republic coupled with annual bilateral trade volume of more than 25 billion euros impeded tough action from Brussels.
The EU countries import roughly 500,000 barrels per day of Iran’s 2.6 million bpd export production. Only Saudi Arabia produces more oil than Iran, with a daily turnout of 3.5 million bpd.
With a view toward not rattling oil markets or jolting fragile EU economies such as those of Greece, Spain and Italy, which depend on vast amounts of Iranian crude, the EU laid out on Thursday a staggered sanctions plan to be put in place over the next six months.
European experts are optimistic. But there remains a need to raise the financial and diplomatic sanctions bar.
Daniel Schwammenthal, the director of the AJC Transatlantic Institute in Brussels, told The Jerusalem Post on Wednesday, “We welcome that the EU has in principle decided to impose an oil embargo on Iran.
But we hope that when foreign ministers meet later this month, they will impose that ban immediately and apply it to existing contracts.”
Schwammenthal wants the EU to further ratchet up the pressure.
“In addition, we urge European leaders to sanction Iran’s Central Bank, as Great Britain and the US did. It is this combination of energy and financial measures that can create the sort of ‘crippling sanctions,’ to use the words of US Secretary of State Hillary Clinton, that may still have a chance to stop Iran’s nuclear weapons program peacefully,” he said. “After years of Iranian deceptions and lies, nothing short of Tehran’s total isolation, which should include travel bans for all regime officials, can convince the Islamic Republic of Iran that it’s simply too costly to continue ignoring their international obligations.”
While some EU countries and US Treasury officials were initially concerned about oil sanctions raising prices and thus Iran’s revenues, and hurting world economies, a set of surgical punitive measures targeting Iran’s main source of income, its oil and gas sector, has been efficacious.
The strategy of imposing laser-like oil sanctions without disrupting global energy markets, and thereby reducing Iran’s oil revenues, was first developed by Mark Dubowitz, executive director of the Foundation for Defense of Democracies, and Reuel Marc Gerecht, a former CIA officer and a senior fellow at the foundation.
In a series of articles in The Wall Street Journal and The New York Times last year, Dubowitz and Gerecht outlined their approach.
Writing in the Times in November, they argued that “effective energy sanctions don’t have to raise oil prices; they can actually do the opposite. Washington just has to learn how to leverage greed.”
They continued, “With fewer buyers to compete with, the Chinese companies would have significant negotiating leverage with which to extract discounts from Tehran. The government could lose out on tens of billions of dollars in oil revenue, loosening its hold on power. This approach may seem distasteful to some, because it does, in a sense, reward bad Chinese behavior. But the objective of sanctions is to cause real economic pain in Tehran, not to make Americans feel moral.”
A telling result of the Dubowitz and Gerecht smart sanctions approach was cited in the International Herald Tribune last week.
According to the paper, “China, which imports about 11 percent of its oil from Iran, has actually reduced its daily purchases of Iranian crude, although estimates of the cutback range from as little as 15,000 barrels a day, or 3% of Chinese imports from Iran, to considerably more than that. It was hard to know whether Beijing was making a political statement or merely trying to buy the oil on better terms.”
Dubowitz told the Post on Wednesday that “the EU oil embargo, even if it contains waivers and a slower than desirable implementation schedule, will be a critical first step. It is already setting off a cascade of oil market behavior as Japan and South Korea decrease their purchase of Iranian oil in order to be in compliance with US Central Bank sanctions, and China forces the Iranians to offer price discounts to compensate their refineries for the added political and legal risk of continuing their purchases of Iranian oil.”
He continued that “Saudia Arabia, Kuwait, the UAE and other oil producers are increasing their supplies to give Japan, South Korea, India and China the cushion to reduce their purchases and drive ruthlessly for price discounts. The goal of US sanctions and the EU embargo is to target Iranian oil revenue which is Khamenei’s lifeblood. Countries should be considered as cooperating under US law if they help to decrease Iranian oil revenue through cuts in purchases of the oil, reductions in the price that they pay for every barrel, or both. This helps to calm oil markets as traders realize that sanctions are designed not to take 2.3 million-2.5 million barrels of Iranian oil immediately off the market, but to replace some of that oil with supplies from other sources, and to put downward price pressure on the remaining Iranian barrels.”
The next step in ratcheting up the oil sanctions pressure on Iran will concern the vital East Asian and Indian markets.
The Saudis have agreed to supply 4 million barrels more to India in January – about a 23-24% increase, which is designed to replace Iranian oil. Indian Foreign Minister S.M. Krishna, however, gave no indication that his country would reduce its import of Iranian crude oil during his visit to Israel last week.

Benjamin Weinthal is a research fellow with the Foundation for Defense of Democracies.