Iran
sanctions herald new big-stick
diplomacy By Erich C Ferrari
and Samuel Cutler
Contained in the Defense
Authorization Act (NDAA) of 2013, and signed into
law by President Barack Obama on January 2, are
sweeping new sanctions targeting Iran over its
disputed nuclear program. The new measures target
foreign entities engaging in a wide array of
transactions with Iran, including the sale of any
goods supporting Iran's energy, shipping and
shipbuilding sectors, the sale of raw materials
such as aluminum, steel, and coal, the provision
of insurance, or underwriting services in support
of any activity for which Iran has been subjected
to US sanctions.
Lawmakers quoted by the
Wall Street Journal said that the new sanctions
move closer to a complete trade embargo on Iran.
Importantly, the US currently maintains a complete
trade embargo, with exceptions for humanitarian
exports and a positive licensing program for
divestment activities and certain academic and
cultural exchanges with Iran. The new sanctions
will therefore have little impact on the legality
of US companies still engaging in
licensed trade with Iran. Any
new steps that restrict Iran's ability to buy or
sell goods and services would need to be enforced
through the threat of US secondary sanctions.
Secondary sanctions, known pejoratively as
extraterritorial sanctions, are designed to
prevent foreign individuals and entities from
conducting activities that US primary sanctions
seek to prohibit by imposing various penalties,
including revoking access to the US market. They
have been increasingly used over the past three
years by the United States to pressure foreign
countries and entities into curtailing their
business dealings with Iran.
Beginning
with the Iran Sanctions Act of 1996 and gaining
wide spread notoriety with the Comprehensive Iran
Sanctions Accountability and Divestment Act of
2010 (CISADA), the US government maintains the
authority to impose secondary sanctions on a wide
variety of activity involving Iran, including but
not limited to the importation of Iranian crude
oil, dealings with entities sanctioned under
Weapons of Mass Destruction (WMD) or
Terrorism-related programs and the export to Iran
of refined petroleum products.
By and
large, these measures have been extremely
effective at cutting Iran off from large swaths of
the global economy. Sanctions on Iranian financial
institutions have been particularly effective as
most foreign banks are loathe to risk their access
to the all-important American financial system and
have responded by cutting off all ties with Iran.
The effectiveness of secondary sanctions
is largely dependent on buy-in from the rest of
the world. Following the passage of new sanctions
included in the 2012 NDAA, Iranian oil exports
have dropped to under 1 million barrels per day. A
number of factors contributed to the sanctions'
success. For example, international concern over
the continued development of Iranian enrichment
capabilities convinced some states that additional
economic leverage was needed to pressure Iran to
resume negotiations. While the NDAA directed
countries to "significantly reduce" their
purchases of Iranian oil, the European Union
announced its intention to institute a full oil
embargo just three weeks after the act's passage.
This does not mean that all of Iran's
trading partners would have acted in the same
manner without the existence of sanctions. An
increase in the global supply of crude oil due to
greater production levels in Saudi Arabia, Iraq,
and Libya coupled with lower demand as result of
the global economic slowdown has allowed Iran's
customers to reduce their purchases without
dramatically increasing the price of crude.
Waivers included in the law have also allowed
importers of Iranian oil to gradually reduce their
purchases so as not decrease the associated
economic costs. So, despite repeated denunciations
of US unilateral sanctions in public, China has
quietly reduced its purchases of Iranian oil, as
have Iran's other East Asian customers. By
complementing new sanctions with robust diplomatic
engagement and managing the economic costs of
compliance, the United States has been able to
ensure fairly broad acceptance of its efforts to
economically isolate Iran.
Indeed,
secondary sanctions targeting Iran have faced
roadblocks in the past when a consensus regarding
their utility was lacking. In 1996, congress
passed the Iran and Libya Sanctions Act, which was
renamed the Iran Sanctions Act (ISA) in 2006
following Libya's decision to give up its WMDs.
The bill directed the President to sanction
foreign companies that provided investments of
over $40 million towards the development of
petroleum resources in Iran.
The EU
responded by threatening to file a World Trade
Organization complaint against the US due to
French petroleum giant Total SA's involvement in a
$2 billion deal to develop Iran's South Pars gas
field. President Bill Clinton was forced to issue
a waiver for the project in 1998 and Secretary of
State Madeline Albright later promised that
similar projects would not be sanctioned. It would
be another 12 years before any entity was
subjected to ISA sanctions.
The reality is
that the executive's use of secondary boycotting
measures has been fairly limited. For example,
only two banks have lost their ability to maintain
correspondent banking relationships with the US
because of the Iranian Financial Sanctions
Regulations mandated by CISADA: Elaf Islamic Bank
and Kunlun Bank. Moreover, the executive branch,
not congress, is tasked with the implementation of
the secondary boycotting measures. In other words,
while congress can continue to provide tools for
the executive to impose additional sanctions, the
actual implementation is left to the president.
Yet the impact of numerous rounds of
congressionally mandated secondary sanctions is
greater than the sum of its prohibitions. Due to
the confusing and oftentimes overlapping nature of
different US sanctions programs, the international
business community has in large part withdrawn
from the Iranian market in fear of running afoul
of US law. Sanctions on Iranian financial
institutions have been particularly effective, as
the mere existence of CISADA-authorities have
convinced most foreign financial institutions to
cut off all ties with Iran.
In practice,
secondary sanctions are the equivalent of speaking
softly, but carrying a big stick. However, the US
has departed from the diplomatic strategy of
Theodore Roosevelt. Indeed, the latest round of
secondary sanctions are a form of neo-big stick
diplomacy; the US is now speaking loudly and
carrying a big stick.
Samuel Cutler
is a policy adviser at Ferrari & Associates,
PC and Erich Ferrari is the principal of
Ferrari & Associates, PC, a Washington, DC
boutique law firm specializing in US economic
sanctions matters.
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