VOL. XLV

No 34

26-August-2002

 

A Review Of US Unilateral Sanctions Against Iran

 

By Herman Franssen and Elaine Morton

                                      

This article is based on a recent presentation at a CWC conference on Iran by Dr Franssen. Much of the research of the presentation was conducted by Dr Elaine Morton. Dr Franssen, a former Senior Economic Advisor of the Minister of Petroleum and Natural Resources of Oman, is President of International Energy Associates; Dr Morton, a former Director for Near East and South Asian Affairs at the US National Security Council, is an energy and foreign policy consultant in Washington, DC.

 

History Of US Sanctions Against Iran

 

Carter Administration

US unilateral sanctions against Iran began almost a quarter of a century ago after the take-over of the US embassy in Tehran (November 1979). President Carter responded immediately by issuing Proclamation 4702, imposing a ban on the importation into the US of Iranian oil. Ten days later, he issued Executive Order 12170, which blocked all property within US jurisdiction owned by the Central Bank and Government of Iran. In April 1980, President Carter issued Executive Order 12205, instituting an embargo on US exports to Iran (including restrictions on financial transactions) and Executive Order 12211, imposing a ban on all imports from Iran and prohibiting US citizens from traveling to Iran or conducting financial transactions there. Once the US hostages were released, the US revoked the previous executive orders, with the exception of the order blocking Iranian Government property within US jurisdiction, and committed the US not to intervene in Iran’s internal affairs.

 

Reagan Administration

Following the 1983 bombing of the US embassy and marine barracks in Lebanon, the Reagan Administration on 20 January 1984 declared Iran “a sponsor of international terrorism”. This designation made Iran ineligible for various forms of US foreign assistance. A year later, the Administration withheld funds from international organizations equal to the amounts allocated by those organizations for Iran and in 1988, US Executive Directors of international financial institutions were required to vote against issuing loans to Iran. In August 1986, the US prohibited Iran from receiving US arms (including spare parts) under the US Arms Export Control Act.

 

By Executive Order, a ban was imposed on US imports of Iranian crude oil and all other Iranian imports in October 1987 because of Iran’s “active support of terrorism as an instrument of state policy” and its “aggressive and unlawful action against US flag vessels and merchant vessels of other non-belligerent nations engaged in peaceful commerce in the international waters of the Persian Gulf.” The order was precipitated by congressional criticism of US Government purchases of Iranian oil for the Strategic Petroleum Reserve (SPR).

 

Bush Sr Administration

In October 1992, the Iran-Iraq Arms Non-Proliferation Act was signed into law. It included provisions concerning dual use items which could be used for military purposes. The principal reason for including Iran was concern about Iran’s development of Weapons of Mass Destruction (WMD). A CIA report had estimated that Iran had allocated $2bn for the development of WMD.

 

Clinton Administration

Unilateral sanctions mushroomed under the Clinton Administration. Prime reasons for the escalation of US sanction regimes were:

 

1)       Dissolution of the Soviet Empire which left the US as the only global superpower. Since other countries were no longer essential in the fight against communism, other factors such as human rights violations, WMD and regional issues, took on greater importance. In the absence of significant opposition, the US could take greater political risks.

 

2)       The end of the Soviet Union also signaled the end of bipartisan US foreign policy.

 

3)       In 1994, the Republicans controlled both Houses of Congress and were looking at sanctions against unpopular foreign governments as a way to placate powerful pressure groups in their constituencies and in the process nibble away at the power of the Democratic Clinton Administration. Clinton’s view of foreign policy differed from previous Administrations (at least at that stage) and he appeared willing to accept sanctions sponsored by Congress in exchange for cooperation on domestic issues. He also was easy to mollify, so long as sanctions legislation contained a Presidential Waiver authority.

 

The Clinton Administration also saw sanctions as low cost alternatives to foreign military intervention. The US had become more insular after the collapse of the USSR and many Congressmen who turned to sanctions had little or no exposure to the world outside of North America. They do not understand the complexities of the outside world and preferred to see it in black and white terms of good versus evil. Moreover, opposition to sanctions related to Middle East issues has generally been considered as politically incorrect.

 

Labor unions have shown limited interest in opposing sanctions as long as the impact on employment was perceived to be low. Farmers have generally been opposed to sanctions but they have been compensated in other ways and international oil companies have far less influence on Congress than is generally perceived at home and abroad.

 

What has made US unilateral sanctions since the 1990s more onerous is the extraterritorial nature of US policy. US sanctions policy not only affects American companies but is also directed against foreign companies. Escalation of US unilateral sanctions in the 1990s has made other countries more reluctant to agree to multilateral sanctions because of the fear that they will have to pay a heavy price for what frequently is perceived as a US domestic political agenda.

 

On 15 March 1995, President Clinton issued Executive Order 12957, banning US contributions to the development of petroleum resources in Iran. It came 10 days after Conoco had signed a $1bn contract to develop the Sirri A and E oil field. Iran had purposely selected Conoco, an American oil company, to give a signal of its desire for improved relations with the US. The pressure from Congress continued, however, and two months later President Clinton issued Executive Order 12959, expanding the previous sanctions to include a total trade and investment embargo on Iran. Iran was declared “an extraordinary threat to the national security, foreign policy and economy of the US.” This executive order has some extraterritorial reach since US companies would not be allowed to facilitate any activities involving trade with Iran and severe restrictions were imposed on the re-export of US or partially-US products.  Support for international terrorism and development of WMD were mentioned as reasons for the Clinton executive orders.

 

The actions against Iran by the Clinton Administration were part of the “Dual Containment” policy of his Administration, aimed at both Iran and Iraq. The purpose of the dual containment policy was to isolate those two countries and, by increasing the strains under which they must operate, generate the “break-up and gradual mellowing” of their power. It is interesting that President Clinton imposed economic sanctions against Iran only after severe criticism from EU countries, which argued that US companies continued to import $4bn worth of Iranian oil while they had been pressured to cooperate with the US containment policy. Germany, for example, had under US pressure given up plans to supply Iran with a nuclear reactor. President Clinton wanted to show that his policy vis-à-vis Iran was consistent.

 

Iran-Libya Sanctions Act Of 1996 (ILSA)

President Clinton had been under considerable domestic pressure to act against Iran following the January 1995 take over of both Houses of Congress by Republicans who wanted to embarrass him and were courting the America Israel Public Affairs Committee (AIPAC), the main Jewish lobby organization in Washington. AIPAC’s pressure on the Administration and Congress to act against Iran had been very strong for some time for a number of reasons. In the first place, Iran was said to support terrorist activities against Israel, which had been subjected to a series of bombings perpetrated by Hamas and the Palestinian Islamic Jihad since the spring of 1994. The attacks accelerated in 1995 and caused a political victory of Netanyahu over Peres. Moreover, Israeli intelligence had informed the US Government that Iran was acquiring components for nuclear weapons and also registered concern about Russian plans to assist Iran in the completion of a civilian nuclear power reactor in Bushehr (the same reactor the US had pressured Germany not to build).

 

AIPAC pushed for comprehensive US sanctions against Iran including secondary US sanctions against foreign companies seeking to invest in Iran’s petroleum sector. What followed was a race between conservative Republicans and the Clinton Administration on Iran. President Clinton was under intense pressure to introduce legislation on US sanctions against Iran to avoid passage of even more restrictive legislation introduced by Senator A D’Amato of New York who was supported on this issue by the majority in the US Senate. Despite the Administration’s earlier executive orders (March and May 1995), the Senate passed the Iran and Libya Sanctions Act (ILSA) of 1996 (Libya had been added by Senator Kennedy because of the Lockerbie bombing). The bill passed with almost no opposition in the Senate and House, which shows how little power the international oil companies have on matters pertaining to Middle East policy. The bill which finally passed excluded a few of the most onerous components, ie, the prohibition of imports into the US of goods from sanctioned foreign companies and the banning of admission into the US of senior executives of foreign companies investing in Iran.

 

AIPAC had been involved throughout the entire process. An AIPAC spokesman was quoted saying: “These guys (Congress) wrote their thing (ILSA) with us sentence by sentence.” The purpose of the bill was to reduce Iran’s ability to export oil and gas and thus deny funds for the development of WMD and support of international terrorism.  ILSA was to be imposed on US and foreign companies investing $40mn in Iran’s petroleum sector during the first year of enforcement, dropping to a limit of $20mn thereafter. ILSA instructed the president to select at least two of a list of six authorized sanctions. Each alternative was deliberately crafted to fall within the scope of US Government authority.  For example, the president could deny access to US financial markets; deny access to US equipment and parts; forbid US Government purchases of goods and services from the offending companies, and so forth.

 

The bill left some room for the President to waive sanctions under ILSA: 1) If the offending company’s country had agreed to undertake strong measures (including economic) to inhibit Iran’s activities in support of terrorism and acquisition of WMD; or 2) if the President determined that a waiver would serve US national security interests.

 

European Reaction To ILSA

On 22 November 1996, the EU adopted “blocking legislation” designed to prevent EU companies from complying with ILSA. The European response was strong and clear, as shown in the following text: “No European person shall comply, whether directly or indirectly or through a subsidiary or other intermediary person, actively or by deliberate omission, with any requirement or prohibition including requests of foreign courts, based on or resulting, directly or indirectly, from ILSA.” The EU encouraged member states to impose their own sanctions on companies that appeared to be complying with ILSA and also decided to lodge a complaint against the US with WTO.

 

Challenges To ILSA

Prior to the passage of ILSA, in July 1995, the French company Total signed a $760mn contract with Iran to develop Sirri A and E, a field which had previously been offered to the American company Conoco. Prior to ILSA signing, Total sold its US assets. After the signing of ILSA, Turkey signed a contract with Iran for the construction of a gas pipeline which could bring 190 cu ms of Iranian gas to Turkey. It is interesting that in this case AIPAC did not propose any action against Turkey because of that country’s special relationship with Israel.

 

On 28 September 1997, Total signed a much larger $2bn contract with Iran to develop part of the South Pars field with partners Gazprom and Petronas. ILSA was already in effect and Congress put pressure on the Clinton Administration to enforce its terms. Meanwhile, prolonged and difficult discussions were being held between US and EU negotiators. In accordance with an EU-US bargain, Secretary Albright defied Congress and on 18 May 1998 announced an ILSA waiver for the Total-Gazprom-Petronas project. Albright applied the “national interest” waiver, which she justified by pointing out that France was cooperating with the US in efforts to slow WMD developments in Iran and end Iranian support for terrorism. Albright also justified the waiver as serving to prevent EU retaliation against US firms and to avoid EU action against the US in the WTO. Secretary Albright’s statement contained an important policy pronouncement: similar waivers could be expected for EU companies in the future as long as their home governments continued to cooperate to reduce terrorist activities and WMD development by Iran. It was made clear, however, that future exemptions would be for E&P activities only and “a line would be drawn” against pipelines.

 

ILSA Cases Under Review by US Department of State

Seven cases, involving seven different countries and representing a total estimated investment of $4.7bn by foreign oil companies in Iran, are under review by the US Department of State. They are:

 

·         $1bn investment by Total to develop the Daroud field (3/99);

 

·         $240mn investment by Total/ENI/Bow Valley to develop Balal (4/99);

 

·         $800mn investment by Shell to develop the Soroush and Nowruz fields (11/99);

 

·         $2.3b investment by ENI/Petronas to develop South Pars 4 and 5 (7/2000);

 

·         $150mn investment by Sinopec (refinery and port facility upgrade) (1/2002);

 

·         $90mn investment by Norsk Hydro for exploration of the Anaran oil field (4/2000);

 

·         $88mn investment by Sheer Energy (49%) and Naftgaran Engineering (51%) for enhanced recovery in the

       Masjad-I-Suleiman field (02/2000).

 

The US Department of State is following a policy of reviewing each new contract between Iran and a foreign oil company but is refusing to make the information public on a case-by-case basis. It can be presumed, for example, that the $1bn ENI (60%) and NIOC (40%) contract to develop Darkhovien, signed in June 2001, is also under review.

 

Congress has not really pressured the Administration in each of these cases because ILSA proponents are afraid of new waivers by the State Department which would render ILSA increasingly ineffective. Congress does not, in particular, want to force the Bush Administration into a position in which it might publicly reiterate the Clinton policy of granting waivers for EU countries. ILSA’s AIPAC and congressional supporters calculate that ambiguity about ILSA enforcement has a deterrent value that is preferable to the possible granting of new waivers.

 

Sanctions Reform Proposal January 1997

Moderates in the US Congress (Senator Lugar and Rep Lee Hamilton) introduced legislation which would require an economic impact statement for future sanctions and establish an automatic expiration date of two years. Their legislation would require the President to assess the likelihood that a proposed US sanctions regime would achieve significant stated foreign policy or national security objectives within a reasonable period of time. Senator Helms never allowed the bill to come to the floor of the Senate for a vote. 

 

GW Bush Administration

The oil industry was quite optimistic that the Bush Administration would lift the unilateral US oil sanctions. Both Bush and Cheney were oilmen who understood that unilateral sanctions were not working and were discriminatory against US companies.

 

Various senior future members of the Bush Administration had been quite outspoken in their opposition to unilateral sanctions and the oil industry expected that a Bush Administration would not renew ILSA when it expired in August 2001. AIPAC supporters were concerned when they heard Secretary Colin Powell say during his confirmation hearings that: “differences with Iran need not preclude greater interaction, whether in more normal commerce or increased dialogue. Our national security team will be reviewing such possibilities”.

 

It came as a surprise to the oil industry that the Cheney energy report in the spring of 2001 favored the use of sanctions as a tool to advance national and global security objectives. While the new Administration was searching for a new policy towards sanctions, super-active AIPAC was pushing for a renewal of ILSA for the following reasons:


·         Iran had developed a new missile which could reach Israel;

 

·         Ten Iranian Jewish nationals had been accused of spying in Iran;

 

·         Hamas and other Palestinian organizations were still supported by Iran;

 

·         Statements by Iran against the State of Israel.

 

By March 2001, AIPAC’s primary goal was to renew ILSA and through sanctions deny Iran the ability to support acts of international terrorism and to fund the development of WMD and WMD-delivery systems. AIPAC effectively pressured Congress and the Bush team was slow to react. When AIPAC began its campaign for ILSA-renewal, the new administration had been in office for less than two months and was still putting its officials in place. Separate reviews of US policy toward energy security, sanctions, and Iran were still in their preliminary stages. 

 

The trade promotion group USAEngage and the oil industry, while strongly opposed to the renewal of ILSA, could never catch up with the momentum of the AIPAC campaign and never received clear signals of support from the White House. In June 2001, 74 Senators sponsored a five-year ILSA extension and the Bush Administration proved unwilling to confront Congress on an issue they would likely loose. Senator Schumer of New York was quoted on ILSA extension: “We want to get this done, period. I hope the President hears the message and puts to rest any move to let it sunset.” Faced with a veto-proof majority in favor of ILSA, the Administration finally decided to try to limit the damage by supporting a shorter, two-year extension. They were afraid to try to modify the language of the legislation in a favorable direction because opening it up to debate could result in withdrawal of the presidential waiver authority.

 

In August 2001, President Bush signed the ILSA Extension Act into law. The final version left open a slim possibility of future change or termination of the legislation upon the recommendation of the President and implementing legislation by the Congress. When signing the bill, President Bush took advantage of this provision by saying: “I think we should review sanctions frequently to assess their effectiveness and continued suitability.” In view of events post September 11 and references to Iran as a member of the “Axis of Evil,” such change is unlikely to come any time soon.

 

In the meantime, AIPAC and other ILSA supporters are unlikely to try and force the Administration to make a decision on foreign contracts under review. The EU position will not change, leaving the US no choice but to issue waivers for EU companies. The US could apply ILSA against other countries, like Canada, China, Russia, and Malaysia, for example. Some Congressional supporters of ILSA have asked the Administration to take action against Sheer Energy, a Canadian oil company (with only 100 b/d of Canadian production). Sheer, together with the Iranian company Naftgaran Engineering has been awarded a contract to increase production from Iran’s oldest oil field, Masjed-I-Suleiman. It is unlikely that the Administration will act on the Congressional request. Instead, it is likely to follow the policy that has been pursued ever since the May 1998 waiver: whenever questioned, the Administration responds that the contract is still being studied to determine whether it does, in fact, violate ILSA.

 

Will ILSA ever be allowed to expire? In the current political climate, ILSA could very well be extended beyond 2006 unless the political situation in Iran and in the region as a whole were to change. The fallout from the Karine-A arms shipment to Palestine, and charges that Iran is actively working against the new government in Kazakhstan and is harboring al-Qa'ida fighters and supporters have been added to Iran’s general support of international terrorism and clandestine attempts to acquire WMD capabilities. There is currently not much hope for change in the sanctions’ regime. Industry and in particular the oil and oil services industry is adamantly opposed to ILSA but the industry is no match against the political clout of AIPAC.

 

Impact Of ILSA

Several studies suggest that ILSA has cost US industry billions of dollars because of lost business opportunities. ILSA has also reduced flexibility in the global oil supply system and may have lowered global oil supply security. The purpose of ILSA has been to deny Iran access to foreign capital and equipment for the maintenance and expansion of oil production and to deny Iran funds to develop WMD and support Hizbollah and other actual and perceived terrorist groups abroad. Has ILSA succeeded in this respect?

 

·         ILSA has not stopped foreign investment in the upstream of Iran. One could argue that without ILSA there might have been additional competition for oilfield development in Iran. It would appear that the current conditions offered to the international oil industry under the problematic buyback formula, have done much more to slow foreign investment in the Iranian oil industry than whatever has been caused by ILSA.

 

·         ILSA has slowed but not stopped the construction of international oil and gas pipelines in Iran.

 

·         ILSA may have slowed the development of LNG projects in Iran because of embedded US technology in vital parts of LNG downstream plants. On the other hand, the sanctions have motivated other countries to develop LNG systems which will have no US components. Once developed these new systems could challenge US dominance in this sector.

 

·         Even though EU companies and more recently Japanese, Canadian and other Asian companies have ignored US threats of extraterritoriality under ILSA, one could argue that ILSA has added an element of risk of doing business in Iran and adds to the demand for a higher return on investment to cover those risks.

 

On balance, ILSA has contributed to US-EU friction on trade; added to the hostility between the US and Iran, which is from a geopolitical point of view arguably the most important country in the Middle East; and has not stopped support for Hizbollah nor halted WMD development. It is not difficult to disagree with Conoco and other US oil companies that active engagement rather than confrontation would have achieved better political results, added to the dialogue with moderate elements in Iran, and allowed trade to flourish between Iran and the US. The EU has recently decided to open an active dialogue with Iran to promote better bilateral relations through trade and other forms of active engagement. The US by contrast appears to have chosen to wait for regime change.

 

 

 


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