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.