US Sanctions Against Libya

VOL. XLV

No 8

25 February 2002

LIBYA

US Sanctions Against Libya

By Herman T Franssen

The following is a speech by Dr Herman T Franssen, Director of Petroleum Economics Ltd, London at the First CEN SAD Energy and Natural Resources Investment Conference held in Casablanca, Morocco on 7-8 February 2002.

A study by USA Engage reported a few years ago that the US had imposed unilateral sanctions on some 70 countries, covering every continent and almost half of the world’s population. Since then, five more countries have been added to the list, making some 40% of the world subject to US unilateral sanctions. The list includes very specific as well as more general sanctions and some are much more severe in their economic impact than others. More than half of all US post-war sanctions were imposed in the 1990’s. The growing use of sanctions as an instrument of US foreign policy coincided with the end of the cold war, which weakened bipartisan support for foreign policy in Congress and reduced the interest of the American public at large in foreign policy issues.

The rise in sanctions also coincided with the Conservative Republican control of the US House of Representatives when President Clinton became Head of State. In addition to the proliferation of sanctions initiated by the US Congress in the 1990’s, State and Local authorities have added to the list of sanctions placed on various countries for humanitarian, internal political, as well as environmental reasons.

The Rationale For Unilateral Sanctions

In the first place, the demise of the Soviet Union created more complex relationships with foreign countries. Since countries were no longer essential in the fight against Soviet communism, other issues such as human rights violations took on greater importance and, in the absence of another super power, the US could take far greater political risks.

The escalation of unilateral sanctions was also strengthened by the change in the US political environment in the 1990’s. Some members of the post-1994 conservative Republican Congress looked at sanctions as a way to nibble at the power of the Democratic Executive Branch over matters of foreign policy, but individual Congressmen from both parties sponsoring economic sanctions against unpopular foreign governments did so to gain support from powerful pressure groups in their State. The political cost was generally small as long as there was no serious opposition from farmers and the business community. The Clinton Administration did not appear to consider foreign policy in the same light as the previous Administrations and seemed ready to accept Congressionally sponsored economic sanctions in exchange for agreements on domestic political issues. At times the Administration welcomed economic sanctions as a low-cost alternative to foreign military intervention.

When the Cold War came to an end, the US Congress became more insular in its outlook and only a minority among the Congressmen truly understand the complexities of the world outside the US. They tend to see the world in black and white; good versus evil. Developments since September 11 have re-ignited interests in foreign affairs but there is a tendency to emphasize military over foreign policy solutions. The world is still seen as a place consisting of nations that are for or against the US in its fight against al-Qa'ida and other terrorist organizations.

Congressmen frequently receive support for the imposition of economic sanctions from NGO’s, human rights groups, expatriates and other groups. Labor Unions are frequently allies of those calling for economic sanctions and, in other cases, Labor has limited interest in opposing economic sanctions as long as the impact on jobs in the US is perceived to be low. Hence, the business community is pretty much alone in its fight against unilateral sanctions.

One of the most onerous elements of US sanctions policy to International Oil Companies has been the advent of extraterritorial sanctions which seek to control third country behavior in the US. The Iran Libya Sanctions Act (ILSA) and the Helms-Burton Act are the best-known sanctions bills affecting foreign companies. ILSA was designed to restrict foreign investments in Iran and Libya by threatening action against foreign company assets in the US (the Helms-Burton Act was directed against Cuba). Proponents of these sanctions have argued that implementation of US sanctions against Iran and Libya has avoided even more damage to US relations with its allies and US interests abroad.

The escalation of unilateral sanctions in the 1990’s by the US has made other states more reluctant to agree on multilateral sanctions and in particular economic sanctions. Hence, while the UN was ready to use the weapon of multilateral sanctions in the late 1980’s and early 1990’s, the implementation of US unilateral sanctions and at times stiffening of existing sanctions, has made other states reluctant to engage in new multilateral sanctions. Since the break-up of the Soviet Union, many states are concerned that multilateral sanctions might advance the US agenda but could adversely affect their own economic and national security interests. Hence, the growing use of unilateral sanctions by the US has weakened the ability of the UN Secretariat to get member states to agree to a multilateral approach.

Have Sanctions Worked?

“…This unilateral embargo (Libya) is both inequitable to our own citizens and ineffective in its impact on the target countries”

(Archie W Dunham, Chairman, President and CEO of Conoco, 9 May 2001).

While sanctions are considered a low-cost foreign policy option (as opposed to military action), most studies indicate that unilateral sanctions have generally not succeeded in meeting their objectives. General Brent Scrowcroft, a former Director of the US National Security Council recently remarked that “unilateral sanctions have an unblemished record; they never succeeded”. Sanctions have often led to nationalistic backlash against the US, strengthening the regimes whose policies the US opposes. Populations, which are not the intended target of sanctions, have suffered the most adverse effects and in particular the young, sick and aged and the professional and business class that have a stake in the international economy. At times, actions against groups that sanctions are supposed to have protected, have worsened as a result of sanctions. Unilateral sanctions are often more the result of domestic pressure by vocal US pressure groups than the result of carefully crafted national policies.

Conoco’s CEO, Archie Dunham in testimony before a US Senate Subcommittee on the extension of ILSA said that “ILSA has proved to be a paper tiger in combating the serious challenges, such as terrorism and proliferation of weapons of mass destruction, that US interests face today in the Middle East and around the world.” Dunham said that ILSA represented the worst of all possible policies, an embargo that has backfired to punish not its target, but its sponsors. “The legislation sets out to punish and prevent any threat from Iran or Libya, but its primary impact has been to place all American interests at a severe disadvantage in an increasingly competitive and globally integrated political economy,” according to Archie Dunham.

There is no doubt that multilateral (as opposed to unilateral) sanctions have hurt the economies of targeted countries in some ways. While it is very difficult to single out the impact of sanctions on the oil industries of targeted countries, at the very least it has slowed the development of upstream projects and pipelines in a number of countries. Various Libyan and foreign sources have estimated that sanctions have cost Libya anywhere between $18 (World Bank) and $33bn, including $5bn in lost oil revenues. However, during much of the sanctions period, Libya, an OPEC member, has been subjected to output restrictions. It is difficult to separate one factor among many other factors which have contributed to production stagnation, making it difficult to estimate the impact of sanctions alone.

In the case of Iran, US sanctions slowed foreign investment in the petroleum sector but, once the foreign investment climate in Iran improved, European companies, backed by their governments, have begun to develop a number of oil and gas fields. The degree to which non-US IOC’s are currently engaged in upstream activities in Iran is as much if not more related to investment conditions in Iran than fear for US retaliation against non-US oil industry investors. US opposition to the construction of oil and gas pipelines from the Caspian region through Iran has been more effective to date. Multilateral UN sanctions on Iraq have had a significant impact on Iraq’s ability to develop the country’s vast oil reserves (perhaps the world’s second largest). Iraq has made attractive terms for the international oil companies but UN sanctions have prevented the oil companies from developing the fields they were offered. Before September 11 there was some hope that in return for re-entry of weapons inspectors in Iraq (Russian proposal), economic sanctions might be lifted. In view of the current policy debate in the US, it seems unlikely that UN sanctions against Iraq will soon come to an end.

Impact On US Companies

The impact of unilateral sanctions has hurt US oil companies and oil service companies alike. They lost out on sales of spare parts and equipment as well as direct investment opportunities in the upstream in major oil producing countries such as Libya. Oxy’s Libyan pull-out deprived it of around 70,000 b/d and some 250mn barrels of oil reserves and the OASIS group (Conoco, Marathon, Amerada Hess) of 400,000 b/d and more than 1bn barrels of reserves. The extraterritoriality of US sanctions also made some countries reluctant to invest in the US and, in some cases, to sell their US assets to avoid action against those assets in the US under the Iran/Libya Sanctions Act.

Unilateral sanctions tend to impose a greater cost on American firms than on the target country, which can usually find substitute sources of financing or equipment. There are many examples of US companies in different industries, losing out to foreign competitors due to US sanctions. A good example is Conoco, which in 1995 had been offered by Iran to develop the Sirri Island oil field. US sanctions forced Conoco to abandon the project, which was then awarded to Total. In addition to the losses to Conoco, hundreds of millions of dollars worth of oilfield equipment that would have been purchased by Conoco from the US, went instead to EU sellers. Conoco and other US oil companies have had to forego many upstream development opportunities in countries where US sanctions apply. Hence, while US policy ILSA objectives do not appear to have been achieved, US companies lost out to European competitors, a significant price to pay for a foreign policy instrument that cannot be enforced unless the US Government is willing to risk a trade war.

Other US industries are also suffering from ILSA sanctions. Caterpillar lost a major turbine contract in Turkey to EU competitors because of US Government uncertainty over whether ILSA sanctions applied and Caterpillar also had to cede its Iran market to European competitors. US farmers are effectively excluded from Iran’s $2-3bn agricultural markets by strict US licensing and strong EU relationships built up before last year’s legislation exempting food and medicine from sanctions programs. Because of its policy of economic sanctions, many countries perceive the US as an increasingly unreliable supplier.

In Libya, US companies have not been able to operate since 1986. However, European companies have managed to continue operations and together produce about 0.5mn b/d. Italy’s ENI is currently the largest foreign oil company operating in Libya, followed by Repsol and Wintershall. Following the suspension of UN sanctions in 1999, Libya has embarked on a major program to attract foreign oil companies, making the country one of the most attractive upstream prospects of the decade. Libya has made it clear that it wants Occidental and the OASIS group back into the country but, if US unilateral sanctions continue indefinitely, Libya reserves to right to offer these leases to other companies. Some European companies are actively trying to get some of the assets of US companies in Libya.

Initially, US oil companies did not make much of an effort to counter the damage done by unilateral sanctions, but gradually they have become more active when they were excluded by their own government from participating in the opening up of vast new oil and gas reserves in countries where US sanctions apply. Key members of the Bush Administration opposed unilateral sanctions prior to the 2000 elections but failed to prevent the extension of the Iran-Libya Sanctions Act by Congress for another five years in the summer of 2001.

The creators of ILSA had hoped that extraterritorial provisions in the act would prevent foreign oil companies from investing in Iran and Libya by threatening their investments in the US and access to US capital markets. Total, which first sold its downstream assets in the US, challenged ILSA by agreeing to develop offshore Sirri Island A and E oil and gas fields in Iran (after Conoco was forced to leave) jointly with Malaysia’s Petronas. The EU made it clear that any action against EU companies under the ILSA Act would invoke retaliation. On 22 November 1996, the EU passed resolution 2271 directing EU members not to comply with ILSA. To avoid retaliation, the US Government since 1998 issued wavers to foreign companies investing in ILSA targeted countries “for reasons of national security” and indicated that other companies might get waivers if Europe would cooperate in other ways with the US to restrict the flow of equipment and expertise that could be used in Iran’s weapons programs. In 1998, the Clinton Administration waived ILSA sanctions on Russian, French and Malaysian companies to avoid retaliation against US companies and provoke a trade war with Europe, which regards secondary boycotts as illegal under the WTO. It is strange that US law prohibits American companies from cooperating with secondary boycotts but the US is imposing secondary boycotts on its allies. ILSA has been largely ignored by Europe and by mid-2001, foreign companies had committed some $18bn of investments in Iran’s petroleum industry and had signed $13bn in contracts.

Libyan Sanctions

US unilateral sanctions against Libya date back to the early 1980’s and were designed to mobilize public opinion in favor of fighting international terrorism, a prime principle of the Reagan Administration. Libyan sanctions were part of a broader geopolitical scheme: by withdrawing US citizens from Libya, the US was trying to put Libya on notice that it could be bombed (which it was in 1986). But the sanctions were also meant as a warning signal for Syria and Iran. Those two countries were considered a far greater danger in terms of terrorist activities, but it was believed that neither could be attacked with US military force – Syria because of its role in the conflict with Israel and Iran because of its size. After seeing that the US was ready to attack Libya, Iran and Syria were supposed to stop supporting terrorism for fear that they too, would be attacked. Reagan Administration decision makers also believed that economic sanctions would remove the easy options so that the Administration could recommend the use of military force after it became evident that the economic sanctions did not do the trick. It was realized at the time that European nations would not join the US and that the sanctions would not be effective. Nevertheless, they were felt to be valuable on a purely symbolic level. Two US companies left Libya in 1981, following a US trade embargo and five more US companies left in 1986 upon orders of the Reagan Administration.

In January 1986, the International Emergency Powers Act was used when the economic sanctions against Libya were broadened into a complete embargo. The US used a novel interpretation of International Law giving it the right to act pre-emptively in “self defense against terrorism”. Following the downing of the Panam airplane over Lockerbie in 1988, the UN imposed multilateral economic sanctions (Resolution 748) on Libya and in November 1993 (UN Resolution 883) extended the sanctions to include a freeze on Libyan funds overseas, a ban on the sale of oil equipment for oil and gas export terminals and refineries, and tougher restrictions on civil aviation and the supply of arms. On 5 August 1996, the Clinton Administration imposed additional sanctions on Libya to cover foreign companies making new investments of $40mn or more over a 12-month period in Libya’s oil and gas sector. The ILSA extension of August 2001 lowered this amount from $40 to $20mn. The EU responded to ILSA by stating that any US attempt to penalize Europeans doing business in Libya would prompt a complaint to the World Trade Organization.

On 5 April 1999, UN sanctions on Libya were suspended after the UN Security Council received confirmation that the two suspects of the 1988 Lockerbie bombing had safely arrived in the Netherlands to stand trial before a Scottish Court and the Libyan authorities had satisfied the French authorities investigating the 1989 bombing of UTA flight 772. The suspension of UN sanctions produced a frenzy of international activity, with at least 50 companies at the table and more than 130 blocks potentially on offer. ILSA was meant to block international oil industry investments in Libya and Iran but in fact only stopped American companies from participating in some of the most active upstream ventures in our times. Conoco’s CEO Archie Dunham in testimony before a US Congressional Committee said that “…more than 70% of the known (Libyan) oil reserves have yet to be exploited. The ILSA waivers to date have granted our foreign competitors a tremendous advantage in terms of positioning, relationships and accessibility in securing this new business.”

Full lifting of UN sanctions may occur 90 days after the UN certifies that Libya has met all requirements, including payments to the relatives of the Lockerbie tragedy. Several recent press reports have indicated that discussions between lawyers representing Libya and representatives of Lockerbie victims on financial compensation are nearing conclusion and once the current review of the Scottish Court’s verdict has been completed, a final settlement may be reached. If this happens, UN sanctions could be lifted as early as the summer of 2002.

US unilateral sanctions, however, will continue even after UN sanctions have been lifted. However, there has been a change in attitude of the US Government towards Libya. The US modified sanctions in April 1999, allowing shipments of donated clothing, food and medicine for humanitarian reasons. Also in 1999, the US Government allowed officials from Conoco, Hess and Marathon to visit Libya to inspect assets they had abandoned when sanctions were imposed. In early 2000, a team of State Department officials visited Libya to determine whether or not it was safe for Americans to travel there. There was some optimism among opponents of US sanctions in early 2001 when the energy task force headed by Vice President Cheney called for a review of US unilateral sanctions against Iran, Iraq and Libya because of the importance of their oil production to meeting domestic US and global energy needs. The Bush Administration appeared inclined to soften US economic sanctions against Libya and Iran and, it came as a surprise in August 2001 that the Administration was unable or unwilling to soften a move by the Congress to extend ILSA for another five years.

Whither Sanctions?

Proponents of the lifting of US unilateral economic sanctions maintain that once UN sanctions on Libya have been lifted, there is no good reason to continue unilateral sanctions. France and the UK settled their differences with Libya related to the London incident of 1984 and the destruction of the French UTA flight in September 1989. There is evidence that Tripoli has agreed to a set of conditions by the US and UK, which are a prerequisite for the lifting of economic sanctions. Libya has cooperated with the UN in the trial of the Lockerbie bombing suspects and provided intelligence on the al-Qa'ida terrorist network to US Government officials after September 11. Former senior US Government officials have pointed to the fact that Libya today is not the Libya of 10 to 15 years ago, a point made about a year ago by the UK Government. They believe that the Bush Administration may begin to ease sanctions after the judicial panel in The Hague decides on the appeal of the Libyan bombing suspect, 'Abd al- Basit 'Ali al Migrahi, and after the relatives of Lockerbie victims have been compensated.

Once UN sanctions are lifted, European and other international oil companies will aggressively push for new oil and gas concessions, as well as for Libya to transfer former US concession to them. Until now Libya has been very patient and has resisted requests by non-US oil companies to transfer some or all of the concessions held by Occidental, Conoco, Hess and Marathon, to them. How much longer will Libya wait before they decide to act on the request by non-US oil companies. In early September 2001, Libya’s foreign Minister, 'Abd al-Rahman Shalqam stated that “either (American oil companies) will come and work (next year) or we will give their rights to other companies”.

Optimists argue that following the lifting of UN sanctions, the Bush Administration will call for a lifting of US unilateral economic sanctions by informing the relevant Committees of Congress that Libya is fully complying with the provisions of resolutions 731, 748 and 883. Pessimists argue that the Administration first needs to engage the support of most of the relatives of the Lockerbie victims as well as a number of senior Members of Congress before they can successfully call for a lifting of US sanctions.

Arguing that the outcome of the debate is not at all certain, pessimists maintain that even if Congress is favorably inclined to see Libyan sanctions lifted, a decision cannot really be expected prior to the US Congressional elections in the autumn of 2002. In light of the fallout from the recent Enron affair, it may be difficult for the Administration to be seen to “cave in to Big Oil interests” prior to the Congressional elections. The Bush Administration may have a better chance of getting Congressional approval by quietly proposing the lifting of US unilateral sanctions against Libya sometime early next year.

Despite the obstacles to removing sanctions once they have been imposed, I share the confidence of those who argue that once the UN Security Council is satisfied that Libya has met all the conditions for lifting UN sanctions, bilateral discussions will follow and there is a fair chance that US unilateral sanctions may come to an end perhaps late this year or, more likely, early next year. Several positive remarks by former high-level State Department officials in the past year suggest that the US foreign policy establishment has accepted that Libya today is a changed country. Libyan Government officials, in turn, have spoken of a new relationship in the making. Referring to US-Libyan talks at “several levels”, Libyan Foreign Ministry spokesman Hassuna Shawush said on 24 January of this year, that “both Libya and the United States have a common willingness to rebuild their relations and help further security and peace in the world.”

As to the concept of unilateral sanctions, I hope that the failure of unilateral sanctions such as ILSA will lead to a multilateral approach to solving global problems of terrorism and the spread of WMD. The extraterritoriality of ILSA has enraged friends and foes alike and the threat of retaliation by the EU has turned ILSA into a rather ineffective policy instrument.

There is a new vision of the future in Libya which became known to the outside world in 1998 when after 10 years, the Libyan Government accepted UN demands for the trial of two Libyan Lockerbie suspects in the Netherlands and, in 1999, when Libya decided to cut ties with radical Palestinian groups and extradited Islamic militants and suspected terrorists to Egypt, Yemen, and Jordan. Stating that the world had changed radically and drastically, Colonel Qadhafi adopted a new approach, embracing the new global realities. Foreign Affairs of May/June 2001 quotes a speech by Colonel Qadhafi from a September 2000 commemorating the Libyan Revolution, suggesting that it was time for former antagonists to start cooperating with one another. The same article quotes Colonel Qadhafi, declaring, “Now is the era of economy, consumption, markets, and nationalities”.

Following recent developments in Libya’s internal policy and its relations with the West, would it not be better to turn an ineffective policy of unilateral sanctions into a policy of active engagement. In view of these new realities in the relations between Libya and the West, gradually building linkages with Libya in the area of commerce, culture and diplomacy and helping the country to become more fully integrated in the world economy, would be more productive than maintaining unilateral sanctions once UN sanctions have been removed. Naturally, there will still be differences between erstwhile adversaries but engagement, rather than confrontation, should be the norm for improved bilateral relations between Libya and the US. Lifting of economic sanctions following the end of UN sanctions and the subsequent return of the US oil industry to Libya could be a significant step in the right direction.