Senate Approach on Iran Sanctions May Prove Counterproductive

By Benjamin Seel

The different approaches to Iran sanctions of the Senate and President Obama’s administration were on full display in the Senate Foreign Relations Committee hearing room on Dec. 1. The Senate approach, articulated in the form of an amendment to the FY 2012 Defense Authorization Act sponsored by Robert Menendez (D-NJ) and Mark Kirk (R-IL), will “require sanctions on financial institutions that do business with the Central Bank of Iran,” and will cover both foreign commercial and state owned banks. Central banks will be targeted only after the Obama administration has determined, through periodic reports by the Treasury Department, that the government of the central bank in question has sufficient alternative petroleum sources. If the foreign government takes steps to reduce its purchase of Iranian oil, the U.S. government can give it a reprieve from the sanctions ordered in the amendment.

Senator Robert Menendez (D-NJ) speaks at a Senate Foreign Relations hearing on U.S. objectives in Iran on December 1. (Photo source: AP)

The administration accurately views this approach as unnecessarily risky, with the potential “to undermine the effective, carefully phased, and sustainable approach” that has garnered a multilateral coalition against Iran, according to a letter sent from Treasury Secretary Timothy Geithner to Senator Carl Levin on Dec. 1. The amendment risks alienating needed allies, Geithner argued, and it has the potential to impact the world oil supply in a way that would increase prices, thereby increasing revenues for Iran.

Though the administration is correctly skeptical of the amendment, their position points to a lack of communication between State, Treasury and the Senate, and contradicts the “whole-of-government approach” Undersecretary Sherman said in her testimony was demanded by the sanctions regime. The initial amendment did not include waivers for instances where global oil supplies would be threatened or where the central bank in question lacked access to alternative oil sources. Those discretionary measures were added at the request of the administration, Menendez said during his testimony, but they were evidently not enough to earn the support of the administration. Any addition to the sanctions regime created by Congress will need to be employed by the Executive, so it is in the best interest of the United States that the two branches coordinate their desired approaches in a more efficient manner.

The hearing also served to highlight steps taken by the United States on Nov. 21 to step up sanctions against Iran’s entire financial sector, including the CBI, which facilitates transactions for the export of Iran’s crude oil, as well as Iran’s petroleum sector. These measures include the targeting of Iran’s petroleum resources, and 11 new individuals and entities under the existing sanctions regime. Additionally, the Obama administration designated Iran as a “jurisdiction of primary money laundering concern under section 311 of the USA PATRIOT ACT,” which clarifies the CBI’s role as a bank known to be “facilitating illicit conduct and sanctions evasion,” according to testimony from Undersecretary for Terrorism and Financial Intelligence David Cohen of the Treasury Department. Treasury has typically issued specific exemptions for central banks in prior instances where Section 311 was invoked.

Though the Senate Foreign Relations Committee members fired questions at Undersecretary Cohen and Undersecretary of State for Political Affairs Wendy Sherman for more than two hours, the fate of the amendment was never in doubt. In a rare display of agreement in Congress, the Senate adopted the amendment by a vote of 100-0 later in the day.

The State Department and Treasury expressed concern that the amendment, even with the delays in the implementation and opt-out provisions included in the amendment, would alienate members of the established coalition against Iran, and could ultimately increase Iranian oil profits, essentially helping to bankroll the Iranian nuclear program.

The administration firmly believes that its current approach is slowing down Iran’s path towards nuclear weapons capability. Undersecretary Sherman recalled a speech by National Security Advisor Tom Donilon at the Brookings Institute on Nov. 22 in which Donilon referred to a 2007 IAEA report that projected Iran would have 50,000 centrifuges installed by 2011. Current IAEA estimates, as cited by Donilon, report that Iran has installed 8,000 centrifuges and with an estimated 6,000 online. The Obama administration suggests that the discrepancy between 2007 and 2011 IAEA estimates is evidence that the sanctions regime is having an effect on Iran’s ability to fund a nuclear weapons program. At the hearing, Cohen asserted that the sanctions regime has isolated Iran to the point that it is struggling to draw foreign investment for the development of Iranian oil fields, pay for imports, and receive payment for exports.

Based on that success, the administration would like more time to cultivate a broad coalition of nations that will voluntarily reduce the scope of their financial relationships with the CBI.

The State Department’s request for more time is not without merit. Rushing to paralyze third parties risks alienating the international coalition at a time when several key members have recently taken promising steps that should further isolate the CBI.

Both the United Kingdom and Canada took steps on Nov. 21 to impose greater measures against Iran’s financial sector based on the information in the IAEA’s Nov. 9 report. Canada prohibited financial transactions with Iran, added individuals and entities to its existing list, and increased the number of banned Iranian goods. The United Kingdom implemented new restrictions that will sever contact between Iranian banks and United Kingdom’s banks.

The European Union, which buys 18% of Iranian exported crude oil, announced an expanded list of entities to be targeted for sanctions on Dec. 1, but the dire financial situations facing Spain and Greece make their participation in a freeze of Iran’s oil exports unlikely. Greece gets 14% of its oil from Iran, and Spain gets 13%.[1] Greece has already blocked a EU proposal to bring sanctions against the CBI. Threats from the United States on this matter would only cause more uncertainty in the market, and greater instability within the European Union.

Undersecretary Sherman, who recently returned from a trip to China, noted at the hearing that the State Department was encouraged by China’s recent acceptance of a visit from Special Envoy Robert Einhorn. Einhorn will assist China with “better applying the sanctions regime.” It is extremely unlikely that China will stop purchasing oil from Iran; it currently buys up to 22% of Iran’s exports. However, better implementation by China of the sanctions regime laid out under UNSCR 1929 would go a long way towards restricting the flow into Iran of capital and goods that could assist Iran’s nuclear program.

UNSCR 1929 was adopted in June 2010 with the approval of all P5+1 members, and it initiated sanctions against areas of the Iranian economy that had the potential to benefit Iran’s nuclear program.

Einhorn was in South Korea on Dec. 5 to encourage Seoul to reduce its petrochemical imports from Iran. South Korea buys 10% of Iran’s exported crude.[2]

In addition to Europe’s lack of consensus on new sanctions, both Treasury and State have speculated that the approach favored by the Senate could actually increase Iranian oil revenues through price spikes. Though the amendment has opt-out provisions, and delays automatically built-in, consumer expectations in the initial five-month delay could push prices on oil upwards, filling Iranian coffers with revenue that could be directed towards their nuclear program, Undersecretary Sherman said.

The Chamber of Commerce shares the administration’s concern, and on Nov. 30 Executive Vice President for Government Affairs R. Bruce Josten sent a letter to all Senators cautioning them that the amendment “could cause prices to soar” if its oil exports are excluded from the world’s markets. Josten further warned that if Menendez-Kirk takes effect, the American economy would not be shielded from a global oil shock, even though the United States does not rely on Iran’s oil for its own energy needs.

There is also the likelihood that sanctions will not be enough to convince Iran to stop developing its nuclear program. Though sanctions seem to have had an impact in terms of slowing down Iran’s ability to fund its nuclear program, Iran’s program is a source of great national pride, and is seen as a powerful defiance of the wishes of the West. Engagement then, becomes the likely solution to the current crisis. And engagement, as with sanctions, will be more fruitful if carried out multilaterally. Since the adoption of UNSCR 1929, there has been a broadly supported sanctions regime against Iran. To threaten that coalition now would be careless and shortsighted.

The two-track approach favored by the Obama administration must proceed in a manner that is cognizant of the fragile economies of several key partners in the sanctions regime, and mindful of the shared purpose of that coalition – denying Iran a nuclear weapons program. That two-track approach must continue to garner broad support, and if the stick becomes the favored policy tool, it must be clear to U.S. allies that it is directed against Iran’s intransigence, and not against U.S. allies struggling with their own difficult economic prospects. Any approach the United States takes must not go so far as to damage the relationships it will need for the engagement track at some point in the future.

[1] Crude oil export statistics from the Energy Information Administration

[2] Ibid

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