IRAN: Turning the screw

08/10/2010 | Gareth Smyth

US pressures on emerging powers to impose sanctions are failing to win over

 
The new wave of US and European Union sanctions introduced in the summer is starting to bite, but few diplomats or analysts expect Iran to make any early diplomatic response.

“I see no signs that sanctions are having any effect on Iran’s foreign policy or its nuclear programme,” says Sir Richard Dalton, UK ambassador from 2003 to 2006.

Elected with a pledge to “engage” Iran, US president Barack Obama has extended the punitive regime developed by his predecessor. “President Obama looks like he is continuing or even intensifying the Bush Administration policy of sticks and carrots,” says Farideh Farhi, an Iran specialist at the University of Hawaii. “Obama has abandoned the insistence on preconditions for talks, but it is not clear whether the US will show any flexibility.”

Leading Washington’s drive to squeeze Iran out of the international financial system is Stuart Levey, retained as Treasury under-secretary from the Bush administration. Levey has stalked the halls of the US’s allies seeking action against Iran beyond the July fourth round of UN sanctions, which at the insistence of Russia and China relate directly to Tehran’s nuclear and missile programmes.

US pressure on third parties, especially banks, to boycott Iran led in the summer to fines of a European bank and a European shipper: Barclays paid $298 million to settle charges that it structured financial flows over more than 10 years, to disguise the origin of hundreds of millions of dollars moved to the US from Iran and other sanctioned countries; Denmark’s Moller-Maersk paid a $3.1 million fine for violating sanctions, after the US Treasury ruled a subsidiary had made nearly 5,000 shipments originating in or bound for Sudan and Iran between 2003 and 2007. These followed settlements by ABN Amro of $500 million in May, by Credit Suisse of $536 million last December, and by Lloyds of $350 million in January 2009.

Most, if not all, banks around the world deal in dollars and are therefore susceptible to US action over dealings with Iran. The US has also decided this summer to blacklist any companies selling petrol to Iran [see box].

But how far Washington is prepared to push action against third parties is unclear. With US sanctions and EU sanctions barring western companies, China, Russia, India and Turkey have also all signed deals or opened talks on investments worth billions of dollars in Iran’s oil and gas fields, petrochemical plants and pipelines. Hence the real impact of the new wave of sanctions will depend on those called dismissively “backfillers” in Washington for taking opportunities left by western companies.

“The crucial factor with the ‘backfillers’ – China, Turkey, Brazil, India and Malaysia – is how far they evade pressures from the US and the, as yet unknown, effect on their businesses in the US, of any actions Washington may take against infringements of US sanctions,” says Dalton.

The backfillers’ mood is resentful against Washington, but all fear for their operations in the US market. The biggest challenge for US plans is China: Beijing has already ploughed $40 billion into Iran’s energy sector, according to the Iranian oil ministry, and Iranian ministers have been in China seeking further investment, especially in new refineries. Beijing is also Iran’s biggest trading partner, with Iran China’s third-largest supplier of crude, with exports this year of around 375,000 barrels per day.

But Obama has made a direct appeal to Chinese president Hu Jintao, and overdependence on China is worrying pragmatists in Iran. Professor Sadegh Zibakalam, professor of Iranian studies at Tehran University, wrote last month: “It would be most unpleasant if the Americans make trouble for the Chinese”, and that he believed the “next countries to sanction Iran” would be China and Turkey.

NEGATIVE REACTION

Turkey voted in July at the UN Security Council against new sanctions, and was annoyed by the negative US reaction earlier this year to its efforts alongside Brazil to negotiate a nuclear agreement with Iran. Nihat Ergun, minister for industry and trade, has said that agreed cooperation projects with Iran would continue, including a joint industrial zone on the border and a scheme for joint car production. During the summer, Iran and Turkey signed a Memorandum of Understanding to build a power plant on their shared border, and Recep Tayyip Erdogan, the Turkish prime minister, told a business conference last month Ankara wants to triple trade with Iran, around $11 billion this year, over five years.

But this is below Turkey’s $15 billion annual exports to the EU. Turkish banks will certainly seek to avoid US blacklisting, and there have been reports of some scaling back dealings with Iran, which could hamper Iranian businesses raising euros in Turkey to finance trade with Europe.

Iraq is a second neighbour vital to Iran, with around $8 billion in trade consisting almost entirely of Iranian exports. Iran supplies 750mw of power daily to Iraq as well as fuel for power stations. Two private Iranian banks, Parsian and Karafarin, are seeking approval to open branches, and Iraq may play a pivotal role in third-party trade. “Iraq is becoming central with regard to Iran’s exports to the UAE,” says a leading Iranian economist, noting reports that the UAE, a busy conduit of Iran’s indirect trade, is imposing greater scrutiny at its ports.

India is also important to watch. Recent Iranian ministerial visits have focused both on improving economic links and on Afghanistan, where both countries want a stable government to contain the Taliban. On energy, their interests match. India’s hopes for sustained 8–10% growth despite scant energy resources make it hard to follow the US line. India already imports from Iran around 14% of its crude – or $11 billion annually.

The Indian private-sector Reliance Industries ended petrol sales to Iran last year. But this summer New Delhi resumed talks with Tehran over the ambitious “peace pipeline” for Iranian gas, and India and Iran in July signed six bilateral security and economic cooperation agreements.

SHARED INTEREST

Iran wants Indian investment in its undeveloped South Pars gas field, and the two countries share an interest in developing Chabahar port in south-east Iran, which New Delhi sees as a transit for trade bypassing Pakistan into Afghanistan and central Asia. New Delhi has part-financed a highway from Chabahar to the Afghan border, where it would meet a 213km road laid by India from Dilaram, an Afghan transportation hub.

Like India, South Korea looks for US diplomatic support, in its case over North Korea. Seoul’s trade with Iran reached $10 billion last year, with Iran supplying 10% of its crude and importing consumer goods including IT products. Trade rose this year until July, when fears over sanctions led to a sudden drop.

The government has tried to hedge, but last month suspended the operation of Bank Mellat in Seoul, its only east Asian branch, apparently for two months, while a tighter system of supervision is put in place. Kia Motors last month joined Japan’s Toyota in halting exports to Iran, although its sales had fallen from a peak of 450,000 vehicle-kits in 2006 to 17,000 last year.

But the Korean government also in August announced a plan to help companies trading with Iran, offering 18-month rollovers on maturing loans and some new loans at low rates. These would enable Korean companies to continue trade despite difficulties in raising letters of credit.

Given all the complexities, many now sense a long haul over Iran sanctions. Indeed, some analysts fear pressures on Iran hamper a diplomatic breakthrough. “Past sanctions certainly paved the way for the increased political role of security-oriented establishments [within Iran], including the Intelligence Ministry and the Revolutionary Guards [IRGC],” says Farhi. “Economically, a perfect example is the increased role of the construction arm of IRGC in the oil industry after increased sanctions.”

Others believe sanctions could help a diplomatic solution. Former ambassador Dalton argues the EU should be more proactive. “Addressing the challenges Iran poses has to be an international endeavour,” he says. “There is still as much scope as ever for an effective input from the Europeans... provided they genuinely want to make such an input and don’t simply tuck in behind the Washington line.”

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