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Wednesday, January 18, 2012

Iran Sanctions

Kenneth Katzman
Specialist in Middle Eastern Affairs

There is broad international support for imposing progressively strict economic sanctions on Iran to try to compel it to verifiably confine its nuclear program to purely peaceful uses. During 2011, there was broad agreement that sanctions had not hurt Iran’s economy to the point at which the Iranian leadership feels pressured to accommodate core Western goals on Iran’s nuclear program. However, as 2012 begins, Iran is indicating it perceives new U.S. and other sanctions affecting its vital oil export lifeline as a severe threat - to the point where Iran might threaten armed conflict in the Strait of Hormuz. It also has offered new nuclear talks in the hopes of heading off some of the oil export- related sanctions under consideration. The energy sector provides nearly 70% of Iran’s government revenues.

The signs of effectiveness of sanctions mounted throughout 2011. The value of Iran’s rial has dropped dramatically over the past two years. Iranian leaders have admitted that Iran is virtually cut off from the international banking system. There have been a stream of announcements by major international firms since early 2010 that they are exiting or declining to undertake further work in the Iranian market, particularly the energy sector, taking with them often irreplaceable expertise. Partly as a result, Iran’s oil production has remained relatively steady at about 4.1 million barrels per day, defying Iranian efforts to increase production. Iran has small amounts of natural gas exports; it had none at all before Iran opened its fields to foreign investment in 1996. Even before the United States and several other countries moved to cut off Iran’s Central Bank in late 2011, several countries, particularly India, had delayed billions of dollars in oil payments for Iran because payments mechanisms had been disrupted by sanctions. However, Iran’s overall ability to limit the effects of sanctions has been aided by relatively high oil prices – prices that tend to increase as Iran threatens conflict in the Persian Gulf region.

What has caused sanctions to start to affect Iranian calculations has been the broadening of international support for and compliance with them. Using the authorities of U.N. Security Council Resolution 1929, adopted June 9, 2010, measures adopted since mid-2010 by the United Nations Security Council, the European Union, and several other countries target the key energy and financial sectors of Iran. These measures complement the numerous U.S. laws and regulations that have long sought to try to pressure Iran, particularly the Iran Sanctions Act (ISA)—a 1996 U.S. law that mandates U.S. penalties against foreign companies that invest in Iran’s energy sector. The application of that law was broadened by the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 (CISADA, P.L. 111-195) as well as by Executive Order 13590 issued November 21, 2011. The issuing of that Order was accompanied by a Treasury Department determination, under Section 311 of the USA Patriot Act, that the Iranian financial system constitutes an entity of primary money laundering concern. These measures have been joined by several other countries, who took into consideration an International Atomic Energy Agency (IAEA) report on Iran’s possible efforts to design a nuclear explosive device, and diplomatic and financial rifts with Britain, which caused the storming of the British Embassy in Tehran on November 30, 2011.

In the 112th Congress, legislation, such as S. 1048 and H.R. 1905, would enhance both the economic sanctions and human rights-related provisions of CISADA and other laws. A provision of the FY2012 defense authorization bill (H.R. 1540) sanctions foreign banks that do business with Iran’s Central Bank. For a broader analysis of policy on Iran, see CRS Report RL32048, Iran: U.S. Concerns and Policy Responses, by Kenneth Katzman.

Date of Report: January 6, 2012
Number of Pages: 75
Order Number: RS20871
Price: $29.95

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