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Thursday, February 2, 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 among experts that sanctions had not hurt Iran’s economy enough for the Iranian leadership to feel pressured to accommodate core Western goals on Iran’s nuclear program. As 2012 begins, Iran is indicating it sees new multilateral sanctions against its oil exports as a severe threat, to the point of Iran possibly threatening armed conflict in the Strait of Hormuz. Iran also has indicated receptivity to new nuclear talks in the hopes of reversing the oil export-related sanctions being implemented. The energy sector provides nearly 70% of Iran’s government revenues. Iran’s alarm stems from the potential loss of oil sales as a result of:

       A decision by the European Union on January 23, 2012, to wind down purchases of Iranian crude oil by July 1, 2012. EU countries buy about 20% of Iran’s oil exports. This action 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.
       Decisions by other Iranian oil purchasers, such as Japan, South Korea, India, and China, to reduce purchases of Iranian oil. Those decisions are intended to comply with a provision of the FY2012 National Defense Authorization Act (P.L. 112-81, signed December 31, 2011) that prevents the opening of U.S. accounts by foreign banks that conduct transactions with Iran’s Central Bank—unless the parent country reduces substantially its purchases of Iranian oil.
       The willingness of other oil producers with spare capacity, particularly Saudi Arabia, a strategic rival, to sell additional oil to countries cutting Iranian oil buys.
Even before these latest sanctions, the signs of economic pressure that sanctions are placing on Iran were multiplying. The value of Iran’s rial has dropped precipitously since December 2011. Iranian leaders have admitted that Iran is virtually cut off from the international banking system. The announced pullouts from Iran by major international firms have accelerated since early 2010, slowing Iran’s efforts to modernize its energy sector and other sectors as foreign firms take with them 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. The United States and its partners are attempting to implement the 2012 sanctions so as not to raise world oil prices any further.

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. 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 26, 2012
Number of Pages: 78
Order Number: RS20871
Price: $29.95

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