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Thursday, February 16, 2012

Iran Sanctions

Kenneth Katzman
Specialist in Middle Eastern Affairs

The international coalition that is imposing progressively strict economic sanctions on Iran is broadening and deepening, with increasingly significant effect on Iran’s economy. The objective, not achieved to date, remains to try to compel Iran to verifiably confine its nuclear program to purely peaceful uses. As 2012 begins, Iran sees newly-imposed multilateral sanctions against its oil exports as a severe threat - to the point where Iran is threatening to risk armed conflict. Iran also has indicated receptivity to new nuclear talks in the hopes of reversing or slowing the implementation of the oil export-related sanctions. 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, particularly Japan and South Korea, 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. 
         This confluence of policies has already begun to reduce Iran’s oil sales and might reduce them by as much as 40% (1 million barrels per day reduction out of 2.5 million barrels per day of sales). Iran is widely assessed as unable to economically sustain that level of lost oil sales. 
The signs of economic pressure on Iran are 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 and is increasingly trading through barter arrangements rather than hard currency exchange. The pullout from Iran by major international firms have slowed Iran’s efforts to modernize its energy sector and other sectors, rendering Iran unable to increase its oil production above 4.1 million barrels per day. Still, Iran has small amounts of natural gas exports; it had none at all before Iran opened its fields to foreign investment in 1996. Iran’s overall ability to limit the effects of sanctions has, until now, been aided by relatively high oil prices—prices that tend to increase as Iran threatens conflict in the Persian Gulf region. Iran also has used various innovations to work around some of the growing international restrictions. 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, H.R. 1905, and a Senate Banking Committee bill reported out on February 2, 2012, 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: February 10, 2012
Number of Pages: 79
Order Number: RS20871
Price: $29.95

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