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Monday, August 20, 2012

Iran Sanctions

Kenneth Katzman
Specialist in Middle Eastern Affairs

The current principal objective of international sanctions—to compel Iran to verifiably demonstrate that its nuclear program is for purely peaceful uses—may be causing Iran’s regime to reconsider its stance on that issue but has produced no breakthrough to date. The international coalition that is imposing progressively strict economic sanctions on Iran has broadened and deepened, producing severe effects on Iran’s economy, including significant impingement on Iran’s oil export lifeline. Many judge that Iran may now need a nuclear compromise that produces an easing of sanctions because the energy sector provides about 70% of Iran’s government revenues. Iran’s worsening economic situation is caused by:

  • A European Union embargo on purchases of Iranian crude oil that took full effect on July 1, 2012. Previously, EU countries were buying about 20% of Iran’s oil exports. This embargo is coupled with decisions by several other Iranian oil customers to substantially reduce purchases of Iranian oil in order to comply with a provision of the FY2012 National Defense Authorization Act (P.L. 112-81).
  • Together, these sanctions have reduced Iranian oil exports to about 1.2 million barrels per day, down from an average of 2.5 million barrels per day for all of 2011, according to the Energy Information Administration and other experts. This loss of sales is causing Iran to store oil aboard tankers and to reduce oil production somewhat. Iran is widely assessed as unable to indefinitely sustain this level of lost oil sales indefinitely, although it does have a large foreign currency reserve fund that can, at least temporarily, mitigate the impact of the lost oil sales. Other oil producers with spare capacity, particularly Saudi Arabia, are selling additional oil to countries cutting Iranian oil buys, thus far preventing the lost Iranian sales from raising world oil prices. 
The signs of economic pressure on Iran are multiplying. The value of Iran’s rial has dropped by about 50% since September 2011. Iran is virtually cut off from the international banking system and is increasingly forced to trade through barter arrangements rather than hard currency exchange. Many major international firms have left the Iran market, many Iranian firms are reported to be closing and laying off workers, and the effect on the energy sector has been further deterioration of its oil and gas production. Still, Iran has small amounts of natural gas exports; it had none at all before Iran opened its fields to foreign investment in 1996.

Department of Defense and other assessments indicate that sanctions have not stopped Iran from building up its conventional military and missile capabilities, in large part with indigenous skills. However, sanctions may be slowing Iran’s nuclear program somewhat by preventing Iran from obtaining some needed technology from foreign sources. Iran is also judged not complying with U.N. requirements that it halt any weapons shipments outside its borders.

Despite the imposition of what many now consider to be “crippling” sanctions, some in Congress believe that economic pressure on Iran needs to increase further and faster. In the 112th Congress, a House-Senate compromise version of an extensive new Iran sanctions bill, H.R. 1905 (“Iran Threat Reduction and Syria Human Rights Act of 2012”), was passed by both chambers on August 1, 2012. The bill makes sanctionable numerous forms of foreign energy dealings with Iran, including shipments of crude oil, and enhances human rights-related provisions of previous Iran sanctions 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: August 8, 2012
Number of Pages: 87
Order Number: RS20871
Price: $29.95

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