Smarter Sanctions on Iran

Smart sanctions can drastically curtail revenue flows from Iran’s oil sector

Many of the details behind re-implementing nuclear sanctions on Iran have yet to be fully fleshed out. The US Government will likely issue additional guidance as key dates for certain sanctions – namely, August 6 and November 4 – approach. 

As officials mull these decisions, they should keep in mind that sanctions need not be reimposed exactly how they were before the nuclear deal. This discretion gives Washington room to better exploit key Iranian vulnerabilities, work with foreign partners with the aim of galvanising multilateral action, and prioritise US efforts in the face of time and resource constraints.

ENERGY SANCTIONS

When targeting Iran’s oil sector, policymakers should focus more on revenues than sales. That is, even as they take steps to reduce the volume of Iran’s oil sales, their priority should be ensuring that revenues from those sales are locked up.

The relevant legislation allows for a waiver of certain financial sanctions as long as countries (1) continue to meet a purchase reduction requirement, and (2) agree to hold Iranian revenues in the purchasing country while restricting their use to financing bilateral trade. This so-called “bilateral trade restriction” barring the repatriation of Iranian oil revenues was introduced one year after the “significant reduction waiver,” which spared Iran’s oil customers from sanctions if they reduced their purchases over time. Both provisions aim to reduce the amount of oil revenues – a key source of hard currency – available to Iran.

Since both measures will be implemented simultaneously, policymakers may want to consider greater flexibility on the reduction requirement in exchange for stronger commitments to refrain from repatriating Iranian revenues. Doing so would mean that the funds are kept in the country to which the oil is exported and are only available for use in that country. 

Countries such as Turkey and India may also be induced to comply given the advantage this arrangement would confer on their exports to Iran.

In addition, the Trump Administration has a great deal of flexibility in determining what constitutes a “significant reduction” of oil imports from Iran. 

The US State Department administers the reduction waiver and is allowed by statute to consider a number of factors when deciding whether a country will receive it, including reductions in the quantity and percentage of oil they purchase from Iran, termination of contracts for future delivery of Iranian crude, and “other actions that demonstrate a commitment to decrease substantially such purchases.” 

Iranian oil exports fell sharply in the first half of June, according to ship-tracking data compiled by Bloomberg, which called it the biggest drop for a similar period since December 2016.

NO SILVER BULLETS

Another measure set to be reimposed in November is sanctions on the provision of specialised financial messaging services to the Central Bank of Iran and other designated banks. Yet cutting off access to the top provider of such services – the Society for Worldwide Interbank Financial Telecommunication (SWIFT) – is neither necessary nor sufficient to minimise Iran’s access to the global financial system.

Leading up to implementation of the Joint Comprehensive Plan of Action (JCPOA), many observers conflated re-establishing Iranian access to SWIFT with the re-establishment of Iranian access to foreign banks. Yet most of these banks declined to re-establish ties with Iranian banks despite their renewed access to SWIFT. Likewise, many foreign institutions had stopped doing business with Iranian banks even before they were barred from SWIFT in 2012. Iranian use of SWIFT declined more than 30% between 2006 and 2012 (the only years for which the organisation provides such data), a telling drop during a period in which the overall global volume of SWIFT transactions grew by nearly 40%. Iran’s decline included a 22% drop in 2008 – the same year the country was banned from using dollarised “U-turn transactions,” not long after the UN had called for “vigilance” in dealing with Iranian banks as part of UN Security Council Resolution 1803.

Since the United States announced its withdrawal from the JCPOA in May, many foreign banks that had resumed ties with Iran have said they will wind down business, among them major financial institutions such as Belgium’s KBC, Switzerland’s Banque de Commerce et de Placements (BCP), and Germany’s DZ Bank, as well as smaller banks with less exposure to the United States (eg. Austria’s Oberbank). 

Undoubtedly, access to SWIFT makes it easier to conduct cross-border transactions and foreign currency exchange, but financial institutions have other ways of exchanging messages related to transactions. Thus, pushing to cut Iran off now may have only a limited impact, and would also come with downsides.

For one, designating SWIFT is as likely to encumber US banks as it is Iranian, since they would find it difficult to use the service if it was added to sanctions lists. Furthermore, certain transactions related to medicine, medical devices and agricultural commodities will remain allowable even after nuclear sanctions are reimposed. It is in America’s interest to allow, if not facilitate, such transactions.

Rather than picking a fight with Europe about SWIFT, the US Government has less contentious ways to counter illicit Iranian behaviour. In a June 5 speech, Treasury Undersecretary Sigal Mandelker delivered an indictment of the Iranian banking sector, including the Central Bank, citing its “systemic efforts to undermine the international financial system.” 

In that vein, Washington should not only warn banks that doing business with Iran could make them complicit in illegal activity, it should also urge partners to better enforce sanctions not eased by the JCPOA. In particular, the EU’s Syria sanctions may be applicable to the Export Development Bank of Iran – the institution that Teheran has reportedly used to extend credit to the Assad regime via various Syrian state-owned banks, including at least one on the current EU sanctions list.

These and other actions could enable SWIFT to disconnect Iranian banks that flout international authority as a matter of “regulatory obligation”. 

CONSIDERING EVASION

In the face of new sanctions pressure, Iran will no doubt see opportunities for evasion. For more than 30 years, the regime and individual institutions have developed sophisticated means of skirting US and multilateral sanctions of varying intensity, and they apparently continued using these networks during the period of sanctions relief. 

For example, in November 2017, the accounts of Iranian businesses in China, Dubai, and Malaysia were blocked after petrochemical companies were discovered falsifying bills of lading to obscure the Iranian origin of goods in order to secure trade financing. In response, China has stepped up enforcement on its banks in preparation for its mid-2018 assessment by the international financial watchdog FATF.

This time around, Iran’s traditional outlets for evasion may be less hospitable. Consider the joint action by Emirati regulators and the US Treasury last month to disrupt an Islamic Revolutionary Guard Corps-Qods Force network that has been exploiting UAE exchange houses to procure US dollars for regional proxy groups. The Turkish financial sector may also be less hospitable after a senior Turkish banking official was sentenced last month to 32 months in a US jail. 

RESOURCE ISSUES

Since the JCPOA withdrawal announcement, the US Government has released seven sets of new sanctions targeting Iran’s illicit non-nuclear activity. Clearly, then, the Administration will continue to focus on Iran’s destabilising regional behaviour, missile development/proliferation efforts, human rights abuses, support for terrorism, and other malign behaviour even as it re-implements nuclear sanctions.

Most, if not all, of these recent actions took months to prepare. Accordingly, the sanctions team at the Treasury and State Departments will need to balance efforts to replenish the queue of additional actions with drafting new regulations, and developing the evidentiary basis for relisting some of the 200 entities delisted under the JCPOA. 

In doing so, they should prioritise actions that will have the greatest impact while demonstrating a willingness to compromise on those that will only marginally affect Iran’s access to financial services and oil revenues. This approach would maximise the US Government’s finite resources while offering an olive branch to partners in Europe and elsewhere, making them more likely to help Washington call attention to Iran’s most egregious violations of international norms.

Katherine Bauer is the Blumenstein-Katz Family Fellow at The Washington Institute for Near East Policy and a former official at the US Treasury Department. © Washington Institute, reprinted by permission, all rights reserved.