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Global Insight: Tightened Iran sanctions

Tightened Iran Sanctions Introduced to UN Security Council in Anticipation of IAEA Report

The United Kingdom, France, and Germany have sponsored the introduction of an Iran sanction-tightening package to the United Nations (UN) Security Council, hoping for measures to be passed next week, following the anticipated publication of the IAEA report on Iran's nuclear programme today.

Global Insight Perspective

Significance The tightening of sanctions includes the extending of travel bans to Iranian nuclear and missile programme officials, inspections of shipments to and from Iran, and calling on members of the United Nations (UN) to exercise vigilance in providing export credits for trade with Iran and in dealing with its banks.

Implications The package is a compromise hammered out by the UN Security Council permanent members and Germany, and has reportedly secured the support of a sufficient number of non-permanent members to be passed. This would make tightened sanctions a done deal, unless the impending International Atomic Energy Agency (IAEA) report is surprisingly positive of Iranian co-operation.

Outlook The tightened sanctions—although watered down from the initial demands of the U.S.-led front for greater isolation of Iran—will further damage Iranian trade and add costs to the country's ongoing projects, especially in the energy sphere. New measures such as shipment inspections will pave the way for more punitive measures going forward.

Swaying the Council

United Nations (UN) ambassadors from France, Germany, and the United Kingdom sponsored the introduction of a package of the latest set of tightened Iran sanctions to the UN Security Council (UNSC) yesterday, saying that they were confident that a sufficient number of Council votes had been secured and that no veto would be cast by any of the permanent members. The sanctions package is indeed a result of prolonged negotiations between the five permanent members—United States, United Kingdom, Russia, China, and France—plus Germany, and its introduction to the UNSC means that the main objectors to further Iran sanctions (Russia and China) have agreed to letting it pass. However, several UNSC members, including veto-wielding Russia and China, have demanded that the discussion and voting on the tightened measures follow the impending International Atomic Energy Agency (IAEA) report on Iran's co-operation and clarification of its nuclear programme. The report could therefore still change the outcome of the voting on the sanctions package, should it give the nations sceptical of further sanctions reason enough to argue that Iran has heightened its level of co-operation with the UN nuclear watchdog.

A Strict Regime

The new tightened sanctions package would include measures that punish individuals tied to Iran's nuclear and missile development programmes, by imposing a travel ban on them. Perhaps more importantly on a macro level, it will call on UN member states to "exercise vigilance in entering into new commitments for public-provided financial support for trade with Iran, including the granting of export credits, guarantees or insurance to their nationals involved in such trade". Businesses trading with Iran have been finding it increasingly hard to secure government export credit guarantees for projects—often a crucial part of securing private financing when dealing with business in developing countries or areas with heightened political risk—in the past year, although this was mainly due to a concerted effort by the United States and several large European nations to disincentivise Iranian trade, rather than a UN-wide measure. The fact that such a measure will now be sanctioned by the UN will give the isolating measure an almost universal level of acceptance and will make the obtaining of government credit guarantees for trade with Iran impossible, save from a very small circle of states.

Likewise, the financial industry isolation of Iran has been very successful over the past year, with U.S. sanctions and political pressure on the international financial industry leading to almost all European and many Asian banks severing ties with Iran, even without these measures having been raised to the UN level. If such measures are legitimised by the UN, the amount of banks dealing with Iran will dwindle, most probably leaving only banks from other more or less isolated economies in the world, with very few—and small-scale—exceptions.

One of the largest successes for the U.S.-led front advocating more isolation to dissuade Iran from its uranium enrichment programme and its alleged nuclear weapons programme is the suggested imposition of shipping inspections. While having their obvious use to act as verification on intelligence suggesting that Iran might be smuggling nuclear or missile components and technology, they will have the perhaps far more effective consequence on the Iranian economy of making imports of several crucial technologies for its energy sector impossible. As Iran is trying to get at least some of its LNG export ventures under way, it needs to secure liquefaction technologies somehow, to which the intellectual rights currently belong to a small circle of Western and Japanese companies. Even if a single company should try to sell LNG technology to Iran, a full project is bound to include at least some technical details from a U.S. company, meaning that such a shipment would be a breach of U.S. sanctions. Similarly, obtaining complex reservoir mapping software or new onshore and offshore technology runs the risk of being in breach of U.S. sanctions and with shipping inspections, the risk of selling Iran such technologies is bound to rocket, further damaging construction and development.

The IAEA Wildcard

With the passing of the sanctions tightening resolution almost guaranteed through preceding informal negotiations, the findings of the IAEA report look like being the only thing that could derail Iran's further isolation. Further accusations against IAEA chairman Mohammed el-Baradei have been aired by those advocating tighter sanctions, fearing that he will be too lenient on Iran in order to, first and foremost, keep a dialogue alive. In the past weeks there have been scattered reports of senior IAEA experts and inspectors being disgruntled with their chairman, accusing him of wanting to play down well-founded concerns and suspicions of Iran's intentions, which have been grounded in recent findings, in favour of prolonging the dialogue with the Islamic Republic. He—and others—have, however, countered that dialogue is of utmost importance and that the criticism, even from within, is to a certain extent orchestrated by those favouring a tougher line on Iran.

Outlook and Implications

An IAEA report emphasising Iran's willingness to co-operate with the UN's nuclear watchdog is likely to spark a strong debate in the UNSC, possibly leading to Russia, China, and some non-permanent members such as South Africa and Libya withdrawing their support for the package. This would delay the process significantly, although it would not lead to the easing of any of the sanctions currently facing Iran and damaging its economy. The status quo would instead prevail until the next push for tougher sanctions could be organised. The movement for tougher sanctions against Iran has very much regained the momentum it had lost by the end of 2007 and looks set to retain sufficient initiative for the pendulum not to swing in the opposite direction, even if the IAEA report turns out to be more positive for Iran than expected.

Samuel Ciszuk is a Global Insight's Middle East energy analyst. Petroleumworld does not necessarily share these views

Editor's Note: For more information on Global Insigth, contact: Catarina Feria-Walsh Global Insight, catarina.walsh@globalinsight.com. / www.globalinsight.com.
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Petroleumworld News 02/25/08

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