Nikolay A. Kozhanov
Dr. Kozhanov is an independent scholar whose current research interests include the political economy and modern history of Iran. From 2006 to 2009, he worked as an attaché of the political section of the Russian embassy in Tehran.
The history of economic sanctions as a tool of foreign policy goes back almost 2,500 years. The first known implementation of these punitive measures by one country against another was in 432 BC, when Athens imposed a trade embargo on the city-state of Megara. Since that date, the use of sanctions has intensified from century to century until it has reached its peak in our time. Researchers, however, have been unable to provide a universal definition of sanctions. The most commonly used explanation of the term states that "sanctions are policy tools used by governments to influence other governments and/or firms and citizens in other nations." Thus, economic sanctions are defined as "restrictions on commercial relations between citizens and firms of at least two countries."1
Unfortunately, these simple and, at the same time, almost all-embracing explanations sometimes mislead researchers by concentrating their attention only on the relations between a sanctioning state/states (the sender) and the sanctioned country (the target). As a result, they limit the range of factors determining the success or failure of sanctions to such parameters as the decisiveness of the sender's political elite in implementing punitive measures completely, the potential of the economy of a sanctioned country to mitigate possible negative effects, the ability of the government of the targeted country to ensure the loyalty of its population, etc.2 At the same time, the role of third countries, the international environment and international cooperation have often been underestimated, but in the age of globalization these aspects have acquired special importance. Thus, as stated by some researchers, nowadays economic sanctions could work effectively only in a situation with international consensus backing their implementation or, at least, with the support of major international players and the trading partners of a sanctioned country.3
The international environment is an especially important factor for American sanctions against Iran. Since 1979, economic cooperation between the United States and the Islamic Republic of Iran (IRI) has been minimal. As a result, the United States could exercise its influence on the Iranian economy only through interaction with the international community (by using punitive measures and incentives to limit its ability to cooperate with the IRI). Iran, in turn, can also mitigate the negative influence of U.S. sanctions, mainly by establishing an appropriate system of international relations. Under these circumstances, the following factors are vitally important for the emergence of opportunities to bypass American sanctions:
• The attitude of Iran's main trading partners towards U.S. sanctions
• The readiness of America's partners to uphold the U.S. sanctions and implement their own punitive measures against Iran in practice
• The existence of so-called "black knights" — a term that some researchers apply to countries that are less important trading partners of the targeted state but are able to use the punitive measures as a "lucrative opportunity" to increase their presence in the markets of the sanctioned country as the bigger players leave and, in doing so, mitigate the negative effect of the punitive measures.4
The punitive measures adopted by U.S. authorities in 2010 were not the first sanctions imposed by Washington on Iran. The history of U.S. sanctions against Tehran began 30 years ago. In accordance with existing laws, Americans were prohibited from importing any goods manufactured in Iran into the United States directly or via other countries. Export of American goods and services to Iran was also banned. Citizens of the United States were not entitled to engage in direct or indirect trade and economic activities with the Iranian government. American companies were not allowed to purchase and trade oil and petrochemical products produced in Iran. They were also prohibited from rendering engineering services to Iranian firms or providing them with modern technology.
By 2010, any financial activities between the United States and Iranian citizens had been banned. This primarily related to American investments in the oil and gas sectors, the petrochemical industry and projects aimed at the development of Iran's economic infrastructure. U.S. financial institutions were not allowed to service the accounts of Iranian public and private organizations or individuals, issue letters of credit for them, grant them loans or make deposits in Iranian banks. American financial institutions could not take part in any transaction that involved Iranian capital or would be carried out via Iranian banks.
U.S. sanctions were also quite strict towards countries that had trade and economic relations with Iran. Foreign companies and individuals (with a number of exceptions) were prohibited from participating in the re-export of American goods into Iran. Otherwise they might face certain restrictions on the export of goods and services from the United States. Such a ban implied that U.S. citizens, regardless of their location, could not be intermediaries, guarantors or insurers in trade deals between representatives of Iran and citizens of any other country. American citizens or companies were banned from engaging in trade with any country, if they knew or suspected that their goods might be re-exported to Iran or used for the manufacture of another product to be sold to the IRI. The only exception to this rule was made for low-quality goods or the obsolete technologies that are supplied to developing countries.
One of the most important acts that allowed American authorities to involve themselves in relations between Iran and third countries was the Iran and Libya Sanctions Act (ILSA) of 1996. This document obliged the U.S. president to take measures against foreign companies that invested more than $20 million during a 12-month period in the development of Iranian oil and gas fields. If any such entity violated the 1996 act, the American government would be entitled to impose at least two out of the following six punitive measures:
1. Prohibit the Export-Import Bank of the United States from providing violating entities with loans, credit or letters of credit for the export of American goods
2. Withdraw an export license for military or dual-purpose technologies from a violating company
3. Prohibit U.S. financial institutions from providing a violator with loans in excess of $10 million in any 12-month period
4. Ban foreign financial institutions in violation of the act from being dealers in U.S. public bonds (the violator could also lose its right to be a depository of U.S. government financial assets)
5. Prohibit public purchases from the violating entity
6. Limit the ability of a violating company to import goods to the United States.5
However, U.S. sanctions against Iran that existed prior to 2010 had a number of drawbacks. As a result, the punitive measures adopted by the American government could be considered strict only in theory. A new sanctions law (Act 2194), signed by Barack Obama in 2010, was supposed to improve the situation for several reasons.
First, the earlier laws imposing sanctions on Iran were riddled with gaps and loopholes that prevented the U.S. government from exercising efficient economic pressure on Tehran. For instance, the notion of prohibited "investments" did not include sales of equipment for the Iranian oil and gas industry or petrochemical plants. This, in turn, created problems for the achievement of ILSA's main goal of impeding development of the oil and petоchemical sectors that are the backbone of the Iranian economy. During the period 2006-10, Washington occasionally managed to persuade oil companies from Western Europe to stop selling necessary equipment to Iran. However, it failed to do the same with companies from Eastern Europe (the most active were companies from Romania, Hungary and Belarus) and the Far East. Until 2010, sanctions also failed to seriously influence oil and petrol trade with Iran.
Even American companies found loopholes in the sanctions to deal with Iranians and, thus, facilitated the leak of financing and technology to Iran. The main opportunity for them was created by the absence of a law that would prohibit the branches and subsidiaries of American firms registered in third countries from doing business with Iran. Subsequently, at different times, branches and subsidiaries of such U.S. companies as Halliburton, General Electric and Coca-Cola were involved in trade and investment in Iran.6 Moreover, unidentified American companies allegedly exported equipment for oil extraction via their branches in Brazil.7
Second, ILSA was never applied in full strength to foreign companies investing in Iran's energy sector. Criticism of America's European partners concerning the extraterritorial nature of this law played an important role in mitigating its effectiveness. As a result, before 2010, the majority of foreign corporations were sanctioned by the U.S. administration for infringement of the nonproliferation regime as well as for the export of assault weapons and dual-use technologies. On the other hand, Washington tried not to punish foreign companies for investing in the Iranian energy sector. In most cases, companies leaving the Iranian market only referred to the threatened application of ILSA to them. A closer study of such cases reveals that the decision to leave Iran was made by these firms solely under pressure from their national governments, which, in turn, were asked by the Americans to exert it.
Meanwhile, in the period 1996-2010, most of the agreements between the IRI and foreign companies concerning the development of the Iranian oil and gas sector were signed in violation of ILSA. Nevertheless, the only serious attempt to apply the 1996 Act against foreign companies was undertaken by the Americans in 1997, when the U.S. government tried to punish Total, Gazprom and Malaysia's Petronas for their decision to develop phases 2 and 3 of the South Pars gas field. However, after extensive talks, the Americans agreed to withdraw their demands in exchange for tighter collaboration with Brussels on nonproliferation activities and combating terrorism. Washington also promised not to apply ILSA to European companies in similar cases. It is believed that its decision was determined by a complaint brought by the European Union to the World Trade Organization (WTO) over the act.8
Third, until 2010, the U.S. government had refrained from using all the sanctions tools at its disposal in order to leave an opportunity for dialogue with Iran. In this case, it intended ILSA as a sort of message to Tehran that it had many different means to shatter the Iranian economy, but did not want to do this unless necessary. It is important to remember that the second half of the 1990s was the period when the Americans tried to establish contact with the IRI. These attempts became even more intense after the election of Mohammad Khatami in 1997. In January 1998, he even declared his readiness to start principled dialogues with Washington. Subsequently, a number of steps were taken by both countries that prompted the illusion of an early revival of relations between the United States and Iran.
Thus, in February 1998, an American team of wrestlers visiting Tehran was welcomed by Iranian officials with flowers. In Davos, the U.S. ambassador to the United Nations, Bill Richardson, shook hands with the Iranian foreign minister, Kamal Kharrazi. Trying to please the Khatami administration, the American government canceled its ban on the export of medical and agricultural products to Iran. U.S. authorities also allowed imports of Iranian dried fruits, carpets and caviar. These steps were considered a sign of the dilution of American sanctions.
The actual failure of secret talks between the two countries at the beginning of the 2000s did not lead to the immediate toughening of the sanctions. The George W. Bush administration, which took over in 2001, at first declared the intensification of dialogue between Iran and the United States as one of its goals. Moreover, after the events of September 11, 2001, certain progress was achieved in boosting cooperation between the United States and the IRI in efforts to combat terrorism and drug trafficking.
The situation changed in July 2005, when Mahmoud Ahmadinejad, the mayor of Tehran, became president of Iran. By then, he had developed a reputation as a hardliner and follower of the tough domestic and international policies of Khomeini. Immediately after his inauguration in August 2005, he proclaimed the indisputable right of Iran to develop nuclear technologies and resumed previously suspended work on uranium enrichment. Subsequently, the new president took a number of demonstrative steps, including reviving the old revolutionary slogan "Death to Israel and the USA," issuing remarks scornful of the Holocaust and addressing letters of admonition to George Bush. In response, Americans adopted the Iran Freedom Support Act of 2006, which suggested offering grants and allowances to Iranian dissident movements, and independent TV channels and radio stations that strive for peaceful transformation of the regime and criticized Tehran's nuclear stance.
Beginning at the end of 2006, American political circles began to discuss ways of increasing the pressure on Tehran. UN Security Council (UNSC) Resolution 1929, adopted on June 9, 2010, gave Americans the necessary freedom of action. The content of this document was relatively weak, but it gave a green light to those who wanted more aggressive unilateral measures. It even outlined the sectors of the Iranian economy — banking, transportation, oil, gas and petrochemicals — against which possible sanctions could be applied. Thus, it mentioned "the potential connection between Iran's revenues derived from its energy sector and the funding of Iran's proliferation-sensitive nuclear activities" and stressed the fact that equipment and materials needed for the petrochemical industry could also be used by the Iranians for the organization of a nuclear fuel cycle.9
In this situation, American hardliners spared no effort to adopt new sanctions against the IRI that would officially follow the guidelines of UNSC Resolution 1929. These attempts resulted in the signing of House Bill 2194, known as the Comprehensive Iran Sanctions, Accountability, and Divestment Act. These U.S. sanctions, adopted in 2010, confirmed the legal validity of previously adopted punitive measures and considerably expanded ILSA by extending the minimal set of applicable punitive measures from two to three and broadening their range from six to nine. Punitive measures were supplemented with sanctions on the following: (1) foreign-exchange transactions via American financial institution or with the assistance of American citizens, (2) any financial transactions via American banks, and (3) acquisition and ownership of property in the United States. Provisions for lifting the sanctions imposed on foreign companies as well as conditions for exemptions from restrictions on economic relations with Iran became more rigorous.
The 2010 sanctions confirmed the rule of $20 million as a maximal amount of possible investment in Iran's oil and gas sector. They also specified that if a company was involved in a number of investment projects within a 12-month period, funds invested in each project must not exceed $5 million, and their total sum must not be more than $20 million. In addition, American and overseas companies were prohibited from supplying to Iran any goods, services or technologies needed for the construction of new oil refineries in Iran or the upgrade and maintenance of existing ones if a one-time shipment was worth more than $1 million or the total value of shipments over a 12-month period exceeded $5 million.
For the first time in the history of American sanctions against the IRI, serious limitations were imposed on the export of oil products (gasoline, diesel fuel, aviation kerosene) to Iran. Since the summer of 2010, a company from any country would surely find itself under U.S. sanctions if its one-time shipment of fuel to Iran was worth more than $1 million or the overall cost of its shipments more than $5 million in a one-year period. The same terms apply to any services (insurance, shipment, financing, brokerage) related to fuel trade with Iran.
Apart from these measures, the American authorities canceled all provisions loosening restrictions on Iranian imports into the United States that had been adopted at the end of the 1990s. Additionally, Washington prohibited branches and subsidiaries of American companies registered in third countries from trading with Iran. The punitive measures of 2010 also made export-licensing procedures tougher for foreign companies from countries such as the UAE and Malaysia, whose governments were reluctant to prevent the re-export of American goods to Iran. The new sanctions, moreover, reinforced previously existing measures against financial institutions dealing with the Iranian banks suspected to be funding the Iranian nuclear program or Tehran's terrorist activities.
Special attention was paid by the American authorities to the issue of support for the Iranian opposition. Thus, special exceptions were made from the list of products that are prohibited for export to Iran. For instance, it is permitted (and even supported by the U.S. government) to sell different types of software to the IRI, as this is expected to promote the development of the Internet in Iran or to allow its users to evade electronic filters installed by the authorities to prevent access to opposition websites and electronic sources with anti-government content.10 The 2010 sanctions also envisage punitive measures (such as a travel ban), not only for Iranian individuals and companies involved in the nuclear program and terrorist support, but for those who are suspected of the violation of human rights.
All in all, the new punitive measures (which, to a certain degree, appear to be an extension of ILSA) significantly broadened American opportunities for exerting pressure on Iran. First of all, they sent a serious signal to the international community that the U.S. government was no longer hesitant concerning the implementation of sanctions against companies investing in Iran's energy sector. Moreover, they broadened the set of punitive measures that the Americans could implement against violators of the sanctions. Second, they imposed serious restrictions on the development of Iran's banking sector and its relations with the international financial system. Third, they limited the ability of Iran to import fuel and jeopardized the future of the entire energy sector. However, even these American measures appeared to be insufficient to influence Tehran to reconsider its approaches to the nuclear issue.
IRAN'S MAIN TRADING PARTNERS
The attitude of Iran's main trading and economic partners towards the punitive measures of 2010 became the first, and one of the most difficult, challenges for U.S. sanctions against the IRI. By 2010, the EU, China, Japan, India, the UAE and South Korea were Iran's main trade partners (21 percent, 15 percent, 8 percent, 8 percent, 8 percent and 7 percent, respectively).11 The fact that four of them supported the American sanctions of 2010 and even adopted their own punitive measures against the IRI was considered by Washington to be an important diplomatic coup. However, despite all attempts, the U.S. government failed to persuade the People's Republic of China (PRC) to follow the example of Iran's other main trading partners. This inability of the American authorities to make Beijing impose sanctions on the IRI, or at least follow the requirements of Washington concerning trade and economic cooperation with Tehran, has created a serious threat to the whole sanctions regime.
Chinese officials have been quite open in their statements concerning the current sanctions. During 2010, they repeatedly argued that unilateral punitive measures were unable to address the problem of Tehran's nuclear program.12 As a result, Beijing is not going to support any sanctions against the IRI except those imposed by the United Nations. However, as a UNSC member, China traditionally has spared no effort to emasculate UNSC resolutions so that they cannot create any problems for the developing cooperation between the PRC and the IRI.
This Chinese persistence in protecting its trade and economic ties with Tehran could be explained by Beijing's pragmatism: Iran is a crucial element in China's energy security, which does not have any alternatives for replacement. Furthermore, Chinese dependence on oil supplies from the IRI has gradually grown. Thus, in 2008, Iran exported 408,000 barrels of oil per day (b/d) to China, rising to 544,000 b/d, or 16 percent of China's oil imports, by 2010.13 According to Chinese analysts, Iran's share in the country's oil imports is expected to rise even higher in 2011.14 At the same time, to guarantee the stability of these supplies, the PRC is striving to increase its investments in Iran's energy sector. Moreover, Beijing does not limit its interests to oil projects only. It is quite active in the financing of the development of Iranian gas fields and road infrastructure.
This Chinese dependence on Iranian oil — and, in the long term, natural gas — creates a number of opportunities for Tehran to bypass American sanctions. On the one hand, the government of the PRC is simply unable to meet the requirements of American sanctions without harming its cooperation with Iran. On the other hand, Chinese reluctance to obey the demands of American sanctions could be considered a way for Beijing to pay Tehran for its oil and to strengthen cooperation between the countries. The United States, in turn, does not have appropriate leverage to influence the PRC; its intense trade relations with China prevent it from analyzing strict measures stipulated in the sanctions act of 2010. Thus, although there are some recent examples of a few Chinese firms being punished for very active cooperation with the IRI, the majority of companies are still untouched by the sanctions.15
Up to now, the PRC has provided the IRI with a number of opportunities to bypass the American sanctions of 2010. First of all, by August 2010, China and Turkey had been declared the main suppliers of petrol to Iran.16 According to certain data, China today supplies at least one-third of Iran's demand. This figure may be even more impressive if we take into account that Chinese companies involved in the import of gasoline as intermediaries buy fuel in Singapore and sell it to Iran via Dubai. Iranian customs statistics usually attribute such shipments of petrol to the trade balance between the IRI and the UAE.17
This is business as usual for all trade between China and the IRI. According to some experts, by 2010, the real volume of trade between these two countries exceeded its officially stated level of $21.2 billion, due to the fact that a considerable quantity of Chinese product was exported to Iran by PRC firms via third countries. As a result, the Iranian statistics attributed them to trade between the IRI and these states. If we take these goods into account, it appears that, by 2010, the volume of trade between Iran and China had reached $30-36 billion. This, in turn, means that on the eve of the implementation of the 2010 sanctions, Beijing was Tehran's largest trading partner, leaving even the EU far behind.18 Under these circumstances, the Iranian government could ignore threats from U.S. or EU authorities to reduce the volume of trade or limit the range of products and technologies produced for export to Iran. As had become obvious during the previous year, China was capable of balancing any reduction of trade or providing necessary conditions for the re-export of forbidden products and technologies to the IRI.19
China also uses the withdrawal of EU companies from Tehran's energy sector for its own benefit. Chinese companies gradually replace "runaways." Thus, during the period 2006-10, European companies were alarmed by the development of the situation around the nuclear program and halted their investment projects in the IRI. The PRC, on the other hand, became more active. As a result, Chinese companies signed contracts supporting the modernization of the "Arak" refinery and the development of such oil and gas fields as Northern Azadegan, Yadavaran, Garmsar and phase 11 of the South Pars (previously assigned to the French firm Total).20
After the U.S. government adopted the 2010 sanctions, Chinese companies continued their attempts to increase their presence in Iran's energy sector. Thus, in July 2010, Sinopec, with Malaysian SKS Ventures, launched talks with Iranian counterparts concerning their possible involvement in projects previously abandoned by other companies under the pressure of American sanctions. The Chinese demonstrated particular interest in developing Phase 12 of the South Pars gas field, initially promised by the Iranians to India.21 Tehran, in turn, expressed its intention to offer Beijing the opportunity to replace the Indians in the project to build a gas pipeline between Iran, Pakistan and India.22
The Chinese banking system is mostly open to Iranians. Theoretically, this allows them to make financial transactions not only with the PRC but with other countries. Although Iranian businessmen dealing with China still faced obstacles, these problems are not crucial. Thus, as stated by some Iranian businessmen, in October 2010, the Bank of China stopped opening credit lines for Iranians. The bank authorities explained this decision as having been at the behest of the U.S.-based investors. However, these services were also immediately provided by other Chinese banks.23
The PRC is not the only important trading partner of Iran that decided not to blindly follow the demands of American sanctions. South Korea also preferred not to cut economic relations with Tehran. It is significant that Seoul officially voiced its support of the sanctions imposed on the IRI and, on September 8, 2010, even adopted its own punitive measures against 102 Iranian entities and 24 individuals. However, Korean authorities made an important reservation in their position on sanctions. As their officials stated, Seoul is ready to interact with the UNSC and the United States on the issue of Tehran's nuclear program. Nevertheless, it is determined to minimize the negative effect of the sanctions in all spheres of economic cooperation with Tehran that are not related to nuclear research.24
Given that during recent years, economic cooperation between the Republic of Korea and the IRI enjoyed gradual growth, and that Tehran supplied 15 percent of all oil imported by Seoul, the Korean government preferred not to support the American official opinion that Iran's economy works solely on the nuclear program.25 Thus, despite the U.S. requirement that the Seoul branch of the Iranian bank Mellat be closed, the Koreans only stopped its activities for two months and strengthened control over its transactions.26 Moreover, on August 25, 2010, the Korean government declared that it would help all Korean companies dealing with the IRI that would suffer from the American sanctions.27
Furthermore, from October 1, 2010, to compensate for the negative impact of American sanctions on the financial interactions between the two countries, Korea started using its own currency, the won, instead of dollars in financial transactions with the IRI. The right to perform these operations was granted to the Industrial Bank of Korea and Woori Bank. On the Iranian side, the won accounts were supposed to be opened in Iran's central bank.28 Additionally, the Korean government allowed Iranians to keep financial resources earned from the export of oil to the Republic of Korea in accounts in the above-mentioned banks. It was supposed that this money could later be used for buying Korean products and importing them to the IRI. 29
These decisions by the Iranian and Korean authorities led to the establishment of direct links between the countries and excluded the unnecessary foreign-exchange operations in dollars that could have been affected by the U.S. sanctions of 2010. Measures adopted by Seoul encouraged Korean companies that had been on the verge of leaving the Iranian market. For instance, in mid-December 2010, DK Tech Corporation declared that, during the summer of 2011, it planned to supply equipment and necessary assistance for the development of phases 17 and 18 of Iran's South Pars gas field through the summer of 2011.30
It is notable that, as in the case of China, the U.S. government has limited its possible retaliatory measures. First of all, Seoul is its loyal ally on the issue of Pyongyang's nuclear program. Moreover, nominally South Korea has adopted its own set of sanctions against the IRI. In this situation, U.S. authorities could do nothing but praise the Korean activities that, in fact, create loopholes in the sanctions against Iran. Thus, the above-mentioned decision of the Korean government to allow Iranians to keep their oil money in the accounts of the Industrial Bank of Korea and Woori Bank was considered by the Americans as a move to make financial transactions between Seoul and Tehran more transparent.31
Meanwhile, the independent behavior of China and South Korea set an example for Iran's other trading partners. For instance, India has started reviving its trade relations with the IRI, which had been harmed by the sanctions of 2010. Thus, from March 2011, the central bank of India began making overdue payments to the National Iranian Oil Company for shipments of crude oil. It was the first time since transactions were halted in December 2010 under the pressure of punitive American measures.32
U.S. Partners and the 2010 Sanctions
There is also no unanimity among the main partners of the United States concerning the practical implementation of the American sanctions. Moreover, their governments are unable to ensure that the private sector will not try to use any opportunity to continue economic cooperation with Iran or even to bypass sanctions. Thus, in February 2011, the head of the Iranian Chamber of Commerce, Mohammad Nahavandian, stated that, in some cases, the position of the private sector of a foreign country concerning the sanctions appears to be more important than the attitude of its government.33
The pressure of public opinion heavily influenced the position of the UAE on the sanctions issue. Initially, UAE authorities supported the punitive measures against Iran. On June 28, 2010, they declared that they were freezing bank accounts belonging to 41 Iranian entities and individuals. The border control of shipments transferred to and from the IRI also became stricter, producing immediate results. On June 30, 2010, UAE officials informed the media of the seizure of a consignment of dual-use goods for export to Iran.34 On July 28, 2010, the authorities of the Ras al-Khaimah free-trade zone officially stopped giving new Iranian companies permits to open branches there.35 From August 2010, ships delivering petrol to the IRI started undergoing increased scrutiny in UAE ports. Moreover, the ports of Fujairah and Jebel Ali were, in fact, closed to these cargo ships.36 Additionally, in mid-August, the UAE media spread the news that insurance companies located in Dubai were prohibited from providing their services to transport companies delivering goods to and from Iran.37
At the same time, by the end of summer 2010, it had become clear that the current sanctions do not enjoy the full support of the UAE authorities. Thus, in mid-August 2010, the ambassador of the UAE to the United States, Yousef al-Otaiba, argued that the Emirates have a significant amount of trade with Iran, and that the majority of economic contracts between the UAE and the IRI cannot be illicit or illegal. Later on, UAE Minister of Foreign Affairs Anwar Gargash stressed that his government was interested in securing a balance between sanctions and commercial interests.38 In practice, this meant that the UAE authorities were not very active in implementing the requirements of the UNSC resolutions and U.S. punitive measures against the IRI. For instance, the blocking of the accounts of Iranian entities (especially banks) and individuals related to Tehran's nuclear and rocket programs took place with a considerable delay (from one to three months) after the sanctions were imposed. As a result, the Iranians had enough time to transfer their financial assets to other banks, saving them from being frozen. At the beginning of September 2010, UAE officials stated that the amount of money blocked in their banks was negligible. According to them, only four out of 41 Iranian entities that were officially put under sanctions by the government kept financial assets in the local banks.39
UAE authorities are still reluctant to implement American limitations (in fact, a blockade) on the volume of petrol imports to Iran. On the one hand, the Emirates government expressed its loyalty to its U.S. ally by imposing some restrictions on the transport of fuel to the IRI. On the other hand, there are no actual prohibitions on selling Emirati petrol to Iran. By 2011, the Emirates National Oil Company, assisted by Chinese and Turkish firms, was continuing to export fuel to the IRI.40
Close economic relations with Iran (from 2002 to 2008, the IRI share of UAE exports was around 15 percent), the existence of a large and influential Iranian community in the Emirates (from 300,000 to 800,000 people), as well as Iranian investments in the UAE economy (around $300 billion by 2008, one-fifth or so invested in Dubai trade malls) do not allow Arab business circles to support the UNSC and U.S. sanctions. Moreover, the business community itself spares no effort to persuade UAE authorities to secure economic ties with the IRI against the negative influence of the punitive measures. For instance, at the beginning of November 2010, a group of local businessmen met with UAE Prime Minister Maktoum bin Rashid al-Maktoum and complained about the losses inflicted on them by the sanctions.41 Subsequently, on December 7, 2010, the UAE foreign minister, Abdullah Bin Zayed al-Nahyan, stated that his government wanted international sanctions imposed on Iran to be reconsidered and lifted.42
There are also worrying signs concerning the position of the EU countries, considered to be the closest American allies on the Iranian nuclear issue. In May 2011, the EU Council approved amendments to its sanctions, adopted in 2010, against Iran that made the European punitive measures even tougher. However, some evidence indicates that there is no unanimity among EU members. For instance, at the end of October 2010, Italian Prime Minister Berlusconi argued that the European approach towards Iran should be more "gentle." He stressed that, although Italy participated in the sanctions, he himself was not convinced of their success. This statement obviously called for a reconsideration of the use of punitive measures against Tehran.43
The sanctions also did not become an obstacle to the development of economic relations between the IRI and Germany. According to some sources, in 2010, the volume of trade between the two countries was stable and even trending upward. It is significant that, in contrast to other European countries, the volume of German exports, was and still is, higher than its imports. Berlin traditionally has been one of the main exporters of industrial equipment to the IRI. Moreover, according to The Jerusalem Post, in 2010, the German government approved more than a dozen trade deals related to the transfer of dual-use goods to Iran.44
The Europeans were not always persistent in enforcing the sanctions or following American advice on the application of punitive measures against Iran. Until the adoption of the amendments to the EU sanctions in May 2011, the German government was reluctant to impose punitive measures against Europaisch-Iranische Handelsbank. This bank was used by India to make payments for Iranian oil. American officials suspected that the money was being used by Tehran to finance its nuclear research. However, Berlin, although it initially agreed that the activities of the bank were suspicious, stated that these transactions could not be halted due to a lack of evidence that this money was being used to finance Iran's nuclear program.45
European selectivity in the practical implementation of sanctions can be illustrated by another example. At the end of October 2010, the EU allowed British Petroleum to continue the development of Azerbaijan's Shah Deniz gas field, in which the Iranian government also holds a stake. The reason the EU ignored the prohibition against the transfer of oil-developing technologies to Iran is relatively simple. This field is expected to be a source of gas for the Nabucco pipeline, projected to reduce EU dependence on Russian gas exports.46
European companies have never ceased to try to find ways to maintain at least minimal cooperation with Iran. For example, on October 28, 2010, the CFO of Royal Dutch Shell, Simon Henry, stated that his company would continue the oil trade with Iran. He emphasized that the trading business of this company "with Iran is carried out under longer-term contracts." However, he also mentioned that Shell had stopped supplying refined petroleum products or aviation fuel to Iran and had begun to divest itself of its Iranian operations.47
It is believed that big European companies have many ways to remain in Iran even after the implementation of the U.S. sanctions of 2010. Foreign corporations clearly understand that once they leave Iran their position will never be restored. As a result, on the eve of the adoption of the new American punitive measures, European companies began developing strategies that would allow them to observe sanctions requirements without cutting ties with Tehran. In particular, foreign companies planned to move their businesses from Iran to a third country. From the territory of this state they could continue trade and investment operations with the IRI using a local intermediary firm as a cover. Under these circumstances a corporation could not be blamed for having direct contacts with Iran. According to available data, European corporations initially saw the UAE as such a third country. However, given that the Emirates' position on the 2010 sanctions appeared to be tougher than expected, it is difficult to say to what extent the EU companies managed to implement this variant of sanctions evasion.
Apart from that, there is always the possibility that European oil companies could join projects that formally cannot trigger U.S. sanctions. Specifically, by 2010, Royal Dutch Shell, Petronas, Total and Statoil Hydro were actively cooperating with Iran's National Oil Company within the framework of the IOR (Improved Oil Recovery) program. Their aim is to research ways of intensifying oil production in old fields or of rendering technical assistance in managing oil and gas fields that had been previously launched with their assistance. 48
Allegedly, European companies could mask their participation in some projects by taking part in them as subcontractors of Asian companies (Chinese and Turkish), which have more freedom of action in Iran. It is reported that, by 2010, Royal Dutch Shell was rendering (and allegedly still renders) assistance to Sinopec in developing the Yadavaran oil field. It is also possible that Royal Dutch Shell will be further used by the Chinese to fulfill their agreement with their Iranian counterparts to implement Phase 2 of the Iran LNG (liquefied natural gas) Project.49 Reportedly, this variant of undercover activity could be the one most favored by oil companies if the U.S. proceeds with sanctions pressure. According to this scenario, business will have to find a country hostile to the United States that has nothing to lose if targeted by sanctions. Given the number of pariah or semi-pariah states, such a country will not be hard to find.
The sanctions of 2010 created many economic opportunities, not only for pariah states but for all the smaller trading partners of Tehran. Some researchers call them "black knights." Previously they could not compete with the Europeans. However, with the withdrawal of Western companies from the IRI market, Iran's smaller trading partners suddenly found that their importance to Iran dramatically increased. As it appears now, most of them decided not to miss an opportunity to earn additional money.
The first companies that attempted to use the sanctions for their own interests were oil firms and producers of oil and gas equipment from Eastern Europe, mostly from Hungary, Belarus and Romania.50 Under the severe sanctions, their supplies fit within allowable limits and, thus, could not be prohibited. Moreover, the activities of such minor companies are harder to trace. As a result, even before the implementation of the 2010 sanctions, Eastern European companies were very active in Iran and enjoyed considerable support from the trade and economic sections of their embassies.51
In general, black knights include not only Tehran's minor trading partners, but all small firms seeking to benefit from the situation. Thus, after the adoption of the 2010 sanctions, small Asian shipping companies (first of all, from India, China, Singapore and Japan) tried to compensate for the withdrawal of larger firms involved in the export of Iranian petrochemical products. As most of these minor firms did not have any business with the United States, most were not afraid of coming under American scrutiny. However, to compensate for the risks they took, these companies charged the Iranians a premium on the usual rates for delivering freight from the IRI.52
Since 2010, the Iranian government has been trying to encourage black knights to cooperate more intensively. Even before the sanctions, Iranian authorities had tried to shift to gasoline suppliers that would be more resistant to American pressure than the Western Europeans. Reportedly, by the summer of 2010, they had arranged with Romania, Qatar and Malaysia to supply gasoline to the IRI. At the same time, Tehran also considered the possibility of approaching the countries of Central Asia on this matter. The same approach was used by the Iranians to solve problems with European insurers, which by 2011 had refused to provide their services to Iranian oil-tanker operators. As a result, the latter were compelled to address "a mixture of fixed-premium insurers outside of the EU."53
Turkey, Venezuela, Ecuador and Brazil could be named among the main black knights that strive to increase their presence in Iran. Visiting Washington in October 2010, Turkish Deputy Prime Minister Ali Babacan stated that his government did not "believe in sanctions." He emphasized that Ankara considered the punitive measures adopted against Tehran to be ineffective in achieving the goal of changing Iran's approach to the nuclear issue. As a result, according to Babacan, the Turkish government was not going to impose its own punitive measures or conform to the demands of the unilateral sanctions adopted by other countries.54 The deputy prime minister also stressed that Turkish firms had no limitations on their business operations with Iran and were "free to make their own decisions" with regard to compliance with international sanctions.55 Later on, in February 2011, Turkish Minister for Foreign Trade Zafer Caglayan stated that, by 2015, Iran and Turkey planned to increase their trade volume to $30 billion. He argued that the U.S. sanctions against Iran would not create an obstacle to that goal.56
Turkish companies, in turn, appeared to be significantly encouraged by their government's statements. Thus, after the adoption of the new American and European sanctions of 2010, they continued to export petrol to Iran and for a certain period became one of the main fuel suppliers of the IRI. Allegedly, the Turkish authorities opened their ports and roads for the transit of goods to Iran. Ankara also became more active in re-exporting products from the EU and the United States to the IRI, thereby replacing the UAE, which is currently experiencing problems in its trade with Iran. This information is partly confirmed by the rise in the volume of trade between the IRI and Turkey.57
Venezuelan authorities also decided not to hang back. On October 21, 2010, they signed a number of memoranda of understanding on energy cooperation with Iran, causing serious concerns at the U.S. Department of State.58 By February 2011, the Venezuelan state-owned energy company PDVSA had considerably increased supplies of petrol to the IRI. As reported by the Energy Intelligence Group, it agreed to export 60,000 tons of gasoline monthly to Iran, helping the Iranian government to satisfy the domestic seasonal rise in demand.59 Later on, in the spring of 2011, U.S. authorities started to suspect PDVSA of selling to Tehran a special chemical substance that upgrades the quality of petrol. As stated by the American government, this deal directly violates the 2010 sanctions.60
By now, it is obvious that the U.S. sanctions of 2010, as well as the punitive measures adopted by America's partners against the IRI, appear to be less effective than initially expected. Iran still has some room for maneuver, however. It has not succeeded in completely offsetting the negative impact of sanctions, but it has been able to mitigate their negative effect.
As a result, Iranian leaders believe that the United States is busy solving its regional problems (such as Iraq and Afghanistan) and simply does not have the capacity to pressure Tehran through sanctions. In the meantime, the United States is determined to continue implementing tougher sanctions. They have found practical support from political circles in the EU, the UAE, Canada, Japan, Australia and other countries. However, there are states that reacted negatively to the adoption of sanctions in 2010. Some of them are providing Iran with opportunities to bypass the sanctions and mitigate their negative effects. Time may also work for Iran, as the focus of Western countries gradually shifts to the issues of global recession and the region's myriad political problems.
On the other hand, unfulfilled threats can have negative consequences. If sanctions fail to achieve their aim, there will be a serious threat to the nuclear nonproliferation regime in the region. Moreover, this threat will not necessarily come from Iran. Looking at the experience of the IRI, the Arab countries of the Middle East (for instance, Saudi Arabia) may well want to build up their own nuclear arsenals. If Iran makes a nuclear bomb, they will not wait for the United States to open its nuclear umbrella over them.61
At the same time, the effectiveness of the U.S. sanctions on Iran could still be improved. First of all, it is crucial for the Americans to continue close cooperation on the Iranian nuclear issue with their partners. As has been shown in this article, some of them are still reluctant to provide complete support for the sanctions. There are also worrying signals that a number of countries have gradually become disillusioned with punitive measures, as they have not brought immediate results. The pro-Iranian factions of their political elites refer to this in an attempt to prove that ineffective and costly sanctions should be lifted. Under these circumstances, it is crucial to remind U.S. partners that economic sanctions have never produced immediate effects. Currently, the success of the punitive measures depends only on the decisiveness of the U.S. government and its partners in observing the sanctions and, if necessary, in strengthening economic pressure on Tehran. From this perspective, the decision of the European Council to broaden the list of sanctioned Iranian entities and individuals seems to be a good sign.
As for countries deliberately creating opportunities for Tehran to bypass the American sanctions, it is no secret that it would be extremely difficult to make them change their position. On the one hand, the UNSC resolutions proved to be ineffective as a means of putting pressure on them. Moreover, due to the positions of China and Russia and some temporary members of the Security Council, the adoption of a truly efficient resolution is almost impossible. On the other hand, U.S. ability to influence violators (such as China and South Korea) is limited. Under these circumstances, the factor of international cooperation again plays a very important role. If, for example, the U.S. partners followed the American pattern and made their own sanctions extraterritorial (applicable to third countries, their entities and individuals), this would considerably raise the price of the violation of the sanctions and would certainly reduce the number of Tehran's loyal trading partners as well as black knights.
Apart from the measures mentioned above, it is also crucial to return to the idea of limiting the ability of Iran to sell its gas and oil abroad. However, this measure should be considered as a last resort. In the current political situation, it would be difficult to gain international support for the imposition of an oil embargo on Tehran. The task would be even more of a challenge than the U.S. attempt to persuade the EU and other partners to restrict the export of petrol to Iran. And what if Iran does not change its position on the nuclear issue and proceeds with its research? In the case of iron-clad proof that Tehran had built a nuclear bomb, it would be reasonable to reconsider the nature of the targeted sanctions and make them more general.
1 H. G. Askari et al., Case Studies of U.S. Economic Sanctions: The Chinese, Cuban, and Iranian Experience (Praeger Books, 2003), 1.
2 S. H. Allen, "The Determinants of Economic Sanctions' Success and Failure," International Interactions 31 (2005): 117 – 138; J. D. Green, "Strategies for Evading Economic Sanctions," in Dilemmas of Economic Coercion: Sanctions in World Politics, ed. M. Nincic and P. Wallensteen (Praeger Books, 1983); D. Lektzian and M. Souva, "The Economic Peace between Democracies: Economic Sanctions and Domestic Institutions," Journal of Peace Research 40 (2003): 641 – 660; and D. Lektzian and M. Souva, "An Institutional Theory of Sanctions Onset and Success," Journal of Conflict Resolution 51 (2007): 848 – 871.
3 K. A. Elliott, "The Sanctions Glass: Half Full or Completely Empty?" International Security 23 (1998): 50 – 65; L. L. Martin, "Credibility, Costs, and Institutions: Cooperation on Economic Sanctions," World Politics 45 (1993): 406 – 432; and E. V. McLean and T. Whang, "Friends or Foes? Major Trading Partners and the Success of Economic Sanctions," International Studies Quarterly 54 (2010): 427 – 447.
4 McLean and Whang, "Friends or Foes? Major Trading Partners and the Success of Economic Sanctions."
5 Kenneth Katzman, "Iran Sanctions," (paper presented to Congressional Research service, July 20, 2011).
6 Katzman, 16.
7 Interview with the prominent Russian expert on Iran, Rasht, August 2009.
8 Katzman, 6.
9 Resolution 1929 (2010), United Nations Security Council, (S/RES/1229 (2010)).
10 Katzman, 37.
11 Eurostat, European Commission, accessed on May 31, 2011, http://appsso.eurostat.ec.europa.eu/.
12 G. R. Simpson and J. Solomon, "Fresh Clues of Iranian Nuclear Intrigue," The Wall Street Journal, January 16, 2008.
13 "U.S. Enlists Oil to Sway Beijing's Stance on Tehran," The Wall Street Journal, October 20, 2009.
14 F. Tan, "Iran's Asian crude buyers see flow steady despite finance sanctions," Reuters, December 30, 2010, accessed on May 28, 2011, http://af.reuters.com/article/energyOilNews/idAFL3E6NU0BK20101230?pageN… Last.
15 "U.S. lawmakers question Chinese firms' dealings with Iran," Global Security Newswire, December 2, 2010, accessed on May 28, 2011, http://www.globalsecuritynewswire.org/gsn/nw_20101202_1772.php.
16 "Iran's Gasoline Imports Declined 50% Last Month After Sanctions, EMC Says," Bloomberg, August 2, 2010, accessed on May 28, 2011 http://www.bloomberg.com/news/2010-08-02/iran-s-gasoline-imports-declin….
17 J. Blas, D. Dombey and C. Hoyos, "Chinese Begin Petrol Supplies to Iran," The Financial Times, September 22, 2009.
18 "Iran Sees $200 Billion in Trade with China in 10 Years: Ambassador," Mehr News Agency, May 30, 2010.
19 "Ship detained and containers with weapon components seized, police confirm," The Star, March 17, 2011; J. Pomfret, "Chinese firms bypass sanctions on Iran, US says," The Washington Post, October 18, 2010.
20 Katzman, 24-26; "Foreign Investment Conference to be held in Iran," Islamic Republic News Agency, May 27, 2009; "Iran, China Sign $5 Bln Gas Deal," AFP, June 3, 2009, accessed on May 28, 2011, http://www.google.com/hostednews/afp/article/ALeqM5h-vUl9xPFrke4Mp5hLxg….
21 Katzman, 26.
22 "China Likely to Replace India in Iran-Pak Gas Pipeline Project," One India, February 6, 2010, accessed on May 28, 2011, http://news.oneindia.in/2010/02/06/chinalikely-to-replace-india-in-iran….
23 "Importers of petrochemicals from Iran find ways around L/C problem," Platts, October 18, 2010, accessed on May 28, 2011, http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Petrochemicals/7375332.
24 "Seoul Delays Decision on Iran Sanctions Till October," The Chosun Ilbo, August 9, 2010.
25 "Support stepped up for Iran-linked companies," JoongAng Daily, August 26, 2010.
26 "S. Korea to suspend Iranian bank as part of sanctions," AFP, October 7, 2010, accessed on May 28, 2011, http://www.google.com/hostednews/afp/article/ALeqM5hnzUX7JsOejkVQjtmAR6….
27 "South Korea in deal with Iranian Central Bank to revive trade ties," International Business Times, October 8, 2010.
28 "Korea, Iran to open won-based accounts," Korea Herald, September 17, 2010.
29 "South Korea in deal with Iranian Central Bank to revive trade ties," International Business Times, October 8, 2010.
30 "South Korea's DK Tech Signs Deal for Iran Gas Field – Filing," Dow Jones, December 17, 2010, accessed on May 28, 2011, http://online.wsj.com/article/BT-CO-20101217-702700.html.
31 "South Korea in deal with Iranian Central Bank to revive trade ties," International Business Times, October 8, 2010.
32 "India Starts Clearing Iran Oil Payments," The Wall Street Journal, March 3, 2011.
33 "Official: Private Firms, Businesses Oppose Sanctions against Iran," Fars News Agency, February 13, 2011, accessed on May 28, 2011, http://english.farsnews.com/newstext.php?nn=8911241276.
34 "Spencer R., Iran's nuclear smugglers raided," The Daily Telegraph, June 30, 2010.
35 T. Arnold, "RAK free zone refuses Iranian companies," The National, July 28, 2010.
36 J. Saul and R. Kasolowsky, "Iran feels sanctions heat at UAE ports," Reuters, August 3, 2010, accessed on May 28, 2011, http://www.reuters.com/article/idUSTRE6721I520100803.
37 "Regulators tell insurers to quit Iran agreements," Zawya, August 11, 2010, accessed on May 28, 2011, http://www.zawya.com/story.cfm/sidGN_10082010_110848.
38 C. Hall and A. Sheikholeslami, "U.A.E. Says it's Checking to be Sure its Trade with Iran Complies with the UN," Bloomberg, August 16, 2010, accessed on May 28, 2011, http://www.bloomberg.com/news/2010-08-16/u-a-e-says-it-s-checking-to-be….
39 "Central Bank freezes four Iranian accounts: report," Emirates Business 24/7, September 7, 2010.
40 "Firms Reported in Open Sources to Have Sold Iran Refined Petroleum Products between January 1, 2009, and June 30, 2010," U.S. Government Accountability Office (2010), accessed on May 28, 2011, http://www.gao.gov/new.items/d10967r.pdf.
41 "UAE Merchants Protest Iran Sanctions," PressTV, November 10, 2010, accessed on May 28, 2011, http://www.presstv.ir/detail/150362.html.
42 "Leaders renew support for UAE on islands issue," The Gulf News, December 8, 2010.
43 "Berlusconi ‘hopes' Israel won't take military action against Iran," Haaretz, October 22, 2010.
44 "Data shows German trade with Iran increased in 2010," The Jerusalem Post, January 9, 2011.
45 J. Ewing, ‘U.S. Presses Germany to Block Indian Payments to Iran for Oil," The New York Times, March 31, 2011.
46 J. G. Neuger, "BP's Azerbaijan gas venture said to be spared EU sanctions," Bloomberg, October 22, 2010, accessed on May 28, 2011, http://www.businessweek.com/news/2010-10-22/bp-s-azerbaijan-gas-venture….
47 A. Lawler, "Shell studies oil trade impact of EU Iran sanctions," Reuters, October 28, 2010, accessed on May 28, 2011, http://www.reuters.com/article/idUSTRE69R28720101028.
48 Interview with a representative of Statoil Hydro, Tehran, June 2009.
50 In the period 2007–09, the author conducted a number of interviews on this matter with the diplomats of the Belorussian, Hungarian and Romanian embassies in Tehran.
51 J. Rogin, "State Department sanctions Belarus firm for doing business with Iran; GOP not satisfied," Foreign Policy, March 29, 2011.
52 "Small shipping companies in Asia ferrying Iran's petrochemicals," Platts, October 13, 2010, accessed on May 28, 2011, http://www.platts.com/RSSFeedDetailedNews/RSSFeed/Petrochemicals/7350645.
53 J. Saul, "Sanctions hit Iran's NITC ship insurance cover," Reuters, February 18, 2011, accessed on May 28, 2011, http://af.reuters.com/article/energyOilNews/idAFLDE71H1ZC20110218?sp=tr….
54 S. Demirtas, "U.S. presses Turkey on Iran sanctions, dismisses claims of trade embargo," The Hurriyet Daily News, October 21, 2010.
55 P. Richter, "Turkey rebuffs U.S. pressure to slash trade with Iran," The Los Angeles Times, October 21, 2010.
56 T. Siebert, "Abdullah visit a boost for Turkey-Iran ties," The National, February 13, 2011.
57 C. Balmer, "Turkey helps Iran avoid sanctions — Israel tells U.S.: cables," Reuters, April 8, 2011, accessed on May 28, 2011, http://www.reuters.com/article/2011/04/08/us-israel-turkey-wikileaks-id….
58 I. Lamloum, "Venezuela submits to no one, says Chavez in Libya," AFP, October 23, 2010, accessed on May 28 2011, http://www.google.com/hostednews/afp/article/ALeqM5jQCgLJkyULXYS4yn-lfc….
59 "Venezuela's PDVSA sends gasoline to Iran — trade-UPDATE 1," Foxyard, February 1, 2011, accessed on May 28, 2011, http://www.forexyard.com/en/news/Venezuelas-PDVSA-sends-gasoline-to-Ira….
60 "Chávez May Be Violating Iran Sanctions," The Wall Street Journal, March 7, 2011.
61 T. Khaitous, Arab Reactions to a Nuclear Armed Iran (Washington Institute for Near East Policy, 2009).