I’ve talked a lot about sanctions and Iranian oil this year. My first article was published in January by Foreign Policy. Since then, I’ve written two surveys for PBS’s Tehran Bureau (in May and September); blogged about different issues related to sanctions here, here, and here; and written two briefs for the Middle East Policy Council in February and April. Last month, I blogged about the likelihood of Iran’s top customers receiving new sanction waivers as a reward for reducing imports, and according Reuters, my prediction should be proven correct in the coming days—maybe even today.
For those interested: I’d like to draw your attention to remarks made yesterday by Treasury Under Secretary David Cohen, who is responsible for Terrorism and Financial Intelligence (see: bio). Cohen has been the most articulate defender and a gifted explainer of sanctions since he was appointed in mid-2011. Anyone interested in Iran’s current predicament should absolutely make a point of reviewing his public comments—both old and new.
Yesterday, he spoke at the Foundation for Defense of Democracies, a conservative Washington think tank that pushes aggressively for tougher action against Iran, and his comments focused mainly on Iran. With brevity, he laid out exactly how sanctions have been ratcheted up these past few years. He was also careful to point out that the U.S. still has options. Particular emphasis was placed on one measure—slated for February—that could dramatically curb Iran’s ability to spend and move money earned by oil sales. As Cohen notes, this move “represents perhaps the most dramatic escalation of financial pressure to date.” Here is the direct quote:
Under the new law, as of February 6, 2013 – two months from today – any bank in a country that has received a “significant reduction” determination [i.e. waiver] that is conducting a transaction with the Central Bank of Iran, or a transaction involving the sale of Iranian oil, can avoid sanctions risk only if it makes its payment into an account at a bank within the country that is purchasing the Iranian oil, and only if those funds are used to facilitate non-sanctionable, bilateral trade between that country and Iran.
Let me repeat this, because it is complicated – but critically important.
Even with the reduced sanctions exposure provided by a significant reduction determination, a foreign bank involved in the payment for Iranian oil must ensure that the payment goes to an account at a bank within the country importing the oil, and then is used only to facilitate permissible trade between that country and Iran, in order to avoid the risk of being cut off from the US financial system.
The funds can’t be transferred to a third country; can’t be repatriated to Iran; and can’t be used to facilitate third-country trade.
This is a very powerful sanction. Virtually all countries that purchase oil from Iran run a significant trade deficit – meaning, the value of their oil imports from Iran is greater than the value of their exports to Iran. As a result, this provision should “lock up” a substantial portion of Iran’s earnings in each of these countries.
As foreign financial institutions will no longer be able to transfer Iran’s oil earnings beyond their country’s borders without the fear of losing their access to the U.S. financial system, Iran will be severely limited in its ability to transfer funds across jurisdictions. Iran’s oil revenues will largely be shackled within a given country and only useable to purchase goods from that country.
You should probably reread this quote. I did. Cohen is talking about forcing Iran to buy goods directly from countries that it sells oil to because it will not be able to move money. Even if countries that buy oil receive sanction waivers, the money will be “shackled,” to borrow Cohen’s term. Iran would much rather trade oil for dollars or euros in order to buoy its own currency like other countries. Instead, they’ll acquire less reliable currencies, and they’ll have to buy goods and services originating in customer countries. And any bank that transfers the money—and has exposure to the U.S. financial system—will be blacklisted as punishment.
To a far lesser extent, Iran has already faced this inconvenience: almost half of Iran’s oil trade with India is said to be conditioned on Iran purchasing goods from India. There is also reason to believe that some Chinese goods are now purchased with oil revenues. To say that this arrangement is less than optimal is an understatement. Doing business with Iran is already a hassle for many customers. Iran would also benefit greatly from gaining access to harder currencies, although, in recent weeks, the rial has recovered somewhat from record lows seen in October.
Those foreign banks with zero exposure to the U.S. financial system can still enable Iran. We should expect Treasury to name and shame them regardless. But the vast majority will have no choice but to restrict Iranian payments like never before and halt transfers altogether. While the severity of this measure could be overstated, and we won’t know it’s real effect for months, it is still a significant development. It also underscores that the U.S. still has financial “options on the table,” and not just military options.
Read the transcript of Cohen’s prepared remarks: http://www.treasury.gov/press-center/press-releases/Pages/tg1790.aspx
And watch the video from the event. An off-the-record question and answer session starts at the 23-minute mark, with a question about humanitarian conditions in Iran: http://www.c-spanvideo.org/program/Coheno&showFullAbstract=1