New sanctions targeting Iran’s financial sector and its sale of crude oil give President Obama leeway to moderate their possible impact on oil markets and to use carrots as well as sticks to sway third parties into isolating the Islamic Republic.
The sanctions target any foreign entity that deals with Iran’s financial system or trades in oil with the country. The legislation notably names the Central Bank of Iran as a target. Existing law already bans such dealings for U.S. entities and individuals.
The sanctions amendment was wrapped into the $662 billion Defense Authorization Act, a comprehensive mechanism that authorizes defense spending and helps shape policy. The act was approved last week by the U.S. House of Representatives and the Senate, and is almost certain to be signed into law by the president.
Weeks of tense negotiations between the Obama administration and Congress preceded the adoption of final language for the Iran sanctions. In House-Senate conference, negotiators modified language to address administration concerns that the tough language would inhibit its ability to influence other countries to ratchet up Iran’s isolation and instead could backfire.
The legislation would allow Obama to delay its implementation for six months at a time if he determines that its provisions would unsettle oil markets. Before applying sanctions, the president would determine that “there is a sufficient supply of petroleum and petroleum products from countries other than Iran to permit a significant reduction in the volume of petroleum and petroleum products purchased from Iran by or through foreign financial institutions,” the legislation says.
Such language addresses administration concerns that the sanctions could backfire, driving up oil prices and alienating nations that Obama sees as key to isolating Iran.
State Department spokesman Victoria Nuland said the sanctions amendment’s new language was undergoing close review by administration officials.
“We are at the stage of looking hard at how one might implement this in a way that ensures that the goals that the administration and the Congress share, which are to maximize the pressure on the government of Iran, are implemented in a manner that affects Iran but also protects the legitimate interests of America’s friends and allies around the world,” she told reporters at the daily briefing on Dec. 15.
One concession to the administration was to temper an earlier version of the sanctions legislation’s absolute prohibition on dealing with an entity that had dealings with Iran’s financial sector by giving the administration the option to stagger the ban, according to an insider with knowledge of the House-Senate conference that produced the final legislation. Under the current legislation, the White House can slow the sanctions if the targeted entity shows that it is winding down its Iran operations.
The aim of the sanctions, supporters say, is to spur a dynamic of pressure that would squeeze Iran, driving down the price of the oil it sells while driving up the price for goods it purchases, with an exemption on food, medicine and medical devices.
Mark Dubowitz, executive director of the Foundation for Defense of Democracies, a think tank that has closely consulted with Congress on shaping such sanctions, said the law’s effect would be to “increase the hassle factor” for companies seeking to purchase oil. That and increased transaction costs for Iran occasioned by the difficulties of bypassing traditional markets would force Iran to discount its oil, he said.
“The goal is to reduce the price companies are willing to pay for Iranian oil, thereby diminishing the oil revenue Iranian companies receive,” he said.
Sen. Mark Kirk (R-Ill.), a co-author of the sanctions amendment, said its provisions allow Obama to moderate, or even bypass, the sanctions.
The amendment, Kirk said in an interview, includes two waivers: one if the president determines that waiving the sanctions will spur a country or an entity to more closely cooperate with U.S. policy; the other is a standard all-encompassing national security waiver.
“That’s a get out of jail free card,” Kirk said of the latter.
The senator doubted that Obama would use it, however.
“As you enter a presidential contest,” Kirk said, “there’s no upside to being soft on Iran.”
Heather Hurlburt, the executive director at the National Security Network, a group oriented to the realist school of foreign policy with ties to the Obama administration, said that “uncertainty” still dogged the administration’s perception of the amendment, despite the compromise.
“It leaves the administration some flexibility on the timeline” for sanctions, Hurlburt said of the amendment, but it was not so clear what discretion the president had on whether or not to administer them in the first place.
A complicating factor, she said, was that much of the leeway accorded to the president was conditioned on his reporting to Congress that implementing the sanctions would negatively affect oil markets, which are notoriously unpredictable.
“No one knows how oil markets will react,” she said, “and anyone who says we figured out how to do this has not.”
The volatility of the oil market was a key administration argument for greater executive prerogative.
In early December, Treasury Secretary Timothy Geithner warned that the amendment as then framed could drive up oil prices. The amendment, he said Dec. 1, when the Senate was set to pass a tougher version of the bill, “threatens to undermine the effective, carefully phased and sustainable approach” that favored by the administration.
A spike in oil prices would drive away nations they had hoped to co-opt, administration officials said then, and would create more funds for Iran to advance its suspected nuclear weapons program.
“Iran would in fact have more money to fuel its nuclear ambitions, not less,” Wendy Sherman, a State Department undersecretary, was quoted as telling CNN at the time.
The administration had hoped, but failed, to head off the sanctions legislation by issuing an executive order in November placing Iran’s interlocutors on notice that they could face sanctions for dealing with the Central Bank, and getting some Western allies to take similar steps.
The executive warning was not enough; Congress wanted sanctions enshrined in law. Kirk, who co-authored the amendment with Sen. Robert Menendez (D-N.J.), said the president could now use the time it gave him before he activated the sanctions to nurture other markets that would supplement the loss of oil to some of Iran’s biggest buyers.
“Oil suppliers like Saudi Arabia and Kuwait and Libya and Iraq could enter those markets,” Kirk said. “If run well by an active U.S. administration, we could be encouraging countries like Turkey and Sri Lanka to sign long-term deals with those countries.”
Trita Parsi, a founder of the National Iranian American Council, a group that favors sanctions on Iranian human rights abusers but has tended to oppose broader economic sanctions because of their effect on ordinary Iranians, said Iran still had options in reserve to counter the sanctions.
Iran’s leaders could shoot up risk premium on oil—the value the market attaches to the potential for interruption of supplies—simply by making belligerent statements, or more substantively by taking actions, he said. Oil prices spiked for a short period earlier this week based on rumors that Iran planned to close the Straits of Hormuz, a key passage for many of the world’s oil carriers, for war games.
“If they manage to drive up the price of oil, we will have repercussions,” Parsi said. The Obama administration, he said, would “lose Russia and China,” two major trading partners of Iran that have, at Obama’s urging, made some concessions in recent years toward isolating the Islamic Republic.
Rep. Brad Sherman (D-Calif.), a senior member of the U.S. House of Representatives Foreign Affairs Committee who helped draft two separate bills passed by the House sanctioning Iran, discounted such fears.
The sanctions “will not reduce the amount of oil Iran sells but the price at which it sells it,” he said. “The world will be getting Iranian oil at some discount” as Iran seeks to circumvent the new bans.