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Sanctions have caused foreign energy firms to pull out of Iran, delaying the development of oil and gas fields.
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In June, the United States imposed sanctions on Iran’s national air carrier, Iran Air.

The Effect of Recent Sanctions on Iran

With world attention focused on the dramatic uprisings across the Middle East in recent months, the most serious threat to regional and global security remains Iran’s nuclear program.

Iran has continued its illicit nuclear activities while the international community is preoccupied with the “Arab Spring.” In June, the Islamic Republic announced it would shift production of higher-grade uranium to a previously undeclared facility and triple output capacity. And just this week, Iran began to move hundreds of advanced centrifuges to the Fordow enrichment facility in a move that Yukiya Amano, director general of the International Atomic Energy Agency (IAEA), called a “further deviation” from U.N. Security Council demands. Once installed and operational, the centrifuges will significantly shorten the time needed for Iran to stockpile weapons-grade uranium.

“We see Iran moving in the direction of becoming a nuclear weapons capable state,” said Olli Heinonen, the former head of U.N. nuclear inspections worldwide.

Current Sanctions

In order to persuade Iran to meet its international obligations and suspend its enrichment of uranium, four rounds of U.N. sanctions have been imposed on the regime. These include an arms embargo, a freeze on assets of individuals and companies associated with the country’s nuclear program and a freeze on funds and assets of Iran’s Islamic Revolutionary Guard Corps (IRGC) and the Islamic Republic of Iran Shipping Lines (IRISL).

The United States has enacted additional measures, including blacklisting Iranian banks and financial institutions and prohibiting them from accessing the U.S. financial system. The E.U. and several other countries, including Japan, South Korea, Canada and Australia, have followed suit by freezing Iranian bank accounts suspected of aiding weapons development and proliferation.

In June 2010, Congress passed the Comprehensive Iran Sanctions, Accountability and Divestment Act (CISADA), which significantly boosts sanctions on Iran. It directs the president to impose sanctions on companies investing $20 million or more in Iran’s petroleum sector. Most recently, the United States has ratcheted up sanctions by targeting two major Iranian companies: the country’s national air carrier, Iran Air, and a key port operator, Tidewater Middle East Co., which manages over 90 percent of Iran’s container operations.

Direct and Indirect Impact

The most direct effect sanctions are having on Iran is in limiting Tehran’s ability to procure the raw materials needed for its nuclear program. Iran’s efforts to deploy advanced centrifuge machines on a significant scale have stalled due to difficulties in obtaining the materials used in these machines. Much of the global supply of such materials comes from U.S.-allied countries that employ strict export controls, such as Japan and Germany.

In addition to directly curbing Iran’s nuclear efforts, the sanctions are intended to extract a price for the Islamic Republic’s continued pursuit of nuclear weapons and persuade its leadership to change course.

One area in which sanctions have had an economic impact is the development of Iran’s oil and gas resources. Foreign energy firms have pulled out of the Islamic Republic, dropping from 41 companies in 2009 to 16 this year, according to a recent report by the U.S. Government Accountability Office. This has delayed various projects that require foreign investment and technology transfers, such as the development of the South Pars natural gas field. Setbacks in that project are costing Iran more than $3 billion a year.

“We had no choice but to resort to Chinese contractors, but they seem unable to carry out projects,” said Emad Hosseini, a spokesman for the Iranian parliament’s energy commission.

Iran is also having difficulties conducting trade and business with other countries. Although sanctions do not penalize non-U.S. refiners for buying Iranian crude, they have made it difficult for Tehran to repatriate money from oil sales. International banks are reluctant to handle transactions involving Iranian banks. As a result, payments to the Islamic Republic from Iran’s top crude buyers, such as China, South Korea and India, have stalled.

“Banks have withdrawn banking facilities from companies which do business with Iran, on the basis that the political risk is too high,” says Tom Smith, the head of Britain’s Export Control Organization.

The limited ability of Iran’s bank sector to do business with other banks around the world has had repercussions for the Iranian economy. In July, a shortage of foreign currency prevented the Central Bank of Iran from controlling the value of the rial against foreign currencies, sparking fluctuations in the local currency market. For the first time, the government announced a one-week delay in the transfer of monthly payments distributed to most Iranian households.

U.S. sanctions on the Tidewater port operator have also hampered Iranian trade. On June 30, the Danish shipping firm Maersk, the world’s largest container ship operator, announced that it was pulling out of Iran’s three largest ports. A number of other shipping companies took similar steps, potentially disrupting the shipment of a range of consumer goods. Iran has become increasingly reliant on cheap imports, meaning that such actions are likely to have an immediate and prolonged impact on the country’s economy.

Sanctions on Iran’s embattled national airline, Iran Air, have led Tehran to seek private buyers for the carrier. In addition to the U.S. ban imposed in June on any transactions with the company, U.S. energy sanctions have limited Iran Air’s refueling capability in Europe. By privatizing the national carrier, Iranian authorities hope to circumvent these sanctions and enable the purchase of spare parts and aircraft.

Similar tactics have been adopted in an attempt to shield the maritime fleet belonging to IRISL from sanctions imposed on it by the United States and E.U. The Iranian shipping conglomerate has used false shipping documents and renamed and repainted its ships in order to continue trading in banned goods. The carrier has been struggling in recent months as insurers refuse to underwrite its operations and its vessels have been seized in foreign ports.

Further Action

While existing sanctions have undoubtedly hurt the Islamic Republic’s economy and delayed its nuclear program, they have failed to stop its pursuit of an atomic bomb. Iran continues to enrich uranium in violation of U.N. resolutions and recently announced a number of advances in its nuclear efforts.

In late July, reports surfaced that Iranian President Mahmoud Ahmadinejad wants to shed the nation’s secrecy and forge ahead openly with developing nuclear weapons. Such a move is consistent with comments he made earlier this year: “If we want to make a bomb, we are not afraid of anybody.”

Given Iran’s ongoing failure to abide by its international obligations under the Nuclear Non-Proliferation Treaty (NPT) and repeated U.N. Security Council demands, additional measures have been called for. More than 90 U.S. senators signed a letter to President Barack Obama in July pressing him to sanction the Central Bank of Iran, which is key to Tehran’s strategy to circumvent sanctions (see Heard on the Hill for details). Stricter enforcement of existing sanctions is also essential to persuade Iran to suspend its quest for nuclear weapons. BACK TO TOP