On July 1, US President Obama signed into law the Iran Sanctions, Accountability, and Divestment Act of 2010 (SADA). The President said the new law’s sanctions were intended to punish Iran for its ongoing uranium enrichment program, according to Reuters. Still, White House spokesman Robert Gibbs said that sanctions were not a “silver bullet.” By setting out to weaken Iran’s oil sector, SADA could have perverse consequences, depending on how the Iranian regime responds to potential future energy shortages.
Major Crude Exporter Must Import Gasoline
According to the Government Accountability Office (GAO), oil export revenues account for 24 percent of Iran’s gross domestic product and between 50 and 76 percent of the Iranian government’s revenues. However, Iran has not reached peak crude oil production levels since 1978, does not produce sufficient natural gas for domestic use, and lacks the refining capacity to meet domestic demand for gasoline.
Reuters reports that Iran currently imports up to 40 percent of its gasoline for domestic consumption.
SADA Extends US Penalties for Non-US Firms
According to its supporters, the SADA aims to further restrict investment in Iran’s energy sector and cut off financing for the Islamic Revolutionary Guards Corps (IRGC) that oversees nuclear and missile programs. It also cracks down on federal contractors that do business with Iran. Moreover, it would reinforce existing U.S. sanctions, penalizing American companies for violations by foreign subsidiaries and barring some of Iran's financial partners from U.S. financial markets. (For now, a total of 16 Iranian banks have been blacklisted.) The bill would also target violators of human rights and increase criminal penalties of up to USD1 million in fines or 20 years in jail for violators of any sanctions.
Harsher Climate Already Stifling Direct Investment
In recent years, Iran has sought the participation of foreign firms in providing financing and technical assistance for its energy projects. Iran is the second-largest oil producer in the Organization of the Petroleum Exporting Countries (OPEC), yet much of its refining sector is over thirty years old, and cannot take full advantage of Iranian oil resources. In November 2008, the Deputy Minister of the National Iranian Oil Company said that Iran would need about USD145 billion in new investments over the next ten years to rebuild its energy sector, according to the GAO.
This rebuilding process has been impeded by at least three ongoing international sanction programs. In June 2010, the United Nations (UN) imposed a fourth round of sanctions, targeting banks, companies, and individuals linked to the nuclear and missile programs. The European Union (EU) has also adopted new measures aimed explicitly at parts of the economy unconnected to Tehran's nuclear program. These were approved at an EU summit in Brussels in June 2010, and details are to be worked out by late July 2010. Major provisions are a ban on new investment in Iran's oil and gas industry, while other steps would target Iran's financial sector, its shipping insurance business and the state-owned Islamic Republic of Iran Shipping Line.
A July 13 report from the Financial Times describes how the US has also implemented so-called informal sanctions, such as publicly listing Iran-involved banks. More formally, non-US banks can be prosecuted in the US for the violations of restrictions under the Department of Treasury (including “U-turn payments” and wire transfers from and to prohibited parties), which in 2009 cost Credit Suisse USD536 million in fines.
These various efforts have slowed the redevelopment of the Iranian oil economy. Major oil suppliers (including Shell and Total) and traders have halted shipments, or decided not to seek new investments (ENI and Lukoil) in the country until the political situation is more stable. Some other long-term foreign investors in Iran (including Statoil) have decided to withdraw after completing existing projects, citing the high political risk from further foreign direct investment in the country.
Sanctions Hamper Iranian Privatization Plan
According to the CIA world fact book, the total amount of foreign direct investment (FDI) in Iran reached USD10.2 billion in 2007. This shrank to an FDI inflow of USD 793 million in 2009. Besides sanctions, another factor in FDI swings is the privatization program of the Iranian government.
In 2005, Iran began its fourth five-year economic development plan, which included privatization of state-owned companies. Iran has privatized USD63 billion worth of government equity in state-owned firms since 2005, says the head of Iran's Privatization Organization, as part of a plan that aims to privatize 80 percent of state-owned assets.
Since 2008, Iran has allowed foreign firms to purchase Iranian state-run companies, although they need permission from the Economy Ministry on a case-by-case basis. As of the end of 2009, the Privatization Organization or Iran stated that the government's ownership of state-owned companies decreased from 80 percent to 40 percent of Iran's Gross Domestic Product.
Despite this liberalization of Iranian policy, the various sanction regimes have slowed the flow of FDI, as noted above.
Unintended Consequences: Asian Investment, and Maybe More Nukes?
As Western firms have pulled back from Iran since 2008, the nation has benefitted from two factors: first, oil prices have risen; second, Asian firms have stepped into the breach. Firms from China are becoming major investors in Iran, in terms of both export and direct investments. Bilateral trade between Iran and China, worth USD 27 billion last year, is set to grow to USD 50 billion by 2015, according to the Iran-China Joint Chamber of Commerce.
The Financial Times has reported that China and India’s share of Iranian foreign trade has grown from 9.9 percent in 2003 to 23.4 percent in 2009. Iranian oil and gas export revenues to those nations reached USD340 billion in September 2009, whereas it decreased with respect to the EU. France, Italy, the UK, and Germany now account for 12.5 percent of world trade with Iran, down from 18.5 percent in 2003.
While stifling Iran’s nuclear ambitions is the stated goal of US sanctions, SADA may actually have the opposite effect. By starving Iran’s economy of petroleum-based energy, sanctions could strengthen the nation’s domestic case for more nuclear power. Further sanctions could also lead to stronger ties between Iran and China, which is of course a nuclear power itself. So while SADA may be the strongest action yet taken against Iran’s nuclear ambitions, the law’s practical impact is far from certain.
For more detail on SADA, also see this “Factbox” report from Reuters.