Introduction – ‘The time HAS come to Take decisions’
“Where is my vote?” Everyone connects these words of protest with the reelection of the Iranian President Mahmoud Ahmadinejad in June 2009. The revolts were recognized as reflecting sorrow concerning the inability of the people of Iran to express their opinions (and desires concerning who should lead the country) in a democratic fashion. Alongside consternation about the obvious violation of democratic principles existed the fear of a resumption of provocations against other states—fear that turned out to be reasonable. The President of Iran has used every chance to emphasize that the country is able to build an atomic bomb. He expelled controlling authorities (for example, the International Atomic Energy Agency, or IAEA), and Iran has continued to secretly enrich uranium. The worry of the international community is that nuclear weapons will fall into the wrong hands, and that terrorists will make use of them.
These threats have convinced most countries of influence that halting Iran’s nuclear ambitions is a worthwhile endeavor. Accordingly, they are willing to adopt sanctions against Iran. “The time has come to take decisions”, demanded the France President Nicolas Sarkozy. Angela Merkel, German Chancellor, declared that “new sanctions are needed against Iran to pressure the country.” Recently, United States President Barack Obama said the following at the Nuclear Security Summit: “I am going to push as hard as I can to make sure that we get strong sanctions that have consequences for Iran as it’s making calculations about its nuclear program, and that those are done [sic] in a timely basis.”
Therefore I want to examine the following question: What kinds of sanctions could effectively change Iran’s nuclear policy, and which of these sanctions could be implemented? I will start this presentation with a short review of the developments during the last year (2010 and into 2011), with specific attention paid to the sanctions themselves (which are already imposed). After this, I will illustrate issues related to the various vulnerabilities currently being experienced by the Islamic Republic of Iran. Finally, I will discuss to what extent sanctions are possible, and which of these measures are to be preferred for putting the optimal amount of pressure on Iran (and for halting its nuclear program).
While Iran has presented various geopolitical challenges for most of the past four decades, and especially after the ascension of the Ayatollah Ruhollah Khomeini, the current situation has existed in more or less its current form since 2005. After Ahmadinejad took office, he provoked Israel with his so-called “World Without Zionism” speech during a conference in Tehran; in this speech, Ahmadinejad declared that Israel should not be recognized by other countries, but rather should be wiped off the map. At the same time, several reports of the International Atomic Energy Agency (IAEA) listed a number of outstanding issues and concerns related to Iran’s nuclear program, including topics related to the potential military nature of the program. Iran signed the Treaty on the Non-Proliferation of Nuclear Weapons on July 1, 1968. Due to their status as signatories of this treaty, Iran is only allowed to use atomic energy for civil reasons and under control and monitoring of the IAEA.
In response to the suspected military nature of some of Iran’s activities, the IAEA adopted a resolution against Iran on February 4, 2006. At that time, the IAEA had no concrete evidence that Iran actually had nuclear bombs, or planned to build them, but the political developments indicated the existence of a reasonable threat of a non-peaceful Iranian nuclear program. The IAEA demanded re-establishment of full and sustained suspension of all enrichment-related and reprocessing activities; including research and development, with verification to be performed by the IAEA. The reaction of Ahmadinejad after the resolution was not diplomatic: “You can pass as many resolutions as you like and be happy about it, but you cannot stop the progress of the Iranian people. […] We thank God that our enemies are idiots!” These provocations ended with the announcement of the President of Iran in April 2006, that the country had “joined the group of those countries which have nuclear technology.” This flagrant disregard of international provisions on the part of the Iranian government led to the need for the United Nations (UN) to act with “strong steps”.
The permanent members of the UN Security Council recognized the necessity of effective acts and adopted Resolution 1737 (on December 23, 2006) on the basis of Article 41 of Chapter VII of the Charter of the United Nations (UN-Charter). Resolution 1737 requested that Iran fulfill the IAEA resolution and end uranium enrichment “to build confidence in the exclusively peaceful purpose of its nuclear program.” As an enforcement mechanism, Resolution 1737 adopted a mixture of economic, financial, and travel sanctions and aimed to control all enrichment-related reprocessing activities, including research and development. Furthermore, embargos on goods necessary for the nuclear program were put into effect, with the idea of ensuring the Iranian nuclear program could not be continued. The Security Council recommended that Iran terminate its uranium enrichment program within 60 days, at which time an investigation would start that would verify this cessation.
On February 22, 2007 (past the deadline), the Report by the Director General of the IAEA, Mohamed ElBaradei, stated that “Iran ha[d] not suspended its enrichment related activities” and as a result had not fulfilled the terms of Resolution 1737 (2006). Because of these results, the Security Council enacted Resolution 1747 (2007) on March 24, 2007. This resolution tightened the measures of 1737 (2006), imposing a strict import and export ban on Iranian weapons and restricting financial support (and supporters) of the Iranian nuclear program. In spite of these two measures, the government of Tehran continued its provocations. In the beginning of 2008 Ahmadinejad declared that “Iran will own atomic power in one year and is on the way to reach the top of nuclear power”.
To hamper these plans the Security Council decided to pass Resolution 1803 (2008), adopting sanctions against Iranian individuals, companies, and banks that had links to Iranian nuclear programs. Resolution 1803 also attempted to freeze the Iranian government’s foreign bank accounts, and travel restrictions were placed on some high-ranking military and nuclear scientists. In the vote, the result—14 affirmative votes with one abstention—was hailed as a “sign of unity of the international community.” The last resolution adopted concerning Iran was Resolution 1935 (on September 27, 2008), as Iran continued uranium enrichment after each of the previous three resolutions in spite of the international community’s demands.
The New York Times confirmed in a September 2009 report that Iran has created enough nuclear fuel to make a rapid sprint for a nuclear weapon. In February 2010, other reports from the press claimed that Iran obtained possession of construction plans for atomic warheads from a former Soviet scientist.
On February 9, 2010, the Iranian Atomic Energy Authority announced that it would start enrichment of uranium to the level of 20% and informed the IAEA of this decision. A few weeks later, Iran published its plans to build two more uranium enrichment facilities.
Along with the UN sanctions, the United States in particular adopted a couple of additional sanctions, and tightened these sanctions over the years. The United States expects other countries, in particular countries in Europe, to follow its lead.
After years of diplomatic wrangling to find a solution to the Iran issue, the international community agreed that something should happen (see above). But which kind of sanctions would be sufficiently punitive? What kinds of strong steps would change the current policies of the Islamic Republic of Iran?
1. Economic sanctions
a) Economic circumstances
Economic statistics provide insight considering which sectors’ disruption would increase Iran’s vulnerability. Not surprisingly, crude oil exports form a very considerable part of Iran’s economy; Iran is the fourth-largest crude oil exporter in the world. The U.S. Energy Information Administration estimates that Iran has 137.6 billion barrels of proven oil reserves, which constitute 10 percent of the world’s total reserves. In 2008 Iran exported about 2.4 million barrels of oil per day (bbl/d), especially to Asia and the European OECD countries. In 2009, Iran produced approximately 3.8 million bbl/d. These numbers reveal the incontrovertible fact that the economic structure of Iran is dominated by oil. This is simultaneously a big advantage for Iran in the geopolitical arena, and also one of its growing problems, as Iran missed the opportunity to use its considerable oil wealth to develop its other sectors during recent decades. For this reason, Iran is still highly dependent on imports. Consequently, the international community can pressure Iran through the adoption of sanctions that disrupt its oil industry and its imports.
b) Stopping international investments
The Iranian oil industry has a huge problem with obsolete refineries. These refineries must be updated to produce the same amount of oil (or more oil) than they have in the past. The Iranian economy cannot finance these plans alone and depends on international investments. Iran has announced that renewing its old (or building new) refineries would require about US $17 billion; US $11.7 billion of this money has been provided for through contracts with international investors. These investment programs all follow the same basic system, known as “buy back.” In this “buy back” system, the contracting company funds all investments and the other partner (Iran, in this case) gives a sufficient yield on the investment. Other international companies and countries have also expressed interest in investing in Iranian factories; however, some of these countries have bowed out due to international pressure. However, large players and investors remain part of the Iranian oil industry. The Russian company Gazprom has invested about US $4 billion since 2007 and wants to play a bigger role in drilling for oil in South Pars, a natural gas condensate field shared by Iran and Qatar. Additionally, the Asian countries China, India, and Pakistan are interested in controlling parts of Iranian oil production and see the potential for considerable appreciation of their capital through investing in the Islamic Republic.
The investment activity in the Iranian oil program presents many problems. It may be that Europe and the United States are unable to stem the investments that support the thriving Iranian oil sector, even as they retreat from investing. A UN resolution with respect to pressuring Iran is not easy to adopt, because China (who holds one of the permanent votes of the UN Security Council) would veto such a move.
c) Oil-embargo against Iran: A double-edged sword
As has been shown, Iran is highly dependent on oil. Next to the possible sanctions on the investment and import levels, you can use another measure and restrict the export of oil. This is the most important economic mainstay in Iran, which exports about 880 million barrels of oil per year. About 40 to 50 percent of Iran’s revenues are from the export of oil. At first glance, this dependence on exports seems to speak to the great potential a broad unit embargo on the part of the international community could hold. At closer inspection, the specific circumstances and the degree of uptake of such an embargo would have more to do with its success or failure.
According to the General Administration of Customs of China more than 10% (11.3%, exactly) of Iranian’s oil exports go to the People’s Republic of China, making China Iran’s second-largest oil customer. You can also expect that this number will grow with a view on the oil-reserves, which Iran has and the growing Chinese need for the so-called “black gold.” However, stating that China would be the only country that would object to an export halt for Iranian oil would not be accurate. European countries may also have a need for Iran’s oil. The geographic location and proximity to Europe to the Islamic Republic could cause Iran to be an interesting partner in the future. The European dependence on Russian and Libyan oil could also be lessened by greater cooperation with Iran. Moreover, if Europe retreated then their economic opponents in Asia (China, India) could attain greater market dominance in the Persian Gulf.
Ultimately, alienating Iran through economic sanctions could have expensive consequences for the European energy situation. In spite of this, the European countries are to this point following (more or less) the sanctions policy of the United States (possibly against their own interests). The conflict between European energy issues and policy guidelines is a huge dilemma that has not yet been solved. But the less strict isolation policy of Barack Obama perhaps gives the countries more room to maneuver.
Finally, even with sanctions and the finding of other suppliers, the isolation of Iran would cause inflation in oil prices and harm the global economy. This “double-edged” situation, however, should be solved either by adopting sanctions or by an opening to the market of the Persian Gulf – in the best case by taking clear steps.
d) Trade embargo
The oil industry is not the only sensitive spot of the Iranian economy. A comprehensive trade embargo could also pressure Iran. The following diagram shows the countries that are the current predominant trade market for Iran:
China, Russia, and especially the European countries Germany, Italy, and France are Iran’s primary trade partners/markets. The Islamic Republic has a need in particular to import special-purpose machines from Germany to exploit new oilfields. “Iran is dependent on German spare parts and suppliers,” in the assessment of the former President of the Chamber of Industry and Commerce in Tehran. Obviously, an embargo of imports would be a disaster for the economy, because it concerns the oil industry—as a mainstay of the economy (see above)—indirectly. Additionally, France is the major exporter of light-wave cable, which is important for the technical development of Iran. A halt in delivery would hamper the development of Iran. Furthermore, France could also use the banking sector as leverage. Its major financial institutions put a lot of money into the Islamic Republic. Société Générale, France’s second-largest bank by market value, has potentially accounted for about 20 percent of Iran’s growth in recent years through its investments and financial outlays in Iran. BNP Paribas, the largest bank in France, is very involved in the Iranian oil business.
In contrast to its huge oil production, Iran is a laggard in the production of petroleum products such as benzene, diesel, and kerosene. Iran has to import around 40 percent of these products, which should usually be part of the yield of domestic refineries. However, Iran does not produce these products, as the produced fuels are injected immediately into the oil fields to increase yield. To cope with the problem, the Iranian government rations (for instance, the maximum benzene allowed for each citizen per months is 100 liters). This measure, however, has not solved the overall shortage.
About 60 percent of the fuel in Iran is imported by the Dutch company Vitol, based in Rotterdam. However, in March 2010 this company (along with the trading firm Trafigura) stopped selling gasoline to Iran. This has considerably increased the pressure on the Iranian government. As can be seen, with the high level of involvement other countries have economically with Iran there is a potential for sanctions, and they are already being used. The 27 members of the European Union in particular could act alone as a brave community and pressure Iran forthwith.
 Baker, p. 1.
 İslâmi Davet, May 21, 2010.
 O'Brien M, p. 1.
 Islamic Republic of Iran Broadcasting (IRIB)-News, October 26, 2005.
 Kairouz A, p. 53.
 IAEA-Resolution, February 4, 2006 - GOV/2006/14, No. 1.
 News24.com, February 5, 2006.
 BBC-News, April 11, 2006.
 The demand of the former Secretary of State of the USA Condoleezza Rice: Chicago Tribune, April 13, 2006.
 UN-Resolution 1737 (2006), No. 1.
 Farrall JM, p. 460.
 UN-Resolution 1737 (2006), No. 3-5.
 UN-Resolution 1737 (2006), No. 19.
 Report by the Director General of the IAEA, February 22, 2007 - GOV/2007/8, No. 28.
 UN-Resolution 1747 (2007), No. 1-7.
 Reuters, January 30, 2008.
 UN-Resolution 1803 (2008), No. 3, 5, 8-11.
 With the words of the former Federal Minister for Foreign Affairs of Germany Frank-Walter Steinmeier: Der Spiegel Online, March 3, 2008.
 Sanger DE, p. 1.
 Zeit Online, February 5, 2010.
 Broad WJ, p. 1.
 PressTV, February 22, 2010.
 Kubbig BW, p. 11.
 EIA, 2010.
 Karshenas M & Hakimian H, p. 197.
 Kubbig BW, p. 17.
 Alexander’s, March 6, 2010.
 Garver J, Leverett F & Leverett HM, pp. 26 et seq.
 IranOilGas Network, April 17, 2010.
 Alexander’s, February 21, 2010.
 Kubbig BW, p. 21.
 Rudolf P, p. 2.
 Garver J, Leverett F & Leverett HM, p. 24.
 Alexander’s, February 10, 2010.
 Beck M & Shabafrouz M, p. 2.
 Posch W, p. 2.
 Beck M & Shabafrouz M, p. 2.
 Posch W, p. 2.
 Reissner J, p. 51.
 Perkovich G & Manzanero S, p. 21.
 Luft G, p. 1.
 Elflein C, p. 1.
 Kubbig BW, p. 27.
 For instance the French company Nexans imports approximately 28 percent in this sector: Mohebbi A, p. 3.
 Daragahi B, p. 4.
 This involvement meets with criticism: Der Spiegel Online, September 22, 2007.
 Bogardus K, December 14, 2009.
 Wirtschaftskammer Österreich, p. 9.
 Der Spiegel Online, June 27, 2007.
 Stephens B, May 16, 2006.
 Webb S & Pachymuthu L, March 8, 2010.