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Mission impossible? U.S. wants sanctions to hurt only Iran

Still image taken from video shows Iran's President Ahmadinejad watching from a control room as nuclear fuel rods are loaded into the Tehran
Still image taken from video shows Iran's President Ahmadinejad watching from a control room as nuclear fuel rods are loaded into the Tehran

By Tabassum Zakaria and Arshad Mohammed

WASHINGTON (Reuters) - President Barack Obama hopes the toughest sanctions ever imposed on Iran will squeeze its oil exports - all without scaring markets, crimping growth, impoverishing ordinary Iranians or antagonizing allies.

The geopolitical equivalent of threading a needle is made even more difficult by elections in both the United States and Iran. Obama's goal, persuading Iran to curb its nuclear program, seems far from assured.

In recent weeks, U.S. officials have crisscrossed the globe to meet allies such as Japan and South Korea that rely heavily on Iranian oil and are worried that the new law may hurt their economies.

The United States also wants to fend off any dramatic spike in oil prices that could hurt its own economy, the top issue for voters who will decide whether Obama is re-elected in November.

U.S. officials say their talks have been productive so far and stress they are not looking to make enemies of their friends, and so will implement the sanctions with care.

"There is flexibility on the sanctions, countries will make their own financial decisions and the United States will work with them," Daniel Glaser, assistant secretary for terrorist financing at the U.S. Treasury, said in an interview.

"The goal here is not to punish any individual country, the goal is to target Iran," he said.

The new law gives Obama the ability to cut off foreign banks, including central banks, from the U.S. financial system if they conduct petroleum-related transactions with Iran's central bank, the main clearing house for its oil exports.

MEASURES OF SUCCESS?

Yet even before the new sanctions go into effect, evidence is mounting that Western pressure may be hitting some of the wrong targets. Shipments of grain to Iran, exempt from the sanctions like other humanitarian goods, have been held up because of financial restrictions on Iranian banks that would handle the transactions.

If previous sanctions efforts elsewhere are any guide, Iran's elites will find ways to insulate themselves from economic pain imposed from outside.

The director of the U.S. Defense Intelligence Agency, Lieutenant General Ronald Burgess, told Congress on Thursday that despite increased pressure on Iran, "Tehran is not close to agreeing to abandoning its nuclear program."

Still, the sanctions are clearly having some impact.

Iran, which denies Western charges that it is seeking to build nuclear weapons, this week offered what it called "new initiatives" for nuclear talks with world powers. The move was widely seen as a response to mounting economic pain.

In Iran, the rial currency has weakened sharply to about 20,000 to the U.S. dollar on the black market from about 13,000 before Obama signed the law on December 31.

"The precipitous drop in the value of the rial as well as their inability to responsibly manage their economy is the best evidence of the effectiveness of sanctions," Glaser said.

"Isolating Iran's central bank from the international financial system will make it difficult for Iran to manage its economy. That, over time, is going to be as important as directly impacting Iran's oil revenue," he said.

The United States has not set a specific target, saying only that it wants to see a "significant" reduction in Iran's oil exports, deliberately leaving that term vague to preserve some latitude.

Analysts say a 20-25 percent reduction in Iran's oil revenue would show sanctions biting, while some U.S. senators say significant means an 18 percent reduction in total payments to Iran for oil.

"I think it is a success if there is a 25 percent reduction in Iranian revenue or exports," said Frank Verrastro, director of the energy and national security program at the Center for Strategic and International Studies.

Facing rising prices for staples such as meat, bread and rice, many Iranians are withdrawing savings to buy increasingly scarce hard currency to preserve their purchasing power as the rial plummets.

"I think psychology has started to take over, started to take hold perhaps more than is warranted," said Ken Katzman, a Middle East specialist at the Congressional Research Service. "It's almost irrelevant whether these fears are unfounded or not because they are creating an economic reality with the fear."

The new U.S. sanctions go into effect for non-petroleum transactions with the Iranian central bank on February 29 and for oil-related transactions on June 28. That is aimed at giving Iran's oil customers - China, the European Union, Japan, India, South Korea and Turkey top the list - time to adapt, and to avoid whipping up oil prices.

"The United States continues to talk to buyers of Iranian oil about their energy needs and alternate sources with the goal being a significant, steady reduction in oil purchases from Iran over time, but it won't happen all at once," Glaser said.

"We need to understand what's in the realm of the possible, and it is unrealistic to apply one standard to all countries. This is going to have to be done on a case-by-case basis." Glaser spoke with Reuters before traveling to Oman, Qatar and Russia last week to discuss the sanctions and other issues.

Verrastro, a former energy official, said while the U.S. administration wants sanctions to have a meaningful impact, it may tolerate some "leakage" if it keeps oil markets calm.

"I think they want some leakage, because they are also trying to mitigate huge price spikes. So it doesn't have to be 100 percent effective," Verrastro said.

The United States is hoping that Saudi Arabia, the United Arab Emirates and other oil producers will help fill the gap created by restrictions on Iranian oil.

IRANIAN EVASION

But the long phasing-in of the U.S. sanctions gives Iran time to devise strategies for evading them and Iran is considered adept at subterfuge to reroute its trade.

"If you target one bank they'll try to use another untargeted bank," Glaser said.

Similarly, Reuters reported this week how the Islamic Republic of Iran Shipping Lines (IRISL), while blacklisted by the United Nations, continues to move cargo using a web of shell companies and diverse ownership.

But trying to evade sanctions raises the cost of doing business for Iran, U.S. officials say.

And Tehran faces a much more united front than it has before. For years, Germany and other leading members of the European Union were slow to heed U.S. calls for tougher sanctions on Iran. Now, the EU has decided to cut off imports of Iranian oil by mid-year.

Diplomats said Europeans overcame their historical resistance to imposing harsh sanctions on Iran because of a belief that Obama genuinely pursued diplomacy when he first came into office, the reality that talks have led nowhere and the fear that Israel might attack Iran's nuclear sites.

"The Europeans could no longer just continue to say 'Oh we have to give diplomacy a chance here,'" said a diplomat from one of the major powers seeking to negotiate with Iran.

"If we are serious about stopping them from getting a nuclear weapons program - and I think everybody is - this was inevitably where it was going to go," he said.

SANCTIONS SKEPTICISM

Still, a Western diplomat said he expected no major movement on the nuclear issue from Iran either before or directly after its parliamentary elections next month, saying there was "paralysis in Tehran" caused by jockeying for power.

An American expert on Iran said the White House might prefer no negotiations this year because Obama's political opponents could criticize the president as soft on Tehran for holding talks, especially if discussions faltered.

An unstated goal of the new sanctions is to demonstrate to Israel and the U.S. Congress that Obama is serious about putting pressure on Tehran, in an effort to persuade Israel not to strike Iran's nuclear sites.

The fear of war breaking out from Iran's threat to close the Strait of Hormuz or an Israeli air strike has led countries to see sanctions as the lesser hardship.

"The impact of that is far greater than the Japanese, South Koreans or Greeks having to find new supplies of oil," said Juan Zarate, a senior adviser with the Center for Strategic and International Studies. "People are willing to contemplate the costly boomerang effects and are willing to absorb them in a way that they might not have five years ago."

But whether the sanctions prompt Iran to change course remains an open question.

"The great irony in all this is that the policy is working, but I don't think it's going to work," said Ken Pollack, director of the Saban Center for Middle East Policy at the Brookings Institution.

"The problem is that it feels like the regime doesn't care. The regime is willing to absorb all of this damage," Pollack said. "They may simply be impervious."

Iran oil exports graphic:

http://graphics.thomsonreuters.com/11/12/IRN_TOPIMP_CT1211.gif

The fall of Iran's rial:

http://link.reuters.com/tex56s

(Additional reporting By Roberta Rampton, Andrew Quinn and Rachelle Younglai; editing by Warren Strobel and Mohammad Zargham)

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