Wednesday, July 28, 2010

Europe's Iran sanctions will backfire

Europe's Iran sanctions will backfire
By Kaveh L Afrasiabi

The European Union (EU) on Monday adopted a new round of sanctions against Iran that, if implemented, will have serious implications not only for the EU as the Islamic Republic's largest trading partner, but also for its energy security.

The new European sanctions target Iranian shipping and air cargo companies, impose visa bans on officials and freeze assets linked to the Islamic Revolutionary Guards Corps, and also include trade insurance and financial sanctions. They ban new EU investments in Iran's nuclear and gas sectors as well as any technical energy assistance - this from a continent that receives roughly 29% of Iran's crude oil exports and is increasingly dependent on its gas exports.

The EU sanctions support curbs under the UN Security Council Resolution 1929 imposed on June 10, which were followed by US sanctions. The resolution paved the way for a fourth round of international sanctions over claims that Iran is building nuclear weapons. Tehran denies the accusations and says its nuclear program is for peaceful purposes only.

In light of Iran's serious need for foreign capital in its energy sector, the crippling effect of Western sanctions on its oil and gas is bound to have ripple effects in accentuating Europe's current energy insecurity, reflected in the 27-member EU's wariness of undue dependence on Russia and its frantic search to diversify sources of gas imports.

It may well be that the implicit assumption behind the new EU sanctions is the comforting assurance that the energy sanctions will not cripple Iran's ability to export, allowing Europe to continue to benefit. The crux of Europe's dilemma, however, is that sanctions on Iran will inevitably translate into economic, financial and energy losses for the EU.

By imposing sanctions on Iran's energy sector while expecting business as usual in the delivery of oil and gas, European politicians are engaging in the self-deluding notion that somehow they can be at the forefront of the sanctions regime on Iran without incurring substantial costs.

Already, Iran has warned that it may switch its energy transactions from the euro to other currencies, above all the dirham of the United Arab Emirates. The mere threat of such a move simply adds to the euro's weaknesses at a critical time when the eurozone is grappling with multiple difficulties in its currency and financial health.

Not only that, the new EU sanctions, in addition to switching the EU's so-called two-track diplomacy with Iran almost entirely to one-track coercive diplomacy, target Europe's own hitherto reliable source of energy, unlike sanctions from the US, which does not directly import oil or gas from Iran. A case in point is the Swiss energy giant EGL, which has signed a US$13 billion 25-year contract with Iran that almost certainly will be hurt by the new Western sanctions on Iran's energy sector.

Ironically, the EU's decision comes only a few days after Turkey signed a US$1.3 billion pipeline agreement with Iran that calls for gas exports of 2.1 billion cubic feet a day (cf/d) in three years. No surprise then that Ankara was quick in denouncing the EU's sanctions and openly stated it would not honor them.

In addition to the proposed 410 mile (660 kilometer) pipeline, the existing 745 mile Iran-Turkey pipeline, completed in 2001, can transport up to 1.4 billion cf/d of natural gas, although due to technical and other difficulties it has never operated at optimal levels and there have been periodic interruptions.

"The EU has foolishly and blindly followed the footsteps of the United States, which has no vested economic interests with Iran,'' a Tehran University political science professor told the author. ''This is going to have negative geo-economic implications for the European Union, that is, telling Iran that now we would love to have your oil and gas, but we will do everything possible to make sure that your energy sectors are crippled. What an irony."

In response, Iran would probably expand its energy ties with Asian countries such as India, which had increased its oil imports from Iran by 9% compared to last year, the professor added. Nor is there any sign that China and Japan, which together account for roughly one third of Iran's oil exports, are ready to risk their energy security over the nuclear standoff, as Europe has now done.

Without doubt, the European and US sanctions will have a significant impact on Iran's trajectory as a gas producer in the years to come. According to senior Iranian energy officials, Iran needs a minimum of $8 billion in investment in the gas sector, given the fact that some two-thirds of its gas reserves remain undeveloped, particularly in the giant South Pars. The gas field contains roughly half of Iran's gas and is shared with Qatar, which has far outplayed Iran in its exploitation of the reserve, much to the chagrin of the Iranians who are worried that Qatar will take advantage of the Western sanctions.

A big question concerns how the new EU sanctions will impact on plans for the ambitious "Persian pipeline" that could connect Iran's South Pars gas to Europe via Turkey? [1] Has Europe really given serious thought to these questions or, as the late German Iran specialist Johannes Reissner once put it, has Europe fallen into the malady of a "nuclear reductionism"?

Prospects for a mini-breakthrough
Meanwhile, in the maddening march of Western governments toward tougher sanctions on Iran there is the glimmer of a mini-breakthrough in the area of a nuclear fuel exchange for Iran's small medical reactor.

After extensive exchanges with the International Atomic Energy Agency (IAEA), there is reportedly a considerable narrowing of differences between the parties on this issue. By early to mid-September we may witness the finalization of an IAEA-proposed deal for a fuel swap.

Iran has now submitted a new letter to the IAEA and the Vienna Group, consisting of the US, Russia, France and the IAEA, regarding the technical aspects of the fuel swap, urging the other side not to "waste time".

Reports from Tehran indicate some new signs of flexibility on Iran's part, such as with respect to the thorny issue of Iran's production of 20% enriched uranium. Iran may now be willing to forego this in exchange for a firm commitment from the Vienna group on the timely delivery of nuclear fuel to the Tehran reactor.

Not only that, the chances are that Iran, which has offered a new round of multilateral nuclear talks this September, may be willing to entertain a deal whereby it would put its enrichment activities on "standby option" and agree to a temporary freeze without stopping its centrifuges from "dry spinning"; this in exchange for the lifting of sanctions.

The "standby option" is, indeed, the most that the West can expect from Iran at this stage, since the "zero centrifuge" option is a thing of the past - and politically unrealistic in Iran.

Thus, a combined nuclear fuel swap with the standby option, together with other "objective guarantees" regarding Iran's peaceful nuclear program, may at this point pose the best and most feasible scenario for ending a crisis that over the past few months has qualitatively worsened and, indeed, could get a lot worse.

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