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Tough Sanctions May Not Persuade Iran to Quit Nuclear Program

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January 12, 2010, 12:36 AM EST

By Indira A.R. Lakshmanan

Jan. 12 (Bloomberg) — President Barack Obama’s push to halt Iran’s suspected nuclear-weapons program with tougher sanctions is likely to fail, if history is a guide.

Financial and trade restrictions imposed by the United Nations, the U.S. and the European Union haven’t stopped Iran from enriching uranium or building a secret nuclear facility — any more than sanctions on countries including Cuba and Myanmar have changed their policies.

Unity on new penalties will be tough. Major economies such as China rely on Iran’s crude oil, and many non-U.S. energy companies including Royal Dutch Shell Plc are invested in Iran, which has the world’s second-biggest natural-gas and oil reserves.

Sanctions require near-universal compliance, so that “as some countries and companies step out of doing business with Iran, others don’t fill the gap,” said Michael Jacobson, former Treasury Department terrorism-finance adviser and now a senior fellow at the Washington Institute for Near East Policy.

Consequences of failure are potentially catastrophic: Pressure may build for military action by Israel or the U.S., which would likely spark retaliation. If Iran does build a weapon, that might set off an arms race in an already unstable region. Iran has said its program is for energy generation.

The menu of sanctions may include additional restrictions on financial transactions and cutting off insurance for Iranian cargo shipments, Jacobson said. The U.S. wants to focus on Iran’s Revolutionary Guard Corps, an elite military branch with far-reaching business interests and involvement in nuclear and missile development, Secretary of State Hillary Clinton has said.

‘Smarter Way’

Targeting “those who actually make the decisions” is “a smarter way to do sanctions,” she told reporters yesterday. “But that is all yet to be decided upon.”

Iran is subject to UN sanctions including a 2007 resolution freezing assets and banning foreign travel for a few Revolutionary Guard-affiliated companies and officials.

“Sanctions until now have been general, hitting the entire Iranian economy and preventing most foreign direct investment,” which means less competition as the Revolutionary Guard increases its influence over industries including energy and telecommunications, said Ali Alfoneh, a fellow at the American Enterprise Institute in Washington.

China is one obstacle to new UN measures. It can veto Security Council resolutions, and its government has resisted stronger penalties on Iran, China’s third-largest source of crude oil, according to the Beijing-based General Administration of Customs.

Enforcement Gaps

Even if countries agree on new restrictions, gaps in enforcement have rendered past sanctions largely ineffectual.

When the United Arab Emirates tightened export controls in 2007 and cracked down on Iranian front companies seeking nuclear and weapons technology the UN banned, Malaysia and Hong Kong emerged as hubs for middlemen and re-export, Jacobson said.

The threat of a trade war with European allies has stopped the U.S. from invoking its 1996 Iran Sanctions Act, which allows it to penalize foreign companies for investing in Iran’s energy industry. American companies are prohibited from most trade with Iran.

The House of Representatives passed legislation last month that would give the U.S. power to sanction foreign businesses that sell gasoline to Iran, ignoring concerns from Obama’s administration and European leaders that an embargo would hurt Iranian citizens. California Democrat Howard Berman, chairman of the House Foreign Affairs Committee, praised the bill, comparing it to a 1986 measure to curtail investment in apartheid South Africa.

‘False Beacon’

Gary Hufbauer, co-author of “Economic Sanctions Reconsidered,” calls South Africa “a false beacon.” A quasi- democracy, it was susceptible to outside pressure, and a strong opposition movement and threat of civil war played a bigger role than sanctions in overturning apartheid, said Hufbauer, a fellow at the Peterson Institute for International Economics in Washington.

Sanctions skeptics say North Korea, Myanmar, Sudan and Cuba have withstood years of economic restrictions, largely because enough trading partners ignored the penalties.

Advocacy groups and 18 states including New York and Florida are trying to pressure businesses to leave Iran.

United Against Nuclear Iran is starting a campaign today that may include legal action, said Mark Wallace, president of the bipartisan New York-based organization, whose founders include James Woolsey, former Central Intelligence Agency chief.

Financial Risks

The group wants to compel companies to disclose in U.S. Securities and Exchange Commission filings the financial risks to their Iranian business operations from political unrest and possible new sanctions. The first target is Royal Dutch Shell, the British-Dutch energy company headquartered in The Hague, Wallace said.

Shell spokesman David Williams said if there’s international agreement on new sanctions, the company will comply.

California’s insurance commissioner, Steve Poizner, is asking the 1,300 firms licensed in his state to rid their portfolios of $6 billion of stock in companies that operate in Iran, including Munich-based Siemens AG.

Siemens spokesman Wolfram Trost said the company values “ethical behavior” and wouldn’t comment on divestment actions.

While such efforts garner headlines, “it’s really hard to draw a line between our action and companies withdrawing” from Iran, said Florida state investment official Michael McCauley, whose pension fund has sold $1.55 billion in stock.

If costs to Iran “are raised high enough, the regime may ultimately conclude that a nuclear program is more of a burden,” said Matthew Levitt, a former deputy assistant Treasury secretary. “We are not there yet. Not close.”

–With assistance from William Varner at the United Nations, Yee Kai Pin in Singapore, Baizhen Chua in Beijing, Henry Meyer in Dubai, Ali Sheikholeslami in London, Richard Weiss in Frankfurt and Ben Holland in Istanbul. Editors: Edward DeMarco, Melinda Grenier.

To contact the reporter on this story: Indira Lakshmanan in Washington at +1-202-654-1277 or [email protected]

To contact the editor responsible for this story: Jim Kirk at +1-202-654-4315 or [email protected]

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