If Europe and the United States get serious about sanctions enforcement, the Iranian regime could find itself without the energy know-how to keep its critical oil and natural gas sectors running.
Last month, the United Nations Security Council provided important political cover for targeted action against the Iranian energy sector -- the lifeblood of the regime. The U.S., France and the United Kingdom added language to the preamble of the recently-adopted UN Security Council Resolution 1929 noting "the potential connection between Iran's revenues derived from its energy sector and the funding of Iran's proliferation-sensitive nuclear activities."
The resolution also expressed concern that "chemical process equipment and materials required for the petrochemical industry have much in common with those required for certain sensitive nuclear fuel cycle activities."
China and Russia voted for this resolution, and the European Union appears to be taking it seriously. At a summit on June 17, the EU announced a ban on new investment, technical assistance and technology transfers in connection with Iran's natural gas and oil industry. Details on the complete sanctions package are expected in late July.
Then, two weeks ago, the United States Congress passed the toughest Iran sanctions legislation in history, with 507 members supporting the bill and only eight members opposing it. The bill, which President Obama signed last Thursday strikes a blow at the heart of the Iranian energy sector.
The Comprehensive Iran Sanctions Accountability and Divestment Act targets the Iranian energy and financial sectors. The core of the bill, originally known as the Iran Refined Petroleum Sanctions Act, initially passed the House and Senate in December and January.
While the original bills only focused on choking off Iran's access to refined petroleum, changes that occurred in committee have the potential to inflict even greater pain on the regime's entire energy business -- beyond gasoline.
The Iranian regime claims it can withstand energy sanctions even though it imports 30 percent of its gasoline. But its much-ballyhooed countermeasures, including the expansion of its refinery capacity, and the introduction of flex-fuel cars, are exaggerated. The regime also plans to cut gasoline subsidies which could double or triple already high inflation rates. Foreign companies -- which were already cutting back their gasoline supplies to Iran before the legislation passed -- now have even more incentive to do so. Following the lead of a number of other energy traders, the French energy giant Total, one of Iran's largest gasoline suppliers, recently terminated its Iranian trade according to press reports.
What should be particularly troubling for Tehran are two changes that occurred during the conference committee: the first, Congress eliminated one sentence in the Iran Sanctions Act which for fourteen years permitted companies providing technology, goods and services to the Iranian oil and natural gas sectors to escape U.S. sanctions; and the second, Congress added additional language to the legislation which could bar foreign companies that do business with the U.S. from entering into joint ventures, partnerships and investments with the Iranian regime for foreign energy projects outside Iran.
With these tweaks to the bill, U.S. sanctions laws could now strike a blow at the heart of Iran's energy wealth.
Without energy wealth, the Iranian regime could collapse. Tehran is the world's fourth-largest producer of crude oil. Oil exports constitute more than 24 percent of Iran's gross domestic product, according to Government Accountability Office estimates, and as much of 75 percent of government revenues.
At some 981 trillion cubic feet, Iran's natural gas reserves are second only to Russia's. Oil already gives the Iranian regime enormous wealth to fund its proliferation and terrorism activities and a vast state system of repression. It also gives the regime significant international leverage. Once it becomes a major natural gas exporter, the regime will have even more influence.
Government mismanagement and the threat of international sanctions on foreign companies are already showing clear signs of slowing Iran's energy industries. During President Mahmoud Ahmadinejad's first four years in office, with the threat of sanctions looming, foreign investment in the Iranian energy sector plummeted by 64 percent, from $4.2 billion to $1.5 billion. Ahmadinejad has also replaced a number of competent energy technocrats with regime loyalists, including Revolutionary Guard officials who had no previous experience in the energy industry. Iranian officials now say that without an annual investment of at least $25 billion, Iran could become a net importer of oil.
To revitalize its energy business, Tehran needs help from foreign companies.
Natural gas projects are complex endeavors, requiring specialized, sophisticated technology and services. Iran lacks the equipment and scientific expertise to harness its gas reserves and has turned to its international trading partners for help. The principal culprits here are not the usual suspects, Russia and China, but U.S. allies in Europe.
According to informed estimates, about 60 percent of the technology Iran uses to exploit its natural gas resources comes from one European nation: Germany.
Iran also depends on foreign technology, goods and services to develop its oil resources. While Chinese and Russian companies can provide significant capital for both natural gas and oil projects, they too depend on foreign subcontractors to provide critical know-how.
Until last week, companies were free to provide these products and services to the Iranian oil and natural gas businesses. That has now changed: With a stroke of the pen, Congress provided President Obama with the means to sanction any company that provides technology, goods or services valued at $20 million or more in any single year to the Iranian energy industry.
The other significant change to the bill in committee involved closing a loophole that overlooked Iran's business relationships with foreign companies for energy-related projects outside Iran. Iranian leaders had been skillfully pursuing partnerships outside Iran with European and Asian energy companies to frustrate American attempts to build an international consensus behind enforcing sanctions.
Iranian entities are involved in numerous foreign energy projects, including joint ventures with foreign energy companies for natural gas projects off the coast of Scotland, in Croatia, and in Azerbaijan, investments in European energy and infrastructure companies, and refineries in Malaysia, Indonesia and Vietnam. These partnerships give Tehran access to technology and expertise to develop its own energy resources, influence over foreign partners, and a source of additional funding for its nuclear program and terrorist activities.
As a result of a last-minute addition to the legislation, the Obama administration must now report to Congress every six months on which companies are involved in these overseas projects with the Iranian regime. Unless it waives these sanctions, the administration must apply the tough penalties stipulated in the legislation against international companies providing technology, goods and services both directly to the Iranian regime and in the context of partnerships and joint ventures with Iranian entities.
Both Beijing and Moscow will resist U.S. and European efforts to target Iran's energy business, but they have only so much technology and assistance of their own to offer. With Gazprom's and other Russian companies' Iranian commercial interests in mind, Russian ambassador to the EU Vladimir Chizhov criticized the announcement: "If you want to dissuade Iran from pursuing a nuclear programme ... then why the hell are you banning the supply of equipment for the oil and gas industry?"
Ambassador Chizhov should know the answer, since his government voted for the UN resolution that emphasizes the nexus between Iran's energy wealth and its illegal nuclear activities. Sanctions are one of the few peaceful ways left to persuade the regime to abandon its pursuit of nuclear weapons, support for terrorism and human rights abuses.
The U.N Security Council provided useful language to encourage international action against the Iranian energy sector. It's now up to President Obama and European leaders to translate this language into real action.
Mark Dubowitz is the executive director of the Foundation for Defense of Democracies, and director of FDD's Iran Energy Project.