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Iran Prepares for EU Sanctions Which Take Full Effect on 1st of July

July 1 figures to be a bad day for Iran -- that's when hard-hitting EU sanctions on Iran's oil exports take full effect.

The sanctions targeting the country's economic lifeline are the EU's toughest measures to date concerning Iran's controversial nuclear activities. Economists believe they could slash Iran's oil revenues by half.

The United States and other Western countries accuse Iran of secretly developing nuclear weapons, while Iran has insisted its nuclear program is purely civilian. The United States, which has imposed its own sanctions, and its allies are looking to deprive Iran of much-needed oil revenue in the hope of constraining Iran to scale back its contentious nuclear activities.

The EU sanctions, formally adopted in late January, bar members of the bloc from buying Iranian petrochemical products and crude oil, and from insuring vessels that carry those products.

Many EU members, which accounted for about 20 percent of Iran's oil exports before the sanctions, beat the July 1 deadline by implementing cuts seen as a blow to Iran's already strained economy. Iran's crude-oil exports have fallen by 40 percent this year, according to the International Energy Agency.

"A lot of these countries have already started to back out and essentially completed the backing out of that crude. So that's around 600,000 barrels a day," says Jamie Webster, a senior manager of the Markets and Country Strategies Group at PFC Energy, a global consulting firm specializing in the oil and gas industry.

"Previously, before all of this latest rash of sanctions, Iran was exporting around 2.2 million barrels a day, so that is affecting them in terms of that customer."

Insurance Ban

Robin Mills, a Dubai-based energy economist and consultant, says the insurance sanctions on oil tankers are likely to hurt Iran further "because that affects not only the EU, but it affects Asian nations such as Japan, South Korea, and so on."

On June 26, South Korea became Iran's first major Asian customer to announce a halt in imports from July 1 as a result of the EU insurance ban on tankers carrying Iranian oil.

Other Asian countries, including Japan and China, have reportedly also cut their imports from Iran by 18 percent. About 20 countries, including China and Singapore, have been granted exemptions from U.S. sanctions because Washington was satisfied that they had reduced their crude purchases from Tehran.

Iranian Oil Refinery
Iranian petrochemical exports are expected to suffer a major drop.

Mills says the insurance sanctions could bring down Iranian oil exports by another 400,000 barrels per day. "Of course at the same time oil prices, which were very high in March, have fallen back quite significantly so that's a kind of a double impact," he adds.

"So it could be that Iran's oil revenues which were perhaps something like $100 billion to $110 billion during the last Iranian year, in this year they could be down to $45 billion to $50 billion," Mills notes, "so the oil revenues could be cut in half overall with the combination of lower exports and lower prices."

Tehran's Defiance Continues

Despite the significant economic hit Iran is taking, the country's rulers have shown no appetite for compromise on their sensitive nuclear work.

In a June 28 letter to European Union foreign-policy chief Catherine Ashton, Iran's chief nuclear negotiator, Said Jalili, warned against "unconstructive measures" that could harm talks about the country's nuclear program. Iran and major world powers held nuclear negotiations in Moscow in early June that failed to result in any breakthrough in the deadlock over Tehran's nuclear work.

Analysts say high foreign-exchange reserves and oil revenues are likely to help the Iranian regime survive in the immediate future despite the tougher sanctions it's facing. In recent weeks Iran has also taken steps that could be intended to circumvent the sanctions, including renaming many of its oil tankers and registering them under other countries' flags.

However, Iran has fewer and fewer options for countering the sanctions, Webster of PFC Energy says. "It is a world-class leader in terms of smuggling or getting around sanctions. It's very, very good at that but that obviously has quite a cost on the amount of revenues that they can actually then bring home because of that additional cost."

Webster adds that Iran is also trying "especially in the oil sector," to build capacity and get projects "going on their own." He notes that foreign assistance in such projects is dwindling with the added sanctions. "The Chinese are still investing in Iran but they're taking their kind of normal strategy, which is, when dealing with these sorts of pariah states, they're just doing enough to keep their foot in the door and maintain a presence there but doing as little as they can so as not to rile the rest of the [international community]."

For Iranian citizens who are already suffering from very high inflation and rising food prices, the new sanctions mean tougher days ahead, economists say. In a sign of growing frustration over rising prices, some Iranians last week reportedly protested by boycotting bread and milk for three days.

By. Golnaz Esfandiari

Copyright (c) 2010. RFE/RL, Inc. Reprinted with the permission of Radio Free Europe/Radio Liberty, 1201 Connecticut Ave., N.W. Washington DC 20036.

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