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WI: Economic Sanctions against Iran: Engaging, Not Confronting, Allies

Author: Michael Jacobson
May 4, 2007


PolicyWatch #1227

Economic Sanctions against Iran: Engaging, Not Confronting, Allies

By Michael Jacobson
May 4, 2007

On April 18, 2007, senior Treasury and State Department officials testifying before Congress were criticized for failing to employ sufficiently tough economic sanctions against Iran. This failure was partly attributed to Washington's fear of upsetting foreign allies. Ironically enough, the Bush administration could use such congressional pressure as leverage in its efforts to forge effective international cooperation on Iran.

Congressional Pressure

The hearing -- a joint session of House Foreign Affairs and Financial Services subcommittees -- focused on efforts to isolate proliferators of weapons of mass destruction (WMD) and state sponsors of terrorism through financial means such as sanctions. Committee members criticized the government's failure to fully exploit existing tools and encouraged the Bush administration to ramp up economic sanctions targeting Iran. One focus was Washington's longstanding unwillingness to sanction foreign companies for investing in Iran's energy sector. Many have argued that such sanctions could cause a backlash and undermine U.S. efforts to build a broad international coalition against Iran -- financial penalties would likely apply to companies in Europe and Japan, whose support is considered essential to the success of any international effort.

The administration maintains that its approach -- combining diplomacy with targeted financial measures -- is succeeding. As evidence, it points to the various UN Security Council resolutions, and the fact that a number of foreign financial institutions and private companies have voluntarily reduced or terminated commercial ties to Iran. The European Union (EU), for one, has exceeded UN requirements by imposing a full arms embargo on Iran and bringing sanctions against entities that have not yet been designated by the UN.

Legal Background

The Iran-Libya Sanctions Act (ILSA), now the Iran Sanctions Act (ISA), was passed in 1996 as part of a broader effort to strengthen economic sanctions against Iran and Libya. Enacted soon after Iran first permitted foreign investment in its energy sector, ILSA was intended to deprive the regime of much-needed assistance in modernizing its energy industry. Many also hoped that the legislation would reduce the funds available to Iran for supporting terrorism or developing WMD programs, given the country's reliance on oil revenues.

ILSA required the president to impose sanctions on non-U.S. companies investing more than $20 million in Iran's energy sector annually. The president could choose which two out of six possible measures to apply in each case. These included sanctions with a potentially major impact (e.g., restricting imports to the United States) as well as less severe measures (e.g., barring a company from serving as a primary dealer in U.S. debt instruments). The president was also given authority to waive sanctions under two conditions: (1) "country waivers," issued when a company's home country had taken steps to inhibit Iran's WMD programs, and (2) "national interest waivers," issued when the president certified that an exception was important to U.S. national interests.

The Iran Freedom Support Act (IFSA), passed in September 2006, amended key portions of ILSA and extended it until December 2011. Most important, IFSA removed the sanctions against Libya, which was no longer designated a state sponsor of terrorism. To reflect this change, ILSA was renamed ISA. IFSA also codified many of the comprehensive sanctions already in place against Iran, which were largely based on 1995 and 1997 executive orders. This step limited the president's ability to unilaterally lift existing sanctions.

Like ILSA before it, IFSA requires the president to impose two out of six potential sanctions on entities investing in Iran's energy sector. But IFSA limits the president's authority to issue waivers. Although the national interest waiver remains in place, the country waiver has been replaced with a case-by-case waiver that can only be issued for six months at a time. The president must also certify that any such provisional waiver is vital to U.S. national security interests. In addition, IFSA requires the president to sanction entities that knowingly support Iran's WMD programs.

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