FPI Bulletin: Obama and Congress Must Max Out Iran Sanctions—Now

May 14, 2013

With senior Obama administration officials set to testify on the status of Iran’s nuclear program in hearings before the Senate and the House on May 15th, the crisis over Iran’s nuclear ambitions is becoming graver with each passing day.  Over the last decade, diplomatic engagement and economic pressure have failed to persuade the Islamic Republic to abandon its drive to get nuclear weapons-making capability.  What’s worse, loopholes in financial sanctions implemented by the United States, Europe, and other international partners are unwittingly giving the regime in Tehran a crucial economic lifeline.  In turn, this has allowed Iranian leaders to fund—and thus advance—its weapons-relevant nuclear program.
 
Time is running short.  The United States should take decisive actions to deny Iran international sources of revenue that are critical to funding its dangerous and destabilizing nuclear program.
 
Gold is important to the Iranian regime because international financial sanctions prevent the Central Bank of Iran from using U.S. dollars—the world’s reserve currency—to conduct foreign transactions.  But while President Obama’s Executive Order 13622 prohibits the export of gold and other “precious metals” to the Islamic Republic, a report just released by the Foundation for Defense of Democracies (FDD) and the Roubini Global Economics notes that the Obama administration “has not placed sanctions on gold exports to Iran, even thought it has asserted explicit authority to do so since July 2012.”
 
As a result, the regime in Tehran still able to exchange natural gas for gold that can either be shipped to Iran or used to purchase other foreign currencies in Dubai or elsewhere.  The FDD-Roubini report states that “direct and indirect gold exports to Iran amounted to $1.33 billion” in the first quarter of 2013, adding:

“Iran received the gold likely as payment from both Turkey and other Iranian energy importers, in particular India. Some of this may also have reflected repatriation of Iran’s foreign holdings ahead of sanctions and a rise in private demand to hedge the risk of a concurrent collapse in the value of the Iranian rial.” 

Indeed, news reports indicate that Turkey exported approximately $380 million in gold to Iran in March 2013.  Ankara is still Tehran’s largest export market for natural gas, even though month-to-month sales are far below last year’s high of $1.1 billion per month in June and July 2012.
 
In response to the Obama administration’s unwillingness to impose sanctions on Iranian gold transactions, Congress stepped in, forcing the White House’s hand with the enactment of the National Defense Authorization Act for Fiscal Year 2013 on January 2, 2013.  That law includes an amendment—authored by Senators Robert Menendez (D-NJ), Mark Kirk (R-IL), and Joe Lieberman (ID-CT)—that imposes sanctions on persons or entities that use precious metals, including gold, to purchase Iranian oil and natural gas.  However, these new sanctions will not take effect until July 2013.
 
What’s worrisome is that Iranian leaders have found other ways to subvert international financial sanctions against them—for example, by exploiting the European Central Bank (ECB) electronic interbank payment system, commonly known as Target2.  Every day, the system is used to process bank-to-bank transactions around the world.  However, reports indicate that the regime in Tehran now uses the system to launder foreign-held euros into local currencies.  The result is that Iran—which is barred by U.S. and international sanctions from accessing American greenbacks—now conducts billions of dollars in trade using euros. 
 
Such loopholes have helped the Islamic Republic to ride out international economic sanctions while, at the same time, continuing to improve its capability to make nuclear weapons on ever shorter notice.   Indeed, Iran has amassed stockpiles of low enriched uranium of 3.5 percent purity, which—if further enriched—would be enough for at least two nuclear weapons.  It has expanded its Fordow facility, a site for uranium enrichment built deep within a mountain on land controlled by Iran’s Islamic Revolutionary Guard Corps.  And it is deploying more advanced centrifuges for uranium enrichment at its Natanz facility that will enable it to produce low enriched uranium at twice the current rate.
 
The window of opportunity for thwarting Iran’s dangerous and destabilizing nuclear ambitions is rapidly closing.  President Obama has warned that if Iran succeeds in getting difficult-to-detect “breakout capacity”—that is, the capability to make nuclear weapons on such short notice that international inspectors would face great difficulties quickly and reliably detecting a violation—then the United States and international community “would not be able to intervene in time to stop their nuclear program.”  Experts now caution that, based upon Iran’s nuclear declarations to the International Atomic Energy Agency (IAEA), Tehran could reach the point of nuclear-no-return in mid-2014, if not sooner.
 
President Obama and Congress will need to take immediate and decisive actions if non-military means are to have any real chance of stopping Iran from getting undetectable “breakout capacity” for nuclear weapons-making. 
 
First, the United States should act to halt Iran’s euro transactions.  Towards this end, a bipartisan group of lawmakers—led by Senators Joe Manchin (D-WV), Mark Kirk, Susan Collins (R-ME), Bill Nelson (D-FL) and John Cornyn (R-TX)—introduced legislation that would block Tehran’s access to non-local currencies.  This would prevent the regime or other blacklisted Iranian persons or entities from accessing foreign exchange reserves, often held in euros.
 
Second, the United States should do more to restrict Iran’s sales of oil and natural gas.  While sanctions dramatically curtailed the volume of crude Iran exported last year to its lowest level since 1986, the U.S. Energy Information Administration estimates the regime still generated $69 billion in revenue from oil exports in 2012.  With global crude oil production expected to increase in 2013—driven largely by increased non-OPEC production in North America—now is a ripe time to further reduce this vital source of Iranian income.
 
Congress is acting.  On May 22, 2013, the House Foreign Affairs Committee will debate Chairman Ed Royce (R-CA) and Ranking Member Eliot Engel’s (D-NY) Nuclear Iran Prevention Act (H.R. 850).  That bill would not only broaden and intensify current sanctions against the Central Bank of Iran for oil purchases, but also empower the President to impose sanctions on foreign persons and entities engaging in “significant financial transactions” with blacklisted Iranian financial institutions. It would create what has been described as a “de facto commercial embargo.” 
 
President Obama has repeatedly drawn a red line on a nuclear-armed Iran, calling it “unacceptable.”  However, as Iranian centrifuges continue to spin, the regime in Tehran gets ever closer to break-out capacity to make nuclear weapons.  It is urgent that the President work with Congress to impose—immediately—decisive economic sanctions and other non-military pressure that compel Iran to abandon its nuclear ambitions.  The clock is ticking.
 


FPI Resources

Additional Resources

  • Iran’s Golden Loophole – Gary Clark, Mark Dubowitz and Rachel Ziemba – Foundation for Defense of Democracies and Roubini Global Economics – May 13, 2013
  • Iran's Shrewd Move – Michael Makovsky and Blaise Misztal – The Weekly Standard Blog – February 22, 2013

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