Middle East
11:01 pm
Tue December 20, 2011

White House Faces Tough Choice On Iran Sanctions

Originally published on Wed December 21, 2011 9:35 am

Let Iran off the hook or undermine the global economy? Slap sanctions on an Iranian energy company or provide Europe with an alternative to Russian gas? Washington policymaking is especially difficult when the aims conflict, and few cases illustrate that principle more clearly than the challenge of finding a way to punish Iran without hurting someone else.

Congress last week approved new sanctions on Iran that could make it harder for that country to sell its oil. The White House has said it supports squeezing Iran economically but worries the sanctions could bring higher oil prices and damage the global economy.

The argument around this latest Iran measure was clear: No sanction would hurt Iran more than cutting its oil revenue. It would strip the regime of funds that could otherwise go to a nuclear weapons program.

On the other hand, Iran is a big oil supplier. If you take Iranian oil out of the global market, there's less supply to meet demand. World prices go up.

Members of Congress understood the dilemma but approved the sanctions anyway. Concerns about Iran's nuclear program took precedence.

"Congress's point of view is that we may be running a risk that this will increase the price of oil but that compared to [the risk of ] Israeli or U.S. military strikes on Iran or a nuclear-armed Iran, the oil market impact of these sanctions will pale in comparison," says Mark Dubowitz, executive director of the Foundation for the Defense of Democracies.

Energy analyst Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says there are no easy answers.

"There are only trade-offs, and many of the trade-offs are difficult ones," Yergin says.

Whether to curtail Iran's oil revenue or protect the global oil market is one such trade-off. Another one involves the natural gas trade in Central Asia.

Europe right now depends on Russia for much of its gas. But Russian leaders have sometimes used their gas exports to promote Russian strategic interests, particularly in former Soviet republics such as Ukraine, which suffered a gas cutoff from Russia in January 2009.

Joschka Fischer, a former German foreign minister, spoke for many European observers when he wrote in 2010: "The primary goal of Russian gas policy isn't economic but political, namely to further the aim of revising the post-Soviet order in Europe."

In response to Russian pressures, European leaders have long sought an alternative gas supply, and they have been supported by the United States. They found a new source in the Shah Deniz field in Azerbaijan, and European governments have backed the construction of a pipeline that would bring the gas straight to Europe, bypassing Russian pipelines.

One of the participating companies in the Shah Deniz consortium, however, is the Naftrian Intertrade Co., or NICO, which is owned by the Iranian government. NICO has only a minority share in the operation, but generally the United States has favored sanctions on foreign joint ventures involving the Iranian government.

Here's the dilemma: Sanctions on the Shah Deniz project could stall the construction of the gas pipeline to Europe. For that reason, the State Department in this case is opposing sanctions on NICO, despite its participation in the joint venture in Azerbaijan.

"If in fact Shah Deniz were to be sanctioned, it would defeat many years of U.S. policy for gas to go from the Caucasus in Central Asia to Europe," explains Ambassador Richard Morningstar, the State Department's special envoy for Eurasia.

In addition, Azerbaijan is strategically important.

"It's a secular Muslim state next door to Iran and next door to Russia," says Yergin, whose new book is titled The Quest: Energy Security and the Remaking of the Modern World. "The development of that gas supply is very important to Azerbaijan, to its economics, and its future."

Iran's participation in the Shah Deniz project, of course, is far less significant than its stake in the global oil market.

"NICO owns only 10 percent of the project," Morningstar says. "It's a totally passive investor, so it's not getting any technical benefit or anything."

But the policy decision here is not easy. Advocates of a tough line against Iran don't like the idea of any project that brings that regime money, much less one that gives Iran a toehold in the rapidly growing natural gas business.

On the other hand, the European need for an alternative to Russian gas is undeniable. Policymakers are looking at a potential choice between bad options.

"Either Europe remains dependent on Russia for its natural gas," Dubowitz says, "and faces a situation like it did with the dispute between Russia and the Ukraine, or Europe becomes more and more dependent on Iran."

Two important sanctions issues now come up before Congress, both with respect to Iran. In the first, Congress opts for the sanctions even at the risk of disrupting the global oil market. In the second, with an Iranian gas company involved, it appears Congress will look the other way. A second Iranian sanctions bill is in the works on Capitol Hill, but for now the proposal does not target the Shah Deniz project.

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Transcript

RENEE MONTAGNE, HOST:

We're going to consider now how policy goals can conflict when sanctions are involved. Case in point: Iran. Last week, Congress approved new sanctions on that country that could make it harder for Iran to sell its oil. The White House has said it supports squeezing Iran economically, but worries the sanctions could bring higher oil prices. And that could hurt the global economy.

NPR's Tom Gjelten reports.

TOM GJELTEN, BYLINE: The argument around this latest Iran measure was clear: No sanction would hurt Iran more than cutting its oil revenue. It would strip the regime of funds that could otherwise go to a nuclear weapons program. On the other hand, Iran is a big oil supplier: If you take Iranian oil out of the global market, there's less supply to meet demand. World prices go up.

Congress understood that dilemma but approved the sanctions anyway. Its concerns about Iran's nuclear program were paramount.

Mark Dubowitz is executive director of the Foundation for the Defense of Democracies.

MARK DUBOWITZ: Congress's point of view is that we may be running a risk that this will increase the price of oil, but that compared to Israeli military strikes on Iran or U.S. military strikes on Iran, or a nuclear armed Iran, the oil market impact of these sanctions will pale in comparison.

GJELTEN: Sanctions often come down to dilemmas just like this, says energy analyst Daniel Yergin.

DANIEL YERGIN: There are no easy answers and there are only trade-offs, and many of the trade-offs are difficult ones.

GJELTEN: Whether to go after Iran's oil revenue raised one such trade-off. Here's another, this one involving natural gas.

Europe right now depends on Russia for much of its gas. European leaders, supported by the United States have long sought an alternative supply. Now they have a new gas source in Azerbaijan. It's called the Shah Deniz Field. And there are plans for a pipeline to bring that gas straight to Europe, bypassing Russia.

But here's the dilemma: One of the companies in the consortium developing that field happens to be owned by the Iranian government. Generally, the United States has favored sanctions on Iran's joint ventures. But sanctions on this Shah Deniz project could stall the pipeline-to-Europe project.

What to do? The State Department's Richard Morningstar says, in this case, sanctions are not a good idea.

RICHARD MORNINGSTAR: If in fact, Shah Deniz were to be sanctioned, it would defeat many years of U.S. policy for gas to go from the Caucasus in Central Asia to Europe.

GJELTEN: Daniel Yergin, whose new book is titled "The Quest," makes another point: Azerbaijan is strategically important to the United States and its allies.

YERGIN: Azerbaijan is a secular Muslim state that is next door to Iran and next door to Russia. And the development of that gas supply is very important to Azerbaijan, to its economics, its future and so forth. So that's a further element in this whole equation.

GJELTEN: It's complicated. Here's an important point: It's not like Iran would gain all that much from this gas project. Sanctioning it wouldn't hurt Iran the way targeting its oil revenue would.

Richard Morningstar, the State Department's special envoy for Eurasia, points out that the Iranian firm - NICO by its initials - is a pretty minor player in the gas and pipeline operation.

MORNINGSTAR: NICO owns only 10 percent of the project. It's a totally passive investor, so it's not getting any technical benefit or anything.

GJELTEN: There is another Iran sanctions bill in the works on Capitol Hill. But so far it appears the Azerbaijan pipeline won't be affected.

Advocates of a tough line against Iran don't like the idea of any project that brings the regime money, much less one that gives Iran a toehold in the rapidly growing natural gas business. But there is that European need for an alternative to Russian gas. As Mark Dubowitz says, sometimes you have to choose between bad options.

DUBOWITZ: Either Europe is dependent on Russia for its natural gas and faces a situation it did five years ago, where a dispute between Russia and the Ukraine leads to a significant disruption, or Europe becomes more and more dependent on Iran.

GJELTEN: So, two important sanctions issues come up before Congress, both with respect to Iran. In the first, Congress opts for the sanctions even at the risk of disrupting the global oil market. In the second, with an Iranian gas company involved, it appears Congress will look the other way.

Tom Gjelten, NPR News, Washington. Transcript provided by NPR, Copyright NPR.