World Powers Hammer Out Draft Deal on New Iran Sanctions

One Step Forward, Two Steps Back?

The protracted journey towards a third round of international sanctions against Iran moved one step closer yesterday, as foreign ministers from the permanent members of the UN Security Council (UNSC) plus Germany meeting in Berlin (Germany) hammered out a draft agreement that proposes an expanded list of travel bans and asset freezes against individuals and entities associated with Iran’s nuclear enterprise. Although the text, described as a “moderate tightening” of the previous sanctions package, is not as stinging as Iran’s chief critics would have wished, it does nonetheless signal a revived international bid to bring Iran to task. Signs that the international community was moving closer towards a third round of sanctions were visible during U.S. President George W. Bush’s recent visit to the Middle East, with the U.S. leader forcefully making the case against allowing Iran to forge ahead with its nuclear course. In an effort to counter the revived momentum against Iran, President Mahmoud Ahmedinejad dispatched his nuclear envoy to Beijing (China) last week in a belated diplomatic bid to prevent China from throwing its weight behind a third round of sanctions.

The Iranians, however, fell short of persuading the Chinese—who are seeking to carve out a more responsible international profile—to sit on the fence as the Asian giant lent its voice to international demands for Iran to halt its uranium enrichment drive or face the financial costs attached to its continued intransigence. However, as yesterday’s watered-down text indicates, China—whose huge energy appetite drives its working relationship with Iran—is prepared to ratchet up the pressure, but only up to a point. The Russians also lent their support, but only after much persuading by U.S. Secretary of State Condoleezza Rice, with a U.S. official privy to the meeting telling the U.K.-based Financial Times newspaper that Rice had worked tirelessly to find common ground with her Russian counterpart, Sergei Lavrov. The United States, which was caught off guard by the publication of the National Intelligence Estimate (NIE), seems more willing to back a diluted sanctions package than none at all.

Iranian President Mahmoud Ahmedinejad responded to the draft resolution in characteristic manner, telling reporters today that a third round of sanctions would prove “ineffective” in deterring Iran from its legitimate nuclear aspirations. Despite the president’s usual grandstanding, the Iranian leader has been chastened in recent days and was publicly slapped down by Iranian Supreme Leader Ayatollah Sayyid Ali Khamenei. The supreme leader overruled a recent attempt by President Ahmedinejad to block a law requiring the government to supply US$724-million worth of imported gas (or gas diverted from oil production injection facilities) to the hardest-hit areas of the country, where 64 people have died as a result of the cold. Following Khamenei's recent appointment of Mohammad Zolghadr as deputy head of the armed forces for the Basij (a volunteer militia) shortly after President Ahmedinejad had sacked him from his post as deputy interior minister, yesterday's snub has been widely interpreted as the supreme leader distancing himself from an increasingly beleaguered president and government.

Outlook and Implications

While the sanctions draft is a watered-down version of what the United States—supported by the United Kingdom and France—would have advocated, it will send yet another clear signal to the international community and, mainly, the international business community, that pressure on Iran and the dangers of doing business with the country are not receding but advancing.

Investment in Iran, and imports of technology, have been severely curtailed in the past not so much by UN sanctions as by unilateral U.S. moves; however, every lot of UN sanctions sends a powerful signal to the business community of the direction in which the wind is blowing and how tolerantly Iranian business contacts will be viewed by governments other than that of the United States. This has been particularly true for European and Japanese companies—which, apart from U.S. counterparts, hold most of the LNG technology that is coveted by Iran—but will be increasingly true for Asian companies. A new round of UN sanctions will restore the momentum for further U.S.-led pressure to isolate Iran and may possibly again stem the inflow of Asian oil and gas companies that have used the loss of momentum since the early-December NIE to clinch large deals with the Islamic Republic.

Iran's opaque state- and semi-state-institution-controlled economy makes it hard for international companies doing business in Iran to be sure to which organisation an individual might be tied or with whom he might be indirectly involved. Further expanding the list of people, companies, foundations and organisations being sanctioned by the UN will therefore further up the overall risk of doing business in the country. This has recently been particularly noticeable for international banks, many of whom have even stopped issuing letters of credit to companies entering into contracts with their Iranian counterparts.

Find out more about Same-day Analysis