U.S. Slowly Changes Sanctions Policy

By Colin MacKinnon

Will they or won’t they? Will the Iranians go ahead with a reported offer to buy grain from the U.S.? Could be—such sales are legal now. At the end of July, the Treasury Department published new regulations that allow American companies to sell food and medicine to Iran, Libya, and Sudan.

While Sudan and Libya are unlikely customers for large food or pharmaceutical sales, Iran is something else. Last fall Niki Trading Company, a U.S. firm with Iranian connections whose CEO is an American trade lobbyist named Richard Bliss (one meaning of the Persian word niki is “bliss”), claimed it had an offer from Iran to buy up to $500 million of American grain. At the time, under an executive order signed by President Bill Clinton, U.S. merchants could sell nothing whatsoever, not an orange, not a frozen chicken, to the Islamic Republic.

Partly in response to the reported Iranian interest in U.S. grain, partly for other reasons, the Clinton administration changed its sanctions policy last April and four months later the regulations came out.

How come?

Conoco and ILSA

Here’s some history. Despite intense, sometimes violent U.S.-Iranian political conflict after the Iranian revolution, American firms were doing important business with Iran well into the 1990s. American oil companies, for example, were buying the majority of Iranian oil for sale on international markets (they just couldn’t import it into the U.S.). Continental Grain and Archer Daniels Midland had grain contracts with Iran. Other U.S. firms sold Iran all sorts of products from auto parts to air conditioners.

But all that stopped in the spring of 1995, when the U.S. oil firm Conoco won an attention-getting $600 million contract to develop Iran’s Sirri Island oil field in the Persian Gulf, a contract widely seen at the time as an Iranian political gesture to the Americans.

Probably for that very reason, the American Israel Public Affairs Committee (AIPAC) and its friends in the media and on the Hill made a great pother over the Conoco deal. So much so that a month after it was announced, President Clinton signed an executive order cutting off all U.S. business with Iran. The order applied retroactively to the Conoco contract.

When Conoco pulled out, the French oil company Total, along with Malaysia’s Petronas, got the Sirri Island contract.

AIPAC and its friends made a great pother over the Conoco deal.

It was the usual story. When the U.S. decides to cut itself out of a market, there’s never any shortage of foreign suppliers to rush in and take the business. The U.S. loses hundreds of millions of dollars in sales and thousands of domestic jobs and gets the reputation for being an unreliable supplier.

Food and medical sanctions are particularly noxious since, as is glaringly true in the case of Iraq, they tend to punish innocent victims in the sanctioned countries rather than the offending leaderships and do little to change the behavior of those leaderships.

A shining light among AIPAC’s legislative allies at the time of the Conoco hullaballoo was the then-senator from New York, Alfonse D’Amato. D’Amato, not satisfied with sanctions that applied merely to U.S. firms, sponsored AIPAC-written legislation requiring the government to punish firms of any foreign country, friend or foe, that invested in the Iranian oil sector.

In 1996 D’Amato’s bill, with references to Libya thrown in at the last minute, became the Iran-Libya Sanctions Act, ILSA for short, and was signed into law.

Under ILSA, the U.S. could forbid offending firms to do business with the U.S. government and forbid U.S. banks to lend to such firms. ILSA set out four other economic punishments, making six in all, at least two of which have to be applied to an offending company.

Europeans Defy ILSA

As predicted, ILSA’s passage touched off a nasty row with European governments, which took then and take now a dim view of other countries interfering with their national firms’ business dealings. The EU threatened to retaliate with legal action.

The administration was saved from a confrontation with the EU over Total’s Sirri Island deal since ILSA did not apply retroactively. But other deals, some of them immense, came along.

In 1997 Bow Valley Energy of Canada signed a $200 million contract to develop an offshore oil field. In September of the same year a consortium consisting of Total, Petronas, and the Russian firm Gazprom announced a mammoth $2 billion investment in Iran’s South Pars offshore gas field. The South Pars deal was clearly in violation of ILSA and way too big to ignore. What was the Clinton administration to do?

After taking over half a year to “study” the issue, the administration announced in May of 1998 that it was granting a “sanctions waiver” to the South Pars consortium.

A spokesman for the U.S. government, who had the task of explaining why, said that such waivers would apply only to companies from the European Union and gave reporters to understand that this one had been issued only in return for particularly helpful European cooperation on matters of deep concern to U.S. national security.

In fact, the EU considered ILSA “unacceptable,” had denounced its passage, and had barred European countries from complying with it. If the U.S. had gone ahead with sanctioning the South Pars consortium, the EU would have made good on a threat to haul the U.S. before the World Trade Organization, where the Americans, as they knew full well, would have lost. Hence the waiver.

Issuing the “waiver” put the administration in the absurd position of “waiving” European and other firms to do business with Iran, at the same time forbidding U.S. firms to do the same. Such are the fruits of the D’Amato bill.

Signs of Change

Signs and portents, beyond the administration’s change in policy and the defeat of Senator D’Amato in his 1998 Senate race, have begun to appear that indicate the U.S. predilection for giving away business to foreign competitors may be weakening. Last winter 32 farm state congressmen, prodded by their constituents, signed a letter to the president calling on the administration to allow the Iranian grain sale to go forward, though only as a one-time exemption to the Clinton executive order (which had been renewed in 1997).

Going further, Sen. Richard Lugar (R-IN) has been calling for an across-the-board change in sanctions policy that would allow sales of food and medicine to all sanctioned countries unless there is some clear reason connected with national security not to allow them.

At least six bills, two of them sponsored by Lugar, are now before the House and Senate that would weaken current economic sanctions on foreign countries. In May the Senate Agriculture, Nutrition and Forestry Committee voted out Lugar’s Agriculture Trade Freedom Act (S. 566), the first sanctions reform legislation in Congress this year. The bill would exempt the sale of agricultural products and livestock from any economic sanctions the U.S. might impose on a foreign country. The president could deny the exemption—that is, forbid the sale of food to a sanctioned country—for reasons of foreign policy or national security. The bill would apply to all sanctions, those already in place and those to come.

Lugar has also introduced The Sanctions Policy Reform Act of 1999 (S. 757), which would require the administration to study the economic impact of proposed sanctions, review sanctions actually in effect to see if they were working, and kill any after two years unless they were renewed. Thirty-seven other senators are co-sponsoring S. 757.

In March of this year, just after the administration announced its new policy allowing food and medical sales, a consortium consisting of the French oil company Elf Aquitaine, the Italian firm ENI, and the National Iranian Oil Company announced a $998 million agreement to redevelop an older Iranian oil field. There has been no talk of sanctions. Doubtless the administration will find some deep national security reason for waiving them on this project as on the South Pars deal.

But will the Iranians buy U.S. grain? Mr. Bliss declined to return a call, but a spokesperson for Niki says that so far, a month after Treasury issued its regulations, the Iranians have not gone ahead with any deals.

They may not do so, at least in the near term. Parliamentary elections are to be held in Iran in March 2000. It may well be that in the run-up to the elections the current reformist government of Iran will be disinclined to make a major commercial deal with the U.S. It would put off such a deal in order to minimize a reaction from the religious conservatives and others on the right, who have money and institutional power, though little popular support, and who might use the issue as a stick to beat the reformers.

As domestic politics in the U.S. first prevented sales to Iran and now allows certain kinds, so domestic politics in Iran, which once allowed all sorts of deals with the U.S., may now be preventing them, even the most innocuous. In international trade, timing is all.

Colin MacKinnon is contributing editor to the Washington-based Middle East Executive Reports.