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Oil Embargo Gains momentum

By Valerie Lincy
Updated January 25, 2012

(Click here to access status report archive)

 

On January 23, the European Union adopted sweeping new sanctions against Iran, including a ban on imports of crude oil and petroleum and petrochemical products. The move, which will be fully implemented by July, should deal a serious economic blow to Iran, as the European Union is one of Iran’s principle trading partners, and 90 percent of E.U. imports from Iran are oil and related products.

Momentum behind an embargo on Iranian oil is also growing in Asia, where a string of U.S. officials have visited in recent weeks – all pushing for a cessation, or at least a decrease, in oil purchases from Iran. The appeal gained little traction in India and China, but Japan has agreed to continue cutting imports of Iranian crude, and South Korea has reportedly been trying to line up alternative energy sources.

Action to limit or end oil trade with Iran comes as the United States prepares to implement new sanctions – pushed by Congress and signed into law by President Obama on December 31 – that target Iran’s energy sector and its Central Bank. The new law would cut off from the United States foreign financial institutions that do business with Iran’s Central Bank. The grace period for oil-related transactions is six months, while for non-oil transactions, sanctions could be imposed as early as next month. A waiver was built into the law allowing the President to delay sanctions or to exempt countries, under certain conditions.

This law follows sanctions measures unveiled by the Obama administration last November, which target firms that enhance Iran’s energy and petrochemical sectors through the “sale, lease, or procurement of goods, services, technology, or support,” up to certain dollar amounts. Also in November, the Treasury Department published a finding identifying the entire Iranian financial sector as a jurisdiction of “Primary Money Laundering Concern” under the U.S. Patriot Act. (Read the full text of the finding here). The finding, which covers Iran's Central Bank and the country's private banks, is based on Iran’s use of its financial sector to support terrorism and weapons of mass destruction proliferation, and to evade sanctions. In the wake of this finding, Britain announced that "all credit and financial institutions are required to cease business relationships and transactions with all Iranian banks, including the Central Bank of Iran," which marks the first time that Britain has cut off an entire country’s banking sector.

The United States, the European Union, and a number of other countries have also continued to blacklist Iranian entities directly involved in nuclear and missile work, as well as companies and individuals linked to the Islamic Republic of Iran Shipping Lines (IRISL) and the Islamic Revolutionary Guard Corps (IRGC). On January 23, the European Union blacklisted Iran’s Central Bank, Bank Tejarat, and several other entities. The United States sanctioned Tejarat and its Belarus-based affiliate on January 12. According to Treasury, Tejarat has “facilitated the movement of tens-of-millions of dollars in an effort to assist the Atomic Energy Organization of Iran.”

Iran’s response to this growing economic pressure has been a combination of threats and conciliatory gestures: Islamic Revolutionary Guard officials have warned that Iran could block the Straits of Hormuz in the event of an oil embargo; meanwhile international nuclear inspectors have been invited for a visit to Iran in late January, and Iranian officials have said they are open to continuing multilateral talks in Turkey.

Yet worrisome developments in Iran’s uranium enrichment program do not suggest that Iran is ready to strike a nuclear deal. Iran announced this month that it had begun producing 20 percent enriched uranium at the Fordow plant, which is fortified and located underground, using several hundred centrifuges. The International Atomic Energy Agency confirmed Iran’s announcement. Enriching uranium to this higher level accomplishes 90 percent of the work needed to process natural uranium to weapon-grade. Whatever is produced at Fordow must be added to the stockpile of 20 percent material Iran has already produced at Natanz. Iran is making an estimated 4.7 kg of this material in the form of uranium hexafluoride each month at Natanz, and had amassed an estimated stockpile of 88 kg by the middle of January. Such progress has to be seen as alarming. According to calculations by the Wisconsin Project, Iran would theoretically need only about 120 kg of this material to make a bomb, after further enrichment.

Iran’s continued refusal to address mounting evidence of nuclear weapon work is also alarming. The IAEA’s November 8 report provided the most detailed picture to date of this evidence, while stopping short – just – of concluding that Iran has an ongoing bomb program. In its report, the Agency described work by Iran for which the only plausible purpose is to make nuclear weapons, including: an undeclared program to produce nuclear material, and procurement, manufacture, and testing of nuclear weapon components.

In an annex to its latest report, the IAEA describes:

The Agency also reported allegations that Iran conducted preparatory work (without nuclear material) on the fabrication of natural and high-enriched uranium metal components, and that Iran has received at least one implosion bomb design.

Much of the information described by the Agency in its November report has been published before. It is the degree of detail in this report, and the Agency’s effort to describe the multiple sources and credibility of its information, that is most striking. As is the Agency’s assertion that it is “increasingly concerned” about activities in Iran “related to the development of a nuclear payload for a missile,” and that it “regularly receives new information” about such activities.

Another troubling revelation in the Agency’s report has to do with a discrepancy in the amount of nuclear material – in this case natural uranium metal – on hand at the Jabr Ibn Hayan Research Laboratory (JHL). According to IAEA inspectors, about 20 kg of this material is unaccounted for. Such material would be useful in the nuclear weapon component testing experiments described above.

Iran has also made good on plans to install larger numbers of more advanced centrifuges. As of last October, about 250 machines (the IR-2m and IR-4) had been installed at the Natanz pilot plant, some of which had been fed with uranium. These machines are more efficient than the thousands of IR-1 centrifuges Iran has installed at the commercial-scale plant at Natanz, and at the Fordow plant. Operating these advanced machines in cascades, as Iran is now doing, is a key step in deploying them on a larger scale.

And Iran continues to produce more low-enriched uranium. As of November 1, this stockpile contained about 5,000 kg of 3.5 percent enriched uranium hexafluoride, a quantity which, if further enriched, is estimated by the Wisconsin Project to be sufficient to fuel five first generation implosion bombs. (See Iran’s Nuclear Timetable.)


The status of sanctions

To tighten the noose around Iran’s nuclear and missile developers, the United States has largely relied on Executive Order 13382. Under this authority, the United States has frozen the bank accounts and financial assets of hundreds of companies and individuals, and prohibited U.S. persons from doing business with them. The United States has also blacklisted almost all major Iranian banks, along with their affiliates and subsidiaries, as well as the Islamic Republic of Iran Shipping Lines (IRISL), and the Islamic Revolutionary Guard Corps (IRGC).

In June 2011, the United States blacklisted a number of major commercial entities, including Iran Air, Iran’s national air carrier, Tidewater Middle East Company, a major Iranian port operator, and several key financial institutions. Also in June, the New York County District Attorney’s office announced a 317 count indictment of IRISL and fifteen of its agents for their role in conspiring to evade U.S. economic sanctions. The indictment describes how IRISL falsified bank records using aliases or corporate alter egos in order to access illegally the U.S. financial system.

On July 1, 2010, U.S. President Barack Obama signed the Comprehensive Iran Sanctions, Accountability, and Divestment Act. This law, which President Obama called “the toughest sanctions against Iran ever passed by the United States Congress,” targets the Iranian government’s primary source of income – its energy sector – and seeks to exploit one of Iran’s primary vulnerabilities – its shortage of petroleum refineries.

The new law penalizes firms that help Iran develop petroleum and natural gas, firms that sell Iran gasoline, and firms that help Iran buy gasoline by providing shipping, insurance or financing. Firms found to be engaging in sanctionable activity are barred from U.S. government contracts.

The law also increases the menu of sanctions that the president “shall impose,” adding a prohibition on accessing foreign exchange in the United States, a prohibition on accessing the U.S. banking system, and a prohibition on property transactions in the United States. A least three of the now-nine sanctions must be imposed unless the President chooses to exercise his waiver authority.

The law has prompted a host of foreign companies to cut ties with Iran. For instance, energy companies Statoil, ENI, Royal Dutch Shell, and Total promised to end their present investments in Iran and avoid any new activity. Insurance giants Allianz and Lloyds have announced that they would no longer cover Iran bound cargo. Flights by Iran Air are unable to refuel in most of Europe, and more foreign banks are refusing to issue letters of credit for trade with Iran.

In addition to the energy sector, the law targets financial institutions that do business with Iranian entities blacklisted by the United States, as well as firms that provide Iran with “sensitive technology,” including telecommunications and computer equipment. The law also authorizes state and local governments to divest from firms involved in Iran’s energy sector, and it seeks to disrupt Iran’s weapon-related procurement by allowing the President to designate a country as a destination of “diversion concern.” This designation would restrict U.S. exports to uncooperative countries.

For its part, the European Union has continued to adopt increasingly severe economic sanctions against Iran. In December 2011, some 180 Iranian entities were added to the E.U. blacklist, including dozens of IRISL shell companies and individuals and firms linked to the IRGC; and in May 2011, over 75 additional Iranian entities were blacklisted, including the Iranian-owned and German-located European-Iranian Trade Bank (known as EIH Bank).

Earlier, in July 2010, the European Union adopted its broadest sanction policy ever, under which all 27 E.U. countries are barred from financing new projects in Iran’s oil and gas sector. In addition, countries are prohibited from expanding existing projects or supplying "key equipment and technology." Financial dealings are restricted as well: Transactions over €40 million with banks domiciled in Iran, or Iranian banks overseas, must be individually authorized. Iranian banks are also barred from opening new branches in Europe or establishing new joint ventures. And all E.U. member states are prohibited (with some exceptions) from providing new loans, grants or other financial assistance to the Iranian government and from insuring Iranian entities. The Europeans also imposed an asset freeze on IRISL, together with a ban on cargo flights operated by Iranian carriers or originating in Iran.

Non-E.U. member states in Europe have adopted sanctions that mirror those of the European Union, in order to prevent Iran from evading sanctions. And Australia, Canada, Japan, New Zealand, Norway, South Korea, and Switzerland have also joined the U.S. and the E.U. in adopting broad economic sanctions that target Iran’s energy, banking and transportation sectors, in addition to blacklisting a number of Iranian entities linked to proliferation.

Iran’s refusal to suspend enrichment, reprocessing and heavy water work has led the U.N. Security Council to vote four rounds of sanctions: Resolution 1929 of June 9, 2010, resolution 1803 of March 3, 2008, resolution 1747 of March 24, 2007, and resolution 1737 of December 23, 2006. These resolutions bar Iran from importing or exporting most conventional weapon systems, as well as items related to uranium enrichment, reprocessing, heavy water and nuclear weapon delivery systems, including dual-use nuclear and missile items; they also bar states from providing Iran with financial or technical assistance aimed at acquiring these items. Resolution 1929 bars Iranian nationals and entities incorporated in Iran from investing in nuclear and missile projects abroad, applies a travel ban on all 41 individuals designated by the Security Council so far, and calls upon countries to “exercise vigilance” in doing business with, and in providing financial services to Iranian entities, and in dealing with Iranian banks. Other elective penalties endorsed by the United Nations include a call for countries to inspect suspicious shipments into and out of Iran, including on the high seas, and to refuse services to Iranian ships suspected of carrying illicit cargo. Countries must also “exercise vigilance” in providing Iranian nationals with specialized nuclear and missile-related training and are called upon, but not required, to cut off “grants, financial assistance, and concessional loans” to the Iranian government. These conditions make it easy for countries to avoid taking action. Combined, the resolutions call for a freeze on the assets of some 117 Iranian entities linked to missile and nuclear work.

In order to oversee implementation, the Security Council has created a Committee responsible for investigating alleged violations. The Committee, which is now aided by a panel of experts named last November, also has the power to expand the asset freeze and travel surveillance to additional persons or companies.

Nuclear progress

After years of delay, the light water power reactor at Bushehr, built by Russia, was connected to Iran's national grid on September 12, 2011. Delivery of the Russian reactor fuel needed for start-up, some 82 tons, was completed in January 2008. The reactor is designed to supply 1,000 megawatts, and is expected to operate at this level by the end of 2011. Each year, the reactor will also generate spent fuel containing some 250 kg of plutonium – enough to fuel several dozen nuclear weapons after further processing. The spent fuel is scheduled to go back to Russia under a protocol signed in 2005.

Following an intermittent freeze on uranium enrichment that lasted several years, Iran resumed enrichment work in January 2006. Since early 2007, Iran has stepped up efforts at its underground commercial-scale enrichment plant at Natanz, with the installation of piping, wiring and control panels, and the installation and linkage of IR-1 (P-1) centrifuges in cascades. Iran has nearly completed the installation of three “units” at Natanz, with roughly 3,000 centrifuges each. As of the IAEA’s November 2011 report, 37 cascades of 164 machines (and in some cases 174 machines) were operating there on November 2. All of these centrifuges had been fed with UF6; a further 17 cascades were installed at the time. According to an IAEA inventory, Iran has produced about 5,000 kg of low-enriched uranium hexafluoride at the plant from the beginning of operations in February 2007, through November 1, 2011.

Work at the Natanz pilot plant has shifted away from the first-generation IR-1 centrifuges towards the development of more advanced machines, including the IR-2, IR-3 and IR-4. All of these machines have been tested with UF6. The IR-2 is a sub-critical machine with a single carbon fiber rotor and no bellows, according to a report by the Institute for Science and International Security. According to the IAEA, Iran is also testing a modified version of the IR-2. This modified IR-2, or one of the other, more advanced centrifuge models, is likely made with higher strength metals, like maraging steel. Iran may rely on foreign suppliers for some of the machine’s key materials and parts. However, Iran is working to make centrifuge operations entirely indigenous; at its Kalaye Electric research and development laboratory, Iran is developing not only centrifuge components, but also measuring equipment and vacuum pumps. As of late October 2011, Iran had installed 164 IR-2m centrifuges (all of which are under vacuum, and some of which had been fed with UF6), and 66 IR-4 centrifuges, none of which had been fed with UF6 by that date.

Iran has also continued to produce uranium hexafluoride (UF6) – a gas that can be enriched to make fuel for reactors or bombs – at its Uranium Conversion Facility (UCF) in Isfahan. From March 2004 through May 2011, Iran produced a total of 371 tons of this material.

Other parts of Iran’s nuclear program have also progressed. Despite calls by the U.N. Security Council, the IAEA and Europe to abandon the project, Iran has pushed forward with its heavy water production plant at Arak, and with its 40-megawatt heavy water reactor nearby. The heavy water plant was inaugurated in August 2006, and had produced 60 tons of heavy water by August 2011, according to Iran. Agency inspectors were able to visit the plant in August 2011 -- their first visit since 2005. The IAEA board indefinitely blocked Iran’s request for technical assistance for this project at a meeting in November 2007, over concerns that the reactor could be used to produce plutonium for weapons. During a visit by to the reactor in November 2010, IAEA inspectors confirmed that civil construction at the site was “almost complete” and that some major equipment, including the pressurizer for the reactor cooling system and the main crane in the reactor building, had been installed. In August 2011, inspectors confirmed that the moderator heat exchangers had been installed, and in October 2011, they confirmed that the coolant heat exchangers had been installed. Iran estimates that the reactor will begin operation by the end of 2013.

On October 22, 2011, Agency inspectors were able to visit the Fuel Manufacturing Plant; they confirmed that Iran had begun installing equipment for the production of fuel plates for the Tehran Research Reactor (TRR). As of this date, inspectors also confirmed that Iran had produced five test plates for the reactor. Earlier, in May 2009, the Plant had produced natural uranium pellets to fuel the heavy water reactor at Arak.

Grounds for suspicion

Doubts about the peaceful nature of Iran’s nuclear work have grown in response to Iran’s decision to limit its cooperation with the IAEA. In early February 2008, the IAEA presented member states, including Iran, with specific evidence that Iran had pursued work related to nuclear weapons. In its May 2008 report, the Agency listed eighteen documents supporting these allegations. Iran has called the documents “forged” or “fabricated,” and still refuses to help the Agency investigate their validity by providing access to individuals, records and sites. For instance, it has barred IAEA inspectors from interviewing Mohsen Fakhrizadeh, former head of the Physics Research Center who was reportedly described by the IAEA as the Iranian military official in charge of Iran's nuclear effort.

The IAEA has also presented specific information showing that a company in Iran involved in uranium conversion was in touch with a team designing the inner cone of a missile re-entry vehicle that could, according to the Agency, “quite likely accommodate” a nuclear warhead. The IAEA wants Iran to explain documents and technical information that link Iran to the testing of high voltage detonator firing equipment, the development of exploding bridge wire detonators and an arrangement for underground, remote explosive testing. The Agency considers these activities to be “relevant to nuclear weapon R&D.”

The IAEA also wants clarification on Iran’s efforts to procure such potentially nuclear weapon-related items as spark gaps, shock wave software, neutron sources, corrosion resistant steel parts and radiation measurement equipment. These items might have been intended for use in interrelated studies on uranium conversion, high explosives testing and the design of a nuclear-capable missile re-entry vehicle.

The IAEA is still reviewing elements of Iran’s undeclared nuclear program, including the illicit import of centrifuge equipment in the late 1980s and 1990s. In November 2007, Iran finally turned over a one-page document containing a 1987 offer from the network run by Pakistani scientist A.Q. Khan. According to Iran, this is the only remaining evidence of the offer, which included supplying a disassembled P-1 centrifuge, centrifuge manufacturing specifications, blueprints for a “complete plant,” and materials to make 2,000 centrifuges. The offer also included auxiliary vacuum and electrical drive equipment, mechanical, electrical and electronic support equipment for the centrifuge plant, and a document on how to reduce UF6 to metal, and how to cast and machine enriched, natural and depleted uranium into “hemispherical forms.” Iran insists that it only received some components for two disassembled centrifuges along with supporting drawings and specifications.

After reviewing what the Agency described as “the limited documentation provided by Iran,” the IAEA concluded that its findings matched Iran’s statements about the 1987 acquisition of P-1 centrifuge technology. However, several questions about Iran’s early research and development work following this offer remain open, including the genesis of a 1993 offer of P-1 enrichment technology from the Khan network and the conditions under which Iran received a document on how to make hemispheres of uranium metal—an activity uniquely useful for bomb making.

As for the development of its more advanced centrifuge program, Iran is sticking to its unlikely story that after receiving a full set of drawings for Pakistan’s P-2 from the Khan network in 1996, during a meeting in Dubai, it conducted no work at all on the P-2 until 2002, and that it never received P-2 components. Iran has also insisted that it procured only a small number of magnets for the P-2. The IAEA was unable to substantiate evidence that Iran received 900 magnets from a foreign supplier during the period between 1996 and 2002 when Iran says it undertook no work on the P-2. As a result, the Agency has concluded its findings about Iran’s P-2 activities match Iran’s statements. Yet, Iran’s current pursuit of the IR-2 makes uncertainties about the program’s early development troubling.

Foreign assistance

Imports of nuclear-, chemical- and missile-related equipment have been indispensable to Iran’s weapon efforts. According to annual reports by the U.S. Director of National Intelligence, Iran has continued to seek foreign assistance from entities in Russia, China, and North Korea.

China has provided key assistance to Iran’s nuclear effort. Chinese entities have helped Iran prospect for uranium, have sold UF6 ready for enrichment and have provided Iran with blueprints, equipment test reports, and equipment design information for its uranium conversion plant at Isfahan.

Russia’s main contribution is the 1,000 MW light-water power reactor it has been building at Bushehr. As of December 2005, 700 Iranian experts had completed training at Russia's Novovoronezh training center, which is run by the Russian nuclear power agency Rosenergoatom. The training included a theory course, work on a nuclear power unit simulator, and work at Russian nuclear power plants similar to the Bushehr reactor. The Iranian experts will continue their training at the Bushehr reactor itself. In addition to the reactor, Russian entities are alleged to have supplied laser equipment for uranium enrichment, know-how for heavy water reactors, and help with heavy water and nuclear-grade graphite production.

The nuclear smuggling network run by Pakistani scientist A. Q. Khan is believed to have been the main supplier to Iran’s centrifuge enrichment program. Speculation as to exactly what equipment and material Iran received has been the subject of numerous media reports since Libya renounced its mass destruction weapons and the Khan network was revealed as Libya’s primary supplier. The IAEA has already confirmed that the enrichment programs in Iran and Libya relied on the same technology obtained from the same foreign sources. And Iran’s P-2 centrifuge design is the same as the one found by the Agency in Libya. The P-1 centrifuges Iran has installed at Natanz are of an early European design, similar to the machines that have been under the control of the Khan Research Laboratories (KRL) in Pakistan. If Iran indeed received the same package of nuclear goods as did Libya, then it is possible that Iran received the same Chinese-origin bomb design. Iran may also have received more sophisticated nuclear weapon designs from the Khan network. Such designs were found on computers seized from Swiss nationals Friedrich, Marco and Urs Tinner. The Tinners were a known part of the Khan smuggling network and the designs found on their computers would reportedly require only 15 kilograms of highly enriched uranium and would be small enough to fit atop Iran’s medium-range Shahab-3 missile.

China, Russia and North Korea have combined to supply Iran’s missiles. Iran’s 1,300 kilometer Shahab-3 missile is essentially an imported North Korean Nodong missile enhanced by Russian technology. It was distributed to Iran’s Revolutionary Guards in June 2003 and has since been tested several times. Russian defense minister Sergei Ivanov confirmed that Russia had delivered Tor-M1 air defense missile systems to Iran. Iran has already tested the missiles and will use them to defend key nuclear sites. North Korea, in addition to selling the Nodong missile, has furnished Iran a fleet of SCUD-B and SCUD-C short-range missiles, plus the factories to make them. Both the SCUD-B and SCUD-C have a diameter sufficient to accommodate a compact nuclear warhead.

According to classified U.S. diplomatic cables released by the non-profit organization WikiLeaks beginning on November 28, 2010, Iran has sought to procure missile-useable technology such as gyroscopes and carbon fiber from Chinese firms. These cables also confirm an allegation first published several years ago that Iran imported Russian-origin, nuclear-capable missiles from North Korea. According to a February 24, 2010 cable, which describes a bilateral meeting between Russian and U.S. officials, North Korea transferred nineteen BM-25 missiles to Iran. Though neither Iran nor North Korea have tested this missile, the United States believes that BM-25 technology has been used by Iran to improve its Safir space launch vehicle, and that it will allow Iran to improve its missile engines through the use of more “energetic fuels.” The BM-25 is based on the SS-N-6, a submarine-launched ballistic missile developed by the Soviet Union that became operational in the late 1960s. The SS-N-6 is a single-stage, liquid-fueled missile with a range of up to 3,000 km.