The European Union has raised the takes in the standoff over Iran's nuclear program. E.U. foreign ministers on Monday adopted the most far-reaching package of sanctions yet on the Islamic Republic, including an embargo on the oil exports that are Iran's economic lifeline, and measures against the country's central bank that will restrict its ability to engage in international trade. European governments have now adopted an immediate ban on all new oil contracts with Iran, and a gradual phase-out of existing contracts between now and July 1. The measures also ban trade in all petrochemical products, gold, precious metals, diamonds, banknotes and coins.
British Foreign Secretary William Hague said the oil embargo was part of "an unprecedented set of sanctions," and he urged Iran to "come to its senses" and resume negotiations on its nuclear program. German Foreign Minister Guido Westerwelle said the concern underlying the new measures was "not a question of security in the region, it is a question of security in the world." And E.U. foreign policy chief Catherine Ashton said the sanctions aimed to "make sure that Iran takes seriously our request to come to the table". Although Iranian officials have signaled a readiness to hold new talks, Ashton says Tehran has yet formally responded to the?letter she sent in October calling for a new meeting between Iran and the group known as the P5+1, comprising the U.S., Britain, France, Germany, Russia and China.
Adopting the new measures carries a significant cost for Europe. The top European customers for Iranian oil are also those currently facing the most serious financial crises: Greece buys about one third of its oil imports from Iran, while Italy and Spain each rely on Tehran for a little over 10% of their own supply. Although Saudi Arabia and other suppliers are expected to fill any shortfall in available output, the International Energy Agency has warned that replacing Iranian oil will not be an easy task for Europe.
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But the key question is the effect sanctions will have on Iran. Oil accounts for around 90% of all Iranian exports to the E.U., and European countries together make up Tehran's second largest market after China. More broadly, oil makes up over three-quarters of Iran's total economic output, and the country sells roughly 2.5 million barrels a day, with Europe accounting for about one quarter of it last year. Indeed, Iran is already suffering from the existing European and American sanctions: the Iranian rial has fallen about 40% against the dollar since December, inflation is at 40%, and youth unemployment is at around 50%.?
One way Iran may try to offset the impact of the European embargo is by selling more oil to China, India and other Asian countries, inducing them by offering major discounts -- a possibility made easier for Iran while the price remains above $100 per barrel. For that reason, Western powers hope to persuade Asian countries to reduce their own purchases from Iran.?
Yet all this effort may still fail to dissuade Iran from pursuing its nuclear ambitions. Sanctions are often a blunt political instrument: Even if they succeed in imposing significant costs on the regime and exacerbating public frustration over economic hardships, they could further entrench Tehran's regime and its intransigence. Says Paul Stevens, a Senior Research Fellow at the London-based Chatham House think tank,? "Given the crucial role of oil in Iran's deepest political DNA, the E.U. embargo would put the population solidly behind the current regime. It would greatly strengthen the Ahmadinejad regime at a time when it is under considerable pressure, especially with parliamentary elections looming in March."
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The new sanctions come just as a US naval flotilla accompanied by British and French warships is patrolling the Strait of Hormuz, inevitably ratcheting up tensions. Two Iranian lawmakers on Monday responded to the E.U. decision by threatening to close the Strait, through which some 40% of the world's oil shipments pass en route to market. Despite the new sanctions, however, some analysts maintain Tehran is more likely to heed the threat of military action. European Council on Foreign Relations policy fellow Richard Gowan warns, "It's hard to believe that these sanctions will cause Iran to discard its nuclear ambitions. Iran will remain much more focused on decision-making in Israel and the U.S. over the possibility of a military strike this year."
E.U. officials accept that sanctions are no silver bullet. But coupled with robust diplomacy and a credible military presence in the region, they believe economic pressures can create diplomatic leverage. The problem for the West is what happens if Iran fails to buckle as sanctions reach their peak.?
J?rg Himmelreich, a senior fellow with the German Marshall Fund in Berlin says the measures can only buy time. "At best, sanctions might force a change of regime, but not the nuclear program, which reflects a widely-shared sense national pride and self-consciousness," he says. "It may be pessimistic, but I see the next step as accepting Iran as a nuclear power." If that is the way the Iran conundrum is heading, Europe's sanctions may simply be the last throw of the dice.
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