Feeble EU economy may stifle Iran sanctions drive

Panic over Europe's economic woes could scuttle hard-hitting economic sanctions against Iran, analysts said Wednesday, drawing the United States closer to a stark choice between military action or containment.

In the wake of a UN report that offered the strongest evidence yet that Iran is pursuing a nuclear weapon, the United States and Europe said they will pursue fresh sanctions in a bid to stop Iran from getting the bomb.

But with Russia publicly stating its opposition, measures via the UN Security Council are in doubt, and Washington may be forced to reach a narrower deal with Europe.

Yet even a hard-hitting trans-Atlantic accord is far from assured. The other substantial measures possible -- constraining Iran's energy exports or its Central Bank -- could very well hurt Europe's economy as well as Iran.

"Europe is obviously very focused on Europe right now and the difficulties that they are having economically," said Michael Singh, a former director for Middle East affairs at the National Security Council.

"I don't think they are going to want to consider anything that would compound their difficulties."

While the US government already bans its citizens and entities from doing business with Iran, a sanction targetting the Central Bank itself could essentially freeze any foreign firm doing business with it out of the US market -- a stark choice for most financial institutions.

The impact could be huge. Iran's Central Bank is thought to be central to its oil industry, funneling to the government large quantities of payments from energy sales, which accounts for 70 percent of Tehran's revenues.

According to experts, tight sanctions on the Central Bank would be just one step short of a gasoline embargo on the country, and just a few steps removed from a full-blown oil embargo -- any of which could lead to a leap in oil prices, for Iran and the world.

"Genuinely tight sanctions or military action against Iran are both clear geopolitical risks that could lead to higher oil prices," Lawrence Eagles, an oil analyst at JPMorgan Chase, said.

Eagles estimates that the top six Iranian importers -- China, India, Japan, Italy, South Korea, and Spain -- take around 1.7 million barrels a day of total exports.

"Where would the world get 1.7 million barrels per day of Iranian crude as an offset?"

An oil shock would prove a double whammy for EU policymakers, with higher prices slowing already dismal economic growth and simultaneously stoking inflation.

A solution could be finessed, but according to Singh, "the Europeans probably want to be assured there won't be some massive spike in oil prices, that Iran will not be prohibited from exporting oil, but will have more difficulty in collecting payments."

"We have the ability to sanction the central bank and basically force the international community to go along," said Michael Rubin of the American Enterprise Institute.

But this would pose severe military and diplomatic problems, he said.

"The problem with any embargo is that it needs to be enforced, and then you have a choice when someone challenges that embargo -- do you back it up? And that is really a slippery slope to war."

Alternatives, Rubin said, include settling for expanding current sanctions lists on Iranian individuals, groups and firms, and include measures against third party arms dealers, firms that transfer technology to Iran or international air travel.

Increased support for independent Iranian broadcasts or for the political opposition could also be on the cards.

But there is also a growing sense that the current twin-track approach -- of simultaneously trying to convince and coerce Iran to abandon its nuclear efforts through talks and sanctions -- is dead or dying.

With the UN report coming hot on the heels of an alleged Iranian plot to assassinate the Saudi ambassador in Washington, Congress is pressing the White House not to accept watered-down sanctions.

"There is a growing frustration in Congress among both Republicans and Democrats that the White House is losing its creditability by not reacting to what many see as Iranian defiance," said Rubin.

"It seems like the diplomacy engagement and pressure track isn't yielding any results, we've tried for a few years now and Iran's nuclear program continues to advance," said Matthew Kroenig, a Iran expert at Georgetown University.

"It does seem like we are nearing the point where we have to make the decision between military action to prevent Iran from getting nuclear weapons and putting place some kind of deterrent-containment regime for a nuclear armed Iran.

"Neither are attractive options."


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