Here’s How Iran Will Try to Evade US Sanctions
U.S. sanctions against the Islamic Republic’s oil industry have gone into effect. Tehran is already turning to some old tricks.
Front companies, barter deals, oil transfers on the high seas: These are just some of the methods that Iran could employ to keep its economy limping on after American sanctions targeting the country’s oil industry went into effect at midnight on Monday.
Iran has plenty of experience here, having already been subject to stringent international sanctions over its nuclear industry, which choked its economy. That changed in July 2015, when it signed a deal―the Joint Comprehensive Plan of Action―with major world powers, including the United States. That accord has legal standing and the imprimatur of the United Nations.
Washington’s withdrawal from the agreement in May—coupled with its decision to not only reimpose sanctions on Iran, but also punish nations that continue to trade with it—has all but guaranteed that Tehran will return to its old playbook.
Here are some of the steps that Iran has taken in the past to evade U.S. sanctions. (Spoiler alert: Richard Nephew, a sanctions expert who helped negotiate the JCPOA, told me that most of these efforts will likely fail.)
Hiding Its Oil Tankers in Plain Sight
An automatic identification system is a safety feature on vessels that allows them to be tracked almost in real time. The catch? It can be turned off. A vessel that doesn’t want everyone to know that it is delivering oil to a particular port will simply switch off its transponders and switch them on again once it has left the area.
“It's a pretty effective tactic, keeping the customers shielded as well,” said Paulina Izewicz, a London-based researcher who studies Iran and North Korea at the Middlebury Institute of International Studies at Monterey, California.
Iran is employing this tactic again by turning off transponders on its tanker fleet, she said. This allows the tankers to serve as floating oil storage for those willing to buy Iranian crude in violation of U.S. sanctions.
This is a commonly used—and legal—method to break up a large shipment of cargo into smaller ones. But Iran has used it to conceal oil sales.
It works like this: An Iranian tanker is stationedy either near a port or in the open sea, and it transfers oil directly to a second vessel. The second vessel then travels to a port, where it sells the oil. The goal, the U.S. Treasury Departmentsaid in 2013, is “to mask the fact that the true origin of the oil is from Iran and to introduce it into the global market as if it were non-Iranian oil.”
Iran has used shell corporations and front companies, and it has registered its vessels in third countries to bypass international scrutiny. These measures are perfectly legal in the shipping world, but are murky and difficult to police.
Izewicz said that in the past, Iran managed to effectively obscure the country’s ownership of ships by transferring its vessels to other state-run companies while retaining control of operations.
“The actual owner or manager would in reality remain the same, just not on the paperwork, which is what mattered,” she said.
Iran has also used flags of convenience on its vessels. This is a common practice in the shipping industry, whereby the owners of a vessel may register it in a country with looser regulations. But in Iran’s case, a flag of convenience complements its effort to prevent scrutiny of ownership. The Islamic Republic also frequently renames its ships, “much more so than normal practice would dictate,” Izewicz said.
Iran has previously taken advantage of places with weak central authority tolaunder and repatriate money, said Behnam Ben Taleblu, who studies Iran at the Foundation for Defense of Democracies, a think tank in Washington, D.C. Before the JCPOA went into effect, Babak Zanjani, an Iranian billionaire, used a Malaysian bank and dozens of front companies to sell Iranian oil, earning billions for the regime, according to the Treasury. (Zanjani was sentenced to death in 2013 for withholding more than $1 billion from those sales. He is awaiting execution.)
“This time around, Iran is likely to draw on this wealth of sanctions-busting expertise and grow its illicit networks, hoping that it can outpace the U.S. when it comes to enforcement,” Ben Taleblu said.
Wild Cards: Barter Deals, European Efforts, and Iran’s Influence
Iran could continue to sell oil to its largest customers by simply carrying out the transactions through bartering or by using a currency other than the U.S. dollar.
It has previously traded oil for goods like cars and telephones with China and sold crude to India for Indian rupees. China and India, two fast-growing economies with a substantial demand for oil, represent the two biggest customers for Iranian supplies. They could seek U.S. waivers to continue to buy Iranian oil, but Donald Trump’s administration, which wants to strangle the Iranian regime, opposes allowing Tehran to profit from oil sales.
Europe has talked about creating a special-purpose vehicle to process Iran’s trade-related transactions. The mechanism would circumvent the U.S. financial system and allow European companies to continue to do business with Iran. So far, the European Union has taken few demonstrable steps to set one up. Additionally, large European companies have said that they will comply with the sanctions. For them, the choice between Iran’s domestic market and U.S. consumers is simply no choice at all.
News reports say that the Iranian regime might also send its oil to Russia, where it can be refined and supplied to European countries. Those countries could then exchange that oil for goods that Iran needs, such as medical instruments and industrial machinery. The U.S. says that it opposes such a mechanism, though how it might change Russia’s mind is unclear given, as Taleblu put it, “all the other outsized issues in the bilateral relationship with Russia.”
Most significant, perhaps, is Tehran’s ability to respond through other means to U.S. pressure. The Islamic Republic’s influence in the Middle East is wide, but its clout in Iraq is particularly significant. Most of Iraq’s senior political leadership and its Shia militia are close to Tehran, and Iraq relies on Iran for electricity. Iran also has influence, albeit to a lesser extent, with Afghanistan. Simply put, it has the means to block U.S. efforts to stabilize those two countries..
The U.S. sanctions take effect Monday, but Iran and the international community’s next steps will unfold slowly—over months.
“The crucial part of what's happening on this issue isn't happening on” the first day of sanctions, Nephew, the JCPOA negotiator, said. “The crucial part is what's going to be happening in February, March, and April, when some of these things have started to settle in, and now everyone has to plot their next move. And that next move is potentially where a lot of intense politicking is going to happen.