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U.S. Exempts Japan, 10 EU Nations From Iran Oil Sanctions

The Obama administration is sending a message to major buyers of Iranian oil, in particular China, India and South Korea, that they can avoid new U.S. sanctions by curtailing their imports of Iranian crude by the end of June, U.S. officials said.

Secretary of State Hillary Clinton announced yesterday that an “initial group” of countries, comprising Japan and 10 European Union nations, have “significantly reduced” their Iranian oil purchases and thus qualified for an exemption from sanctions for a renewable period of 180 days under the law.

The U.S. didn’t grant waivers to China (CCCIIQIR), the leading importer of Iranian crude in the first half of last year, or to India and South Korea, which were the third- and fourth-largest buyers, according to the U.S. Department of Energy.

Clinton praised the EU and Japan, which the Energy Department lists as the No. 2 importer of Iranian oil in the first half of last year, for taking actions that “were not easy” to cut back Iranian oil imports. “They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs,” she said in a statement.

Under a law enacted Dec. 31, countries have until June 28 to demonstrate they have “significantly reduced” the volume of their Iranian crude purchases -- or their banks that settle oil trades with Iran may be cut off from the U.S. financial system.

Reducing Uncertainty

Mark Dubowitz, executive director of the Foundation for Defense of Democracies in Washington, said in an interview that the Obama administration’s action yesterday “begins to reduce some of the uncertainty in oil markets over how the administration will apply oil market sanctions.”

“It gives Japan, in particular, which needs to keep buying Iranian oil, a clear pathway to continue those purchases without putting their financial institutions at risk,” said Dubowitz, who has advised the administration and Congress on sanctions. “It also establishes an early precedent that puts pressure on South Korea, India, China, Turkey, South Africa and other major buyers of Iranian oil to also comply with U.S. law.”

South Korean Finance Minister Bahk Jae Wan today downplayed yesterday’s action, saying the government in Seoul is “talking with the U.S. and the talks are going well” regarding cutting Iranian oil shipments. Japanese counterpart Jun Azumi said his government “welcomed the U.S. announcement,” and intends to “keep reducing oil imports at a certain pace.”

15 Percent Cut

The U.S. hasn’t defined what counts as a significant reduction. Obama administration officials, speaking on condition of anonymity because of the sensitivity of the issue, said they’re looking for reductions of about 15 percent or more, depending on each nation’s circumstances.

President Barack Obama’s administration announced the exemptions to signal that the EU and Japan are being rewarded for their efforts in the hope that other countries will follow suit before the deadline, according to U.S. officials who spoke on condition of anonymity.

The U.S. officials said that, unlike previous sanctions, these allow the president little leeway in applying the law, so he’ll be forced to sanction China, India, South Korea, Turkey or other buyers if they don’t make substantial cuts in time.

Yesterday’s decision means Japan may continue buying some Iranian oil after U.S. sanctions take effect without exposing Japanese banks to penalties.

Japan cut its imports of Iranian oil by 15 percent to 22 percent in the second half of last year, according to public data, during a difficult time when it was reeling from an earthquake and subsequent nuclear disaster, and its energy needs were high, one U.S. official said.

Japan’s Imports

Japan got 10 percent of its crude imports from Iran from January through June of last year, according to the U.S. Energy Information Administration.

In addition to Japan, all EU nations that purchased Iranian oil in the past year -- Belgium, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland, Spain and the United Kingdom -- cut back or halted their imports in order to qualify for the exemption, U.S. officials said.

The EU imported 450,000 barrels a day of Iranian oil in the first half of last year, about 3 percent of the region’s needs, according to the International Energy Agency in Paris. The EU collectively accounted for 18 percent of Iran’s oil exports in that period, according to the U.S. Energy Department.

The European Union decided two months ago to embargo Iranian oil imports effective July 1, so EU nations would not be buying Iranian crude or affected by U.S. sanctions in any case.

Sanctions Law

Under the sanctions law, the president must cut off U.S. bank accounts of any foreign financial institution that transacts petroleum-related business with Iran’s central bank -- unless its home country receives an exemption.

The sanctions are part of a coordinated campaign by the U.S. and the EU to ratchet up economic pressure on Iran’s leaders to persuade them to abandon any illicit aspects of their nuclear program.

U.S., European and Israeli officials have accused Iran of seeking the capability to build a nuclear weapon. United Nations inspectors, in a report released Nov. 8, raised questions about possible military dimensions of Iran’s program. Iran says its program is solely for civilian energy and medical research.

Iran is the No. 2 producer in the Organization of Petroleum Exporting Countries, and earns more than half of its government revenue from oil sales, according to the International Monetary Fund. Proponents of sanctions say pinching Iran’s oil revenues is the best way to deny Iran funding for any illicit nuclear or weapons-related activities.

Oil Prices

Oil yesterday dropped the most in more than three months in New York as Saudi Arabia, the world’s biggest crude-exporting country, said it can boost output immediately to stave off shortages.

Oil for April delivery fell $2.48 to settle yesterday at $105.61 a barrel on the New York Mercantile Exchange, the biggest one-day decline since Dec. 14. Futures are up 6.9 percent this year. The April contract expired yesterday. The more actively traded May futures declined $2.49, or 2.3 percent, to $106.07 a barrel.

“The sanctions are working,” said Senator Bob Menendez, a New Jersey Democrat and co-author of the sanctions law, in an interview. “Since President Obama signed the National Defense Authorization Act on December 31, we have seen Iran’s currency plummet and oil shipments in February fell to a 10-year low.”

To contact the reporter on this story: Indira A.R. Lakshmanan in Washington at ilakshmanan@bloomberg.net

To contact the editor responsible for this story: John Walcott at jwalcott9@bloomberg.net

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