Let Iran off the hook or undermine the global economy? Slap sanctions on an Iranian energy company or provide Europe with an alternative to Russian gas? Washington policymaking is especially difficult when the aims conflict, and few cases illustrate that principle more clearly than the challenge of finding a way to punish Iran without hurting someone else.
Congress last week approved new sanctions on Iran that could make it harder for that country to sell its oil. The White House has said it supports squeezing Iran economically but worries the sanctions could bring higher oil prices and damage the global economy.
The argument around this latest Iran measure was clear: No sanction would hurt Iran more than cutting its oil revenue. It would strip the regime of funds that could otherwise go to a nuclear weapons program.
On the other hand, Iran is a big oil supplier. If you take Iranian oil out of the global market, there’s less supply to meet demand. World prices go up.
Members of Congress understood the dilemma but approved the sanctions anyway. Concerns about Iran’s nuclear program took precedence.
“Congress’s point of view is that we may be running a risk that this will increase the price of oil but that compared to [the risk of ] Israeli or U.S. military strikes on Iran or a nuclear-armed Iran, the oil market impact of these sanctions will pale in comparison,” says Mark Dubowitz, executive director of the Foundation for the Defense of Democracies.
Energy analyst Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, says there are no easy answers.
“There are only trade-offs, and many of the trade-offs are difficult ones,” Yergin says.
Whether to curtail Iran’s oil revenue or protect the global oil market is one such trade-off. Another one involves the natural gas trade in Central Asia.
Europe right now depends on Russia for much of its gas. But Russian leaders have sometimes used their gas exports to promote Russian strategic interests, particularly in former Soviet republics such as Ukraine, which suffered a gas cutoff from Russia in January 2009.
Joschka Fischer, a former German foreign minister, spoke for many European observers when he wrote in 2010: “The primary goal of Russian gas policy isn’t economic but political, namely to further the aim of revising the post-Soviet order in Europe.”
In response to Russian pressures, European leaders have long sought an alternative gas supply, and they have been supported by the United States. They found a new source in the Shah Deniz field in Azerbaijan, and European governments have backed the construction of a pipeline that would bring the gas straight to Europe, bypassing Russian pipelines.
One of the participating companies in the Shah Deniz consortium, however, is the Naftrian Intertrade Co., or NICO, which is owned by the Iranian government. NICO has only a minority share in the operation, but generally the United States has favored sanctions on foreign joint ventures involving the Iranian government.
Here’s the dilemma: Sanctions on the Shah Deniz project could stall the construction of the gas pipeline to Europe. For that reason, the State Department in this case is opposing sanctions on NICO, despite its participation in the joint venture in Azerbaijan.
“If in fact Shah Deniz were to be sanctioned, it would defeat many years of U.S. policy for gas to go from the Caucasus in Central Asia to Europe,” explains Ambassador Richard Morningstar, the State Department’s special envoy for Eurasia.
In addition, Azerbaijan is strategically important.
“It’s a secular Muslim state next door to Iran and next door to Russia,” says Yergin, whose new book is titled The Quest: Energy Security and the Remaking of the Modern World. “The development of that gas supply is very important to Azerbaijan, to its economics, and its future.”
Iran’s participation in the Shah Deniz project, of course, is far less significant than its stake in the global oil market.
“NICO owns only 10 percent of the project,” Morningstar says. “It’s a totally passive investor, so it’s not getting any technical benefit or anything.”
But the policy decision here is not easy. Advocates of a tough line against Iran don’t like the idea of any project that brings that regime money, much less one that gives Iran a toehold in the rapidly growing natural gas business.
On the other hand, the European need for an alternative to Russian gas is undeniable. Policymakers are looking at a potential choice between bad options.
“Either Europe remains dependent on Russia for its natural gas,” Dubowitz says, “and faces a situation like it did with the dispute between Russia and the Ukraine, or Europe becomes more and more dependent on Iran.”
Two important sanctions issues now come up before Congress, both with respect to Iran. In the first, Congress opts for the sanctions even at the risk of disrupting the global oil market. In the second, with an Iranian gas company involved, it appears Congress will look the other way. A second Iranian sanctions bill is in the works on Capitol Hill, but for now the proposal does not target the Shah Deniz project.