{ "id": "IN11108", "type": "CRS Insight", "typeId": "INSIGHTS", "number": "IN11108", "active": false, "source": "EveryCRSReport.com", "versions": [ { "source": "EveryCRSReport.com", "id": 597185, "date": "2019-04-24", "retrieved": "2020-01-02T16:00:41.711653", "title": "Iran Oil Sanctions Exceptions Ended", "summary": "Overview\nOn April 22, 2019, the State Department announced that exceptions granted to eight countries enabling them to buy Iranian oil without U.S. penalty would not be renewed when they expire on May 2, 2019. The announcement stated that the global oil market is sufficiently well supplied to permit the move, which \u201caims to bring Iran\u2019s oil exports to zero, denying the regime its principal source of revenue.\u201d The decision has raised speculation over how effective it will be in reducing Iran\u2019s oil exports, how Iran will react, and potential effects on the global oil market\u2014issues that might potentially be considered in evaluating legislation, including Iran sanctions legislation, in the 116th Congress.\nLegislative Basis\nThe State Department announcement represents a decision under Section 1245 of the FY2012 National Defense Authorization Act (NDAA; P.L. 112-81). That law requires the President to prevent a foreign bank from opening or maintaining an account in the United States if that bank is determined to have conducted a \u201csignificant financial transaction\u201d with Iran\u2019s Central Bank or with any sanctioned Iranian bank. Iran\u2019s Central Bank maintains or controls accounts abroad for the primary purpose of receiving payments for Iranian oil and other goods that are considered a national resource.\nThe FY2012 NDAA provision provides an incentive for Iran\u2019s oil buyers to cut purchases of Iranian oil by providing for an exception for the banks of any country determined to have \u201csignificantly reduced\u201d its purchases of oil from Iran. The exception, called a \u201cSignificant Reduction Exception\u201d (SRE), allows the banks of countries granted the SRE to conduct all transactions with the Central Bank (not just for oil) or with any sanctioned Iranian bank. The SRE is reviewed every 180 days, and, to maintain the SRE, countries are required to reduce their oil buys from Iran by approximately 20% relative to the previous period.\n\nImplementation\nThe Obama and Trump Administrations have implemented the FY2012 NDAA with an eye toward balancing the stability of the global oil market with the intended effects on Iran\u2019s economy and behavior. During 2012, the Obama Administration granted SREs to 20 countries, and the incentive succeeded in reducing Iran\u2019s oil exports from about 2.5 million barrels per day (mbd) to about 1.1 mbd by the end of 2013. Of that amount, almost all was exported to six major customers: the European Union (mainly Greece, Italy, and Spain), China, India, Turkey, Japan, and South Korea, with smaller amounts exported to other buyers mainly in East Asia.\nIn January 2016, in concert with the implementation of the 2015 multilateral nuclear deal with Iran, President Obama waived the NDAA provision, thus suspending the requirement of Iran\u2019s oil customers to reduce their purchases to avoid sanctions. As a result, most buyers resumed purchasing oil from Iran at levels prior to the enactment of the law, and Iran\u2019s exports quickly returned to the 2.5 mbd level.\nOn November 5, 2018 the FY2012 NDAA provision went back into full effect as a consequence of President Trump\u2019s decision in May 2018 to withdraw the United States from the Iran nuclear accord. However, Administration officials said at that time that they would evaluate new requests for SREs based on country-specific circumstances and the need for global oil market stability. On November 5, 2018, eight countries received SREs: China, India, Italy, Greece, Japan, South Korea, Taiwan, and Turkey. Yet the requirement that countries continue to reduce purchases from Iran caused Iran\u2019s oil sales to fall to about 1.1 mbd as of the end of March 2019. Of the eight, Taiwan, Greece, and Italy had ceased importing Iranian oil in late 2018.\nWith the SREs set to expire on May 2, 2019, some of Iran\u2019s oil customers indicated an expectation of receiving an SRE for another 180-day period. However, the Administration decided to apply additional pressure on Iran\u2019s economy, perhaps assisted by commitments from Saudi Arabia, the United Arab Emirates, and other suppliers to ensure that \u201cglobal oil markets remain adequately supplied.\u201d \nResponses of Key Iran Oil Customers\nWhether the ending of the SREs achieves the stated goal of reducing Iran\u2019s oil exports to zero depends on the behavior of Iran\u2019s key customers. Some buyers might attempt to bypass U.S. penalties by forging an arrangement that trades Iranian oil for goods of equivalent value. Others might process payments through banks that do not operate in the United States. Some countries might try to link the imposition of actual penalties to their broader relationship with the United States. Officials from China, the largest buyer of Iranian oil, have expressed defiance of the U.S. move, indicating they will continue to buy oil from Iran. Turkey\u2019s leaders have strongly criticized the U.S. decision and indicated Turkey might continue to buy Iranian oil. Indian officials said they would arrange alternate supplies. Japan and South Korea historically have strictly complied with U.S. sanctions and may find alternate supplies of oil and condensate\u2014an ultra-light oil feedstock on which South Korea\u2019s petrochemical industry depends.\nIran\u2019s Reaction and Possible Responses\nComing only two weeks after the United States designated the Islamic Revolutionary Guard Corps (IRGC) as a foreign terrorist organization (FTO), the SRE decision has further aggravated tensions with Iran. Immediately after the SRE announcement, the head of the IRGC Navy, Rear Admiral Alireza Tangsiri, reiterated a previous threat to close the strategic Strait of Hormuz, through which a third of the world\u2019s seaborne oil passes, if the end of the SRE allowances causes Iran to be \u201cbanned from using [the Strait].\u201d This latest Administration move might strengthen Iran\u2019s hardliners in the internal Iranian debate over whether to abrogate the 2015 multilateral nuclear deal on the grounds that it no longer provides the promised economic benefits. Iran\u2019s reaction to the Administration decision might affect congressional consideration of Iran sanctions legislation introduced in the 116th Congress.", "type": "CRS Insight", "typeId": "INSIGHTS", "active": false, "formats": [ { "format": "HTML", "encoding": "utf-8", "url": "https://www.crs.gov/Reports/IN11108", "sha1": "d44434f4e353d8c67d85ba897849abb9c61b178c", "filename": "files/20190424_IN11108_d44434f4e353d8c67d85ba897849abb9c61b178c.html", "images": {} }, { "format": "PDF", "encoding": null, "url": "https://www.crs.gov/Reports/pdf/IN11108", "sha1": "86c6ac6818bcea3f58766858f4eb740c79717e5c", "filename": "files/20190424_IN11108_86c6ac6818bcea3f58766858f4eb740c79717e5c.pdf", "images": {} } ], "topics": [ { "source": "IBCList", "id": 4758, "name": "Middle East & North Africa" } ] } ], "topics": [ "CRS Insights", "National Defense" ] }