On March 30, 2012, President Obama determined that there exists a "sufficient supply" of petroleum and petroleum products (petroleum products) from countries other than Iran to permit a "significant reduction" in the volume of Iranian petroleum products purchased by or through foreign government-owned financial institutions, including central banks. The determination means that the US Government can now impose sanctions on such institutions for engaging in significant petroleum-related transactions with Iran.
As discussed in our previous advisory, a Presidential determination of whether there exists a sufficient alternative supply of petroleum products is mandated by the National Defense Authorization Act for Fiscal Year 2012 (NDAA) as a condition for imposing sanctions on foreign government-owned financial institutions that do business with certain Iranian financial institutions, including the Central Bank of Iran (CBI). The President's determination was based on an NDAA-required Energy Information Administration report submitted to Congress on February 29, 2012, detailing the availability and price of petroleum products produced outside Iran in the preceding 60 days.
The President's finding allows the United States to prohibit or impose strict conditions on correspondent and payable-through accounts in the US of non-US financial institutions owned by foreign governments, including central banks, that conduct or facilitate petroleum-related business with the CBI or other Iranian financial institutions designated as Specially Designated Nationals by the Secretary of the Treasury. The NDAA already requires sanctions on private foreign financial institutions that conduct or facilitate "significant financial transactions" with the CBI or designated Iranian banks, whether or not such transactions are petroleum-related.
Although the President's determination paves the way for sanctions, non-US financial institutions will not risk a cut-off or strict conditions on their correspondent or payable-through accounts if the President determines that the country with primary jurisdiction over the institution has "significantly reduced" its purchases of Iranian petroleum products.
The President made the first such finding on March 20, 2012, when the Department of State announced that the following eleven countries had significantly reduced their volumes of Iranian petroleum purchases: Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. The State Department observed that the EU banned all new purchases of Iranian crude oil as of January 23, 2012 and mandated a phase out of existing contracts by July 1, 2012. Although there is no specific percentage of reductions required in the NDAA, the State Department also noted Japan's estimated 15-22 percent cut in Iranian petroleum imports in the second half of 2011. Major importers of Iranian crude oil that have not yet qualified for the exception include China, India, South Africa, South Korea, and Turkey (although Turkey recently announced that it was reducing its oil imports from Iran by 20 percent).
The President's availability determination followed months of back-channel talks to isolate Iran from the global energy market without raising the price of oil. While the danger of higher petroleum prices and the risk of sanctioning foreign central banks have been cited as a rationale for moving cautiously, the President's March 30 determination suggests a willingness to move assertively against entities deemed to be facilitating Iranian sales of petroleum products, and at the least makes such sanctions possible. The next deadline for the President to make this availability determination is 180 days after the March 30, 2012 determination, and every 180 days thereafter.
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