U.S. Bullying Europe Into Cutting Ties with Iran

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Tougher U.S. and European sanctions against Iran might be hitting its economy, leading to fears of looming inflation and cuts in food and gas subsidies. But that doesn't mean the Islamic Republic is out of friends — far from it. Even the U.S.'s close allies in Europe have stopped short of cutting their relations with Iran, allowing it to continue its trade in oil and gas. And on Iran's other flank, it is cementing alliances with Asian countries, which are eager to build links with one of the world's biggest oil producers and are angling to snap up contracts abandoned by departing Western companies. "The Chinese and especially the Malaysians have been buying up Iran's oil assets recently and reselling a lot of Iranian oil," says Philippe Vasset, editor of the Paris-based newsletter Intelligence Online, which monitors energy deals. "Many of the tough sanctions against Iran are in fact U.S. sanctions."

The latest sanctions went into effect Wednesday, Oct. 27, when the E.U. published 77 pages of new measures, including a ban on European energy companies making new investments in Iran's mammoth oil and gas industries. Iran has the world's third largest oil reserves and owns half of the world's biggest natural-gas field, South Pars in the Persian Gulf. The E.U. sanctions follow a fourth round of U.N. sanctions in June and a fresh round of U.S. sanctions, introduced in July, all aimed at coaxing Iranian President Mahmoud Ahmadinejad into negotiations over his nuclear-enrichment program, which Western countries say is to develop nuclear weapons. Ahmadinejad has refused, insisting that the program is solely for peaceful purposes. (See pictures of smuggling between Iran and Iraq.)

The new E.U. sanctions are in some ways a big change for Europe: French, Italian, Norwegian and Spanish energy companies all trade with Iran and have long held production contracts with the country. Those have been steadily reduced over the past few years, however, as European companies ready themselves for tougher action against Iran and weigh their ties with the country against their ties with the U.S. A spokesman for E.U. foreign-policy chief Catherine Ashton told the Wall Street Journal on Tuesday that the new E.U. sanctions "could lead to ... closure" of BP's Rhum gas field in Scotland's North Sea, a joint project between BP and Iranian Oil Company U.K. Ltd., a subsidiary of an Iranian state-run energy firm. BP has said it will study the sanctions before deciding what to do.

Yet even with the toughest-ever E.U. sanctions now in force, Europe maintains an economic relationship with Iran. Unlike U.S. companies, European firms are free to buy Iranian crude oil and natural gas and to sell refined petroleum products to Iran. And the E.U. this week urged financial institutions to lend their support to that legitimate trade. Europe imports about 1.2 million bbl. of Iranian crude a day — double the amount it imported in 2008, according to the International Energy Agency in Paris. In addition, some E.U. partnerships with Iran could be exempted from the sanctions by E.U. officials if they consider them crucial to Europe's energy needs. One example could be the Iranian gas from the Caspian Sea, which will feed into the huge new Nabucco pipeline across Europe, a project aimed at reducing the continent's dependence on Russian gas. (See the semiofficial view of Iran's political unrest.)

Despite that flexibility in the sanctions, many European politicians believe that the U.S. has strong-armed them into following Washington's demands on Iran. Some say European companies feel obligated to cut ties with Iran even though their governments do not require them to do so. A small Portuguese oil company, Galp, told Reuters on Tuesday that it was considering completely stopping its trade with Iran, mostly because of political pressure. And in recent months, Total, BP and Swiss-based oil trader Vitol — all of which have extensive investments in the U.S. — have reduced or halted their Iran oil trade without explanation. "The U.S. is pressuring companies to go beyond sanctions when it comes to energy supplies," Marietje Schaake, a Dutch member of the European Parliament, tells TIME. "This is an issue of E.U. independence in general."

U.S. officials deny putting pressure on Europe, but Treasury officials did travel to Brussels, Berlin and Paris in July to brief companies and governments about the consequences of the new U.S. sanctions. "Individual companies are making the decision that business with Iran is just not worth the risk," a Treasury spokesman, who did not want to be named, said in an e-mail to TIME on Thursday. "We are giving companies information that sheds light on the risks, but they are making these decisions on their own."

But for many European companies, the new U.S. sanctions are pressure enough. Under the rules, banks, oil companies and others who do business with Iranian entities on the U.S. sanctions list can be blocked from doing business in the U.S. That threat alone has persuaded many companies to drop their business with Iran rather than risk being frozen out of the world's biggest economy. In a speech last month at Washington's Center for Strategic and International Studies, Treasury Under Secretary for Terrorism and Financial Intelligence Stuart Levey said that with the new U.S. sanctions, "the reputation risk increases" for companies that don't cut ties with Iran, "creating a ripple effect that amplifies sanctions." (See the top 10 Mahmoud Ahmadinejad–isms.)

To some Europeans, that ripple effect looks a lot like strong-arming. A Swiss investment manager (who did not want to be named) puts it bluntly, saying the U.S. has bullied European companies into cutting ties with Iran. "Because the U.S. has Iran on a blacklist, the rest of the world has to follow," he tells TIME. "What makes it a shady country anyway? Because the U.S. says so? The U.S. is trying to corner other countries." (Comment on this story.)

But as some countries and companies withdraw from trading with Iran, others appear set to benefit from the sanctions. China, a permanent member of the Security Council, agreed to vote for new U.N. sanctions only after being assured that its own extensive investments in Iran would not be touched. Vasset, editor of Intelligence Online, says Iran is also expanding its ties with Malaysia, with whom "its bond is quite deep," and whose oil companies — unlike China's — have the know-how to explore and produce in Iran's deepwater fields.

Last May, Malaysia's International Shipping Corporation, a subsidiary of the state-owned oil company Petronas, took over a crucial refinery owned by Switzerland's Vitol in order to supply Iran with 55,000 bbl. a day of gasoline. And for those Western companies that have not yet backed off from doing business with Iran, the benefits could be great. The Guardian newspaper in London reported last month that Royal Dutch Shell, the British-Dutch energy giant, had increased its purchases of Iranian crude oil from May to August by 27%, or about $100 million a month — just at the time when new U.N., U.S. and E.U. sanctions were being drafted. In gratitude, Iran heavily discounted its sales to Shell. "Frankly, Iran needs customers," says Vasset. "They will sell oil to anyone who will buy it right now."