Will the Obama administration sanction Chinese companies doing business in Iran?

The State Department has been stepping up both its rhetorical and punitive actions against Iran, but the question still remains whether the administration will go as far as to sanction companies based in countries where relations are delicate, especially China.

Last week, the United States announced two steps to increase pressure on Iran: President Obama signed an executive order on Sept. 29 targeting eight Iranian individuals for serious human rights abuses, and the State Department announced on Sept. 30 that it was imposing sanctions on the Switzerland-based Naftiran Intertrade Company (NICO) due to its involvement in the Iranian petroleum sector. These actions are based on the Iran sanctions legislation passed overwhelmingly by Congress and signed into law by President Obama last June.

On Monday, the Government Accountability Office (GAO) released a new report that identified 16 companies as having sold petroleum products to Iran between Jan. 1, 2009, and June 30, 2010. Of those 16, the GAO reported that five have shown no signs of curtailing business with Iran. Three of those companies are based in China, one in Singapore, and one in the UAE.

There are some positive signs, however, that international pressure is having an effect on companies’ willingness to do business in Iran. Several firms — hailing from Switzerland, the Netherlands, France, India, and the United Kingdom — told the GAO that they are halting their refined petroleum business with Iran.

But leading senators aren’t convinced that the holdouts are planning to follow suit. They are pressing the Obama administration to use the new sanctions law to punish those who won’t go along — especially if they are from China.

"The GAO report released today provides encouraging evidence that the comprehensive sanctions legislation passed by Congress earlier this year is indeed persuading many companies to stop selling gasoline and other refined petroleum products to Iran. We applaud those firms that have taken this responsible and important step," said Sens. Joseph Lieberman (I-CT), Susan Collins (R-ME), and Jon Kyl (R-AZ) joint statement. Lieberman and Collins had requested the GAO report in July.

However, the success of sanctions legislation has only made it "even more imperative" that the Obama administration pressure countries that have maintained their ties in Iran, the senators stated. "We are particularly concerned that the majority of the companies that GAO identifies as still selling gasoline to Iran are in China. We urge the Administration to complete its own investigations swiftly and enforce the sanctions law, comprehensively and aggressively, against any violators," the statement read.

Deputy Secretary of State Jim Steinberg told reporters last week that the State Department was looking at additional firms’ business in Iran and would consider more direct sanctions through a two-step process that takes up to 180 days. But he added that the administration was first trying to negotiate with foreign governments to stop the companies’ activities in advance of imposing penalties.

"We are following the process outlined in the statute," said Steinberg. "If we find credible evidence [of firms violating the sanctions], then we go to the next stage, which is to conduct an investigation … and then we would make a decision," Steinberg said.

One of the main concerns on Capitol Hill is that, as countries pull out from Iran, other countries will take over contracts, thereby nullifying the effect of the sanctions and enriching themselves at other countries’ expense — a practice known as "backfilling."

The administration and Congress worked hard to convince Japan and South Korea to impose unilateral measures against Iran, which they did, but there’s particular concern that China will simply come in and take over those contracts.

Kyl and Sen. Chuck Schumer (D-NY) sent a letter to Secretary of State Hillary Clinton last week on this very issue, pointing out reports that China National Petroleum Company (CNPC) replaced the Japanese firm Inpex and agreed to invest around $2 billion to develop Iran’s South Azadegan oil fields last year.

"The Administration, by continuing to ignore blatant violations of our sanctions laws by Chinese companies, has undermined our sanctions regime on Iran.  It has sent the message to our friends and allies — many of which have taken the difficult steps to reduce their economic ties with Iran — that others will be let off the hook," Kyl said Sept. 30.

"If President Obama genuinely believes that a nuclear-armed Iran is not acceptable, he must stand by those words and apply the authority Congress has given him to punish all who are violating U.S. sanctions laws, particularly China," said Kyl. "Time is of the essence." 

Steinberg addressed the issue of backfilling in his briefing, saying that such activity would provoke actions under the sanctions legislation. "We’ve made clear to all our international partners that we are strongly discouraging substitution. And of course, were there to be substitution that came within the ambit of the act, it would raise questions under the act," he said.

Bob Einhorn¸ State’s senior advisor on Iran and North Korea sanctions, is the man responsible for delivering that message and he traveled to Beijing last week to press the Chinese not to undermine the sanctions. It’s not clear yet if he was successful. 

In a July 29 hearing, Einhorn referenced a previous GAO report that identified 41 foreign firms with a petroleum interest in Iran. "There are a number of entities that are very problematic. I have to say that a number of them have been engaged in sanctionable activity," he said in testimony to the House Oversight and Government Reform committee.

Complicating matters are the persistent rumors that China may have secured some type of immunity from additional sanctions as part of their agreement to support U.N. Security Council Resolution 1929, which established relatively benign sanctions against Iran as punishment for its continued pursuit of nuclear weapons capability.

Undersecretary of State William Burns said at an Oct. 1 hearing of the Senate Foreign Relations Committee that the State Department had competed an internal review of the companies noted in the GAO report and would make more determinations soon, but he cautioned not to expect too many companies to be singled out for punishment.

"There are probably — there are a number of cases, less than 10, in which it appears that there may have been violations of the Iran Sanctions Act. Most of those appear to involve activities that have stopped, in other words, involving companies that have pulled out of business in Iran, but there are a couple that appear to be ongoing," he said.

Capitol Hill observers have been encouraged by the administration’s
recent moves — but are still not convinced they constitute enough of a commitment to increasing pressure on Iran. Staffers say that the administration’s new forceful tone and rhetoric are a marked improvement, even if they are only fulfilling the actions required by the sanctions legislation.

What’s clear is that the administration is not yet finished implementing sanctions against firms doing business with Iran, and Congress will be pressing it not to back down from punishing companies from countries that may take retaliatory measures.

"Many in Congress are worried that the administration will fall for Iran’s latest bid to buy a reprieve from sanctions by appearing interested in negotiations," said one senior GOP senate aide. "Congress will not let up on the pressure on the administration to go after Iran and those who are supporting it, namely, the Chinese."