Breaking down exemptions

The good news that the US has renewed exemptions for a host of countries including Sri Lanka from Iran sanctions on oil purchases is tempered by the fact that it is difficult to use. The stranglehold on payment mechanisms means that Sri Lanka will still have to pay billions extra to purchase oil that it can ill-afford, resulting in deep economic challenges.

The Obama administration reissued waivers that exempt nine countries, including China, India and Turkey, from fully complying with US sanctions targeting Iran’s oil exports, as the US attempts to maintain international pressure on Tehran’s finances.  Washington extended the exemptions, initially granted in 2012, to these countries for reducing their purchases of Iranian oil over the past six months, thereby helping force Tehran to cut its total oil production. The other countries granted waivers were Malaysia, South Korea, Singapore, South Africa, Sri Lanka and Taiwan. US and European officials said they believe Tehran is losing around $ 15 billion every quarter in lost oil sales and have had to deal with an 18% drop in trade with China.

However, the worry is that the damage being inflicted on Iran’s economy might not be sufficient to pressure Supreme Leader Ayatollah Ali Khamenei to give ground on Tehran’s nuclear work. The United Nations reported last month that Iran continues to expand its production of nuclear fuel and is moving closer to obtaining weapons-grade materials. Iran says it is not seeking to develop nuclear weapons. So in simple terms, the US is still not winning this war. Yet the sanctions imposed by it are seriously affecting other countries, particularly Iran oil dependent Sri Lanka, which used to import as much as 90% of its needs from that beleaguered nation.

Sri Lanka’s problems are twofold. One is that banks are refusing to open letters of credit as they fear being blacklisted. State-run Bank of Ceylon and People’s Bank that support the bulk of the Ceylon Petroleum Corporations (CPC) purchases are refusing to open lines of credit as losing their credibility would have sweeping economic repercussions. This is a valid fear given that the US this week blacklisted 37 international companies and has outlined plans to go after scores more that do business or hold extensive accounts for Iran.  Since February, countries gaining exemptions have to comply with new payment restrictions. In particular, the US will require that these countries make payments into accounts at banks within their own borders. The funds can then be used only to purchase authorised goods or services.

Such strangleholds mean that exempted countries will struggle to make good their loophole. The US has an obligation to ensure that their exemptions count for practical implementation on the ground, otherwise they would be pointless. Offering insurance against strictures and setting clear parameters on what would be legal procedure would clear up these grey areas. Yet, even with the lapse of a year, this is yet to happen meaningfully.

The second dimension is that the Sapugaskanda Refinery, which is tailor-made for Iranian crude, is struggling to cope with the different chemical makeup of Saudi and Oman oil. The long-term repair and maintenance costs will run up to millions of dollars that the Government can ill-afford. Last November Parliament passed the 2013 Budget, giving the nod to reduce its fiscal deficit to a 35-year low of 5.8% and achieve economic growth of 7.5% in 2013. Oil prices are crucial to achieve this goal. In addition, the US Government would get much better support globally if it functioned with understanding and consideration of the challenges faced by smaller developing countries. Yet this seems increasingly unlikely.