Crude 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.

Secretary of State Hillary Clinton said Washington granted the exemptions 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 by one million barrels a day in September and October from a year earlier. 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.

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.

Moreover, come February, countries gaining exemptions must 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 six months, 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 weekend Parliament passed the 2013 Budget, giving the nod to reduce its fiscal deficit to a 35-year low of 5.8% and achieve an 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.