Will Europe finally dare to make the difference in Iran that only it can?

By Emanuele Ottolenghi and Mark Dubowitz

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July 20, 2010

In the coming days, the European Union will hopefully adopt tough new measures designed to push Tehran to halt its illegal nuclear activities. “Sanctions have become inevitable,” EU leaders said last month in a statement.

For years, Europe has been criticized for its lucrative business deals with a regime that threatens Israel with nuclear annihilation, sponsors terror around the globe, and brutalizes its own population. Now, the rest of the world will be watching how the EU expands on June’s new round of U.N. sanctions, in both substance and implementation. The EU is Iran’s largest trading partner, so whatever it does will become a “ceiling” particularly for Gulf and Asian countries that are unlikely to do more.

That’s why it’s so important that Europe finally gets it right. Like comparable U.S. measures, the new EU sanctions will target Iran’s energy industry, the regime’s lifeblood. The problem is that when it comes to Iran, the EU has so far drawn a distinction between ostensibly legitimate Iranian businesses and those involved in procurement and proliferation for the state’s nuclear and missile programs. But by using its own sanctions against Burma as a precedent, the EU could now target any publicly owned Iranian companies regardless of whether they directly contribute to proliferation.

The EU’s sanctions against Burma’s military junta focus simply on any company owned by the state or regime officials and their families, whose revenues help to keep the junta in power. The U.N.’s recent resolution provides the political cover for a similar approach against Tehran by emphasizing in its preamble “the potential connection between Iran’s revenues derived from its energy sector and the funding of Iran’s proliferation-sensitive nuclear activities.”

By designating specific companies and individuals in Iran’s energy industry as well as their overseas procurement branches active in energy-related, nuclear-proliferation and missile activities, the EU could deny vital revenues to companies whose profits and access to foreign technology are critical to Iran’s nuclear ambitions. Given that Iran’s energy business is wholly owned by state companies; and that many enterprises in its energy-service industry are linked to the Islamic Revolutionary Guard Corps (a key player in the regime’s nuclear activities and internal repression efforts), a proper EU blacklist would have to be quite exhaustive.

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It would have to include, for example, the hundreds of affiliates operated by Khatam al-Anbiya (Ghorb), the IRGC engineering and construction company, which has won billions of dollars in Iranian energy-related deals. Though Ghorb is already on U.N., U.S., and EU blacklists, its hundreds of affiliates are not. These affiliates intentionally conceal their connection to Ghorb, creating significant business and legal risks for those Western companies transacting with them. No one should be fooled by recent reports that Ghorb is pulling out of South Pars, Iran’s large natural-gas field. Ghorb will remain a major player in Iran’s energy industry through its front companies and affiliates, unless their real affiliations are revealed. The EU blacklist should also include the 22 Iranian insurance, petroleum and petrochemicals companies recently banned by the U.S. Treasury Department.

The EU ought also to pay particular attention to Kala Naft, the overseas procurement arm of the National Iranian Oil Company, which is on British and Japanese watch lists for its connection to nuclear-proliferation activities. NaftIran, registered in the Channel Islands and operating in Switzerland (a key player in European energy projects) also shouldn’t escape sanctions, nor should Pars Oil & Gas Company, a major Iranian energy company with ties to the IRGC.

Procurement efforts in other sectors should also get sharp attention, such as technology, raw materials, and banking. It is in these areas where, through the Iranian-German Trade Bank in Hamburg, Iran has been running operations to evade sanctions for years. And while we know that the EU is mulling a ban on European companies entering into new contracts that involve the transfer of energy technology, equipment and expertise to Iran, the prohibition should also cover existing business deals, including the transfer of spare parts, maintenance and repairs to existing projects.

We also know that the EU will likely bar its own companies from entering into joint ventures, investments and other partnerships with Iranian companies in Iran’s energy sector. This would effectively amount to a blanket ban on future European involvement in Iran’s energy sector, given that no contracts there can be awarded without the participation of an Iranian partner. The EU should further ensure that this ban on investment applies to exploration, production and refining of Iranian oil and natural gas, and to prohibit the transfer of European technology and technical assistance.

So too should the EU extend its ban to overseas Iranian energy projects, where Iranian-government-controlled entities are currently partnering with European companies in Europe. These projects give the Iranian regime access to key technology, technical expertise and influence over European energy sources and their European energy partners.

The mere threat of U.S. energy sanctions, enacted by the Clinton and Obama administrations, has already had a significant impact: Many of Iran’s energy partners such as Total, Lukoil, BP, and Eni have already terminated, or have announced their intentions to terminate, their businesses ties with Iran. Massoud Mirkazemi, Iran’s oil minister and a former IRGC official, says that without annual oil and gas investments of at least $25 billion, Iran could soon become a net importer of oil. In the first four years of Mahmoud Ahmadinejad’s presidency, foreign investment in Iranian energy plummeted 64% to $1.5 billion from $4.2 billion.

Now imagine what tough sanctions from Iran’s biggest trading partner could do.

Mr. Ottolenghi is a senior fellow at the Foundation for Defense of Democracies and author of the forthcoming “Iran: The Looming Crisis” (Profile Books). Mr. Dubowitz is the executive director of the Foundation for Defense of Democracies and leads its Iran Energy Project.