U.S. House Passes Iran Sanctions Bill to Slash Oil Exports

The House of Representatives easily passed a bill on Wednesday to tighten sanctions on Iran, showing a strong message to Tehran over its disputed nuclear program days before President-elect Hassan Rouhani is sworn in.

The vote also highlighted a growing divide between Congress and the Obama administration on Iran policy ahead of international talks on the nuclear program in coming months. Iran insists the nuclear program is purely for civilian purposes.

The bill, which passed 400 to 20, would cut Iran's oil exports by another 1 million barrels per day over a year to near zero, in an attempt to reduce the flow of funds to the nuclear program. It is the first sanctions bill to put a number on exactly how much Iran's oil exports would be cut.

The legislation provides for heavy penalties for buyers who do not find alternative supplies, limits Iran's access to funds in overseas accounts and penalizes countries trading with Iran in other industrial sectors.

Existing U.S. and EU measures have already reduced Iran's oil exports by more than half from pre-sanction levels of about 2.2 million barrels per day (bpd), costing Tehran billions of dollars in lost revenue a month.

Most of the OPEC member's exports head to Asia, where the United States has worked with Iran's top four customers China, India, Japan and South Korea to push them towards alternative suppliers. The four have cut purchases from Iran by more than a fifth in the first half of this year, over and above the reductions made last year.

CHINA

The success of any toughening of the sanctions will depend on China, Iran's top customer, which has repeatedly said it opposes unilateral sanctions outside the purview of the United Nations, such as those imposed by the United States.

The country reduced oil purchases from the Middle Eastern nation by 21 percent last year, but that was partly on account of differences in the first quarter over the renewal terms of annual contracts and shipping delays.

Chinese officials have said refiners are likely to cut shipments 5-10 percent this year from last. They cut imports 2 percent in the first six months of the year.

"I don't think the Chinese government will give in to this kind of pressure," said an official with a Chinese refinery that processes Iranian crude. "There is no chance that Iranian supplies would come to a halt."

For now, relatively steady oil prices have allowed the efforts to continue, but analysts say further sanctions risk pushing up prices and damaging the economies of U.S. allies.

"This is almost like an embargo on Iranian oil imports. It is like giving Iran an ultimatum," a Seoul-based refining source said, after the vote. "I think we can find alternatives but we prefer Iranian crude as the economics are better. If very little Iranian crude is available, overall oil prices would rise."

The bill still has to be passed in the Senate and signed by President Barack Obama before becoming law. The Senate Banking Committee is expected to introduce a similar measure in September, though it is uncertain whether the language to cut exports by 1 million barrels a day will survive.

Critics of the bill said it shows an aggressive signal to Iran that last month voted in Rouhani, a cleric many see as more moderate. He will be sworn in on Sunday.

NO HIGHER PRIORITY

Rep. Ed Royce, a California Republican and Chairman of the House Foreign Affairs Committee who introduced the bill with Rep. Eliot Engel, a New York Democrat, said the United States has no higher national security priority than preventing a nuclear-armed Iran.

Royce said the Supreme Leader Ayatollah Ali Khamenei's drive to develop a nuclear arsenal was evident. "New president or not, I am convinced that Iran's Supreme Leader intends to continue on this path," he said.

The vote showed a growing disagreement between the White House and Congress on Iran policy. A senior administration official said on Wednesday the White House is not opposed to new sanctions in principle, but wants to give Rouhani a chance.

The Treasury Department last week partially eased sanctions on Iran by expanding a list of medical devices that can be exported there without special permission.

One of the 20 lawmakers to vote against the bill, Jim McDermott, a Washington-state Democrat, said shortly before the vote that the rush to sanction Iran before Rouhani takes office could hurt efforts to deflate the nuclear issue.

"It's a dangerous sign to send and it limits our ability to find a diplomatic solution to nuclear arms in Iran," McDermott said.

A supporter of harsher sanctions disagreed.

Ayatollah Ali Khamenei "doesn't see our flexibility and good faith efforts as a sign of good intentions, he sees it as a sign of weakness," said Mark Dubowitz, the head of Foundation of Defense of Democracies, an advocate of sanctions.

"If anything, it's only going to be massively intensified sanctions that get him to blink."

But Trita Parsi, the president of the National Iranian American council, said the House action undermines the U.S. strategy which has long been one of good cop - bad cop.

The White House has taken a softer stance toward Iran's nuclear program and Congress has taken a tougher one. But now there are signs that the good cop cannot control the bad cop, he said.

"The impression on the Iranian side is not that it's good cop bad cop, but complete chaos and mayhem," Parsi said.

'TOO MUCH'

The bill also further denies Iran's government access to foreign currency reserves, and targets Iranian efforts to circumvent international sanctions against its shipping business.

"I think it's too much. Asian countries don't have much oil resources and they need to import a lot from the Middle East," said a trader with a North Asian buyer of Iranian crude. "If the United States keeps pushing further, it would be a big burden for Asian refineries."

While the bill has more steps to clear before becoming law, other buyers, apart from China, have already begun voicing their inability to reduce dependence on Iranian oil much further.

"Cuts in our imports from Iran have been the maximum as compared to other Asian countries," an Indian industry executive said. "At this moment there is no scope for further reduction."

India cut its Iranian oil imports by 43 percent over the first half of the year. That's more than the 27 percent cut by South Korea and 22.5 percent by Japan.

Turkey would also struggle to cut its crude oil imports from Iran any further, a Turkish official said.

By Timothy Gardner (C) Reuters 2013.

Additional reporting by Warren Strobel, Meeyoung Cho in Seoul, Florence Tan and Manash Goswami in Singapore, Nidhi Verma in New Delhi, Orhan Coskun and Humeyra Pamuk in Ankara; Editing by Philip Barbara, Ron Popeski and Tom Hogue