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How did Countries Deal with Iran During Previous Sanctions?

August 7, 2018
Faramarz Davar
15 min read
Before the sanctions were lifted, the Russian government even denied Iran’s request for the passage of a military vessel from Volga Canal to the waters of the Caspian Sea
Before the sanctions were lifted, the Russian government even denied Iran’s request for the passage of a military vessel from Volga Canal to the waters of the Caspian Sea

President Barack Obama called them “paralyzing,” Ayatollah Khamenei said they were “barbaric” and President Hassan Rouhani declared them to be “unjust.” Now the US sanctions against Iran are on their way back, beginning with the first sanctions being re-imposed on April 7. What is more, President Trump who announced on May 8 that he was pulling the US out of the nuclear deal with Iran, has threatened to impose additional sanctions on the Islamic Republic.

In the years before the 2015 nuclear deal, officially known as the Joint Comprehensive Plan of Action (JCPOA), the United States made Iran a “special case” within the international community through its comprehensive campaign to apply sanctions and ensuring the UN Security Council played a significant role in how the world dealt with Iran. As a result, governments and companies that wanted to have normal political and business relations with Iran were required to report to the Security Council. “They want to create a situation where no country can have relations with us,” wrote Mohammad Javad Zarif in his book before he assumed his current position as Iranian foreign minister.

With very little time left before the full list of sanctions against Iran are officially re-imposed, a group of US diplomats traveled to Iran’s neighboring countries and oil customers in an effort to persuade them to fully implement the sanctions, the harshest of which will be on Iranian oil exports. Iranian Supreme Leader Ayatollah Khamenei has asked Iranian diplomats to counter American efforts by visiting the same countries, and President Rouhani has implicitly threatened to close the strategic Strait of Hormuz and prevent countries from exporting their oil through it if Iran will not be allowed to sell its own oil.

Prior to the nuclear deal, Iran successfully bypassed some of the sanctions for a period of more than three years. But the country paid a heavy and lasting price for it — from unprecedented corruption to a damaged economy that is making the country more difficult to govern day by day and which has been undermining the public trust across the country.

But during the sanctions years, how did other countries conduct their relations with Iran? And how are they behaving now?


India: Goods as Payments for Iranian Oil

After the US banking and oil sanctions against Iran were put in place, Iran’s biggest problem was selling oil and actually getting the money after the sale.

India was one country that quickly complied with American oil sanctions, reducing the amount of petroleum it imported from Iran. But what it did import, it paid for in an unconventional way. According to Ali Akbar Salehi, who was Iranian foreign minister during the sanctions, India “paid 45 percent of the money for the oil in rupees. But they would not transfer the rupees to us. Instead, they said we should buy goods from India and import them.” The rest of the money was deposited in a euro account, but the account was blocked and Iran could not withdraw money from it.

Currently, India buys around 500,000 barrels of crude oil from Iran per day, but when Trump threatened to exit the JCPOA, it reduced its imports by 10 percent. It also rejected President Rouhani’s proposal that Iran would ship its oil to India for free if India guaranteed to continue buying oil from Iran.


China: Loaned Iran’s Own Money to Iran

China, Iranian oil’s biggest customer, treated Iran in an even worse manner, which Rouhani’s advisor Akbar Torkan described as being “very humiliating.”

In one case, China loaned the Islamic Republic the $22 billion it owed for oil purchases — but first it deducted $4 billion in interest. For the remaining $18 billion it imposed an eight percent “insurance” fee so that China would not lose anything if the sanctions were extended and Iran was unable to pay back China for the so-called loan. That $22 billion of Iranian money remained blocked in China at least until early 2016.

In addition, Iran’s Khazar Sea Shipping Lines had a contract with Chinese shipbuilding companies, which failed to comply with the contract and deliver the ships. Instead, China demanded damages from the company because Iran was under sanctions and was unable to pay [Persian link].

China is the world’s top crude oil buyer and imported around 655,000 barrels a day on average from Iran in the first quarter of 2018, according to official Chinese customs data — equivalent to more than a quarter of Iran’s total exports. But, even though China is a signatory to the JCPOA, there are reports that it intends to reduce its petroleum imports from Iran and has asked the United States to give it time and to refrain from imposing fines and sanctions on China until it can find substitute sources.

At the same time that President Trump withdrew from the JCPOA, the US imposed unprecedented and heavy fines on a Chinese company for violating existing trade sanctions on Iran. ZTE, a telecommunications equipment and systems manufacturer, was hit with a fine of close to one billion US dollars and was forced to change its board of directors and to reprimand or dismiss employees who had played a part in violating the sanctions. And, in yet another unprecedented action, the company had to deposit $400 million in an escrow account in case of sanction violations in the future. (In late May it was reported that the US government had reached a deal to keep ZTE in business.)

The US has announced that, through these sorts of actions, it plans to reduce Iranian oil exports to zero.


South Korea: Withheld Ships and Prepayment and Asked for Damages

South Korea is another major Iranian oil customer that has reduced its imports from Iran since Trump threatened to withdraw from the JCPOA. The imports now stand at 250,000, almost half of what it imported after the JCPOA was implemented [Persian link].

South Korea, of course, has very close relations with the US and fully observed all the sanctions imposed on Iran before the nuclear deal. For example, in 2008 it had signed contracts to sell Iran 17 ships but suspended the contracts after sanctions were imposed. The Islamic Republic of Iran Shipping Lines (IRISL) had paid the South Korean company Hyundai around $160 million as an advance toward the ships but, after the sanctions, Hyundai not only refused to return the advance but it also demanded close to $180 million in damages [Persian link].

According to IRISL’s CEO Mohammad Saeedi, after the JCPOA was signed, Hyundai reluctantly signed a contract to sell Iran 10 ships after negotiations lasting 15 months. The order is to be paid in euros, but now it is not clear what will happen to the contract.

During the earlier time of sanctions, South Korea paid its debts to Iran in euros and dollars by depositing the money into a blocked account belonging to Iran. But with the preliminary nuclear agreement it paid Iran $550 million and after the JCPOA went into effect, it paid all of its outstanding debts, an amount that reached over $5.6 billion [Persian link].


Russia: A Vanguard for Complying with American Sanctions  

Russia is an important non-western party to the JCPOA but, contrary to the hopes and expectations of the Islamic Republic, its energy minister has announced that when the oil sanctions return on November 4, Russia will review the legality of paying for Iranian oil by exchanging Russian-made goods. And the Kremlin denied claims made by Ali Akbar Velayati, senior advisor to the Supreme Leader. Following a meeting with President Vladimir Putin, Velayati had quoted the Russian president as promising to invest $50 billion in Iran.

Russia supported the previous round of US sanctions against Iran and, after the sanctions on trade with Iran in US dollars got underway, the Russian private sector and the Russian non-state banks stopped their dealings with Iran.

The two countries conduct their commercial exchanges in rubles and rials, but the Russian national currency was the real winner in these deals. In 2017, the total volume of Iran-Russia trade amounted to over $290 billion. Iran increased its exports to Russia but its share of the deal was only $400 million [Persian link].

Before the sanctions were lifted, the Russian government even denied Iran’s request for the passage of an Iranian military vessel through the Volga Canal to the waters of the Caspian Sea, citing the sanctions [Persian link]. Cooperation between the two countries to complete the nuclear power plant at Bushehr continued, but the slow pace of progress dissuaded Iran from entering into new contracts with Russia to build more nuclear power plants. And the sale of Russian S-300 missile systems that were meant to protect Bushehr’s power plant was suspended. When Iran threatened to complain to the UN Security Council, Russia cited sanctions approved by the council — sanctions for which Russia itself had voted. Russia played a role in modifying some of the Security Council resolutions but it always voted for them and never even bothered to abstain.

Russia “is a second- or even third-rate player on the world stage and one can only expect it to sacrifice everything for its own interests,” Zarif said prior to becoming Iran’s foreign minister. “It is an undeniable fact that Russia has always used Iran as a card in its strategic game,” he wrote in his book. “It has always done this and has always sold Iran down the river.”

Russia now says the nuclear agreement must stay intact, but there are clear indications that it might return to its pre-JCPOA behavior. During the time of sanctions, every country — depending on its specific situation, its international position and, of course, its bilateral relations with the Islamic Republic — exploited the sanctions to its own benefit one way or another.


Iraq: No Money for Iranian Electricity

Islamic Republic officials view Iraq as Iran’s little brother who needs its help, but during the sanctions Iraq refused to pay for the electricity that Iran exported to the country, giving banking sanctions against Iran as an excuse.

“During the hot season,” said the then Foreign Minister Ali Akbar Salehi, “we supplied their electricity but they would not pay for it, using sanctions as an excuse. If we cut off the electricity, they protested. Their debt reached almost a billion dollars but Iran generously continued to supply them with electricity.”


Turkmenistan: No Gas in Winter

To provide fuel for northern Iranian cities in the cold season, Iran imported gas from Turkmenistan. But since Iran could not pay for it due to banking sanctions, Turkmenistan shut down its gas pipeline to Iran in mid-winter [Persian link]. According to Foreign Minister Salehi, “we did want to pay our debt but could not because of banking sanctions...They kicked us whenever we were down.”


Airliners in Search of Fuel

At the height of the sanctions before the nuclear deal went into effect and when commercial dealings with Iran became very costly for other countries, even countries that were in bad economic conditions but had good relations with the Islamic Republic avoided making deals with Iran. One of them was Venezuela, a member of the Organization of the Petroleum Exporting Countries (OPEC). President Ahmadinejad had established very close relations with President Hugo Chaves and other high Venezuelan government officials but, at the time, the Venezuelan foreign minister announced that Iran did not need his country’s aviation fuel, meaning that Venezuela was not going to sell fuel to Iran.

Also, during the same period, European countries refused to sell aviation fuel to Iran Air planes and Iran was forced to find alternative places to refuel [Persian link]. For example, for return flights to Tehran from London, Vienna and Amsterdam, Iranian airliners had to land at one of the Eastern European airports to refuel. They had to refuel with passengers onboard — abnormal practice in the air travel industry and widely considered to be dangerous. And, again, because of banking sanctions, they had to pay for the fuel in cash.

And, because of the sanctions, foreign airliners avoided refueling at Iranian airports or Iran refused to refuel them as a retaliatory measure. As a result, there were fewer flights by foreign carriers to Iran and the price of air travel tickets rose.


Turkey: Gold for Oil and Gas

Despite very difficult conditions during the sanctions, two of Iran’s neighbors, Turkey and the United Arab Emirates (UAE), provided Iran with some breathing room.

Turkey imports a major portion of its oil and gas from Iran. When dollar transactions with Iran were banned, Turkey started paying for its oil imports from Iran in its own national currency, the lira. Then Iran used liras to buy gold bullions from Turkey. In other words, Iran was indirectly paid in gold for its oil and gas exports to Turkey.

Then, to further close escape routes for Iran, the US banned the practice of exchanging gold and other precious metal with the Islamic Republic. Even though at the time Iran-Turkey relations were extremely tense over Syria and Iranian support for the regime of President Bashar al-Asad, both countries found ways to continue trading with each other. Their trading relations became very difficult but they never stopped.

According to Ali Akbar Salehi, Turkey “left open a tiny stream but also profited from it.” Nevertheless, the US fined a number of Turkish banks and companies for helping Iran to bypass the sanctions, including one that was fined five billion dollars. But fines were not the end of the story. The US Department of Justice also indicted some Turkish government officials, including Zafer Caglayan, who was then Turkey’s Minister of Economy. The arrest of Reza Zarrab, a businessman close to Turkish president Recep Tayyip Erdogan, and later his conviction, was one of the more serious developments in the story.


UAE: Reordering Iran’s Orders

Relations between Iran and the United Arab Emirates were in some ways similar to Iran-Turkey relations at the height of sanctions.

With the US sanctions on Iranian ports in place, international shipping lines refused to carry goods from or to Iran. Also, the insurance companies refused to insure Iranian-registered ships. A large part of Iranian imports depend on ships and its ports so, to bypass sanctions, Iran had no choice but to put its orders in the name of another country. The goods, of course, were then delivered to the ports of that country.

The UAE was in the best position to play the role of middleman. In 2012, at the height of international sanctions, UAE exports to Iran reached an unprecedented $30 billion [PDF], but these so-called exports were in fact what Iran had originally ordered in the name of the United Arab Emirates.

After Iranian orders were unloaded at UAE ports, especially at Dubai, floats carried the mostly uninsured goods to Iranian ports. As a result, Iran had to pay more for its imports. The most important items that came through UAE were gold, office equipment, glass, health products and polyethylene.

UAE officials had announced that they would adhere to UN sanctions against Iran but would not necessarily enforce unilateral US sanctions, even though the UAE’s minister of economy at the time said that the banks and private companies were free to observe unilateral sanctions.

In those years, many Iranian businessman tried to open branches in neighboring countries or even move their whole businesses to those countries in order to survive sanctions, and the United Arab Emirates was at the top of the list of destination countries. Toward the end of Mahmoud Ahmadinejad’s presidency and the beginning of Rouhani’s first term, the number of Iranian businesses in Dubai had reached 50,000 [Persian link].


Sanctions as Viewed by Two Iranian Foreign Ministers

Before assuming office, Ahmadinejad’s Foreign Minister Ali Akbar Salehi was on the sanctions list of the European Union, so when he wanted to travel to Europe as the foreign minister he had to acquire a special permit from the union. “The US wanted to destroy the economy of the Islamic Republic by imposing paralyzing sanctions,” says Salehi, “but fortunately our country quickly found how to bypass these sanctions and to reduce their effectiveness.”

But Salehi’s immediate successor under President Rouhani, Mohammad Javad Zarif, sees the sanctions differently. “We make a mistake by saying that sanctions do not lead to pressures,” he said. “Pressures are evident everywhere. The real aim of sanctions is to increasingly erode the credibility and the legitimacy of the country and turn it into an unwelcome entity, and which having relations with would be costly.”

“According to [parliament’ speaker] Mr. Larijani,” said Zarif, no country gives up the ghost because of sanctions — “but the truth is that it has to pay a higher price for getting what it needs.”


More on the aftermath of Trump’s withdrawal from the nuclear treaty with Iran:


Iran’s Revolutionary Guards Commander Threatens Trump, July 26, 2018

Decoding Iran’s Politics: The 12-Point US Ultimatum, July 6, 2018

Can Iran Legally Close the Strait of Hormuz?, July 5, 2018

Rouhani’s Plane Bypasses US Sanctions, July 3, 2018

Guards Sell Missile Program to the Iranian Public, June 22, 2018

Iran and its Fleeting Dream of New Airplanes, June 13, 2018

Khamenei Calls for Immediate Action on Nuclear Enrichment, June 6, 2018

Decoding Iranian Politics: Ayatollah Khamenei’s Stance on the JCPOA, June 1, 2018

The Nuclear Deal: Will Khamenei Get What he Wants?, May 29, 2018

Khamenei’s Eight Conditions for Talks with Europe, May 25, 2018

Revolutionary Guards Respond to Pompeo’s “Empty Bluff”, May 23, 2018

The 12 Demands of Pompeo's New Iran Strategy, May 21, 2018

When Will US Sanctions Hit Iranian Oil Sales?, May 18, 2018

The JCPOA: A Missed Opportunity, May 17, 2018

The Future of Iran’s Economy as the US Bows Out of the Deal, May 10, 2018

What are Iran’s Choices as US Abandons the Nuclear Deal?, May 9, 2018

Khamenei’s “Heroic Flexibility 2.0”, May 9, 2018

What you Need to Know About Trump and the Nuclear Deal, May 8, 2018



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