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Pressing Ahead With Iran Pipeline, Pakistan Calls Washington’s Bluff

US and international sanctions have not succeeded in halting Iran’s nuclear program, and Pakistan’s domestic need for energy may outweigh what it calculates as the cost of ignoring US sanctions and cooperating with Iran to build a natural gas pipeline.

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On March 11, 2013, Pakistani President Asif Ali Zardari and his Iranian counterpart Mahmoud Ahmadinejad announced the construction of a pipeline that will make Washington’s plan to isolate Iran over its nuclear program increasingly difficult. While the natural gas pipeline will account for a small fraction of Iran’s exports, the fact that Pakistan is pressing ahead despite the threat of US sanctions points to the larger failure of the West to negotiate an end to its standoff over Iran’s nuclear program. Despite a host of economic problems due to the sanctions, Iran has not halted its nuclear program, prompting even the United States’ closest allies to weigh their domestic needs against supporting a policy of isolation that seems to be going nowhere.

On the night of February 24, 2013, Pakistan experienced a national power outage, plunging most of its 180 million population into darkness. A power plant in the southwest shut down after being overloaded, and the country’s other production facilities could not keep up. The extent of the blackout was rare, but Pakistan has been reeling from major power shortages for several years now. Last June, for instance, major cities like Lahore went without power for 20 hours a day. The average temperature in Lahore that month was 108 °F, but air conditioning was not all that was missed. The textile industry, for instance, employs 39% of Pakistan’s workforce, but without power, factories cannot run. It is thought that 3-4% of the country’s GDP is lost because of the energy shortage.

Pakistan produces about 12,400 megawatts of electricity, mostly through burning fossil fuels, but is thought to need around 19,000 megawatts. Needless to say, the energy crisis has a tremendous impact on the country’s politics. In January 2013, the Supreme Court nearly sparked a constitutional crisis by ordering the arrest of Prime Minister Raja Pervez Ashraf. Ashraf, who had served as a minister for power and water, was accused of corruption in managing a project that would allow foreign investors to operate private power plants in Pakistan. Pakistan and India, which have fought three wars over the last few decades, have been arguing for years now about how to develop hydroelectric plants on three rivers that originate in Indian-controlled Kashmir.

For nearly two decades, Pakistan has been trying to build a natural gas pipeline with Iran that would provide about 4,000 megawatts of electricity, meeting much of its domestic energy need. Once dubbed the Peace Pipeline, it was supposed to connect Pakistan and India to the world’s largest natural gas field, the South Pars off the coast of Iran. Iran, second only to Russia in its natural gas reserves, is unable to export most of its gas because Western sanctions have kept it from developing facilities to convert it into liquefied natural gas. Without these facilities, it must rely on pipelines for exports.

In 2009, India pulled out of the project when the United States agreed to forgo a three-decade-old moratorium, selling it nuclear technology and fuel in exchange for limited safeguards on India’s nuclear weapons program.

While domestic politics have contributed to the pipeline’s delay, the United States has also hampered the project, warning that Pakistan would be violating sanctions against Iran aimed at ending its alleged nuclear weapons program. When Iran and Pakistan moved ahead with the pipeline, the State Department’s spokesperson, Victoria Nuland, tried to downplay it, saying, “We’ve heard this pipeline announced about 10 or 15 times before in the past, so we have to see what actually happens … if this project actually goes forward, we have serious concerns that sanctions would be triggered.”

In fact, then Secretary of State Hillary Clinton, when pressed on exactly when sanctions would be violated at a Congressional hearing last year, said “…actually beginning the construction of such a pipeline either as an Iranian project or as a joint project would violate our Iran sanctions law.” The $1.5 billion pipeline is being financed partly by Iran and China, each of which agreed to give Pakistan a $500 million loan. Chinese firms will help construct the pipeline.

Growing Opposition to Unilateral American Sanctions

In monetary terms, the pipeline with Pakistan is not very significant. Pakistan would receive 750 million cubic feet of natural gas per day, nearly doubling Iran’s current gas exports, but this would still be less than 10 percent of Iran’s revenues through oil exports.

Politically though, the pipeline could have tremendous implications. “Once countries start to ignore the United States’ sanctions, then there is a risk of a trickle effect,” says Trita Parsi, president of the National Iranian American Council and author of several books on Iran and its relationship with the West. “The entire idea is to create a consensus in which no one is dealing with Iran economically.”

The sanctions are taking a heavy toll on the Iranian economy, but have produced little change in Iran’s nuclear program and have not forced the kinds of compromises the West was looking for.

Iran is subject to three kinds of sanctions over its nuclear program. The United Nations Security Council imposed several rounds of sanctions since 2006, but these are restrictions to which all countries are expected to adhere: They prohibit imports of weapons and nuclear technology. The European Union has also imposed restrictions on its members, banning the export of equipment for refining natural gas in 2011. In 2012, the EU placed an embargo on Iranian crude oil and natural gas, barred European companies from issuing insurance to Iranian oil shipments, and restricted transactions with major Iranian banks. Not being able to do business with EU companies had a major impact on Iran: It lost 20% of its oil exports, and 90% of its shipments had been insured through companies in Europe.

The United States has imposed its own sanctions on Iran, but goes a step further than the EU, threatening to punish any country that does business with Iran. The President could choose from a list of possible punishments. “We have prohibited US companies from doing business with Iran for decades,” says Flynt Leverett, a professor at Pennsylvania State University and author of Going to Tehran, a new book that makes the case for normalizing America’s relationship with the Islamic Republic. “But what has been going on with increasing intensity since the mid-1990s, and has really accelerated under Obama, is the use of secondary sanctions.”

Through a series of legislative measures by Congress and executive orders by the President, the United States has imposed the most restrictive sanctions ever on the Iranian regime, and is requiring third countries, like Pakistan, to follow them as well. Iran, which must import 40 percent of its gasoline because it doesn’t have the parts to build new refineries, can no longer buy it from other countries. The US sanctions bar countries from purchasing oil and gas from Iran, and companies from insuring Iran’s shipments. Oil and gas production accounts for 20 percent of Iran’s GDP, and 50 percent of its government revenue, so the sanctions make it difficult for the government to pay others. The US also bars countries from buying Iranian government bonds.

Any private or state-owned foreign companies and banks involved in Iran’s energy industry could be barred from working with Americans, and their assets in the United States could be frozen. Although it would require new legislation, countries like Pakistan could also lose American foreign assistance.

Iran’s oil sales have dropped 40 percent, from 2.5 million barrels per day in 2011 to 1-1.5 million barrels per day today. Iran relied on its oil sales for accumulating foreign currency such as US dollars, and it is estimated that it might run out of foreign currency reserves by July 2014 if current sanctions continue. Without the foreign currency, Iran’s Central Bank cannot buy Iranian rials, so the value of the rial goes down.

The drop in the Iranian rial has wide-ranging implications for the economy. Massive riots were triggered in October 2012 by a sudden drop in the rial’s value. In the last year, the rial lost half of its value.

“Isolating Iran does not seem to be bringing about change on the nuclear front,” says Parsi. “In fact, increased isolation seems to be increasing Iranian intentions towards nuclear capability.”

The latest assesment of Iran’s compliance with UN Security Council requirements concerning its nuclear program makes it clear there is little progress being made. The International Atomic Energy Agency (IAEA) found that Iran had not suspended uranium enrichment, not allowed the level of inspections of its facilities the UN had asked for, and was installing more equipment for continuing the refinement process at its plants.

“The Iranians are paying a heavy price economically,” says Parsi, “but we have not seen that price in any way shape or form affect the nuclear strategy. And that’s one of the concerns of some of these skeptical countries, that they are also paying a price; the sanctions cost them a lot.”

Pakistan is not the only country flouting US sanctions.

Leverett says a growing list of countries including China, Russia, Turkey, and India are resisting US sanctions because of their own economic needs and because of the wider principle that they should not be bound by American legislation. “It is essentially the US making a kind of hegemonic assertion, which is not grounded in international law,” he says, “and could be held to violate US commitments under the World Trade Organization.”

The latest round of US sanctions against countries buying Iranian oil includes exceptions for those “significantly reducing” purchases. The judgment of whether or not a reduction was “significant” is left to the President to make. The Obama administration has extended the exemption to 20 countries, mostly its allies and those that it does not want to upset, including India, Korea, Turkey, Japan and China. After the EU, these countries also happen to be Iran’s largest customers: China buys nearly 30 percent of Iran’s oil, India 20 percent, and Japan and South Korea 15 percent each.

“For many years the sanctions have been authorized by US law,” Leverett says, “but presidents have not really been imposing them because they recognize there is this real potential for real diplomatic blowback if the US starts doing this on any kind of widespread basis.”

All of the countries have reduced their imports of Iranian oil, but not to the levels the US would like to see.

Giving Diplomacy a Chance

By enacting tougher sanctions, Parsi says the US pushes Iran to improve its negotiating position by escalating on the nuclear front. “And the more they escalate on the nuclear front, the more we think we need to have sanctions. So it’s a vicious cycle.”

Parsi says sanctions have their greatest power right before they are enacted. Once they are on the books, it is very difficult for either side to back down. In the case of the United States, Congress has usually taken a much tougher line towards Iran than the President, making it hard to offer any concessions to Iran during negotiations. In 2010, as the UN Security Council was threatening a new round of sanctions, Brazil and Turkey negotiated a deal with Iran that would allow it to deposit enriched uranium in Turkey for safekeeping. But by the time they got Iran to agree to the plan, the United States had spent so much political capital persuading the Security Council to embrace the sanctions, it was unwilling to back down.

On other occasions, Congress has passed laws imposing tougher sanctions in the middle of negotiations. “Congress reduces the flexibility that Obama or any other President would have in implementing the sanctions,” says Leverett. In order for many of the latest US sanctions to be lifted, Iran would have to not only give up its nuclear program but also be removed from the list of state sponsors of terrorism, cutting its ties to Hamas and Hezbollah. It would have to enact wide-ranging reforms, Leverett says, “and basically become a secular, liberal democracy.” Short of regime change in Tehran, it is unlikely Iran could meet the conditions set out in US sanctions today.

“I think we are, to some degree, locked into a very dysfunctional policy, and it’s just a matter of time before it just kind of starts to erode,” says Leverett.

One sign of this erosion is the apparent disappearance of India’s hesitance to get involved in the Iran-Pakistan pipeline. On March 24, 2013, India’s minister for petroleum and natural gas told reporters his country was reconsidering the pipeline. “We are engaged in these kinds of talks with Iran and also with the US,” he said. “This project is beneficial to our country, no doubt … there are other sensitivities and other issues with regard to the sanctions, which we will have to address.”