Iran Cracks Down on Iraq’s Illegal Shipments of Oil

In a major break for U.S. efforts to close loopholes in the economic embargo of Iraq, the government of Iran has launched a crackdown on sanctions-busting oil shipments that have earned Saddam Hussein’s regime hundreds of millions of dollars over the past two years.

The move is widely interpreted in Washington as a positive political gesture by Iran to the United States, according to senior U.S. officials and regional experts.

“In terms of global oil markets, the amount is too small to make much difference in price, so the motive and real significance have to be political,” said Vahan Zanoyan, an oil analyst and president of the Petroleum Finance Co. in Washington. “It’s clearly a gesture to show goodwill to the United States.”

Tehran’s crackdown on what has been the fastest-growing loophole in the economic embargo deals a direct blow to the Iraqi president because the traffic is run by his eldest son, Uday, largely for the benefit of the Hussein family and inner circle, Clinton administration sources say.

Illegal Iraqi oil shipments, which reached significant levels in 1996, recently soared to an estimated 100,000 barrels a day, generating up to $600,000 daily for Hussein’s regime after bribes and price discounts, according to James Placke, a former U.S. diplomat in Iraq now with Cambridge Energy Research Associates.

Iran’s crackdown began in mid-February. Since early this month, it has cut off more than half of Iraq’s illicit oil trade, U.S. officials say. It was launched at the same time Iraq was being pressured to cooperate with U.N. weapons inspectors--and may have played a significant role in tightening the squeeze on Baghdad.

“This was happening as the crisis [over the U.N. disarmament program] was coming to a critical point. It represented a separate crisis that began to put pressure on Saddam in a very real way,” a senior Clinton administration official said. “It must have been a very unpleasant time to be a decision-maker in Baghdad.”

Tehran has been able to restrict the flow of petroleum because most ships that have carried Iraqi oil have used forged Iranian papers and passed through Iranian waters, hugging Iran’s coastline, U.S. officials say. When the sea was clear, the oil-laden ships then sailed into ports of the United Arab Emirates to sell or barter their cargo.

The Iraqi operation was so effective that only about 5% of the illicit oil shipments were intercepted by the U.S.-led multinational interdiction force deployed in the Persian Gulf after Iraq’s 1990 invasion of Kuwait led the United Nations to impose the world’s toughest economic embargo.

As the amount of oil smuggling escalated, the United States pressured the United Nations and other Gulf nations to close off the sanctions loopholes. At U.S. urging, strong messages about the illegal oil traffic--noting that U.S. and British ships had recently tracked and confronted sanctions-busting ships--were relayed from the United Nations to both Iran and the United Arab Emirates earlier this year.

Last year, Vice Adm. Thomas B. Fargo, commander of the U.S. 5th Fleet, headquartered in Bahrain, characterized Iraq’s embargo evasion efforts as “rather sophisticated” and facilitated “within Iran.”

The Iranian National Oil Co. denied that it was involved in smuggling Iraqi oil. U.S. officials and oil analysts blame corrupt Iranian officials for aiding the Iraqi operation.

The illegal oil trade epitomized Iraq’s often ingenious schemes to defy U.N. sanctions. It also became the most important source of income for the regime in Baghdad to buy equipment to secretly continue developing weapons of mass destruction, U.S. officials say.

Under a U.N. oil-for-food program, Iraq has been allowed since 1996 to sell $2 billion worth of oil every six months to pay for humanitarian goods. The proceeds, some of which also pay for war reparations, are channeled through the United Nations. Under a new resolution passed last month, the sales will more than double, to $5.25 billion every six months.

In contrast to the U.N.-supervised oil-for-food program, the illegal oil sales have provided the regime with direct control over a large amount of hard currency unregulated by anyone. Baghdad also smuggles oil overland through Turkey and is allowed to legally sell oil to Jordan. But the oil shipped through the Gulf has provided the biggest windfall, U.S. officials say. If Iraq had continued to smuggle at recent rates, it stood to net more than $200 million a year.

The crackdown is notable not only for its impact on Iraq but also for the signals it sends about Tehran’s motives.

Iran and Iraq, two regional powerhouses that share shipping lanes in the Shatt al Arab waterway that flows into the Gulf, fought their own war from 1980 to 1988. They have had sporadic periods of cooperation since then, even though no formal peace ended the conflict.

“Iran may have come to the conclusion that it didn’t want Iraq to get any stronger,” the Clinton administration official said.

The consensus among other U.S. officials and oil analysts is that Iran is using its oil card to send a pointed message, as it has in the past. The timing of Tehran’s crackdown coincided with the first recent cultural exchanges between Iran and the United States, at the onset of a gradual thawing of relations after verbal overtures by the presidents of both countries.

The regime of Iran’s reformist President Mohammad Khatami appears to be prepared to show it can play by international rules.

“Iran’s action is a significant signal aimed at the United States, but also a sign of its willingness to cooperate with Gulf neighbors and the international community,’ said Judith Yaphe, a Gulf specialist at the National Defense University in Washington.