European governments have agreed in principle to ban imports of Iranian oil, EU diplomats said, dealing a potentially heavy blow to Tehran just months before an Iranian election.
The prospective embargo from the European Union – agreed yesterday (4 January) – along with tough American financial measures signed into law by President Barack Obama on New Year's Eve, form a concerted Western campaign to impose sanctions over Iran's nuclear programme.
Iran says its nuclear programme is strictly peaceful, but Western countries say a November UN report shows it has sought to build an atomic bomb. Talks between Tehran and major powers broke down a year ago.
Diplomats said EU envoys had held talks on Iran in the last days of December, and that any objections to an oil embargo had been dropped – notably from crisis-hit Greece which gets a third of its oil from Iran, relying on Tehran's lenient financing. Spain and Italy are also big buyers.
"A lot of progress has been made," one EU diplomat said, speaking on condition of anonymity. "The principle of an oil embargo is agreed. It is not being debated any more."
EU diplomats in Brussels said member countries had not yet agreed on how soon the embargo should take effect and were still debating other possible sanctions.
France has said it wants the embargo and other sanctions agreed at a meeting of the EU's foreign ministers at the end of this month. Paris also seeks a ban on transactions with the Iranian central bank, similar to what Washington has imposed.
Prime Minister Mario Monti said Italy was ready to back an oil embargo as long as it was imposed gradually and deliveries to repay Tehran's debts to Italian energy firm ENI were exempted.
US welcomes news from Brussels
US State Department spokeswoman Victoria Nuland called the EU moves "the kinds of steps that we would like to see not just from our close allies and partners in places like Europe but from countries around the world".
"We do believe that this is consistent with tightening the noose on Iran economically," she said.
A US Treasury official said Tehran's oil revenues could be choked off without disrupting global oil markets.
The embargo will force Tehran to find other buyers for oil. EU countries buy about 450,000 barrels per day (bpd) of Iran's 2.6 million bpd in exports, making the bloc collectively the second largest market for Iranian crude after China.
Tehran dismisses threats
Tehran insisted it would have no trouble: "We could very easily replace these customers," said S.M. Qamsari, international director of the National Iranian Oil Co.
But the new US sanctions have already made it difficult for Iran to keep its customers, and could force it to offer steep discounts to countries willing to risk doing business with it, hurting its revenues.
Biggest trading partner China, driving a hard bargain, has cut its orders of Iranian oil by more than half this month.
Western countries have imposed various sanctions on Iran for years with little impact. But the latest measures are qualitatively different, directly targeting Iran's oil industry, which forms 60% of its economy.
Most traders expect Iran will still find buyers for its crude, mostly in Asia, but it is going to have to offer substantial discounts, cutting back the revenue that the state relies on to subsidise basic goods for its citizens.
Tougher sanctions appear to be having an impact already on Iran's streets, where prices for foodstuffs are soaring. The rial currency has lost 40% of its value against the dollar over the past month.
Currency exchanges have shut in Tehran and Iranians have queued to withdraw their savings from banks and buy dollars.
That economic hardship is being felt by the public two months before a parliamentary election, Iran's first since a disputed 2009 presidential vote that led to massive street demonstrations, put down violently by Iran's rulers.
Iran's leaders are anxious to prevent any popular unrest, especially after the Arab Spring revolts last year showed the vulnerability of Middle Eastern governments to street protest.
Iran has warned that any steps to cut its oil exports could cause havoc in international oil markets at a time of global economic pain. In recent weeks it has also resorted to increasingly aggressive military sabre-rattling.