The West has gone for Iran's economic jugular with a series of measures aimed at crippling its oil imports.
Iran faces new import embargo
NICOSIA // A European Union embargo on imports of Iranian oil comes fully into effect today, dramatically escalating the West's economic and psychological chokehold on Iran in a drive to curb its cherished nuclear programme.
Spreading the embargo's impact far further afield is a ban prohibiting European-based insurers, which dominate the global maritime insurance business, from covering any tanker carrying Iranian oil. The ban also comes into force today.
South Korea today will become Iran's first major Asian oil customer to halt imports.
The US also went for Tehran's economic jugular on Thursday by imposing sanctions on countries doing oil deals with Iran's central bank.
The combined measures mean Iran's oil exports have already plummeted about 40 per cent in the past six months to 1.5 billion barrels a day, energy analysts said.
"The West wants Iran to get a nasty shock on the first of July which they hope will force it into making a nuclear compromise," said Meir Javedanfar, an Iranian-born analyst in Israel.
"Time is on America's side right now."
The Iranian regime, however, has yet to show any sign of capitulating to mounting pressure by making a significant concession in faltering nuclear negotiations with six world powers.
These resume at a lower, technical level on Tuesday, following talks in Moscow last month that resulted in a stalemate.
Neither side, however, wants to call a halt on diplomacy because it could lead to a catastrophic Israeli attack on Iran's nuclear facilities.
The EU sanctions "will worsen the plight of the Iranian people but probably make no difference to Iran's defence of its nuclear programme", said Muhammad Sahimi, an Iran expert at the University of Southern California.
Other Iran specialists warned that Tehran, rather than passively soaking up the punishment, could hit back through overt and covert measures, carefully calibrated not to provoke American retaliation but enough to rattle global oil markets.
"We have proceeded with sanctions and a virtual blockade of Iran's oil production… on the unstated assumption that it is a one-way street," said Gary Sick, an Iran expert at Columbia University in New York.
"I've been suggesting for some time there could be some kind of retaliation," added Mr Sick, the chief White House aide on Iran during the 1979 Iranian revolution.
Payback could come in a cyber-attack on computer-managed Arab oil production in the Gulf, he said. "If a significant percentage of that production were taken offline by computer malfunction, what would the price of gasoline look like?"
Washington, he said in an interview, first used viruses such as Stuxnet and Flame to blast Iran's nuclear and oil facilities, setting a dangerous precedent.
Other Iran experts said Tehran could declare some new advance in its nuclear programme or renew tensions in the Strait of Hormuz.
Mahmoud Ahmadinejad, the Iranian president, demonstrated how this could be done in April when he made a provocative visit to Abu Musa, which the UAE claims as its sovereign territory.
"Iran could blow up one of its own ships in the middle of the Strait and make it look like an accident," said Trita Parsi, an Iran expert in Washington. "No one's going to go to war because an Iranian ship got blown up. But it would send shivers through the oil markets."
Tehran's position has been weakened by the fall in oil prices while its European customers, who once accounted for 18 per cent of Iran's oil exports, have been weaning themselves off Iranian oil since the EU embargo was first announced in January.
Increased output from Saudi Arabia is making up the shortfall, while Iraq is pumping more oil than ever and Libyan production is back online.
Nevertheless, like the West, Iran believes time will improve its strategic advantage.
It has signalled readiness to halt enriching uranium up to 20 per cent, which is of most concern to the West, provided its right to a domestic nuclear fuel cycle is accepted, namely enriching uranium to 3.5 per cent purity.
But Iran believes domestic political constraints will prevent Barack Obama from delivering concessions until after the US presidential elections in November, assuming he wins a second term.
Iran has complained the P5+1 - the five permanent members of the UN Security Council, along with Germany - offered only meagre incentives in Moscow if it halted 20 per cent enrichment and sent abroad its stockpile of that material.
"Our nation is prepared to prove that 5+1 equals zero," Brig Gen Mohammad Reza Naqdi, commander of Iran's paramilitary Basij force, scoffed in a rare show of wit this week.
Iran had long insisted it could ride out sanctions, insisting they would boomerang on troubled western economies. Although Iran admitted last week that its exports had fallen 20 to 30 per cent, a report by the semi-official Mehr news agency yesterday quoted Central Bank Governor Mahmoud Bahmani as saying Iran could circumvent the sanctions and "easily" sell its oil as some countries were given waivers by the US.
The State Department has announced that China, India, Japan, Malaysia, South Korea, Singapore, South Africa, Sri Lanka, Turkey and Taiwan have received waivers from the US in exchange for "significantly reducing" oil imports.
* With additional reporting by Associated Press