Obama chooses not to impose new Iran penalties

WASHINGTON (AP) — The Obama administration sidestepped a congressional deadline Wednesday and an opportunity to unilaterally ratchet up economic pressure on Iran by punishing foreign firms that do business there.

Top officials instead pointed to success in persuading friendly countries and financial institutions to cut ties with the Islamic republic on their own.

The White House hopes that tough commitment to financial pressure will persuade Israel to back away from the possibility of launching a military strike on Iran, an approach the U.S. believes is shortsighted. President Barack Obama will make that case directly to Israeli Prime Minister Benjamin Netanyahu on Monday when the two leaders meet at the White House.

The decision also reflects concerns over what effect those actions would have on the fragile world economy.

Some in Washington expected Obama to strengthen his position ahead of the high-stakes meeting by announcing fresh economic penalties that went into effect Wednesday. The penalties were included in a law Obama signed on Dec. 31.

But the administration chose not to immediately take action available to it to go after foreign firms.

In testimony on Capitol Hill and private negotiations with key allies around the world, Obama administration officials insisted sanctions already levied on Iran were working and that more economic pressure can thwart Tehran’s disputed nuclear program.

Secretary of State Hillary Rodham Clinton told Congress the administration is having success in pushing U.S. allies to cut ties with Iran on their own rather than face American sanctions.

“We have faced some challenges because even some of our very best friends have to make serious adjustments in order to comply,” Clinton said. “But we’ve laid the groundwork so that they understand that … this is an important international commitment and they’re stepping up.”

The legislation said that 60 days after its enactment, the president must penalize any privately owned foreign financial institutions that knowingly conduct or facilitate any significant non-petroleum financial transaction with the Central Bank of Iran. Oil sanctions would be added later under the same legislation.

The United States would have had ample examples of foreign firms that have continued to do lucrative business with the powerful Iranian central bank since December.

“Our approach right now is to continue to pursue the diplomatic path that we’ve taken, combined with very aggressive sanctions,” White House press secretary Jay Carney said Wednesday.

“Iran has not broken out and started to pursue a weapon. So there is time and space to continue to pursue the policy that we have been pursuing since the president took office.”

The administration says it has more time to impose those penalties. A Treasury Department official said the U.S. was interpreting the law to mean that transactions with the Central Bank occurring after Wednesday’s deadline would put financial institutions at risk of penalties.

“Foreign private banks that, after today, engage in significant transactions with the CBI unrelated to the purchase of oil risk losing their correspondent account access to U.S. financial institutions,” David Cohen, Treasury’s undersecretary for terrorism and financial intelligence, said in a speech Wednesday to a financial trade group.

Since the United States does little real business with Iran, its economic leverage comes largely from the threat of U.S. financial punishment on foreign government or businesses.

Iran has an extensive international trade network, including longstanding economic relationships with many U.S. allies. Since long before the current crisis over a possible Israeli strike, the U.S. has taken a cautious approach to punishing friendly foreign entities.

The sanctions that went into effect Wednesday put the White House in the awkward position of choosing whether to punish financial institutions in countries that are friendly to the U.S., mainly in Europe, the Middle East and Asia.

Tommy Vietor, another White House spokesman, said the U.S. has approached financial institutions around the world to caution them to stop doing business with Iranian banks, “both due to the reputational risks involved and the potential exposure to sanctions.”

One such institution, the Dubai-based Noor Islamic Bank, said Wednesday that it had stopped doing business with Iranian banks in December, shortly before Obama signed the defense bill into law. Noor appears to have acted, at least indirectly, in response to Washington’s efforts to tighten the screws on Tehran.

“When we became aware in December 2011, that unilateral U.S. sanctions were to be applied against a number of Iranian banks, we took pre-emptive action to end our business relationships with Iranian banks licensed in the UAE,” the Dubai bank said.

Dubai, just across the Gulf from Iran, is a major Middle East banking and commercial hub and an important trading center for Iranian merchants. It is one of seven semiautonomous sheikdoms that make up the United Arab Emirates, a key U.S. ally.

Mark Dubowitz, a sanctions expert advising the administration on Iran, said announcing more penalties Wednesday would have sent a message that the administration was serious about sanctions enforcement.

“I think it would have been wise to have welcomed the prime minister with a show of force on the economic warfare front and to have imposed a meaningful and consequential sanction in anticipation of what will be a difficult meeting,” Dubowitz said of the meeting between Obama and Netanyahu.

Israel has largely stayed out of the debate about specific sanctions. Israel has made the case to U.S. officials privately that its decision about whether to attack Iran is based on its own calculations about when such a strike would be effective.

Israeli Defense Minister Ehud Barak was in Washington Tuesday and Wednesday for unusually private meetings with the Pentagon and White House. Neither the White House nor Israel offered details of Barak’s meetings Tuesday with Vice President Joe Biden and National Security Adviser Tom Donilon.

A Pentagon spokesman said Barak and Defense Secretary Leon Panetta “discussed the U.S.-Israel defense relationship and a range of regional issues including Syria, Iran, and the ongoing changes in the Middle East.”

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