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U.S. exempts 11 states from Iran sanctions; China, India exposed

By Arshad Mohammed and Andrew Quinn

WASHINGTON (Reuters) - The United States exempted Japan and 10 EU nations from financial sanctions because they have significantly cut purchases of Iranian oil, but left Iran's top customers China and India exposed to the possibility of such steps.

The decision means banks in these countries have been given a six-month reprieve from the threat of being cut off from the U.S. financial system under new sanctions designed to pressure Iran over its nuclear program.

The list did not include China and India, Iran's top two crude oil importers, nor U.S. allies South Korea and Turkey, which are among the top-10 consumers of Iranian oil.

Japan, China and India combined buy close to half of Iran's crude exports of 2.6 million barrels a day, providing crucial foreign exchange for the OPEC member.

But the U.S. sanctions and an EU oil embargo have cut Iran out of financial networks, making it difficult to transfer funds to pay for trade and disrupting some oil shipments because of the difficulty of securing shipping insurance. Domestic prices in Iran have spiraled higher and the rial has slumped in value.

Japanese Finance Minister Jun Azumi welcomed the U.S. decision, saying on Wednesday that Japan would continue to cut its imports of Iranian oil at a set rate in the future.

"The decision takes account of Japan's steps on Iranian oil, including its future response," he told reporters.

Indeed, the Japan government wants the nation's crude buyers to cut Iran imports by 10 percent to 20 percent a year, Akihiko Tembo, the chairman of the Petroleum Association of Japan, said.

A U.S. official held up Japan's estimated 15-22 percent cut in oil purchases from Iran in the second half of last year as an example for other nations.

"Japan was a model," Carlos Pascual, State Department Special Envoy and Coordinator for International Energy Affairs, told lawmakers, noting the cuts were made even after the country suffered an earthquake that caused a civil nuclear disaster.

"If Japan was able to do what it did ... that should be an example to others that they could potentially do more."

Still, Pascual declined to set a benchmark that countries could use to secure an exemption. The law says they must "significantly reduce" Iranian oil imports and continue to do so to win exemptions, he said.

Underlining U.S. efforts to tighten the financial noose around Iran, a state department official said 12 other countries may eventually be subject to U.S. sanctions unless they cut Iran crude purchases. He did not list them.

South Korea will hold another round of talks soon with the United States on significantly reducing its imports from Iran, a source at the Korea's economy ministry said on Wednesday.

In contrast to Japan, South Korea, the world's fifth-largest oil importer, increased its imports from Iran in 2011 by 20 percent. It's refiners have signed deals to import a little more crude again from Iran in 2012.

South Africa's energy minister said last week he hoped to have a plan by the end of May for replacing Iran supplies, which currently make up a quarter of its crude imports.

But reflecting a problem for several countries, Turkey's energy minister, Taner Yildiz, told reporters on Wednesday the country could not stop buying Iran crude unless alternative oil sources were found.

The 10 nations from the European Union, which has already decided to stop importing Iranian oil from July, were Belgium, Britain, the Czech Republic, France, Germany, Greece, Italy, the Netherlands, Poland and Spain, the State Department said.

"The actions taken by these countries were not easy," U.S. Secretary of State Hillary Clinton said in a statement. "We commend these countries for their actions and urge other nations that import oil from Iran to follow their example."

While China and India and others remain exposed to possible financial sanctions, U.S. law gives President Barack Obama the ability to waive such steps if this is in the national interest.

China, Iran's top trade partner and crude buyer, has made it clear that it rejects in principle the unilateral U.S. sanctions, while trying to maintain its energy ties with Tehran. It says Washington and the EU should not go beyond UN resolutions on Iran.

Still, China slashed Iranian crude imports by more than half in the first quarter of 2012 as China's largest refiner Sinopec put pressure on Iran's state oil company to protest against tougher contract terms proposed by Tehran.

Those cuts, if averaged out over the full year, amount to a reduction of around 14 percent of the volume China imported on contract in 2011.

India's government says it is not under any obligation to observe U.S. sanctions, but privately has asked its refineries to cut Iran imports by at least 15 percent, industry sources have said.

JAPANESE CUTS MAY BE KEY

The United States has tightened sanctions due to Iran's failure to answer questions about its nuclear program, which Washington and its allies suspect is a cover to develop nuclear weapons. Iran says it is solely to generate power supply.

World oil prices have surged on the growing Iran tensions - including the possibility that Israel will launch an attack on Iranian nuclear facilities - and on worries sanctions will tighten global oil supplies.

OPEC's biggest producer Saudi Arabia said on Tuesday it was ready to raise its output to 12.5 million barrels per day (bpd), from almost 10 million bpd now, if needed.

The comments from Saudi Arabian Oil Minister Ali al-Naimi, soothed nervous oil markets, although the price impact was partly offset by data showing a fall in U.S. crude inventories.

Mark Dubowitz, an advocate for tougher sanctions on Iran and the head of the Foundation for Defense of Democracies, said Japan's example was likely to be significant.

"The key number will be what Japan agreed to," he said. "This will be the number that other countries will have to meet or otherwise make the case to the administration why their energy circumstances demand a lower reduction."

Cutting Iran crude imports may be easier for Japan than the likes of China and India. Demand for oil from the emerging giants has risen rapidly with their economic expansion, but a sluggish economy and a switch to other energy sources has meant Japan's demand has been falling.

All 27 EU nations have agreed to an embargo on Iranian crude purchases by banning new imports from January 23 and phasing out existing contracts by July 1.

A U.S. official, who spoke on condition of anonymity, said the 10 EU members granted exemptions were the only members that imported Iranian crude in 2011.

Under the 2012 National Defense Authorization Act, Obama can impose financial sanctions on foreign banks that carry out financial transactions with Iran's central bank "for the purchase of petroleum or petroleum products from Iran" if several conditions are met.

The penalties include effectively cutting off a foreign bank from the U.S. financial system.

The law allows Obama not to apply sanctions if he determines a country with primary jurisdiction over a bank has "significantly reduced" its volume of crude oil purchases.

(Additional reporting by Susan Cornwell, Tim Gardner, Emily Stephenson, Andrew Quinn, Rie Ishiguro in TOKYO; Cho Mee-young in SEOUL; Orhan Coskun in Ankara; Editing by Michael Perry and Neil Fullick)

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