Last week the United States Senate passed new legislation leveling sanctions against Iran’s energy and shipping sectors. The majority of the sanctions provisions contained in that legislation consists of secondary boycotting measures. This means that the legislation provides the authority to the President to designate parties who are engaged in certain transactions with designated parties, even if they are not directly involved in some type of nefarious activity warranting sanctions. Although this new legislation has not been signed into law, some countries have already taken notice and are taking action.

According to reports, Sri Lanka, a nation who imports approximately 92% of its crude oil from Iran, has made the decision that in light of the new sanctions legislation forthcoming from the U.S. that it will purchase its oil from Iraq. Current sanctions have already made it difficult to obtain oil from Iran. Given the new sanctions legislation it appears that these ever increasing difficulties have become too much to bear for Sri Lanka who will now turn to Iraq for its oil requirements.

Sri Lanka has stated that there are similarities between the oil coming from Northern Iraq and Iran and that by refining that oil domestically the island nation will actually reduces the costs of its refined imports. Sri Lanka still owes Iran approximately $15.38 million for oil imports and is planning to use that money to finance and irrigation project which has been funded by Iran. Iran had originally planned to invest $450 million into the project, however, that plan has been frustrated by the difficulties they have experienced in transferring funds due to sanctions.

It is interesting to note that most Iraqi oil is controlled by Western energy firms. As such, Sri Lanka’s decision to switch its oil supplier is a double win for the U.S. On one hand it further reduces Iran’s main export and that which is responsible for the overwhelming majority of its foreign currency reserves. At the same time it brings additional revenues to U.S. companies and their Western counterparts. Therefore, Sri Lanka’s decision furthers U.S. foreign policy and potentially benefits the U.S. economy, making the decision coming from Colombo a major victory for the United States.

The author of this blog is Erich Ferrari, an attorney specializing in OFAC matters. If you have any questions please contact him at 202-280-6370 or ferrari@ferrariassociatespc.com.