European ban on Iranian oil tests sanctions limits

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* Sanctions on Iran becoming more complicated

* Diplomacy making little headway in nuclear standoff

By Justyna Pawlak

BRUSSELS, June 29 (Reuters) - A European Union embargo on Iranian oil comes into effect on Sunday with Western governments hopeful economic pain will persuade Tehran to scale back its nuclear work but also mindful they are pushing against the limits of sanctions.

Combined with new measures coming into force this week in the United States, the European ban constitutes a major international push to pressure the Iranian government over its nuclear ambitions.

But even before its full implementation on July 1, EU heavyweights Britain and France have signalled more sanctions could be needed to force Tehran to address their concerns it is producing a nuclear bomb. Iran denies this, saying its nuclear work focuses on energy supplies and medical needs.

While the spectre of the oil ban and U.S. measures appear to have brought Iranian negotiators back to the table in April and again in May and June, there has been little tangible result in terms of nuclear concessions.

Diplomats and experts say, however, the room for manoeuvre for European governments is shrinking.

"A lot of what could have been done has been done," a senior EU official said, highlighting the overarching concern that there are no more economic sectors where real pressure can be brought to bear.

"Oil is the main source of revenue for the regime. There are no significant sectors which could produce such an impact without adding unintended effects," he said.

The West is wary of imposing a broad trade embargo on Iran, that would be reminiscent of crippling sanctions against Iraq and South Africa that caused significant economic difficulties for their populations.

What EU governments may have to focus on in the coming months is the painstaking and slow process of combing through Iranian industry to find front companies for firms that face sanctions or go after evaders, and freeze their assets.

"We can always find new measures but ... it will not be such an easy process," the EU official said.

That process, some European diplomats say, is being hampered by a growing number of cases filed by Iranian firms in the European Court of Justice against sanctions decisions.

In two recent cases, the court ruled that European governments did not have sufficient proof that companies facing sanctions were involved in nuclear proliferation activities.

A European diplomat expressed concern such cases were setting legal precedents that would complicate efforts to freeze further assets.

"These court cases seriously put in danger our sanctions regime," the diplomat said.WEB OF INTERESTSIranian officials have been dismissive of the impact of sanctions on the oil sector"Hundreds of Iranian institutions and companies are already targeted.

"Iran is trying to destroy our sanctions system. These court cases seriously put in danger our sanctions regime," the diplomat said.

WEB OF INTERESTS

Iranian officials have been dismissive of the impact of sanctions on the oil sector. But there are signs the embargo, which encompasses prohibitions against the import of crude into Europe as well as transport and provision of insurance, has taken a toll on the economy and Iran's ability to secure cash.

Iran's crude oil exports, which according to EU estimates represent some 80 percent of the government's export revenues and half of its income, have fallen by some 40 percent this year, according to the International Energy Agency.

In the past, EU imports have accounted for about a fifth of Iran's crude sales abroad. With European insurers accounting for a vast majority of the world's tanker insurance, that prohibition is also having a major effect.

The Iranian rial has lost much of its value this year, inflation is running at some 20 percent and the prices of staple foods and utility bills have multiplied in the last one to two years. Tens of thousands of Iranians have lost their jobs, and trade between Iran and European countries has halved in a year, according Eurostat data from March.

Meanwhile, nuclear talks have lost steam, after resuming in April following a 15-month hiatus, with Iran demanding sanctions relief before it takes steps to curb uranium enrichment.

Experts from Iran and six world powers - the United States, Russia, China, Britain, France and Germany - are set to meet in Istanbul next week.

But at a round of political talks in Moscow this month, there was not enough common ground for negotiators to agree yet whether to meet again.

Diplomats in Brussels say no formal discussions are taking place on new sanctions. If governments agree the way forward would be to target more companies, the process could be slow.

But economists say by focusing, for example, on small banks which are taking over trade transactions from major financial institutions that face sanctions, European governments could tighten the noose.

"I am confident the Iranians are exercising considerable creativity in trying to come up with new mechanisms to evade restrictions," said Patrick Clawson, head of the Iran Security Initiative at U.S. think-tank the Washington Institute for Near East Policy. (Reporting by Justyna Pawlak; Editing by Michael Roddy)

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