(Adds Geithner visit to China, U.S. reaction)
* Oil move targets key sector of Iranian economy
* Embargo would force Iran to seek business elsewhere
* Ban could hurt Iran's revenues, stoke tensions at home
By Justyna Pawlak and Parisa Hafezi
BRUSSELS/TEHRAN, Jan 4 (Reuters) - European
governments have agreed in principle to ban imports of Iranian
oil, EU diplomats said Wednesday, dealing a blow to Tehran that
crowns new Western sanctions months before an Iranian election.
The prospective embargo by the European Union, along with
tough U.S. financial measures signed into law by President
Barack Obama on New Year's Eve, form a concerted Western
campaign to hold back Iran's nuclear programme.
Iran says the programme is strictly non-military, but
Western countries say a November U.N. report shows it has sought
to build an atomic bomb. Talks between Tehran and major powers
broke down a year ago.
Diplomats said EU envoys held talks on Iran in the last days
of December, and that any objections to an oil embargo had been
dropped - notably from crisis-hit Greece which gets a third of
its oil from Iran, relying on Tehran's lenient financing. Spain
and Italy are also big buyers.
"A lot of progress has been made," one EU diplomat said,
speaking on condition of anonymity. "The principle of an oil
embargo is agreed. It is not being debated any more."
A U.S. Treasury official said Washington supported the
European proposal to ban purchases of Iranian crude and believes
Tehran's oil revenues can be choked off without disrupting
global oil markets.
Treasury Secretary Timothy Geithner will travel to China and
Japan next week to discuss U.S. sanctions on Iran and the state
of the global economy, the Treasury Department said.
The embargo will force Tehran to find other buyers for oil.
EU countries buy about 450,000 barrels per day (bpd) of Iran's
2.6 million bpd in exports, making the bloc collectively the
second largest market for Iranian crude after China.
The news caused a spike rise in oil prices, with Brent crude
peaking at nearly $114 a barrel in intraday trading, up nearly
$2 from Tuesday's close.
Tehran insisted it would have no trouble: "We could very
easily replace these customers," said S. M. Qamsari,
International Director of the National Iranian Oil Co.
But the new U.S. sanctions have already made it difficult
for Iran to keep its customers, and could force it to offer
steep discounts to countries willing to risk doing business with
it, hurting its revenues.
Biggest trading partner China, driving a hard bargain, has
cut its orders of Iranian oil by more than half this month.
Western countries have imposed various sanctions on Iran for
years with little impact. But the latest measures are
qualitatively different, directly targeting Iran's oil industry,
which forms 60 percent of its economy.
Most traders expect Iran will still find buyers for its
crude, mostly in Asia, but it is going to have to offer
substantial discounts, cutting back the revenue that the state
relies on to subsidise basic goods for its citizens.
Tougher sanctions appear to be having an impact already on
Iran's streets, where prices for foodstuffs are soaring. The
rial currency has lost 40 percent of its value against the
dollar over the past month.
Currency exchanges have shut in Tehran and Iranians have
queued to withdraw their savings from banks and buy dollars.
That economic hardship is being felt by the public two
months before a parliamentary election, Iran's first since a
disputed 2009 presidential vote that led to massive street
demonstrations, put down violently by Iran's rulers.
Iran's leaders are anxious to prevent any popular unrest,
especially after the Arab Spring revolts last year showed the
vulnerability of Middle Eastern governments to street protest.
Iran has warned that any steps to cut its oil exports could
cause havoc in international oil markets at a time of global
economic pain. In recent weeks it has also resorted to
increasingly aggressive military sabre-rattling.
Tehran threatened last month to shut the Strait of Hormuz -
outlet to the Gulf through which 40 percent of traded oil flows
- and on Tuesday threatened to take unspecified action if a U.S.
aircraft carrier sails through the strait.
Washington, which has a carrier strike group led by the USS
John C Stennis in the Arabian Sea, brushed off that threat and
said its navy would continue to sail the strait.
Most analysts dismiss the sabre-rattling as a bluff and say
they do not expect war.
"There's an anticipation that it might lead to an escalation
of military activity in the region, but we think this is
overplayed," said Gareth Lewis-Davies, energy strategist at BNP
Paribas in London.
The EU diplomats said member countries had not yet agreed on
how soon the embargo should take effect and were still debating
other possible sanctions.
France has said it wants the EU embargo and other sanctions
agreed at a meeting of the bloc's foreign ministers at the end
of this month. Paris also seeks a ban on transactions with the
Iranian central bank, similar to what Washington has imposed.
The new U.S. financial sanctions, if imposed fully, would
make it all but impossible for many refineries to pay for
Iranian crude. The law grants Obama the power to issue temporary
waivers to prevent shocks in energy markets.
A Turkish energy official said Ankara, which buys about 30
percent of its oil from Iran, was seeking a waiver from
Washington for its biggest refiner, Tupras.
Washington says it is discussing with its allies how to
implement the measures without causing an oil supply shock.
(Additional reporting by Julien Toyer in Brussels and Peg
Mackey in London; Writing by Peter Graff; Editing by Andrew
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