Question marks over EU sanctions on Iran

EU countries are also looking to further restrict transactions with Iranian banks and to disrupt Iran-bound flights and shipping.

The gas embargo rules out Iran's involvement in future EU gas pipelines to the Caspian region. But it will not cost Tehran any money for now.

Just one EU country - Greece - imports Iranian gas. It gets it through the Greece-Turkey interconnector, a pipe which pumps about 1 billion cubic metres a year of gas from Azerbaijan mixed with small volumes from Iran.

Greek lawyers at a meeting in the EU Council last week put a "reserve" on the embargo for technical reasons.

"They are worried that they could inadvertently get some molecules of gas from Iran and that this might make them fall foul of the rules ... It's always like this. When we agreed the oil sanctions, we made the final decision on the morning of the ministers' meeting," an EU diplomat told this website.

The EU sanctions are designed to put pressure on Khamenei to stop enriching uranium to weapons grade.

EU diplomats estimate the oil embargo, which came into force in July, has already cost him €5 billion in lost income.

The sanctions appeared to be working last Wednesday when the Iranian currency, the rial, lost more than 40 percent of its value on unofficial exchanges in Tehran's main bazaar in less than 48 hours.

It now stands at about 40,000 rials to the euro. But EU diplomats believe it might go to 80,000 by Christmas.

An EU contact said: "It makes life difficult. People in Iran want products like Persil [a washing powder made by Anglo-Dutch firm Unilever] or Italian pasta. But when you have to pay your supplier, I don't think they want to see a container full of rials."

The currency shock caused protests in the Iranian capital.

Shahin Gobadi, a Paris-based activist in the People's Mojahedin Organisation of Iran (PMOI), an opposition group, said that people shouted "We do not want the nuclear programme!" and "Down with Khamenei!" in a show of "deep loathing" for the regime.

Iran itself blamed the EU.

"The enemy has banned Iranian crude oil exports, which are a key source of foreign exchange," President Mahmoud Ahmadinejad said.

But neither EU capitals nor financial markets know what caused the rial shock.

"No new laws or measures came into force last week which might explain it," an EU diplomat said. "We are really in the dark regarding this country. We are also wondering what was the reason why the rial fell so sharply," a contact at a big German bank noted.

The PMOI says outside pressure is part of the cause.

Gobadi said fear of war with Israel is making people stockpile dollars, euros and gold. At the same time, the "havaleh" system - a form of money transfer in Islamic society, which is based on word-of-mouth pledges and which bypasses EU and US bank restrictions - is flooding bazaars with cash.

But if outside pressure is to blame, then it might be playing into Khamenei's hands.

The sky high exchange rate means fewer imports and more buying of Iranian-made goods.

It also means that Khamenei loyalists, who are permitted to use Iran's state-subsidised official rate of 17,000 rials to the euro, take business away from independent traders who pay more than twice as much for supplies.

Iran is believed to hold huge foreign currency reserves - Brazil, China and Russia are still buying its oil, while Turkey, a big buyer of Iranian gas, has no intention of following the EU ban.

"They [Iran] could inject hard currency into the system to prop up the rial if they wanted to. The question is why are they not doing it?" an EU diplomat said.

Meanwhile, state-managed economic pain helps to feed popular anti-Western feeling.

Some people in Tehran might "loathe" Khamenei as the PMOI says.

But for average Iranians - and for the millions of Shia Muslims in Iraq, the Gulf states, Lebanon and Syria who owe allegiance to Iran - he symbolises heroic resistance against a US-led effort to keep down Muslim power.

For his part, Alastair Crooke - a former EU aide on the Middle East, who now runs the Conflicts Forum NGO in Beirut - told EUobserver that EU sanctions are "cutting off Europe from knowing what's happening in the world."

"There is a complete misunderstanding of where Iran's strength lies. It's not a physical empire of tanks and missiles. It's a cultural and intellectual one. Iran is a soft power, an empire of the mind," he said.