The State Department announced on Tuesday that it would exempt 10 European countries and Japan from penalties for doing business with Iran's central bank, because those countries are making significant progress toward weaning themselves off of Iranian oil.

"I am pleased to announce that an initial group of eleven countries has significantly reduced their volume of crude oil purchases from Iran -- Belgium, the Czech Republic, France, Germany, Greece, Italy, Japan, the Netherlands, Poland, Spain, and the United Kingdom. As a result, I will report to the Congress that sanctions pursuant to Section 1245 of the National Defense Authorization Act for 2012 (NDAA) will not apply to the financial institutions based in these countries, for a renewable period of 180 days," Secretary of State Hillary Clinton said in a Tuesday statement. "The actions taken by these countries were not easy. They had to rethink their energy needs at a critical time for the world economy and quickly begin to find alternatives to Iranian oil, which many had been reliant on for their energy needs."

The European Union banned all new purchases of Iranian crude oil as of Jan. 23 and will phase out existing contracts by July 1, Clinton said. Japan was able to reduce its dependence on Iranian oil even despite energy shortages created by the Fukushima nuclear disaster.

"We commend these countries for their actions and urge other nations that import oil from Iran to follow their example," said Clinton. "Diplomacy coupled with strong pressure can achieve the long-term solutions we seek and we will continue to work with our international partners to increase the pressure on Iran to meet its international obligations."

Sen. Bob Menendez (D-NJ), who co-authored the sanctions against the Central Bank of Iran (CBI) and those who do business with it, praised the State Department's move in a Tuesday statement of his own.

"The sanctions are working," he said. "Countries and companies are stepping up in recognition of the real threat that Iran poses to its neighbors and the global community and are terminating business relationships with Iran. On Saturday, SWIFT - the financial messaging service provider - cut off services to the Central Bank of Iran and 30 designated Iranian banks, and as a result -- for the first time -- we are seeing a real impact on the Iranian economy."

A senior State Department official said Tuesday that there are 12 countries left who import Iranian oil and could be sanctioned but didn't get exemptions today. Butthe official said that if those countries are going to be sanctioned, it won't be for a while.

Since the CBI sanctions didn't actually go into effect until Feb. 29, any case for implementing sanctions against those 12 countries would have to be based on evidence from that date forward, which would take time.

On March 30, President Barack Obama will have to make a determination as to whether price and supply conditions in the energy market allow for countries to switch from Iranian crude oil to other suppliers. If he determines they do, then a new set of harsher sanctions would go into effect on June 28 against any countries that don't have exemptions by then.

The main countries that the United States might be forced to sanction at that time include China, Turkey, India, and South Korea, none of which received exemptions today. The State Department official admitted that the conditions for receiving an exemption are vague.

"On the case of the other countries, the legislation specifies ‘significantly reduce.' It doesn't define what ‘significantly reduce' is," the official said.

The official said that Japan represents a model for how other countries could act to avoid sanctions. But under questioning, the official refused to say exactly how much Japan has committed to reducing its dependence on Iranian oil, calling that "commercially protected information." He said Japan reduced its intake of Iranian oil between about 15 to 22 percent over the last half of 2011, depending on how you look at the data.

One senior Senate aide called into question the State Department's decision to issue Japan an exemption. The aide pointed out that the law requires countries to reduce their intake of Iranian oil in 2012, not 2011, and it's not clear if Japan is going to continue that trend ahead of the June 28 deadline.

"The bottom line is that if Japan has in fact committed to reducing their purchases of Iranian oil by 15 to 22 percent in 2012, this exemption is fully warranted. But if this is just a get out of jail free card issued on the basis of past performance alone, this would not be a faithful application of the law," the aide said.

The aide also pointed out that the 10 EU countries are no-brainers for exemptions, because the EU is in the process of implementing a full Iranian oil embargo anyway.

"This is no diplomatic success, this is just cover to make sure that those EU countries that are complying with the embargo have cover from the sanctions."