Meeting the Challenge: U.S. Policy toward Iranian Nuclear Development (Page 5)

Continued from Page 4

Iran's Nuclear Program (Continued)

The Strategic Threat of a Nuclear Iran

The danger of the Islamic Republic developing military nuclear technology is multifold. A nuclear-ready or nuclear-armed Islamic Republic ruled by the clerical regime could threaten the Persian Gulf region and its vast energy resources, spark nuclear proliferation throughout the Middle East, inject additional volatility into global energy markets, embolden extremists in the region and destabilize states such as Saudi Arabia and others in the region, provide nuclear technology to other radical regimes and terrorists, and seek to make good on its threats to eradicate Israel. The threat posed by the Islamic Republic is not only direct Iranian action but also aggression committed by proxy.

Western policymakers do not have the luxury of omniscience with regard to the state of Iran’s program or the Iranian leadership’s intentions. U.S. intelligence assessments are useful, but must be read with caution because of the intelligence community’s consistent difficulty in predicting when states will achieve nuclear weapons capability. The Soviet Union’s 1949 nuclear test, for example, took the U.S. intelligence community by surprise, as did the 1960 French test, and the Chinese acquisition of nuclear bombs in 1964. The Central Intelligence Community underestimated Iraq’s progress before 1990, and overestimated it in 2003. The Intelligence Community was also caught by surprise by the nuclear tests in India in 1974 and 1998, and later by how close both Libya and Syria had come. In other cases, uncertainty prevailed in times of crisis. During the 1982 Falkland Islands War between Argentina and Great Britain, some analysts worried that Buenos Aires might quickly be able to acquire a nuclear bomb. That Iran’s nuclear program remains shrouded in ambiguity only escalates the threat it poses.

U.S. policymakers must consider the worst-case scenario—a first strike by Iran against U.S. interests or allies. Such a strike might occur directly or by proxy, with the Iranian leadership seeking to maintain deniability. While a primary target may be Israel, Iranian leaders may consider other targets: U.S. military bases or Saudi oil fields.   In such strikes, the Iranian leadership need not rely on traditional delivery systems. There may be a strategic advantage for Iran, again in terms of deniability, if any nuclear device is ship or truck-borne rather than on a ballistic missile. Any use of an Iranian nuclear device may open U.S. policymakers to blackmail: following use of a nuclear device, Iranian leaders or terrorists may argue that they have other bombs pre-positioned in Western population centers or near other strategic targets and that they might detonate such bombs should there be either retaliation against Iran for its use of nuclear bombs, or should Western authorities not accede to specific demands. 

Some suggest that Iran could be deterred in much the same way as the Soviet Union. Parallels to Cold War deterrence, however, are not convincing. First, although many analysts argue that Iran is like every other country, in point of fact there are ideological elements among Iran’s leadership that actively believe that Iranian actions and violence can hasten the return of the Hidden Imam. Secondly, the opacity of Iran’s nuclear command structure means that it is possible for those messianic hardliners to enjoy disproportionate influence there.   Thirdly, Iranian nuclear development will likely spark proliferation across much of the Middle East. Although our allies during the Cold War felt secure under the United States’ nuclear umbrella, that is no longer the case. Riyadh, for example, has already indicated it would want a matching capacity of its own. Already, many regional states have announced their intention to build nuclear power plants. Under the current Atoms for Peace initiative, Moscow, Paris, and Washington have committed to help Riyadh, Abu Dhabi, Amman, Cairo, Tripoli, and Ankara develop reactors. Furthermore, it is difficult to determine with certainty that Tehran would be able to resist the temptation to transfer technology. On July 13, 2008, Ahmadinejad told his Senegalese counterpart that he saw no problem in transferring technology to other Muslim countries.[1] History offers a guide: Moscow helped Beijing acquire its nuclear capacity despite political differences between the two countries, and the rogue Pakistani scientist Abdul Qadir Khan helped Iran advance its program despite tensions between the two states. At the very least, this would spell the effective end of the Nuclear Non-Proliferation Treaty.

It should also be remembered that deterrence was less effective than is commonly assumed. The United States and Soviet Union came close to nuclear confrontation during both the 1961 Cuban Missile Crisis and the 1983 Korean Air 007 shoot-down. The 1999 India-Pakistan crisis over Kargil demonstrated the danger of conflict with and between nuclear states lacking sufficient command, control, and doctrine.

Even if Tehran does not build or test a nuclear weapon, its establishment of an indigenous enrichment capability has already placed the region under a cloud of ambiguity. An Iranian nuclear break-out would be fundamentally different from that of other countries because there has never been a true state sponsor of terrorism with nuclear weapons. Uncertainty over Iranian capabilities and intentions will make Iran more immune to conventional deterrence and give the Islamic Republic a de facto nuclear deterrent, which could embolden it to reinvigorate its export of revolution and escalate support for terrorist groups. Iran remains an ideological state. While many Iranian civilians and members of the government focus only upon seeking the best life for themselves and their family, more ideological elements remain committed to export of the Islamic revolution. Throughout the 1980s and early 1990s, application of this principle took the form of assistance to terrorist groups, attempts to undermine regional governments, and assassinations of dissidents. Should the Iranian leadership feel itself secure behind a nuclear shield, they may increase both their overt and covert aggression. The repercussions of such Iranian assertion would be felt not only throughout the Middle East, but also—because of Iran’s position on the Strait of Hormuz—on the world energy markets. Iran would then become not just a regional threat, but an international one.

Policy Options

So what can Washington do to prevent the Islamic Republic from developing nuclear weapons? Policymakers have discussed several options, but each has its own risks and complications—and, disturbingly, rarely have these options been examined in detail. Many diplomats, think-tanks, and academics advocate engagement, but seldom do their reports consider either the complexities involved in preparing leverage for successful engagement or what strategies should be considered if engagement fails. More robust strategies involve both unilateral and multilateral sanctions, embargoes and blockades, exploitation of regime vulnerabilities, regime change, and military actions. Explanations of these strategies’ advantages, disadvantages, and incumbent difficulties follow.

Engagement

There are two general ways to engage the Islamic Republic between which lies a spectrum of options. One pole is negotiation without precondition and engagement without requiring anything in return. At the opposite end of the spectrum are negotiations with preconditions and strategies to squeeze Tehran hard while negotiations occur.

Some U.S. and European policymakers may see the North Korea multilateral talks as a paradigm for engaging Iran, but the first Gulf War may provide a better model. It was the George H.W. Bush administration’s willingness to engage in talks, instead of ramping up to war right away, that preempted diplomatic stalling and ultimately persuaded Gorbachev to support a single UN resolution with a built-in timetable that gave time for diplomacy to work but also authorized the use of force.

In practice, past engagement with Iran has had only mixed success. Germany began a “critical dialogue” with the Islamic Republic in 1992 to address a wide range of concerns about Iranian behavior. This morphed into a more general European engagement policy. While Khatami lessened tensions with the West and relaxed some social restrictions internally, Europe’s dialogue did not resolve international disputes over the Islamic Republic’s nuclear program; to the contrary, Iran’s nuclear development continued alongside the European engagement. At the heart of the European engagement strategy has been an assumption that increased Western investment in and trade with Iran might encourage first economic and then political liberalization. Some European policymakers also sought to insert human rights benchmarks into this “China model,” but, in practice, these fell by the wayside.

Between 2000 and 2005, the height of the Khatami presidency, European Union trade with the Islamic Republic almost tripled, and oil prices rose sharply. Rather than utilize the hard currency premium, the Iranian government invested perhaps 70 percent of its windfall into its nuclear and military programs. The 2007 National Intelligence Estimate confirmed that the Islamic Republic maintained a covert nuclear weapons program during Khatami’s presidency.

The European Union, through the efforts of London, Paris, and Berlin, the so-called EU-3, continued to lead diplomacy. While Iranian officials have met with EU-3 diplomats, Tehran has simultaneously sought to exploit divisions within Europe. This was not hard. While the EU-3 says they speak for the entire EU, other member states—Sweden and Finland, for example—have privately expressed reservations at having to commit to EU-3 decisions, especially when they might run contrary to their own commercial interests. 

On May 31, 2006, Secretary of State Condoleezza Rice sought to augment negotiations by committing Washington to talks with Tehran so long as the Iranian government suspended enrichment for the duration. In April 2007, U.S. and Iranian diplomats met at a multilateral forum in Sharm el-Sheikh.   The following month, the U.S. and Iranian ambassadors in Baghdad met in a bilateral setting to discuss security issues, the first of several meetings which continued into early 2008. Both U.S. and Iranian diplomats denied these talks extended beyond the security issue. In July 2008, the State Department voided the May 31, 2006 redline when Rice dispatched Undersecretary of State William Burns to meet the Islamic Republic’s nuclear negotiator even without any Iranian commitment to suspend its illicit uranium enrichment.

The Bush administration appears to have rejected the so-called “grand bargain” in which the Islamic Republic would end all actions the United States considers objectionable in return for U.S. lifting of sanctions, security guarantees, re-establishment of diplomatic relations, and firm assurances it would not support opposition groups trying to topple Iran’s regime.   Rumors arose in May 2003 that Tehran had offered Washington a grand bargain; these are not credible and appear to have originated with a freelancing Swiss diplomat and an Iranian-American lobbyist rather than with the Iranian government.

The Islamic Republic is vulnerable to pressure. The Iranian leadership lacks the self-confidence of popular rulers and knows many Iranians do not care for the revolutionary principles upon which the regime stands. Indeed, over the past year, Iranian officials have implemented a Societal Security Scheme and instituted an ideological purge in the universities to reinforce ideological compliance and indoctrination.   Iranian apathy toward the Islamic Revolution does not mean that Iranians are ready to rise up and throw off the theocratic yoke. Rather, most Iranians are apathetic about politics and concentrate instead on guaranteeing the best possible life for their immediate families. The regime feels vulnerable to a Velvet Revolution, which is why they arrest elderly Iranian-American grandmothers and dictate who can and cannot run in parliamentary elections.

If diplomacy is to work, U.S. officials must determine both what they expect from the Islamic Republic and what Iranian objectives they are prepared to meet. U.S. concerns about Iranian activities have been consistent across administrations: opposition to the Islamic Republic’s nuclear and ballistic missile development; concern about Iranian support for terrorism; Tehran’s violent opposition to the Middle East peace process; and human rights issues. U.S. military presence in Iraq and Afghanistan also makes Iranian activities in those countries an immediate concern.

Successful diplomacy will require give-and-take, however. Iranian authorities have repeatedly insisted upon security assurances, lifting of economic sanctions, and the unfreezing of assets. These are only base demands; senior Iranian officials have also demanded U.S. abandonment of Israel, U.S. withdrawal from the Persian Gulf, and reparations for any number of perceived slights. Many of these more extreme Iranian demands are simply unacceptable and cannot be subject to negotiation. Nevertheless, U.S. officials will need to determine just what they are willing to offer the Islamic Republic for its forfeiture of its nuclear program and the abandonment of its terrorist proxies.

A major decision for Western policymakers will be whether to agree to negotiate with Iran about its nuclear program without any Iranian agreement to suspend enrichment. Dropping preconditions has the advantage of getting all parties to the table faster. But negotiation without precondition also has two major drawbacks: first, if Tehran does not negotiate in good faith, it may simply draw out talks while it masters enrichment technology. Second, agreeing to engage Iran while it continues its enrichment program in defiance of multiple UN Security Council Resolutions would precondition the outcome of those negotiations by, in effect, conceding that the West accepts Iranian enrichment. This would undercut the possibility of Iranian compliance with any future UN Security Council resolution. Regardless of which option the next President chooses, it is important that any negotiations with Iran have a predetermined timeline, for example 90 days, so that Iran cannot simply ‘run out the clock.’

Should Washington wish to make that concession for negotiations and, in effect, bless the notion that the Islamic Republic will enrich uranium, policymakers might consider a number of other agreements:

• In return for Western acceptance of an Iranian civilian nuclear program, Tehran might agree that any low-enriched uranium produced would be moved outside the country to an IAEA facility so that there is no stockpiling of any low-enriched uranium.

• In addition, international authorities may demand Iranian ratification of the Additional Protocol and the commitments that implementation of Additional Protocol implies.

Regardless of any agreement reached, U.S. policymakers must pay careful attention to verification mechanisms. 

Alliance Building

But while negotiations may be either bilateral or multilateral, the subjects that Iranian officials and the West may seek addressed will be broader. European officials will likely accede to Iranian demands that the Middle East become a nuclear free zone, in effect disarming Israel’s capability. It is not the place of U.S. officials to offer concessions on behalf of other sovereign countries, especially those like Israel which have legitimate security concerns. It is quite possible that Tehran will incorporate demands to internationalize the Arab-Israeli conflicts and, simultaneously, pursue policies that exacerbate it. Should Iranian officials adopt such a policy, U.S. officials and their European counterparts will have no choice but to pursue other options against the Islamic Republic. There is precedent for this: in 1990, Iraqi officials sought linkage between Iraq’s withdrawal from Kuwait and Israel’s withdrawal from the West Bank and Gaza. Had U.S. and European officials accepted such conditions, Kuwait today might still be Iraq’s 19^th province, and an appeased Saddam Hussein might well have continued his conquests southward.

As the stakes grow in the Iranian diplomatic crisis, many Western states seek to backtrack from their statements about the unacceptability of the Iranian nuclear program. There is a tendency, especially among some in Europe, to seek to accommodate the Islamic Republic. Other European capitals must understand how seriously Washington takes the possibility that Tehran will achieve breakout nuclear capacity; simultaneously, however, U.S. policymakers must show their European counterparts that the White House will go the extra mile for a peaceful resolution. Across the policy spectrum, U.S. officials should accept that there needs to be an effort to talk to the Iranian regime before Washington resorts to military means to deny the Islamic Republic breakout nuclear capacity. However, the international community should also realize that any possibility that diplomacy will not achieve its aims or that the Iranian government will use such engagement as a mechanism to stall while Iranian technicians master nuclear enrichment will cause Washington to embark upon more robust strategies.

If diplomacy and multilateralism are to succeed, the United States and European Union must agree to a firm and finite timeline for talks to occur. Unfortunately, the international community is still a German election away from Berlin being able to make any real, binding decision on its policy toward Iran. Until then, Washington cannot expect German support for any significant coercive measures should diplomatic outreach toward Iran fail.

U.S. and European Union coordination with other regional and international players is also necessary. The President or another high-ranking U.S. official—not simply a visiting diplomat—will have to ask Saudi leaders whether they are determined to prevent the Islamic Republic from becoming a nuclear power and, given U.S. commitment to prevent Iranian nuclear weapons capability, whether Riyadh wishes to avert the mess that could result from military action. If so, Saudi officials need to determine what they will to do to help the United States. The Saudis will be important to any deal for their leverage over Beijing. Sanctions can only be effective if China does not seek to take Europe’s place as the Islamic Republic’s main trading partner. By forcing China to choose between Iran and Saudi Arabia, the Saudis might persuade China to downgrade ties with Tehran as European sanctions take effect. Of course, it is possible that confronted with a choice, Beijing may cast its lot with Tehran over Riyadh, an outcome which the Saudis may not wish to risk and one which, by making sanctions less effective, might accelerate conflict.

It may be possible also to convince Moscow to reconsider its support for the Iranian government and its nuclear program. Bushehr is the pretext for Iran’s entire enrichment program. If Moscow were to withdraw its support—and its engineers—the Iranians could not ready the reactor for operation and would have no civilian reason to keep spinning their centrifuges. U.S. diplomats should send the message to Rosatom that, over the long-term, they would be much better off staying out of Iran. If the UN Security Council were to ban nuclear cooperation with Iran until it was in full compliance with its Non-Proliferation Treaty Safeguards Agreement, then it might provide cover for Rosatom to cease its work in Iran. Absent such UN Security Council cover, the firm may fear that any withdrawal from the Iranian market would brand them an unreliable partner as they bid on other states’ nuclear programs. So long as Rosatom persists in its Iranian business, it risks soiling its commercial reputation at a time when it can compete with Westinghouse and AREVA. 

The United States government has other commercial leverage over Russia and Rosatom. In 1995, the White House shelved bilateral nuclear cooperation with Russia under terms of Section 123 of the Atomic Energy Act. In July 2007, however, Presidents Bush and Putin initialed a 123 Agreement, and on May 13, 2008, Bush submitted this to Congress for approval. Many members of Congress have spoken out against pursuing nuclear cooperation–in theory worth more than $10 billion to Moscow should Russia chose to become a repository for spent nuclear fuel–unless the Russian government first ceases nuclear cooperation with Iran. The prospect of joint commercial projects with Rosatom might entice greater Russian cooperation.

There is also room for discussion with regard to U.S. anti-ballistic missile bases in Eastern Europe. Putin has made clear his opposition to these facilities in the Czech Republic and Poland. He may seek to trade Russian flexibility for a U.S. agreement to cancel these bases. Under such circumstances—and given European ambivalence both about ballistic missile defense and a commitment to have any U.S. ballistic missile defense apply to all NATO members-- it may prove useful to accept Putin’s compromise offer of utilizing Azerbaijan for this purpose. While Russia’s opening offer was not acceptable—Moscow would have retained the unilateral ability to power down the facility without notice—Putin’s offer might have been an opening to bargain for Russian compliance on Iran. Both U.S. and Russian policymakers also need to consider what impact the expiration of the START treaty in 2012 will have on their respective positions.

Should Russia and China play ball, then the diplomatic stage might be set for engagement. A diplomatic process with Iran assumes that providing Tehran with the right combination of incentives and sanctions might encourage the Iranian leadership to drop its international defiance and forfeit its nuclear weapons program in return for regaining its international legitimacy and rejoining the international community. The logic of engagement is compelling on a number of levels. Tactically, encouraging diplomatic contacts lessens the opportunity for miscommunication to escalate into crises. Given the vulnerabilities of the Iranian economy, either the regime and/or the general Iranian public may conclude that the benefits of increased access to Western commerce and technology outweigh the benefits of nuclear weapons. Moreover, as engagement proceeds, increased ties to business elites and the middle class might moderate the regime, even if the Iranian leadership did not initially intend to change. Lastly, cultural and other Track II exchanges might bypass the regime and encourage moderation and understanding on the popular level.

However, U.S. policymakers must consider the possibility that neither Beijing nor Moscow will cooperate. In such a case, Washington may have little option but to pursue more unilateral and military strategies.

Iranian strategy is to stall in talks until it appears the United States or other international actors may pursue punitive measures. Only then will Tehran offer compromise, although this conciliation will only last until pressure alleviates. Given the Iranian pattern of defiance coupled with insincere conciliation, European diplomats cannot simply propose amorphous timelines and find excuses to suspend them as they pursue ever more unlikely “Hail Mary” attempts to win Iranian compliance. 

In order to address such concerns, the United States and Europe might agree to a predetermined timeframe for negotiations after which, and regardless of whether talks remain ongoing, sanctions to which the United States and European Union committed to prior to the beginning of talks will take effect. The Iranians—and perhaps some European officials as well—should understand that their traditional delaying tactics no longer apply.

Leverage Building

Sanctions are a tool to strengthen leverage; they are not in and of themselves a fix, and they are certainly no panacea. When considering sanctions, options range from comprehensive and multilateral sanctions to targeted and unilateral sanctions. The most effective sanctions might be comprehensive sanctions against Iranian oil sales. Iran is oil-rich, but also energy-dependent. This dynamic dictates the range of economic policy options by which the U.S. might seek to influence Iranian behavior. Available strategies include not only enacting tougher sanctions and closing loopholes in existing ones, but also targeting Iran’s major source of revenue by blocking oil exports; exploiting its insufficient refining capacity and growing gasoline consumption by halting gasoline imports: or a combination of both actions. The choice of instruments for implementing these actions depends upon the desired time horizon. In the following discussion, primary consideration will be given to short-term instruments.

Accumulated sanctions on Iran and pressures on companies not to invest in the country’s hydrocarbon sector have been one set of factors that have impeded efforts by Tehran to increase its oil and gas production capacities and its refining capacity, expansion of which is required if Iran is to meet its current and future gasoline requirements. In early 2008, for example, both Royal Dutch Shell and Spain’s Repsol withdrew from participation in development of phase 13 of the South Pars gas field, one of the Islamic Republic’s largest projects. In July 2008, the French oil giant Total announced its withdrawal from Iranian projects. Just as critical, if not more so, in retarding Iran’s potential growth, however, has been the failure of Iran to offer competitive terms and conditions to attract sufficient capital.

Oil revenues account for about 80 percent of Iran’s export earnings and almost 50 percent of the government budget.   While diplomats and analysts might also consider enhanced sanctions, the very tight energy market and the threat that higher petroleum prices might damage the international economy could undercut this strategy. The basis of the EU-3 strategy is to offer not only the carrots of engagements, but also threaten Iran with sticks, most often sanctions.

The Iranian government may find its pre-existing trade relationships capable of mitigating such sanctions’ bite. The Nordic countries have already made it clear that, when it comes to sanctions, the EU-3 does not speak for them. The Russian government has repeatedly sought to delay or downgrade sanctions, and the Chirac administration had suggested that Paris might drop insistence that the Iranian government suspend enrichment—although Sarkozy’s administration is significantly tougher. Beijing is also reluctant to impose harsh sanctions or further Chapter VII resolutions as forceful action against Iran might undercut its energy security. However, the Chinese government is more likely to work behind the scenes than use its Security Council veto. While they do not have veto power at the United Nations, the German and Japanese governments might also resist wide-ranging sanctions as they have, by some diplomats’ estimates, extended more than $20 billion in loan guarantees to their own companies doing business in the Islamic Republic. Indeed, the German ambassador to Tehran has bragged to Iranian journalists that rather than adhere to sanctions, German companies had simply laundered their trade through the United Arab Emirates.[2]

Still, there may be some room for targeted sanctions to focus on Iran’s economic vulnerabilities, such as the Islamic Republic’s need to import much of its refined petroleum needs. Iran’s government currently spends roughly $5 billion per year to import refined gasoline, an expenditure which steadily draws down Iran’s foreign exchange reserve fund. The international community may consider sanctions to retard Iran’s ability to refine or liquefy its gasoline and other petroleum products. Iran does not have the technically trained human capital to add refining capacity on its own. It is dependent upon foreign investment and technical assistance in order to construct new refineries.  

Even sanctions that are effective seldom work quickly. Should the Iranian regime remain committed to its nuclear program, it may decide it can withstand the pressure of sanctions which, even at their harshest, would not compare to the deprivations suffered during the Iran-Iraq War. Some have argued that the state-dominated nature of Iran’s economy could allow it to withstand private-sector divestment from its economy in ways other countries could not.

With no expectation that Iran will comply with the uranium enrichment suspension deadline contained in Resolution 1747, especially after the publication of the 2007 National Intelligence Estimate, an immediate question is whether, and if so what, further international sanctions might be imposed on Iran.

U.S. Unilateral Sanctions    

Any international or multilateral sanctions would add to the wide range of U.S. sanctions in place since the November 4, 1979 seizure of the U.S. embassy in Tehran. Some experts believe that U.S. sanctions have been somewhat successful by reducing Iran’s ability to develop its key oil and gas sector.

Iran has been on the U.S. “terrorism list” since January 1984, following Hezbollah’s October 1983 bombing of the U.S. Marine barracks in Lebanon.  The list was established by Section 6(j) of the Export Administration Act of 1979, sanctioning countries determined to have provided repeated support for acts of international terrorism. The terrorism list designation bans direct U.S. financial assistance and arms sales, restricts sales of U.S. dual use items, and requires the United States to vote to oppose multilateral lending to the designated countries.  U.S. law provides waivers, but successive foreign aid appropriations laws since the late 1980s ban direct assistance to Iran such as loans, credits, insurance, and Export-Import Bank credits without providing for a waiver. 

Iran also is prevented from receiving technology from the United States under anti-proliferation laws, including the Atomic Energy Act of 1954 and the Energy Policy Act of 2005 (P.L. 109-58).  Several proliferation laws are unique to Iran.  The Iran-Iraq Arms Nonproliferation Act (P.L. 102-484) requires denial of license applications for exports of dual use items to Iran, and imposes sanctions on foreign countries that transfer to Iran "destabilizing numbers and types of conventional weapons," as well as WMD technology.  The Iran Nonproliferation Act (P.L. 106-178) authorizes sanctions on foreign entities that assist Iran’s WMD programs.  Reflecting a Bush Administration decision to impose sanctions for violations, the U.S. government has sanctioned numerous foreign entities, including some U.S. allies. The following are sanctioned entities: China, Taiwan, India, North Korea, Belarus, Macedonia, United Arab Emirates, Spain, Ukraine, Russia, and Cuba. 

The U.S. President has at his disposal authority to augment financial pressure through a series of Executive Orders. The Clinton Administration issued two Executive Orders in 1995: Executive Order 12957, imposed on March 15, 1995, prohibited certain transactions contributing to the development of Iranian petroleum resources. A ban on U.S. trade with and investment in Iran remains in place, imposed on May 6, 1995 under Executive Order 12959.   The trade ban was partly intended to blunt criticism that U.S. trade with Iran made U.S. appeals for multilateral containment of Iran less credible.  The trade ban prohibits U.S. firms from negotiating investment deals with Iran or to trade Iranian oil overseas.  Under the provisions of the trade ban, some goods related to the safe operation of civilian aircraft may be licensed for export to Iran, and in December 1999, the Clinton Administration allowed the repair of engine mountings on seven Iran Air Boeing 747s.  Clinton further augmented U.S. ability to implement offensive financial measures with Executive Order 13059, issued on August 19, 1997, which tightened restrictions on U.S. technology trans-shipped through or re-exported from third countries into Iran.  

Entities designated as illicit actors under terms of the Executive Orders may include individuals, banks, corporation, charities, and governments. Designated Iranian entities include Bank Sedarat, Bank Sepah, Bank Melli (the national bank), the Islamic Revolutionary Guard Corps, its constituent Qods Force, and the Ministry of Defense and Armed Forces Logistics. Designation has multiple advantages. While the Executive Order empowers U.S. authorities to seize funds traversing its financial system, the greater advantage may be simply disrupting the Islamic Republic’s ability to pursue normal financial transactions.

The U.S. Treasury and State Departments have begun using U.S.  financial regulations — as well as the new authorities in UN Security Council Resolutions 1737 and 1747 — to pressure European banks not to do business with Iran.   On December 20, 2005, the Treasury Department fined Dutch bank ABN Amro $80 million for failing to report fully the processing of financial transactions involving Iran’s Bank Melli (and another bank partially owned by Libya).  In 2004, the Treasury Department fined UBS $100 million for the unauthorized movement of U.S. dollars to Iran and other sanctioned countries, and it and three other European banks, Britain’s HSBC, Switzerland’s Credit Suisse, and Germany’s Commerzbank A.G, have stopped dollar transactions from within Iran and pursuit of new business in Iran. 

However, the trade ban is not comprehensive. While U.S. banks cannot do business directly with their Iranian counterparts, there has been a general exception for “u-turn transactions” in order to ensure that the oil market remains dollarized. Iranian banks are therefore able to dollarize their transactions through third-party, non-U.S. banks that have American branches. However, on September 8, 2006, the U.S. government announced it would ban the Iranian-owned Bank Sedarat from participating in such transactions because of its ties to Hezbollah. Iranian officials themselves acknowledge that the U.S. restriction makes it more difficult to fund energy industry and other projects in Iran.

Other modifications to the trade ban account for the small trade that does exist between the United States and Iran.  Since April 1999, commercial sales of food and medical products to Iran have been allowed on a case-by-case basis and subject to Office of Foreign Asset Control licensing.  Private letters of credit can be used to finance approved sales, but no U.S. government credit guarantees are available, and U.S. exporters are not permitted to deal directly with Iranian banks.   In April 2000, the trade ban was further eased to allow U.S. importation of Iranian nuts, dried fruits, carpets, and caviar. 

Subsidiaries of U.S. firms are not barred from dealing with Iran, as long as the subsidiary has no operational relationship with the parent company.  Some U.S. companies, however, have come under scrutiny for dealings by their subsidiaries with Iran.  On January 11, 2005, Tehran announced it had issued a contract to the U.S. company Halliburton, and an Iranian company, Oriental Kish, to drill for gas in Phases 9 and 10 of South Pars.  Under the deal, subsequently scrapped, Halliburton was to provide $30 million to $35 million worth of services per year through Oriental Kish.  It was unclear whether Halliburton would have been considered in violation of the U.S. trade and investment bans or the Iran Sanctions Act.

Because of criticism, Halliburton announced on January 28, 2005, that it would withdraw all employees from Iran and end its pursuit of future business opportunities there, a process it had announced that it had completed in mid-April 2007. In 2005, General Electric also announced it would seek no new business in Iran.   According to press reports, General Electric had been selling Iran equipment and services for hydroelectric, oil and gas services, and medical diagnostic projects through Italian, Canadian, and French subsidiaries.  

Still, application of targeted financial measures has not been consistent. In late September 2006, the Bush Administration informed Congress that, in the interests of safe operations of civilian aircraft, it intended to permit a sale by General Electric of Airbus engine spare parts to be installed on several Iran Air passenger aircraft, albeit by European airline contractors. 

In addition to the Executive Orders, the U.S. Congress has empowered the U.S. government to undertake further economic coercion against the Islamic Republic or its business partners. The Iran Sanctions Act, the successor to the Iran-Libya Sanctions Act of 1996, empowers the United States to act against private companies investing in Iran.  The law requires the President to impose sanctions on foreign (or U.S.) investment of more than $20 million in one year in Iran’s energy sector.  These sanctions have succeeded in impeding a number of projects, including Lukoil’s exploration of the Anaran oil field.[3]  Given the potential sensitivities of our European allies, consultations with them on such legislation should take place as part of our intensive efforts to proceed on a common course.

In 2006, Congress amended the law to make exports to Iran of weapons of mass destruction or advanced conventional weapons technology sanctionable, and to call for, but not mandate, a 180-day time limit for the Administration to determine whether a project violates the Iran Sanctions Act.  No projects have actually been sanctioned under Iran Sanctions Act, and only one–a 1997 investment by Total SA, Gazprom, and Petronas of Malaysia–was determined to have violated it, although Clinton waived sanctions on the grounds of national interest. In the subsequent decade, more than a dozen investment agreements with Iran–many of which are now operational and producing oil or gas–have helped Iran slow deterioration of its energy export sector.  However, the Islamic Republic would have attracted far more investment if the Iran Sanctions Act had never been enacted. One major project that Iran believes would help its gas export sector considerably is a proposed gas pipeline from Iran through Pakistan to India.

The U.S. government has other tools at its disposal. Section 311 of the Patriot Act of 2001 authorizes the Treasury Department to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of “primary money laundering concern.” This enables the Treasury Department to impose one or more of five special measures:

1. Requiring additional recordkeeping or reporting for particular transactions;

2. Requiring the identification of the foreign beneficiary owners of certain accounts at U.S. financial institutions;

3. Requiring the identification of customers of a foreign bank who use an interbank payable-through account opened by that foreign bank at a U.S. bank;

4. Requiring the identification of customers of a foreign bank who use an interbank correspondent account opened by that foreign bank at a U.S. bank; and

5. After consultation with the Secretary of State, the Attorney General, and the Chairman of the Federal Reserve Board, restricting or prohibiting the opening or maintenance of certain interbank correspondent or payable through accounts.

The net impact of Section 311 denies access to the U.S. financial system to entities designated as “special concerns.” While the authority has been invoked seven times since the passage of the Patriot Act, it has yet to be applied to an Iranian entity.

The U.S. Treasury Department has not implemented Section 311 on Iranian interests for fear that the financial community may deem such action as too political, a judgment that might erode the specter of Section 311 action in other cases. Ironically, this self-restraint benefits the Islamic Republic in two ways. First, it allows Tehran to engage in deceptive financial behavior without consequence. Second, it undercuts the effectiveness of U.S. diplomacy as other states conclude that Washington’s failure to implement Section 311 suggests the United States is not as serious as it claims.

In addition, there are a number of informal defensive measures that the U.S. government can apply to undercut any bank’s cooperation with Iranian institutions. U.S. officials can warn both U.S. and foreign banks of the risks inherent in business dealings with Iran. These dangers include reputation risk and fiduciary obligation to shareholders. Because the Islamic Republic engages in illicit and deceitful financial activities, transactions that the best international due diligence practices may consider legitimate may turn out to be illicit. When any bank’s participation in illicit Iranian activity becomes public, the bank is likely to face fines and damage to its reputation.

Disrupting Gasoline Imports and Oil Exports

While Tehran may have reaped an oil windfall in recent years, such money has failed to revive a moribund economy. The government’s social welfare strategy includes the provision of implicit subsidies, not only for gasoline but also for medicines, bread, and other goods. The World Bank calls these subsidies “untargeted and ineffective.” They undercut market development, drain resources, and encourage black markets and smuggling of goods out of the country. The Iranian government has responded by instituting both rationing and further price controls. While Iranians protested the imposition of gasoline rationing, the Iranian government has successfully tempered dissent by enabling Iranians to trade and profit from unused ration allotments.

Both the Iranian government and its opponents recognize the importance of Iran’s energy sector: Iran’s oil and gas production accounts for the bulk of Iran’s income and its ability to satisfy consumer needs. Recognizing their vulnerabilities, Iranian authorities have proactively sought to minimize their exposure to sanction and economic coercion. 

U.S. leverage has further declined with the publication of the 2007 National Intelligence Estimate on Iran’s nuclear program (See Appendix B). Companies from China and, to a lesser extent, Russia appear to be taking advantage of a changed climate to sign contracts that would, if implemented, ease Iran’s capacity constraints. 

Since the gasoline market is fungible and global, it is almost impossible to try to limit gasoline imports at the country of origin. The only possible instruments are a blockade and targeting the companies involved in making petroleum product deliveries. Some of these companies are outside the reach of Washington, for example in Russia, but others might well be active in the United States, Israel or other places where pressure can be brought to bear. This would at best increase the difficulty Iran confronts on the import side, but its overall effect may be limited.

An alternative policy option would be to exploit Iran’s economic dependence upon oil exports. Revenue from export of crude amounted to about $54 billion in 2006, accounting for 63 percent of Iran’s state revenue. Halting the export of Iranian crude would have significant economic repercussions for the regime.

Enforcing any sanctions may be easier said than done, however. In order to be effective, sanctions on Iranian crude would have to be multilateral. Currently, the main recipients of Iranian crude are Japan, China, India and South Korea. Together they receive more than half of Iran’s oil exports. Convincing these countries, especially China, to forgo Iranian imports of crude might be farfetched.   Iran’s primary means for the export of crude oil is by tanker through the 34-mile wide Strait of Hormuz, through which approximately 17 million barrels per day, two-fifths of seaborne oil trade, move each day. Iran has the largest oil tanker fleet in the Middle East, with 29 ships including Very Large Crude Carriers. Important terminals in the Persian Gulf include Kharg Island, Kish Island, Abadan and Bandar Mahshahr. The Neka terminal on the Caspian Sea is used primarily to handle increased product imports from Russia and Azerbaijan, as well as crude swaps with Turkmenistan and Kazakhstan. 

Without multilateral sanctions, the only way of halting the export of Iranian crude is the naval blockade of Iranian ports. The ramifications of such action would include an immediate jump in the price of crude oil and a global crude shortage. The extent and impact of such a shortage depends upon the Iranian reaction to a blockade. The immediate consequence would be the loss of the 2.0 million barrels per day that Iran currently exports. This amount roughly corresponds to the existing spare production capacity in the world, most of which is found in Saudi Arabia. Mitigating this shortfall would require ramping up all available production, preferably ahead of any planned action against Iran. 

Even if action is taken to exploit such vulnerabilities, though, sanctions can be undermined and even become counter-productive. For instance, Iranian authorities could circumvent an international embargo on its gasoline imports by smuggling product in, and divert blame for higher prices at the pump to outside enemies. If Russia opposed an embargo, it could blunt the domestic impact upon Iran with shipments through the Caspian. This could not fully compensate for Iran’s domestic loss, but it could ease it.

Iranian authorities could also retaliate effectively against any such pressure, given the tight energy market. Iran exerts considerable influence in the southern region of Iraq, where virtually all of Iraq’s current production and exports are sourced, and could disrupt the regions production—almost 2 million barrels per day—in order to drive up energy costs internationally. Should Iran or any Iranian-sponsored groups react by attempting to interfere with the export of oil through the Persian Gulf, however, current spare production capacity could no longer cover this loss. 

In order to better plan for Iran’s possible retaliation, Washington needs to treat the Strategic Petroleum Reserves realistically.  The Department of Energy’s drawdown schedule depicts a capability to pull down 4.4 million barrels of oil per day from the Strategic Petroleum Reserve caverns, for 90 days in case of emergency.  On its face, this appears adequate to calm markets in the event of a cutoff of Iranian oil exports or Iranian action to punish others by inducing a radical increase in oil prices.  It is uncertain, however, that the Strategic Petroleum Reserves can produce and distribute such a level since it has never been tested at such levels. For that reason, the U.S. Government should test the SPR system at different levels at different durations of time and fix any problems that might arise. Of course, other members of the Paris-based consumer group, the International Energy Agency, should do the same to be properly prepared to mitigate the impact from any Iran oil-induced economic shock. 

U.S. policymakers must also consider alternative ways to export oil from the Persian Gulf. Beyond fleshing out current military contingency planning, U.S. officials should engage in serious discussions with the Saudis to resolve their issues with Iraq and revive and rehabilitate the Iraqi Petroleum Saudi Arabia (IPSA) pipeline which ends in the Red Sea port of Yanbu. This would provide an additional outlet for Iraqi and Saudi oil exports. The United States might also work on refurbishing the Turkish pipeline in northern Iraq and restoring it to its original, larger capacity of 1.6 million barrels/day. The United States might also explore other long term oil infrastructure options including a pipeline from Iraq to the Jordanian port of Aqaba on the Red Sea.

Page 6: "Policy Options" Continued