Iran Watch Rountable
|Ross Allen||The Wisconsin Project on Nuclear Arms Control|
On May 18, U.S. Secretary of State Hillary Clinton announced that the five permanent members of the U.N. Security Council had agreed to new sanctions against Iran. A draft U.N. resolution, aimed at Iran’s illicit nuclear effort, is now before the Council. Although the resolution would limit Iran’s ability to buy arms, would target Iran’s illicit shipping, and would authorize restrictions on Iranian banks, it does not contain the “crippling sanctions” that Mrs. Clinton had warned earlier could flow if Iran’s nuclear defiance continued.
She delivered that warning in April, 2009. One year later, Iran is still enriching uranium. It is also boosting the enrichment level of its uranium stockpile closer to weapon grade, developing centrifuges that would enrich uranium more efficiently, refusing to explain evidence of nuclear weapon work, and has been caught building a secret nuclear fuel production plant – all of which have made the situation more dire.
In the United States, both houses of Congress have passed sweeping sanctions bills that target Iran’s energy sector, as well as its ability to purchase refined petroleum. The bills, which are now being reconciled, also hit foreign firms that invest in Iran’s economy.
As the Security Council mulls the draft resolution, and as Congress readies legislation for the president’s desk, it is time to ask which measures, if any, would force Iran to reconsider its nuclear program. To this end, the Wisconsin Project on Nuclear Arms Control hosted a roundtable discussion on April 15, 2010 that examined a number of sanctions measures, including the impact they might have and the likelihood of their gaining support. The panelists were Ross Allen, First Secretary for Middle East policy at the British Embassy, Gary Hufbauer, Reginald Jones Senior Fellow at the Peterson Institute for International Economics, Kenneth Katzman (*), Specialist in Middle East Affairs at the Congressional Research Service, Orde Kittrie, Professor of Law at the Sandra Day O’Connor College of Law, Arizona State University, Alireza Nader, international affairs analyst at the Rand Corporation, and Nicolas Roche, responsible for political-military affairs at the French Embassy.
The panelists concluded that although “crippling” sanctions against Iran could be devised, they could not be achieved or applied easily. A complete ban on oil sales by Iran would cripple the country. Iran derives about 80 percent of its national revenue from oil. An absolute ban on transactions with Iranian banks would also be crippling; Iran needs to get paid for exports, including oil, and to pay for imports, including refined petroleum products. Both measures, however, would inflict costs that countries are not presently willing to bear. Instead, a series of smaller steps, each having less impact on international trade, and each causing less distress to the Iranian population, would be achievable, and when combined, could have an important effect on the Iranian regime and its decision-making regarding the nuclear program. One panelist cautioned that although the Iranian government is concerned about the prospect of strengthened sanctions, such sanctions may not cause Iran to change its course.
Following is the moderators’ summary of the discussion. The findings are a composite of the panelists’ individual views. No finding should be attributed to any single panelist, or be seen as a statement of policy of any government.
Energy sanctions could powerfully affect Iran, even in the absence of an international oil embargo.
Iran derives most of its revenue from oil sales, and it depends on foreign oil refining in order to meet domestic demand; this creates a double vulnerability. Several panelists found that a fully enforced embargo on Iranian exports of crude oil would cut Iran’s revenue enough to prevent the country from functioning; it would effectively checkmate the regime. Similarly, an embargo on the sale of gasoline to Iran would cause shortages that would quickly affect Iranian businesses and consumers. However, the panelists concluded that the international community is unlikely to impose a ban on Iranian crude oil exports and unlikely to impose a comprehensive ban on Iranian imports of gasoline.
A majority of panelists found that a series of targeted sanctions, aimed at exploiting the vulnerabilities of Iran’s energy sector, could still have an impact, even without universal support. The panelists identified three such penalties: limiting the ease with which Iran can bring its crude oil to market; limiting Iran’s ability to purchase gasoline; and limiting investment in Iran’s oil and natural gas infrastructure.
Sanctions aimed at limiting Iran’s ability to export crude oil could include barring Iranian tankers from coming to port in Europe and parts of Asia, placing stringent authorization requirements on tankers transporting Iranian crude oil before docking, or otherwise raising the cost of these shipments through inspection or insurance requirements. Western governments could also discourage their companies from buying Iranian crude oil. Combined, such measures would make it more costly and time-consuming for Iran to sell its oil. As a result, Iran could be forced to use secondary buyers and might have to sell for less money. One panelist estimated that the decrease in revenue for the Iranian regime could be between ten and twenty dollars per barrel.
Limiting Iran’s crude oil exports would also be costly to consumer countries -- in the form of higher oil prices. According to one panelist, a decrease in supply from Iran could probably be made up by Saudi Arabia’s reserve. As a result, however, there would be no cushion if a problem arose in another oil-producing country (such as Venezuela or Nigeria) that caused worldwide output to drop further.
The panelists agreed that limiting gasoline sales to Iran could also increase pressure. The United States could enforce an interdiction on such sales by intercepting tankers on their way to Iran. While this would be tantamount to an act of war, and thus should be avoided, several panelists suggested that sanctions which point to a military option could help impress upon the Iranian government the strength of opposition to its noncompliance. The U.S. Congress is pursuing a less belligerent approach by amending the Iran Sanctions Act to target firms that sell refined petroleum to Iran, as well as those that provide shipping or insurance. Some panelists strongly favored such sanctions. Others did not, on the grounds that such sanctions, which would be imposed by the United States on foreign companies, could alienate countries whose support is needed for a vote on sanctions at the United Nations, and would have too big and direct an impact on the Iranian population.
Concerned governments could also approach major refineries and major refined petroleum suppliers to dissuade them from dealing with Iran; it is possible to track Iran’s crude oil and avoid it. Insurance companies could also be encouraged to stop insuring gasoline shipments into Iran and crude oil exports from Iran.
Some panelists argued that Iran was already adopting countermeasures in order to blunt a decrease in gasoline imports, and could continue to do so. Such countermeasures include limiting domestic gasoline subsidies, rationing gasoline, and building up a domestic reserve. Other panelists argued that reducing subsidies or rationing gasoline could fuel unrest in Iran, which would put pressure on the government.
The panelists found that ad hoc efforts, led by the United States, to dissuade companies from investing in Iran’s energy sector have been successful. Since 1996, when the United States passed what is now called the Iran Sanctions Act, the possibility that foreign energy companies investing in Iran’s petroleum sector could be hit with sanctions by the U.S. government has deterred such investment. This is true despite the fact that the United States has only officially determined one energy project to be a violation of the ISA, in 1998. Sanctions were waived in that case by the Clinton administration for reasons of "national interest," in order to avoid a trade dispute with Europe.
Since then, foreign energy investment agreements with Iran have been announced, but few have been implemented by major western firms. While Chinese and Malaysian companies are still embarking on new investment, these firms are not considered as technically capable as those that have either withdrawn from the country, or limited activity to ongoing projects. If the Obama administration were to step up reviews of investment projects in Iran for possible violations of the ISA, as Congress is now demanding, some panelists found that more firms might be deterred from finalizing agreements with Iran. By persisting in deals with Iran, these firms would risk losing U.S. government contracts, access to U.S. technology, and perhaps access to the U.S. market.
The majority of panelists found that an implicit threat of sanctions can be sufficient to deter many companies from doing business with Iran. These panelists noted that several major gasoline suppliers have stopped supplying Iran without being required to do so legally. And, as noted above, even absent executive branch implementation of the Iran Sanctions Act, few western firms have undertaken major investments in Iran’s energy infrastructure in recent years.
Some panelists said that any attempt to impose an embargo on oil exports or gasoline imports would lead to an increase in smuggling, which would benefit Iran’s Islamic Revolutionary Guard Corps and hurt the general population. Panelists also acknowledged that gasoline is a fungible commodity, making it possible for Iran to find other suppliers and buyers; for these panelists, any such ban would have to be close to universally applied, which would be difficult to achieve in practice.
Financial sanctions should be increased and are likely to have the greatest impact on Iran.
For the past several years, the U.S. Treasury Department has led a campaign aimed at convincing the world’s leading financial institutions to limit or end transactions with Iran. As a result, some eighty major banks have reportedly curtailed business. The panelists agreed that this effort is having an important impact and that increasing the number of banks willing to enforce this de facto embargo has great potential to force Iran to reconsider its nuclear program.
The panelists noted that there are about 100 major banks in the world. If all could be persuaded to stop dealing with Iran, the country would be forced to use secondary banks. Iran would have a difficult time executing wire transfers and might have to pay for imports with cash. The impact would be greatest if China’s five major banks could be convinced to join this initiative. Support from Singaporean and Malaysian banks is also important. Yet, even if Chinese banks opt out, or only partially limit dealings with Iran, such measures would still have an impact. Iran would be forced to function to an ever greater extent as a cash economy, similar to North Korea. Unlike North Korea, however, Iran has oil, and such measures would make it more complicated, and costly, for Iran to sell its crude oil and to import gasoline and other goods.
The U.S. Treasury Department and finance ministries in other countries have gone directly to banks instead of governments. The panelists found this direct engagement with the private sector to be effective. Businesses want to limit risk and protect their larger market interests.
Treasury’s actions also have been reinforced by intergovernmental organizations like the Financial Action Task Force (FATF) and the Organization for Economic Cooperation and Developmen (OECD). In its public statements, the FATF has repeatedly warned banks that Iran poses "ongoing and substantial money laundering and terrorist financing risks," and has called on its member countries and their banks to apply enhanced scrutiny to any business relationship with Iran. And for the past several years, the OECD has given Iran a Country Risk Classification of six (on a scale of zero to seven), increasing the cost of credit and shrinking its availability.
Another step that could pressure Iran’s financial sector would be to impose strict authorization requirements on transactions with Iranian banks. The panelists also agreed that it would be possible to sanction the commercial side of Iran’s central bank, while avoiding infringement upon its sovereign character.
General trade and investment sanctions should be broadened.
The United States is currently the only country with a near total embargo on trade with Iran. Several panelists agreed that additional countries, and especially the European Union, should drastically tighten their trade and investment sanctions. A wide-ranging European embargo would damage the Iranian economy. Iran depends on access to sophisticated machinery and parts from European companies. Because Iran represents less than one percent of the European Union’s total worldwide trade, E.U. governments could dissuade their companies from dealing with Iran without forcing their economies to incur large financial losses. The E.U. could also expand its list of dual-use items requiring an export license for sale to Iran. While Iran may be able to purchase similar goods from suppliers in Asia, the panelists agreed that Iran needs western goods in some cases; therefore cutting off this supply would be a cost to the Iranian regime. The efficiency and effectiveness of such sanctions would be enhanced if other like-minded countries joined the effort.
The panelists were divided regarding the benefits of a measure aimed at foreign subsidiaries of U.S. companies that continue to trade with Iran. This is considered by some to be a loophole in the U.S. embargo. The Iran sanctions bills approved by the House and the Senate contain language that would close this loophole, by making the parent company liable, and sanctionable in many cases, for the actions of its foreign subsidiaries. Several panelists underlined that such legislation would have the potential to create a distracting trade dispute between the United States and Europe, where many of the foreign subsidiaries are based. Here too, these panelists thought it best for the U.S. government to approach these companies informally.
The panelists found that disinvestment initiatives are valuable and could impose an important cost on Iran, but would take time to be effective. These initiatives, which the U.S. Congress is seeking to authorize, have already been undertaken by a number of U.S. states. Such initiatives are usually aimed at requiring or authorizing pension funds to divest themselves of shares in firms that have invested in Iran’s energy sector.
Political sanctions could be effective and should be tried.
There is now general international agreement that in the crisis surrounding Iran’s nuclear program, Iran’s leaders are the problem -- especially since last June’s disputed presidential election and the subsequent internal repression. The panelists agreed that this sentiment should be reinforced through political sanctions.
Public diplomacy is an important part of any effort to rein in Iran’s nuclear program through sanctions. The panelists agreed that a better job needs to be done to explain to the Iranian population that international sanctions are the result of the nuclear program, and, more broadly, of the dysfunctional behavior of the current regime. One panelist noted that the population has grown used to the country’s poorly run economy, and people are not likely to make the link between the nuclear program and more bad economic news without help. An information campaign could provide such help and would be best accomplished by private groups, not by governments. Given the discontent with the current regime in the wake of last June’s election, the Iranian population is likely to understand that international sanctions are aimed at the regime and not the general population. The likelihood of the Iranian population rallying around the regime would, in this context, be low.
The panelists also agreed on the value of sending a message to Iran’s leaders that pursuing the nuclear program will result in their increasing isolation. Isolating the country’s leaders diplomatically -- through a freeze on high-level official visits, visa bans or financial sanctions against individuals -- has not been given adequate consideration. Countries could also consider recalling some of their diplomats from Tehran. Several panelists noted that this would have to be done by more than just the European Union to have any real effect; they also underscored the benefits of having personnel on the ground.
Iran’s sense of political isolation could also be reinforced if it were locked out of committees in regional and international organizations or otherwise sidelined. Such actions would be especially meaningful to Iran if they were supported by China, Russia and countries in the non-aligned movement. Iran has long counted on support from non-aligned countries at the International Atomic Energy Agency and at the United Nations. The political message to Iran would be powerful if, for instance, several non-aligned countries supported the next U.N. sanctions resolution.
Sanctions against Iran’s Islamic Revolutionary Guard Corps would be valuable and are likely to gain international support.
The Islamic Revolutionary Guard Corps (IRGC) is now the dominant actor in Iran’s economy. It is also playing a growing role in Iranian politics. The United Nations, the European Union and the United States have already targeted subsidiary companies and officials of this group with financial penalties and travel restrictions because of links to Iran’s nuclear and missile programs; the next U.N. resolution is likely to target additional IRGC entities.
Most panelists agreed that such measures could further contribute to isolating the regime. However, the IRGC is not a monolithic organization; it has hundreds of subgroups and affiliates. It also holds minority stakes in a number of Iranian companies. Therefore, targeting the IRGC’s various elements will require good intelligence information. For instance, the IRGC has made enormous inroads into the financial sector and is now operating banks in Iran and Dubai. Some of these banks have already been sanctioned by the United States.
Several panelists suggested that rather than play a cat and mouse game with Iran by expanding sanctions lists one name at a time, it might be better to target the IRGC as a whole. The IRGC is likely to continue setting up front companies and employing other means of sanctions evasion. Targeting the entire organization would mean that penalties could automatically be applied to entities owned or controlled by the IRGC, without having to wait for these new names to be included on a sanctions list. It takes time to expand sanctions lists. Interested countries could then name subgroups and individuals that are most worrisome. Because of the IRGC’s role in Iran’s economy, a prohibition on dealing with any affiliate of the organization might force more foreign firms to leave Iran.
One panelist questioned the value of such sanctions. This panelist emphasized that, for the most part, IRGC elements do not care about the political or economic isolation from the world that would be the result of international sanctions. In fact, the group would be the main beneficiary of international economic sanctions. As stated above, the IRGC profits from smuggling and other illegal activities; and it pays no taxes or import fees.
The timing of sanctions is crucial.
Most panelists concluded that the current climate is ripe for enhancing sanctions. Iran’s nuclear clock is ticking faster: Iran has begun to process its stockpile of enriched uranium from 3.5 percent to 20 percent, which will bring that stockpile much closer to weapon grade. At the same time, the political and economic situation is working in favor of sanctions. Oil prices are currently lower because of the worldwide economic slowdown, but they won’t remain so. Internal repression in Iran following the contested presidential election that returned Mahmoud Ahmadinejad to power last June has invigorated domestic opposition. The Iranian regime must now worry about consolidating power at home.
Most panelists also felt that additional sanctions are necessary to send a message to Iran and other countries; the Iranian regime must pay a price for its actions, which violate its treaty obligations and U.N. resolutions. Countries in the region must be assured that the world is prepared to act if a country violates its nuclear obligations and flouts U.N. demands.
Most panelists agreed that the U.N. Security Council is likely to approve a set of limited sanctions soon. This U.N. action will provide a platform for more stringent measures by a coalition of countries, including the European Union and Japan. The panelists agreed that no one sanction will be a "silver bullet." Yet a series of measures, none perfect, none airtight, would, combined, do a great deal to raise the economic and political cost to Iran of pursuing its illicit nuclear program.
(*) Mr. Katzman participated in this discussion in his personal capacity as an Iran expert, and not as a representative of the Congressional Research Service, the Library of Congress, or the U.S. Congress.