House International Relations Committee Hearing: Effect of Sanctions on Iraq and Libya

July 23, 1997

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REP. BENJAMIN GILMAN (R-NY): The committee will come to order. With great pleasure, we welcome the distinguished administration private sector panelists before our committee this morning to discuss the Iran-Libya Sanctions Act, ILSA, and give us their perspectives of the effects of this act one year after its enactment back in August of 1996.

The committee's review of ILSA implementation comes at a time of heightened debate within the administration, within Washington policy circles over the future direction of U.S. policy toward Iran and toward other terrorist nations. Some prominent outside observers are calling for a dialogue and more moderation in our policies toward Iran as part of a review of a broader strategy of dual containment of both Iran and Iraq. The debate thus far centers around the question of whether our nation should offer incentives to moderate its behavior toward its neighbors in the Gulf and in the Middle East as a whole.

This debate over the Iranian policy has only accelerated in the wake of the May 23rd election of Mohammed Khatami as president. A relatively moderate candidate on social and domestic issues, he was elected with nearly 70 percent of the vote and takes office in mid- August.

The administration has reacted with justifiable caution to these events, stressing, I believe correctly, that there shouldn't be any change in U.S. policy unless Iran takes clear steps to improve its international behavior. These steps should include a declared end to its support for international terrorism, a reduction in its conventional arms buildup in the Gulf and a clear statement that it's not trying to acquire or produce nuclear weapons and the means to deliver them.

Unless and until Iran is willing to accomplish these objectives, we should not alter our stance toward this country and we should vigorously enforce the Iran-Libya Sanctions Act as an important component of our overall dual containment strategy toward both Iran and Iraq. And in that regard, I would note that the only oil development contract that Iran has signed with a foreign firm since the imposition of U.S. sanctions now appears to be floundering because of a lack of financing, according to a recent report in "The Iran Times."

A key oil industry publication has also reported that this deal to develop the Balal (ph) field is on the brink of falling apart because the Canadian and British firms involved in the bidding have been unable to arrange any financing. I'd welcome the comments of our panelists this morning on the effects of -- (unintelligible) -- proposed transaction and several others that are now pending between the Iranians and foreign companies. I understand that one potential firm waiting in the wings for this particular deal to fall through is the China National Petroleum Corporation. And if that report turns out to have some validity, this could be a potential flash point in our U.S.-China relations, particularly in light of increasing Chinese support for Iran's military buildup.

I'd also ask our panelists to comment on reports that another Iranian oil field development, the Sorush (ph) field, has the backing of Germany's Wesdeutschlandesbank (sp). This bank has reportedly put together a syndicate of other banks to provide 90 million (dollars) in financing this year and another 70 million (dollars) in subsequent years.

To the extent that the administration witnesses and other panelists today can confirm these reports, this committee will be asking the German government to clarify its position in this matter. In light of the recent German court decision clearly implicating the Iranian government in terrorist acts on German soil, we'd like to know why a prominent German bank like Deutchlandesbank that has been in the past been subsidized by government credits is financing this project and reportedly doing so with its own funds.

More troubling are recurrent reports that foreign firms, particularly the French oil company Totale (ph) might be on the verge of signing contracts with Iran to develop the large South Pars (ph) gas project, expected to require more than $2 billion in capital. In a letter I received on July 15th from the chairman and chief operating officer of Totale, Mr. Huri Demeres (ph), he indicates that increased investment in Iran will, and I quote, "help further stimulate democratic reform in Iran," close quote.

It would in fact appear that this company is intent on proceeding with its contract with Iran, which is clearly a sanctionable event under the terms of ILSA. With the recent indications from the French government that it's willing to support French firms in Iran with the new $500 million insurance line of credit, we need to enter into an immediate high-level dialogue with France to make certain that it's aware of the implications of imposing sanctions on its leading oil exploration and development firm.

I'd welcome the comments of our panelists on these and other issues related to ILSA as we review its effects on our policies in the region. We also need to explore in particular the prospects of multilateral cooperation in an effort to stop Iran from developing its offshore oil fields and using any of the revenues generated from those fields to fund its nuclear and conventional weapons buildup.

I'm also asking our panelists to comment on recent developments to Libya and the impact of the legislation on our policy toward that country. I'd like to know how the United States has responded to calls by other nations for the lifting of UN sanctions against Libya in light of its continuing refusal to hand over for trial two suspected intelligence agents indicted for the bombing of Pan Am Flight 103 in December of 1988.

We look forward to hearing from our panelists.

Our first witness will be Ambassador Alan Larsen, assistant secretary of State for economic and business affairs. He was sworn in as an assistant secretary in July of 1996. Ambassador Larsen has had a long distinguished career as a Foreign Service officer serving in capacities such as principal deputy assistant secretary of State for economic and business affairs, deputy assistant secretary for international finance and development, and our American ambassador to the Organization for Economic Cooperation and Development.

Mr. Ambassador, we welcome you to the committee. We'll be looking forward to your testimony.

From the Department of State, we have David Welch, principal deputy assistant secretary of State for Near Eastern affairs. Mr. Welch is a career Foreign Service officer. He has served numerous in the Middle East and South Asia.

We welcome having you here today, Mr. Welch.

I turn to our ranking minority member, Mr. Hamilton, if he has any opening statement.

REP. LEE HAMILTON (D-IN): Mr. Chairman, I think you are to be commended for having these hearings. I join you in welcoming the witnesses. I look forward to their testimony. I have no opening statement. Thank you.

REP. GILMAN: Thank you, Mr. Hamilton.

Mr. Larsen -- any other members seeking recognition? -- Mr. Larsen, you may proceed. You may put in your full testimony or summarize it, whichever you deem appropriate.



Assistant Secretary of State
for Economic and Business Affairs


MR. ALAN LARSEN: Okay. Thank you, Mr. Chairman. I would like to submit my full statement for the record and make a brief oral summary.

Mr. Chairman and members of the committee, I'd like to thank you for the opportunity to brief the committee on the first year of the Iran-Libya Sanctions Act. I'm going to comment today on ILSA's implementation and on its role in achieving our policy objectives.

ILSA does not stand alone. As Mr. Welch will outline, it is part of a broader effort to deter Libyan involvement in terrorism, Iranian and Libyan involvement in global terrorism and the spread of weapons of mass destruction. The act underscores the seriousness of our concerns about Iranian and Libyan behavior. It highlights the importance of enlisting multilateral support for efforts to change that behavior. We're working with friends and allies to develop common approaches to this problem and to achieve ILSA's objectives.

Looking at the first year of ILSA implementation, we believe the act has had a significant deterrent effect on petroleum sector investment in Iran and Libya. Of course, ILSA's not the only factor in investment decisions, and the law has not eliminated petroleum company interest in these countries. Nonetheless, since ILSA's enactment, the information we've gathered and the analysis we have performed does not support a determination that any person has made a sanctionable investment, as defined in the act.

There are certain cases that we're watching particularly closely, and we will take appropriate action under ILSA if we find that sanctionable activity has occurred.

Our strategy for implementing ILSA has three main elements. First we're collecting and analyzing a vast amount of information to keep track of international commercial transactions that may have ILSA implications. The State Department's ILSA unit is charged with monitoring the data, coordinating government-wide analysis and ensuring that the administration is prepared to take timely and appropriate action.

Cases are reviewed by the State Department's internal ILSA working group and by an interagency working group before any action is taken. The president has delegated responsibility for final decisions about sanctionability to the secretary of State.

Secondly, we've worked hard to enhance the international business community's awareness and understanding of ILSA. Since the law's enactment, we have informed international petroleum companies and others about the risks of engaging in activities that might be subject to ILSA sanctions. When we have identified firms engaging in questionable activities, we've contacted them directly to make them aware of our concerns.

So far, none of the petroleum firms contacted in this way have finalized an investment in Iran or Libya, though some apparently are continuing to give those activities serious consideration. We continue to monitor those cases very closely.

Third, we have kept other governments informed of our efforts to deter activities contrary to the act. ILSA encourages consultation with foreign governments. When we have contacted foreign firms about questionable activities, we've also tried to engage their governments as well. In some cases, we've raised our concerns at the highest levels of government. Press reports and statements by oil company officials suggest that concern about ILSA sanctions is an important factor in corporate decisions and has had a chilling effect on investment. No foreign firms have so far invested in the 11 oil and gas projects tendered by Iran, though some firms are interested.

The situation in Libya is somewhat different. Foreign firms have been involved in Libya's oil industry for many years, and there are activities being carried out under agreements that were concluded before ILSA. Nonetheless, we actively investigate reports of new investments in Libya as well as evidence of prohibited transactions that both violate the existing UN sanctions against Libya and would as well be sanctionable under ILSA.

Our efforts to implement ILSA have not been without cost. ILSA is a source of friction in our bilateral relations with some of our closest friends and allies. The European Union and the member states have voiced strong opposition to the law, and the European Union has enacted blocking legislation that's designed to prevent its member states from complying with the provisions of ILSA.

We are trying to keep our European friends focused on the overriding importance of concerted action on Iranand Libya. The April 1997 US-EU understanding on the Libertad Act, for example, reiterates the president's commitment to implement ILSA and commits us and the Europeans to work together towards the objective of meeting terms which would warrant waivers under Section 4(c) of ILSA. Several European countries already have taken important useful action on Iran. We've made it clear, however, that substantial measures, including economic sanctions, are necessary to justify such a waiver, and I would add that I would not be in a position to recommend waivers solely on the basis of measures taken to date.

We need to keep in mind that despite ILSA's chilling effect on some investment plans over the last year, there's no guarantee that the act alone will prevent all of the investment and commercial activity in Iran and Libya that we oppose. This is why diplomatic efforts to encourage a common multilateral approach on Iran are essential. By either integrating ILSA into our broader strategy with respect to both Iran and Libya, we can maximize its impact and move closer to realizing our goal of changing Iranian and Libyan behavior. This is going to be our prime objective as we move into the second year of ILSA implementation. Thank you.

REP.: Thank you very much. Our next speaker this morning will be David Welch, who's the principal deputy assistant secretary in the State Department's Bureau of Near Eastern Affairs. He's a career Foreign Service officer. Mr. Welch has had a number of assignments in the Middle East and South Asia, including Saudi Arabia, Jordan, Syria, and Pakistan.

Most recently, Mr. Welch was the deputy chief of mission at the U.S. embassy in Riyadh from 1992 to 1995. In the absence of an ambassador, he served there for two years, from 1992 to '94, as charge d'affaires. He was a member of the National Security Council staff at the White House from 1989 to '91, and has served in several positions at the State Department.

Mr. Welch graduated from Georgetown University School of Foreign Service in '75. He also studied at the London School of Economics in '73 and '74 and has advanced degrees from Fletcher School of Law and Diplomacy. Mr. Welch was born in Munich, Germany, in '53 out of parents who were also in the Foreign Service, and lived with them in Germany, Brazil, Morocco, Ecuador, and Mexico. Mr. Welch has three children -- three daughters.

And we welcome your testimony here this morning, Mr. Welch, and thank you for coming.


Principal Deputy Assistant Secretary of State
Near Eastern Affairs

DAVID WELCH (Principal Deputy Assistant Secretary of State, Near Eastern Affairs): Thank you. It's my pleasure to be with you today to discuss Iran and Libya, two of the principal challenges to U.S. foreign policy.

The Iran and Libya Sanctions Act -- ILSA is our acronym -- reflects the shared conviction of the executive and legislative branches that terrorism cannot and will not be accepted or legitimated as an instrument of foreign policy. We reject the notions that the use of violence to terrorize or intimidate is somehow acceptable or that weapons of mass destruction and their means of delivery are necessary tools of state power.

I'd like to focus a bit on what the administration has done on Iran and Libya and how ILSA fits into that effort. Our approach focuses on three areas: economic pressure, counterterrorism and arms control and nonproliferation. We have achieved some cooperation with our principal international partners in each of these areas. Equally, we seek greater (conversions/convergence ?) within on Iran policy.

First, economic pressure. Unilaterally, we have a very strict trade and investment embargo instituted by the president in May of 1995. In addition to those unilateral measures, we are implementing ILSA firmly and fairly. For their part, many of our allies have been reluctant to grant Iran extensive access to official credits and guarantees for both economic and policy reasons. This is a first step, but more remains to be done.

Second, counterterrorism. Events over the past year have heightened our common concerns on terrorism and led to some useful actions by the European Union, including suspension of the critical dialogue and official bilateral ministerial visits, a public confirmation of the existing ban on arms sales to Iran, increased cooperation on reducing Iranian intelligence presence in EU member states, and a recall of all EU members' ambassadors from Tehran.

At the Denver Summit of the Eight in June, our allies joined us in calling on Iran to renounce the use of terrorism, including threats against Salman Rushdie.

Third, the area of arms control and nonproliferation. Excellent multilateral cooperation has made it more difficult for Iran to buy arms, dual-use items and technology of proliferation concern. The existing net of multilateral arrangements does not stop all transfers of concern, but it has slowed the pace of Iran's programs. We push for compliance with nonproliferation and arms control arrangements should we receive information that transfers are taking place. When we have done so, we have generally received good cooperation from other governments in those types of cases.

Again, at the Denver summit, the (P-8 ?) called on all states to avoid cooperation with Iran's nuclear, biological and chemical weapons and missile development programs.

Let me discuss ILSA and what we've done to build greater consensus on Iran among our allies, one of the requirements of the act. The administration has worked to build broad support for a multilateral sanctions regime to inhibit Iran's efforts to acquire weapons of mass destruction and to support international terrorism. The basis of that dialogue with our partners is our common conviction that Iran must alter its objectionable behavior. We differ, however, on the tactics for achieving this goal.

The United States has taken a range of actions to counter the Iranian threat. Now we must have help from our allies, and we're working to develop the convergence between our approach and that of our allies. We have regular discussions with the EU, Japan, Canada, Australia, Turkey, and others regarding developments in Iran and how we should react to its threatening policies.

We have suggested a method of reviewing Iran's behavior together to come to a common evaluation of any change, be that positive or negative. It is our hope that such a process would lead to a discussion of possible common reaction. We do not have agreement from our allies on this proposal. They remain concerned that the U.S. seeks to impose a multilateral policy toward Iran. However, we genuinely seek effective methods of cooperation, and we will continue to work with our allies toward that end.

The act allows the president to waive sanctions for nationals of any country that have agreed to take, quote, "substantial measures, including economic sanctions," unquote, that would inhibit Iran's efforts the acquire weapons of mass destruction and to support international terrorism. The administration has stated clearly that economic measures are necessary to justify such a waiver. We have not defined precisely what those measures should be and do not believe it would be constructive to insist that our allies mirror U.S. policy on Iran. However, to merit a waiver, any actions taken by our allies must inhibit Iran's efforts to pursue those objectionable policies cited in the act.

A brief word about the Iranian elections and the election in particular of Mohammed Khatami as the president of Iran. This is an interesting development to the extent that it reflects the Iranian people's desire for change. We'll have to wait and see whether it produces any positive changes in Iranian policies that threaten our interests.

On Libya, we face a somewhat different situation. A UN sanctions regime exists on Libya for which there is broad multilateral support. Our allies, however, are disturbed by the additional sanctions ILSA places on investment in Libya. We are discussing our allies' concern while working to maintain their strong cooperation with our efforts to bring to justice those responsible for the bombing of Pan Am Flight 103.

It is too early to gauge the impact of ILSA on would-be violators of the UN sanctions against Libya. However, we emphasize in demarches on possible violations of the UN sanctions that violators must also risk exposing themselves to ILSA sanctions. We remain committed to raising violations of these sanctions in the appropriate UN committee, the Sanctions Committee, even though the structure of that particular committee makes attaining adequate unanimous responses difficult.

In conclusion, I want to emphasize that sanctions on Iran and Libya are not ends in themselves. The administration's goal, and I believe it is that of the Congress as well and its intention in passing this legislation, is to see that these nations abandon objectionable policies and become constructive members of the international community. Thank you very much.

REP.: Thank you. And members, at this time, we'll have questions.

First of all, Mr. Welch, the administration has said Iran must agree to discuss its objectionable international behavior if there is to be a dialogue with the United States. Are there any signs that Iran wants to open a dialogue with the United States at this time? And should the United States offer to discuss aspects of U.S. behavior that Iran finds objectionable?

MR. WELCH: Our position is that we don't oppose dialogue per se on the part of others. We have offered it ourselves. So far, Iran's government has not deemed that offer to be worthy of taking up.

We have -- each time we have reiterated this in public, we have said that our agenda for any such discussions would include each of Iran's objectionable behaviors.

We have not suggested what their agenda should be. I've got no clear indication of what it might be (audio break)

REP.: Can I ask our panelists, how are U.S. allies in Europe responding to the election of the new government in Iran? And are they likely to soon revive an official dialogue with Iran, suspended following the April 10th German court verdict that determined official Iranian complicity in a '92 assassination of an Iranian dissident?

MR. WELCH: Mr. Chairman, I think our allies in Europe have had a reaction to the election result that is not dissimilar to our own. It is an interesting, intriguing result, contrary to their own private expectations about what it might be.

My understanding is that the decisions taken after the Mykonos (ph) verdict was released, that is, that first and foremost, there is no basis for a continuation of the critical dialogue and the suspension of bilateral ministerial visits and the withdrawal until now of the European ambassadors from Tehran, those measures remain in effect. I -- we continue our discussion with the Europeans on each of these matters, and I would expect that absent any resumption of the dialogue between Europe and Iran, that there won't be any change in those measures for now.

REP.: Can our panelists tell us, why did the administration issue only guidelines, instead of regulations, governing the implementation of ILSA, although it chose to issue detailed regulations for the anti-terrorism and effective death penalty act of '96? It seems to us that the administration has given itself broad latitude to determine whether or not to impose sanctions under ILSA? If that be the case, we'd like to know why that is the case.

MR. LARSEN: Mr. Chairman, we have not had that type of consideration in mind (that I've seen ?), not to have regulations. We wanted to get a quick start, we wanted to set out arrangements that would very clearly define for the executive branch agencies how we were going to implement this act.

I think that the record over the last year suggests that we have moved quickly. We have done a great deal of work both to gather information, analyze that information, to approach foreign firms and foreign governments. And we are determined to implement the act in a vigorous way, including taking appropriate action if and when we find any evidence that a firm has conducted an activity that would bring it in violation of ILSA.

REP. GILMAN: Gentlemen, recent reports, as I indicated, in "The Iranian Times" state that the French export insurance company agency Coface (ph) has extended a $500 million line for Iran. Does that extension violate any understandings we had with our allies about extending new credit lines to that country?

MR. LARSEN: Mr. Chairman, over several years, we have worked with our allies to try to persuade them that the extension of new official credit was an unwise policy. I don't have the details on the particular Coface loan or guarantee to which you referred, and I would need to get more information on that before I would make an assertion about whether it violates understandings.

I think that the general point that I can make this morning is that we have been discouraged in the past over the difficulty that we've had in getting sufficient cooperation from European governments in restricting official credits to Iran.

REP. GILMAN: If this be the case, and the facts are verified about what Coface is doing, would that be sanctionable, a sanctionable action against France?

MR. LARSEN: I think, Mr. Chairman, the answer to your question would depend a great deal about the details. There is -- there was at the time that ILSA was implemented a debate about whether purely financial transactions should be included. And at that time, the judgment was made, I think for good and sufficient reason, that certain types of purely financial transaction would not be considered sanctionable activities under ILSA.

The law makes quite clear that there are circumstances where financing when it basically puts the financing agency in a position that it has an equity stake, that it's gaining royalties or things like that, would be a sanctionable activity. So I think one would have to look in -- among other things, one would have to look into the details of the particular transaction.

REP. GILMAN: Well, are we looking into the details?

MR. LARSEN: We're investigating every single case that we hear about of investment of financing of Iranian oil and gas production, and we'll certainly be investigating this one as well.

REP. GILMAN: Thank you. Just one last question, and I'm exceeding my time. Is it your assessment that ILSA has succeeded in reducing investment in Iran's energy sector?

MR. LARSEN: Yes, Mr. Chairman, it is. Certainly, one year is a short period of time when one's talking about foreign investment decisions. And we will be quite ready to acknowledge that ILSA is not the only factor that enters into decisions on investment. Nevertheless, I think it is notable that during the first year of ILSA, there has not been any activity that we have been able to learn about or identify that would be sanctionable under ILSA.

We find it notable that none of the 11 projects for which Iran has solicited foreign involvement have resulted in a contract producing that type of involvement. So we do think ithas had a chilling effect on foreign investment in Iran's petroleum sector.

REP. GILMAN: Thank you.

Mr. Hamilton.

REP. HAMILTON: Thank you very much, Mr. Chairman. We obviously have some really big problems with Iranian foreign policy. They don't support the peace process, they export revolution, they support international terrorism, and they seem to be trying to acquire weapons of mass destruction.

So far as I am aware, we haven't made any progress in changing Iranian behavior in any of those key areas. Is that correct?

MR. WELCH: I think we've made progress in raising the cost to them of certain of thosebehaviors. We have not reversed them.

REP. HAMILTON: So what you have today, then, is an Iran that is very belligerent towards the United States, an Iran that is very rigid in its policies and has been for many years, that is implacable in its opposition to the peace process, and supports terrorism as an instrument of policy.

Why can you argue -- you're now in the 18th year of the Iranian revolution. The policy which you have set out in your statement, Mr. Welch, is a policy that I have heard for many, many years. That doesn't make it -- mean it's the wrong policy. But it certainly has been stated over and over again, I can't see that it has changed Iranian behavior in any way. So why -- how can you say this policy today is successful?

MR. WELCH: I think Iran's behavior, if it chooses to pursue it, must be met by substantial additional cost to Iran. I think we have succeeded in raising the cost to Iran of pursuing the kind of problem behaviors that you have listed, Mr. Hamilton.

That they nonetheless choose to do so is not a failure of our policy, it's a standard of their determination. Some of these behaviors are quite threatening to our national security interests. That's one of the principal motivations behind the legislation that we're reviewing today.

We would have better success were we not acting unilaterally. We have had some cooperation, in some areas very good cooperation, from our friends and allies around the world. There's more that could be done there.

I think you have to look at what the alternatives might be to the sort of policy we have pursued also. I think to go to the other end of the scale and pursue engagement more or less for its own sake, dialogue that is critical only in name, I think would be in error. The record has --

REP. HAMILTON: Let me take up this question of our posture on a dialogue with you a moment.

Mr. Murphy, whose name you know, one of the predecessors in the position you're now serving in an acting capacity, speaks about this openness for official dialogue. And I quote him. "After more than a decade of repetition, coupled with our harsh public rhetoric about Iranian actions and intentions, this invitation is unpersuasive."

How do you react to that?

MR. WELCH: Well, I can't answer why the Iranian government has not chosen to pick up on this offer of a dialogue. They have made their own calculations for their own reasons that the offer, such as it is, is not persuasive to them. We're not in the business, however, of making offers that are designed to tempt them for talk alone.

REP. HAMILTON: Let me ask you -- let me have you respond to another question here. Mr. Murphy writes, "It is now clear that we will make little progress on the items of disagreement, nuclear peace process, and so forth, with Iran, unless we engage the Iranians in serious high-level negotiations without preconditions."

How do you feel about that?

MR. WELCH: Well, I --

REP. HAMILTON: We haven't made any progress, we haven't changed their behavior. All you have said this morning is we've raised the cost, which we can't do very effectively, you indicate, without the support of others. So why not try to engage now in some way? Now, what he is suggesting is a very modest kind of engagement. He's not suggesting swinging to the other end of the pendulum.

Specifically, the Council on Foreign Relations report suggests four very modest steps: reducing the intensity of the rhetorical war -- obviously, that takes some reciprocity; reducing the economic embargo of Iran to a narrow range of specific items, such as components for weapons of mass destruction, missiles and dual-use technology -- there I think you would have a lot of support from the European Community; encouraging the IAEA to carry out a more aggressive program of inspections in Iran; and exploring the potential of dialogue with Iran through some non-official channels.

Now, I'm -- you see the kind of a problem I'm wrestling with here. I think this is a very tough policy problem. I think you've had a policy in place for a very long period of time that we have kind of repeated year after year after year. We have always said that the objective of that policy is to change Iranian behavior. We acknowledge that it has not changed Iranian behavior on those areas that are most important to us.

Now, at the very least, it seems to me, that calls into question your policy and should makeus more willing to explore other possibilities. And I guess that's where my thinking is at the moment.

Now, I see some advantages to the policy we've had there. After all, our position in the Gulf is strong. And we have had followed the policy of containment, and Iran has been frustrated, I think, in many of its ambitions, or at least that's my impression. So you don't veer off of this policy easily, I understand that.

On the other hand, there might be some very modest things that could be done that might kind of break the logjam here, and that's what I've been thinking about. I've asked you to respond to that kind of thinking in a previous encounter that we had. I have not received a response from you. I look forward to that soon.

And let me just ask a final question, Mr. Chairman. I know my time is expired. I have heard that the EU governments have told us that they will not increase cooperation with us on Iran policy until the threat of sanctions under ILSA is removed. Is that correct?

MR. LARSEN: Mr. Hamilton, certainly in the discussions that I've been involved with regarding ILSA, that specific statement has not been made. Certainly the European countries on many occasions have made clear their strong unhappiness with the ILSA legislation. They've even introduced blocking legislation to make it more difficult for European firms and nationals to cooperate in the legislation. They have not said that -- at least in my presence, that they would not cooperate with us further on Iran until the legislation was repealed.

REP. HAMILTON: Well, I think most everybody would like to see your idea of raising thecosts on Iran work effectively. And it makes some sense. But it does seem to me that these sanctions that we can apply unilaterally aren't going to raise the cost to Iran all that much. It may raise it somewhat, but if you're really going to have an effective sanction policy against Iran, then we must have multilateral cooperation.

And it just seems to me that we're a very, very long way away from that. Every European leader that comes into this city that talks with me absolutely rejects our policy towards Iran. I've just seen no softening of that position at all on their part. And so I know you've got a tough job here working with them, don't have any doubt about that. There's a real difference.

MR. WELCH: I think, Mr. Hamilton, that we've not exhausted the possibilities to do more together, though they are quite resistant to the -- what they label as the extraterritorial reach of our policy.

I also think that even as they oppose what we -- what they say or perceive that we're doing, what they propose as an alternative I find not very precise, and where they have suggested engagement, I believe it simply hasn't worked. I think the historical record is quite good in that respect also.

REP. HAMILTON: I agree with you there. Their so-called critical dialogue hasn't shown any progress either, as far as I know. I don't know all the elements of it.

Well, okay. Thank you very much. Thank you, Mr. Chairman.

REP. GILMAN: Thank you, Mr. Hamilton. Mr. Berman.

REP. HOWARD BERMAN (D-CA): Thank you. Thank you, Mr. Chairman.

If I could just try to review for one moment the thrust of the testimony. It's my assumption from what you said that we can pretty safely say that no threshold investment in this sector of the Iranian economy has taken place since the passage of the sanctions legislation. Is that a fair conclusion?

MR. LARSEN: Yes, sir. I think what I said is that there's been -- to our best information and analysis, there's been no action since the passage of ILSA that involves sanctionable activity under ILSA. There has not been that type of an investment.

REP. BERMAN: And it's also, I assume it's equally true that the Iranians have sought seriously and forcefully to obtain investments in that sector. I've been told that by some of the recipients of their efforts.

MR. LARSEN: That's correct. The Iranians are seeking foreign participation in at least 11 oil and gas projects.

REP. BERMAN: And as I understand the purpose of this legislation, it was not so much to assume that in the short term, it would cause a change in Iranian policy, but rather to impede, make more difficult, raise additional obstacles to their efforts to pursue the more costly aspects of some of their very disruptive policies internally, externally, pursue those weapons of mass destruction, support for terrorism, et cetera, et cetera.

Is that a fair -- that the focus -- that no one, neither the president when he signed it nor the Congress when it passed assumed that this sanctions effort was an effort to produce a quick change in Iranian policy, but rather to increase the cost of pursuing the policies we don't like. Is that a reasonable conclusion? MR. WELCH: That's exactly correct. I would add that as in any of these efforts, while the success rate in deterring investment appears so far to have been good, deterring all investment was not the objective either. It was to make this pinch.

REP. BERMAN: Macro --

MR. WELCH: Exactly.REP. BERMAN: The major --

MR. WELCH: Iran's oil exports account for the lion's share of its export earnings. They need to expand those. They have a very rapidly growing population and tremendous economic needs. They can't do it without this investment. This investment is now obviously going to come to them at a much higher price.

REP. BERMAN: Assuming the Europeans are offended by the presumptuousness of our extraterritorial actions in this area, but given the fact that it has so far deterred the investments that were sanctioned activity, what's the difference whether the Europeans like what we're doing or don't like what we're doing if they're business entities, their state corporations, they're in the end, for all the crabbing and complaining, do not make the sanctions investments?

MR. WELCH: ILSA would deny certain U.S. benefits to foreign companies who elect nonetheless to pursue an investment in Iran's oil and gas sector of a certain magnitude. It's their choice. And so far, I think it has worked to deter some of these companies.

But the focus, really, of our effort isn't ILSA per se. It's what Iran does that we all find objectionable.

REP. BERMAN: Let me just quickly ask you two short questions before my time runs out. One, is there anything in our policy that would prohibit us from doing what Ambassador Murphy argues for, and that is using the IAEA to encourage a higher level and more effective inspections of Iranian nuclear facilities?

MR. WELCH: I've -- knowing Mr. Hamilton's interest and your own, Mr. Berman, in this particular analysis of the dual containment problem, I reread it last night. The only area I think, to answer your specific question, where I believe our unilateral latitude is circumscribed more than he accounts for in the article is in allowing certain U.S. business transactions with Iran. We have --

REP. BERMAN: In other words, every other thing he advocates are not inconsistent with the present administration policy of dual containment? MR. WELCH: Some are under way.

REP. BERMAN: And then the last question is, there are rumors that a high-level Italian delegation, Italian government and commercial delegation, have gone to Iran to try and put together an investment in the Iranian energy sector. Are you aware of these rumors? Do you have any knowledge of whether this is true or not? Are we doing anything about it?

MR. LARSEN: I'm not aware, Congressman, of any specific details on that. What we've found in implementing this act is that we often hear about rumors, and there certainly are discussions that are ongoing all the time, but we've seen absolutely nothing that would indicate substantial activity by Italian interests in Iran at this stage, or certainly not the types of activity that would call into question whether an ILSA sanction was called for under the act.

REP. GILMAN: Gentleman, the time is expired. Thank you, Mr. Berman.

Mr. Davis.

REP. DAVIS: Thank you, Mr. Chairman.

I'd like to focus further on your comments as to how you're gauging our success as far as discouraging Iraq from meeting -- Iran from engaging in the type of conduct that was proscribed by the legislation. You conceded to Mr. Hamilton that our principal success has been in increasing the price that Iran has to pay. And I wonder if you're seeing any secondary effects as far as having increased the price to pay in terms of creating stress on the country or the relationship between the elected and the electorate such that we're seeing, for example, some positive changes internally, for example, the recent election results?

MR. WELCH: I think it's a little harder to be precise in that area. It is notable, though, that this is the first Iranian election in which there's been such a surprising political outcome. Many of the people who voted in this election can't remember the revolution. You know, most of Iran's population is quite young. They're essentially making their political choice in an environment that is shaped by -- only by the experience with the clerical leadership that has come in after the revolution.

I think it's principally for their own domestic reasons. Foreign policy does not appear to have been a factor in this election. And those domestic reasons are important to them. They see the revolution as having constrained their opportunities of expression and their civil liberties. They see that the economic situation in Iran is worse today than it was in 1979 by a considerable amount, Mr. Congressman.

So I think to the degree the Iranian people are looking for change, they're also measuring what change has occurred and coming up with a pretty poor answer. And they delivered it, you know, in Iranian terms at the ballot box.

Now, I'm not suggesting that this election was sort of a watershed event in Iranian democracy in the sense that everybody who wanted to participate was allowed to participate. You had 238 potential candidates, and it suddenly got narrowed to 4, so the range of choice was somewhat circumscribed. But within that range of choice, they certainly delivered a very clear signal. And I think it's because things at home are not very good.

(Audio break.)

REP. DAVIS: -- further engaging our allies around the world in supporting our efforts to isolate Iran through the types of sanctions provided for in ILSA?

MR. WELCH: Well, first and foremost, this is a serious issue that requires serious and sustained American leadership. And as I sit here today, we are giving the leadership up to and including the president of the United States. This is a matter that is of substantial importance in our foreign policy. And I think our allies know and understand that.

The second thing is to point out the areas where we agree that there are problems that Iran presents to all of us, not so much as a U.S.-Iranian issue, but as an issue that deserves to be addressed by the world community. Those are terrorism and weapons of mass destruction in particular have a very compelling rationale.

I think we've done fairly well in broadening the international consensus on dealing with those issues. If you went back 10 years ago to ask where we were then, you would find really quite a different European relationship with Iran, where the controls on what they sold were much less restricted than they are today.

This agreement I feel can be broadened. There are challenges to that. I wouldn't say that they're insuperable ones. And because, as others have said, we have not totally succeeded in changing Iranian behavior, they continue to provide us fresh evidence that they are a problem, and that evidence is compelling to our friends.

REP. DAVIS: Thank you, Mr. Welch. Thank you, Mr. Chairman.

REP. GILMAN: Thank the gentleman. Mr. Ackerman.

REP. GARY ACKERMAN (D-NY): Mr. Chairman -- (off mike).

REP. GILMAN: Mr. Luther. Oh, I'm sorry. Just one moment. Mr. Berman.


REP. BERMAN: Thank you, Mr. Chairman. I'd just like to get on the record what the administration's understanding of our allies' -- the Europeans, the Japanese -- policy is with respect to exports of munitions list items to Iran at this particular time. Would you speak to that?

MR. WELCH: Yes, and then maybe if Al wants to add anything. We have a common policy that there should be no exports of military items to sensitive countries like Iran under the Wassenaar agreement.

REP. BERMAN: Of what kind of items?

MR. WELCH: Sensitive items to military end users.

And this is I believe something that all the partners in Vasenar agreed to. That isn't to say that there are not transfers of items taking place to these military end users. Where we find out about those, we investigate them, and as I mentioned in my prepared remarks, the cooperation we've had from the signatories in those cases has been good.

REP. BERMAN: The transfers then you're talking about are essentially transfers that violate the ones in our agreement and violate the countries' own internal laws and regulations. They're, in effect, illegal transfers that the governmental entities, at least officially, do not know about.

MR. WELCH: Yes, I would presume that is the case.

REP. BERMAN: That's the -- you're not talking about government- approved transfers?

MR. WELCH: No. These governments do not transfer military items to Iran.

REP. BERMAN: And when you say "sensitive," I assume you mean that means no military items and no dual-use items going to military end users.

MR. WELCH: Correct.

REP. BERMAN: Okay. (Off-mike.)

REP. GILMAN: (Off-mike.)

REP.: Thank you, Mr. Chairman.

The sanctions so far have worked well. You've told us that there has not been substantial foreign financing for a major energy project in Iran. But there is the effort of Germany's Westdeutschlandesbank to perhaps enter into a disguised scheme in order to provide $90 million to an Iranian firm to finance an oil project Iran, and this scheme seems to have acquired the support of the German government. The scheme involves the German bank making a loan to an Iranian finance company, which would then proceed to finance the oil project.


REP.: If this Ponzi scheme system of evading the sanctions goes forward, will the administration respond and treat it as a violation of the sanctions act?

MR. LARSEN: We've been following very closely the proposed transaction to which you have referred. We have seen reports that the German bank is proceeding with this loan, but we don't have the details at this stage, Congressman.

We've been sufficiently concerned about the report that we've raised it with the bank as well as with the German government. We've pointed out to both that we oppose any arrangement, such as the rehabilitation of this oil field, that would create revenues that Iran could use to support international terrorism or acquire weapons of mass destruction, and we're going to raise those points and to monitor this transaction very closely.

We don't have enough information at this stage to make a final determination about the sanctionability of the transaction.

REP: How is the administration responding to the close relationship between Iran and Syria, and would the administration consider asking Congress to expand the sanctions act to include Syria, given the fact that both Iran and Syria are cooperating so closely on terrorism, particularly through Hezbollah?

MR. WELCH: We find Iran's activities in the -- in Lebanon and with relationship to certain groups that operate either in Lebanon or Syrian-controlled Lebanon or have branches or offices in Damascus to be one of the clearest pieces of evidence of Iran's support for terrorism. This is a matter that we discuss regularly with the Syrians and others, including the government of Lebanon.

This is a very problematic policy on the part of the Iranians and has I think been problematic for the Syrians, too. At this point, we're not suggesting any expansion of the measures that we have in effect on either Syria or Iran as state sponsors of terrorism.

REP.: What will the administration do if Totale (ph), the French oil company, goes through with the deal to expand the natural gas field or develop the national gas field in South Pars (ph).

MR. LARSEN: We're following the Totale issue very, very closely, Congressman. We have made clear to Totale as well as to the French government at a very high level that we will take appropriate action under ILSA if we find that sanctionable activity has occurred. The information that we have at this stage suggests that this deal has not been finalized.

REP: Thank you. Just one more comment I'd like to make, and that is that the United States is spending billions of dollars to defend Europe, and our attitude toward the Europeans seems to be that we humbly accept whatever the Europeans do to help us and our security efforts elsewhere in the world. But if the Europeans feel that they can make money by undermining our security, they're free to do so without any effect on our security relationship with them in their own defense.

We're now on the verge of expanding NATO at a cost of billions of dollars to the U.S. taxpayer, some of that admitted, some of it not admitted. There may come a time when the Iranian government is the sponsor of some great terrorist act in the United States, and it may involve money that -- it will be based on weapons that they've developed with money that they've acquired from a European continent unwilling to join us in tough sanctions against Iran.

And maybe at that point, Americans and our State Department will begin to reflect on the fact that on that day, Prague will be safe, Warsaw will be safe, Budapest will be safe, and all of the Western European capitals will be extremely safe -- and there may be hundreds of thousands of American casualties due to some great terrorist act. And those deaths will be in part caused by the fact that the Europeans have undermined our national security at a time when we are expanding beyond any traditional -- anything we would have expected a few years ago our efforts for their security.

I realize time doesn't permit you to respond to those comments, but if you want to submit a response in writing, I'm sure that that would be made part of the record. Thank you, Mr. Chairman.

REP. GILMAN: The gentleman's time is expired. You may submit the response for us in writing. And to both panelists, there may be some questions that'll be submitted by our members, and I'll ask for a response in writing from you.

Ambassador Larsen, when will we get final information about the Wesdeutschelandesbank transaction?

MR. LARSEN: The nature of these transactions is that -- or of our information-gathering processes is that we use all information sources available to us. So it makes it difficult for me to say that at some date specific, we will know more than we do today.

REP. GILMAN: Well, can we set a deadline on getting that information?

MR. LARSEN: Well --

REP. GILMAN: How long have we been asking for that information?

MR. LARSEN: Oh, you mean from the --

REP. GILMAN: From the bank.

MR. LARSEN: Yeah, from the -- well, we will certainly continue to press both the German government and the German bank for information about this transaction. Those efforts are going on at every opportunity.

REP. GILMAN: And again, can we set a deadline for getting that information? Why I'm asking you that, last year, Mr. Menendez told me he sent a letter to the president, and I'm going to ask that Mr. Menendez' statement be made part of the record. He said he sent a request to the president along with 31 of his colleagues concerning a $23 billion natural gas deal with Turkey, that Turkey signed with Iran just after Iran-Libya Oil Sanctions Act was signed into law.

And according to Mr. Menendez' statement, "The response I received in October was ambiguous about the administration's intent.

It stated, 'We are actively collecting, assessing and verifying information on this arrangement and information on any other arrangements that come to our attention involving Iran's oil and gas sector to determine whether they cross the standard set into law.'"

And Mr. Menendez went on to say, "When my staff inquired into the status of the assessment last December, as Turkey was seeking bids for construction of the pipeline," again he was told that the arrangement was being assessed and that the United States is attempting to find an alternative energy source for Turkey to dissuade it from implementing the deal.

And he goes on to say, "Now I understand that construction on that pipeline began in March of this year and that the deal is moving ahead." And he's left to wonder if the administration ever finished its assessment or if it intends to wait until Iran has derived the entire $23 billion in revenue before it comes to a conclusion as to whether or not the deal was a violation of the law.

MR. LARSEN: Mr. Chairman, let me respond specifically to the points about Turkey. We have reviewed Turkey's latest gas import plans, and it's our view that they do not appear to constitute sanctionable activity under ILSA. Under the terms of a memorandum of understanding that was reached on May 14th of this year involving Turkey, Turkmenistan and Iran, Turkey is going to buy gas from Turkmenistan. Iran will permit this gas to transit its territory.

The Turkish government has assured us that Turkey will not purchase gas from Iran. We expect that Turkey is going to fulfill these assurances, and we're going to monitor developments of this transaction very carefully to make sure that no activity that would be sanctionable under ILSA takes place in the future.

REP. GILMAN: I want to ask, in pursuit of that question, will Iran be receiving any revenue from this transaction?

MR. LARSEN: The only revenue that Iran would receive from this transaction would be the transit fees for the gas to flow through a pipeline from Turkmenistan through Iran to Turkey.

REP. GILMAN: How much would that revenue be?


MR. LARSEN: My understanding, sir, is that that has not been settled on. It's going to be the subject of negotiations among the parties. It's clear that both Turkey and Turkmenistan would have a strong financial incentive in making sure that those transit fees are as small as possible and represent essentially a market price for the transit of this gas through its territory.

REP. GILMAN: Mr. Larsen, what is your estimate when -- will this pipeline ever be built? What is your assessment?

MR. LARSEN: I have no reason at this stage to doubt that it will be built.

REP. GILMAN: Do you have any idea when?

MR. LARSEN: I would want to supply a correction for the record if my recollection is wrong, but my recollection is that it could be built within two years.

REP. GILMAN: And if the pipeline's built, will there be sanctions imposed under ILSA against any Turkish entity firms involved in the gas pipeline?

MR. LARSEN: Well, again, the transaction as it's been worked out in this May 14th memorandum of understanding constitutes a transaction that would bring gas from Turkmenistan into Turkey. So long as that continues to be the case, it's our judgment that this transaction doesn't involve sanctionable activity under ILSA.

This does represent a change, an apparent change in the plans to which you referred when you were posing the question, because at an earlier stage, it was reported that there were plans from Turkey to buy -- for Turkey to buy gas from Iran. They have changed, it would appear, those plans. It may be that concerns about ILSA were a significant part of that concern. I know that this was raised by many administration officials with Turkish officials, including myself and others, over the last year. The Iranians may also have had doubts about Iran's ability to deliver the gas in any event.

REP. GILMAN: If this -- when this pipeline is completed, can Iran eventually sell gas to the European nations?

MR. LARSEN: Sir, I don't believe that this pipeline goes beyond Turkey, but again, I would want to correct that for the record if my understanding is wrong. The pipeline is essentially going from Turkey to the Iranian border, so that this Turkmeni gas can flow to Turkey, but by transit in Iran.

REP. GILMAN: If it were found to be a fact that they could sell to European nations through the pipeline, would that be a violation of the sanctions?


MR. LARSEN: Well, to my mind, the issue is whether the gas -- whether Iranian gas is going to Europe, or for that matter, whether it's going to Turkey. Our assurance from the Turkish government is that they are going to be buying gas from Turkmenistan, not from Iran, and that's a very important factor in our evaluation of this transaction.

REP. GILMAN: If it was a sale from Iran to Turkey through Turkmenistan, would that be sanctionable?

MR. LARSEN: Well, that's a different set of facts. We'd need to know the details of those facts to make that judgment.

REP. GILMAN: Well, let's assume the facts are that Iran is selling gas through Turkmenistan to Turkey. Would that be sanctionable?

MR. LARSEN: No. No. The point that I wanted to stress here is that as I interpret ILSA, sales per se, or purchases per se are not a sanctionable activity, and I think that's spelled out fairly straight -- in a fairly straightforward manner in the act.

At the same time, I think it is -- the specifics of the transaction, whether this is an investment as determined under the act, would be an important thing that would need to be evaluated. I do think that it is notable that over the course of the first year of the ILSA, that a transaction that was portrayed earlier as a transaction that could involve in the future significant import or purchase of Iranian gas by Turkey has become a transaction that involves a significant purchase by Turkey of gas from Turkmenistan, not from Iran.

REP. GILMAN: Does the -- one last question. Does the joint Libyan-Tunisian offshore oil project that was awarded in May require sanctions against the Saudi and Malaysian firms involved?

MR. LARSEN: Mr. Chairman, are you talking about the so-called November 7 Libya-Tunisia project?

REP. GILMAN: I'm sorry.

MR. LARSEN: I just wanted to -- let me -- my understanding of your question was that you're referring to a project that has been called the November 7 project, that straddles the offshore boundary between Libya and Tunisia. If that's correct, I would explain that these two countries formed a joint venture corporation to exploit these potential reserves. A contract for the development of a field reportedly was awarded to Namir (ph) Petroleum of Saudi Arabia and to Petronas (ph).

We are making inquiries into this matter. We have not made a determination as to whether a sanctionable activity has occurred. The information that has been provided to us at this stage suggests that the value of the investment is $30 million over five years. REP. GILMAN: And you're still looking at that?

MR. LARSEN: We're looking into it actively, sir.

REP. GILMAN: How long will it take you to make a decision on that?

MR. LARSEN: Well, it depends on how long it takes to verify the information. We need to rely on information that we regard as credible.

Among the things that we need to look at are the value of the investment. I don't want to be in a position of relying on a press report that says that the value of the investment is only $30 million because that has implications for ILSA. I want to be sure that the value of the investment was not actually $50 million, for example, because that would be part of an assessment of whether it's sanctionable.

REP. GILMAN: Ambassador Larsen, have there been any sanctions imposed under ILSA against any country or any investment firm?

MR. LARSEN: No, we have not imposed sanctions during the first year, and I think that my assessment of what has happened is that firms have taken seriously ILSA, and they've tried during this first year to conduct their affairs in such a way that does not bring them into conflict with the law. That's not a guarantee that this will continue to be the case, but I think it has been the case during the first year.

REP. GILMAN: My time has run. Mr. Berman. Gentlemen --

REP. BERMAN: Mr. Chairman, I'd like to submit some questions for the record.

REP. GILMAN: They will be submitted, without objection.

Our next panel -- and I want to thank our panelists for being with us this morning and for being candid. And we will submit some written questions.

Our first witness on panel two will be Dr. Patrick Clawson. Dr. Clawson is a Senior Research Professor at the Institute for National Strategic Studies for the National Defense University. He is the author of over 30 scholarly articles as well as Senior Editor of the Middle East Quarterly. We are pleased to have you with us today, Dr. Clawson.

And our additional panelist is Ayatollah Dr. Mehdi Haeri Khorshidi. Dr. Haeri teaches Middle East and Islamic studies in Bochum and Cologne Universities in Germany as well as practices law representing Iranian and other foreign refugees. In 1996, Dr. Haeri founded the Council for the Defense of the tenets of the Shi'a religion. He presently coordinates his activities with the Iranian National Conference.

We also have Ms. Sara Miller, Editor of Petroleum Intelligence Weekly and Mr. Jeffrey Schott, Senior Fellow, Institute for International Economics.

Dr. Clawson, you may proceed. You may put in your full statement in the record and summarize it however you may deem appropriate. Dr. Clawson.



Senior Research Professor,
Institute for National Strategic Studies


DR. PATRICK CLAWSON: Thank you very much, Mr. Chairman. Thank you very much for inviting me here today. I'd like to submit my full statement for the record and just summarize it and make a few additional remarks.

When ILSA was being considered by Congress a year ago, critics claimed that the act would hurt US/European relations and would not affect Iran. The critics have been wrong on both points. In fact, US and European attitudes about Iran have come closer. And Iran has had significant problems attracting investment for its oil and gas industry. On the first point about European policy towards Iran, in the year since ILSA was enacted, European attitudes towards Iran have shifted substantially. In 1996 European governments and European opinion was openly dismissive about -- excuse me -- openly dismissive of US complaints about Iran. Those complaints were regarded as motivated by domestic US politics rather than by real concerns about security. Over the last year European toleration for Iranian misbehavior has significantly diminished. For instance, in March of this year, the Norwegian State Secretary for Foreign Affairs announced that the government of Norway calls for international economic sanctions against Iran over the Rushdie affair.

Mention has already been made earlier this morning about the German court decision in April of this year which found that Iranian officials at the highest level had been responsibility for four murders in Germany in 1992. Since that case there has been a variety of European reactions which reinforces the anger over Iranian sponsorships of killings in Europe. Let me mention, for instance, that the majority of the members of the Italian Chamber of Deputies has petitioned the Italian government to take a stronger stance against Iran including reopening the murder case against an Iranian diplomat who killed an Iranian opposition figure in Rome in 1993.

Also there has been considerable interest in Europe about the fate of an Iranian editor by the name of Faraj Sar Koohee (ph) who has been under arrest in Iran recently. And the editors of the two prominent Paris newspapers have appealed for his release last month, and so did 50 prominent British writers.

I think it's fair to say that European opinion now regards Iran as a problematic country and that Europe understands better the reasons for tough US policy. However, it is true that European governments still profoundly disagree with the United States about how to induce Iran to change course. They continue to argue that the best course is to support Iranian moderates rather than to apply pressure. There is little prospect that Europe will adopt economic measures against Iran soon. However, I think it's fair to say that since ILSA's passed, we have made significant progress. We have seen significant progress in the evolving European attitudes about Iran.

But what has been ILSA's affect on the Iranian economy? We have heard this morning about Iran's inability to carry on its major investment programs that it was so hoping to attract foreign investment for. Let me just highlight for you the importance that these investment programs have for Iran. The gentleman who was recently elected as President Iran, Mohammed Khatami, predicted that Iran would become a net importer of oil within 15 years if current conditions persist and emphasized how important it is for Iran to attract foreign investments which will allow Iran to expand its output and renovate its oil fields. I think that the Iranian leaders are well aware of how much this investment is necessary for them.

Mention has been made of the South Pars Field project. That gas field, which has in it actually some oil as well as gas, is by far and away the single most single important project being considered by Iran today. The French firm Totale, which is actively negotiating for South Pars clearly feel that it does not have to particularly worry about the threat of US sanctions. Indeed Totale's Managing Director in an interview that he gave to a French newspaper in May was quite dismissive of the threat of sanctions because he said that he thought that US policy on Iran might change.

If the South Pars project were to proceed, that would be a considerable blow to our efforts to deter investments in Iran. And I hope that we can find some way to kill the South Pars development. We may be able to do that without having to have an open confrontation with France or the French government. These big projects are so complex that they can be easily stopped despite highly publicized agreements. Iran has already signed one deal to develop South Pars which was announced in 1992. But that deal fell apart by 1994. Perhaps the best course of action regarding South Pars may be to allow Iran and Totale to claim that they have reached a deal but then to watch the deal slowly fall apart and not to sanction Totale until such time as the deal actually gets implemented, which I hope will be never.

To be honest I think that the question of South Pars is much more important than the question of the Westdeutcheslandebank deal which has been made mention of earlier. To be sure, Westdeutcheslandebank thinks it's found a loophole in the law. And if others try to exploit similar loopholes then it may be necessary to revisit the question of how investment is defined. But the South Pars deal is of such a size and such importance that if it proceeds I think we will receive a serious setback to our effort to reduce investment in Iran's oil and gas. If I may make a final comment, despite the successes that we have had with regard to ILSA this last year, the sad fact is that the United States is losing the propaganda war with regards to Iran. There's a widespread perception in the Middle East, in Europe and here in the United States that Washington's attitude is the barrier to dialogue; whereas in fact it is Tehran which flatly refuses talks, while Washington repeatedly and at all levels states its readiness for official discussions. US sanctions towards Iran are seen by many as ineffective, if not counterproductive; while in reality, Iran has not been able to attract foreign investments or loans for a single one of its priority oil and gas projects. US policy towards Iran is seen as creating friction if not a crisis with European allies, when in fact European elite and government attitudes towards Iran have become much closer to the US view due to continued unacceptable Iranian actions.

Partly because of its success in the propaganda war, Iran does not yet see its foreign policy as unsustainable. The US has not to date convinced Iran that the US has the will to persevere, to outlast the Islamic republic's -- (inaudible) -- behavior. Nor has the US demonstrated to Iran that America and it's allies will stand together. Tehran expects that despite US opposition, it can acquire the finance and technology it wants. Until these circumstances change the Islamic Republic is not likely to change its unacceptable foreign policy behavior. Thank you very much, Mr. Chairman.

REP. GILMAN: Thank you, Dr. Clawson. We appreciate your comments. We will proceed with the additional panelists. And then we will address the questions.

We'll now proceed with Dr. Mehdi Haeri Khorshidi, who I noted teaches Middle Eastern Islamic Studies at the Universities of Bochum and Cologne in Germany as well as practicing law representing Iranian and other foreign refugees and founded the Council for the Defense of the Tenets of the (Shi'a ?) religion. He is presently coordinating his activities with the Iranian National Conference. Dr. Haeri, you may proceed. And I know you have a translator, interpreter, with you. Please proceed.

AMIR H. LADAN (ph): Thank you very much.

REP. GILMAN: Could you put the microphone a little closer to you. Thank you very much.

MR. LADAN: Mr. Chairman, before I start translation, with your permission and for the record, I'd like to state that I'm here on behalf of the Iranian National Conference, INC Ayatollah Haeri and I are members of the Coordinating Committee of INC. I am here as an advisor and a translator for Dr. Haeri.

REP. GILMAN: Yes. And would you identify yourself.

MR. LADAN: My name is Amir H. Ladan.

REP. GILMAN: Thank you. And would you proceed to translate.



Coordinating Committee Member,
Iranian National Conference


DR. MEHDI HAERI KHORSHIDI (All testimony is through an interpreter.): Mr. Chairman, distinguished members of Congress, I want to thank you for inviting me to testify before this very important hearing. I can assure you the work you are doing and what is said here today is being watched very carefully and with great interest both in my country and the Iranian Di Fora (ph). I speak here today on behalf of all Iranian people who yearn for freedom. It is not without considerable personal risk that I have come here today, for we all are only too well aware of Tehran regime's sanctions for assassinating its opponents and critics. But the work you and we are doing is of greater importance than one man. And we must not be stopped by threats and intimidation.

I appear here before you an Iranian, the son of a deeply religious family who has spent most of his life in religious studies in the Holy cities of Qom and Najar (ph) where I was a disciple of Ayatollah Khomeini and a classmate of President-elect Khatami. I willingly relinquished my high position in the court of Ayatollah Khomeini, who we thought would become a new Ghandi but turned out to be a Nero, gone to prison because I dared to write a book about the absolute necessity to separate religion from the state if the Iranians wish to protect and preserve the dignity of Islam. The true teaching of Holy Koran, the integrity of our homeland, and our ancient. I spent four years in prison before I managed to escape to Germany where mercifully I was given sanctuary.

I consider it an act of God to have been given this unique opportunity to come here to this haven of freedom and democracy in order to tell you, speaking as I am, in the name of many millions of silent, oppressed, humiliated Iranians who are looking to you, to American people, for encouragement and hope; to tell you thank you, thank you very much for your Iran Libya Sanction Act, the only effective response so far to the evil regime now dominates our lives in Iran.

I know my time is limited, and I wish to be very brief. Let me state here and now that your acts of containment have succeeded beyond any expectations. I am not the only one who claims this. Let me give you two pointed examples from official Iranian sources. The present Minister of Oil, Mr. Bolam Reza Arozade (ph), was quoted in Tehran radio, conceded this when he said that Iran expected an investment of $7 billion for ten major oil projects but since the Iran Libya Sanction Act on August of '95, absolutely nothing has materialized. And more, Mr. Mussin Yakeabee (ph), Deputy Chairman of Iranian Parliamentary Subcommittee on Oil on January 28 was quoted in the English language newspaper Iran News similarly conceding the dismal failure of Iran's investment policy in the oil industry as a result of your legislation. His exact words were: Despite widespread arrangements by the Ministry, foreign contractors are not much interested in engaging in petroleum projects in Iran. There are many other similar admissions of their failure and your success. What more does one need to be convinced of the value of this law?


The 20 million voters who represent 69 1/2 percent of the Iranian electorate did not vote for Mr. Khatami but against Ayatollah Khomeini, the so-called Divine Guide who, according to the present Constitution, still wields absolute authority in Iran and will continue to do so until the people of Iran will tell him: No more. No more spending billions of dollars to obtain weapons of mass destruction. No more use of state terror. No more torture and assassination of dissidents. No more spending enormous fund to propagate terrorists' movement all over the globe. No more subverting the regime the Algeria, Egypt, Saudi Arabia and the Persian Gulf States. And no more financial military support for Hezbollah in Lebanon and Palestinian extremists of Jahad and Hamas who are at the behest of the present rulers of Tehran do their utmost to subvert the peace process in the Middle East. The vast majority of the people in Iran do not want these dangerous politics. They do not subscribe to them and abhor those who have advised them and tried to spread the madness.

While the rulers in Iran today may believe that what they are preaching and practicing is an obligation ordained by God, I am here to tell you that by pursuing those policies of hatred and destruction which they believe in, they are sinning before God. They are committing sacrilege. They are defaming Islam and causing millions of people to turn away from it. From my intimate personal knowledge of the present rulers in Iran, I can assure you that these are certainly not people one can hope to conduct a rational dialogue with. Just look at what happened to Germany and how badly that country has been humiliated by Iran notwithstanding it's critical dialogue with the government of Tehran. What we seek is to do away with this madness. And return to our deserted mosques, pray, and let the people of Iran freely elect their representatives and leaders in a truly democratic way so that they may lead Iran out of darkness, out of the Middle Ages, and back into the family of nations.

Mr. Chairman, I am submitting with this testimony a brief article I have prepared including in the hearing record. The article is special records of the -- I'm sorry -- Special Records on the Struggle and Suffering of Religious Leaders and Groups Who Believe in the Separation of Church and State.

REP. GILMAN: We will accept it as part of the record.

DR. HAERI: Thank you, Mr. Chairman.

You, Mr. Chairman and members of this distinguished committee and this honorable House can help us achieve freedom and democracy by continuing to stick to your sanction guns which have already achieved so much and will achieve so much more if you continue this sanction. Do not be impressed by the guile and duplicity of the present rulers. They are destined to fail. There is no way they can succeed in their quest to rule the Persian Gulf, to strangle the lifeline of the free flow of crude oil to the Strait of Hormuz, impose their pernicious and warped policy on their neighbors, and threaten the whole region with terror, nonconventional weapons, and sheer brute force. Yesterday, Rafsanjani called on all Islamic countries to deprive the US from oil if Americans are deprived for six months it will become hard for them to maintain security. Fifty Moslem nations are situated at the world's most strategic position and deserve to become world dominant powers. This took place yesterday, Mr. Chairman.

REP. GILMAN: Where was that statement issued?

DR. HAERI: It was in the Tehran Times, Mr. Chairman by Rafsanjani? Trance, trance yes. It was stated by President Rafsanjani.

REP. GILMAN: Thank you very much.

MR. LADAN: I am missing one section here, I'm sorry.

DR. HAERI: Mark my words distinguished friends, more sanctions and more pressures are the proven recipe for more encouragement to the Iranian people to rise up. And in their long, cruel nightmare of pain and oppression Iranians will not forget that even at the time when the prospect of change in Iran looked bleak and remote, the United States stood firm in its principles, a beacon of freedom and inspiration.

And to those of your businessmen who feel that they have lost business opportunities in Iran as a result of your sanctions, I have only this to say: Do not forget that this is the same regime that after it came to power immediately closed down your businesses, closed your offices and nationalized your assets. Today, as the sanction are so obviously successful, the Iranian leaders are trying to create division between America business and American government. Do not let them get away with this. Do not act penny wise and pound foolish. Be assured that once freedom and democracy will prevail in Iran, we will remember very well who helped us bring this about. And we will remember you not only with our deep gratitude and love but also with open arms and great new business opportunities.

Mr. Chairman, may God give you and this Congress and this nation the wisdom strength and compassion required to support and lead us into a better, brighter future. In this period in human history when the people of the world are moving towards freedom and democracy, let us remember the word of our holy profit whose birthday is today, it is a Moslem's duty to always advance with his (time ?). Thank you, Mr. Chairman.

REP. GILMAN: And thank you, Dr. Haeri. And thank you for the good translation. It's a pleasure having you with us.

Our next witness is Ms. Sara Miller, Editor in Chief of Petroleum Intelligence Weekly. Since 1976 Ms. Miller has held various journalistic posts with McGraw Hill Publications working her way from Energy correspondent for Business Week to Editor in Chief of Petroleum Intelligence Weekly. She has covered OPEC and the world oil market's extensively. Ms. Miller, you may put in your full statement for the record and summarize it or whatever you see fit. Ms. Miller, please proceed.

MS. SARA MILLER: Thank you. I have submitted the full text.

REP. GILMAN: Would you put the mike a little closer to you please. Thank you.



Editor and Chief, Petroleum Intelligence Weekly


MS. MILLER: Yes. And I'll be brief here in summing up the remarks and would wish to thank you for the opportunity to speak and submit those remarks and to note very briefly that although this sanctions issue is evidently an emotive one, I am speaking here as a journalist and editor primarily without meaning to advocate any particular position.

That said, I would like to start with one general comment on the context in which this legislation arose. It relates to the fact that the law narrowly pinpoints investment in oil as grounds for imposing sanctions against companies based outside the United States. It seem ironic that the US should adopt a policy that is aimed at restricting access to oil and gas in a part of the world in which the issue of paramount national importance to us is unimpeded access to those same resources. To many, such brandishing of the oil weapon, used so effectively against us in 1973, appears short-sighted.

I will now move on to the specifics of the effects of ILSA. It's clear that Tehran's effort to bring outside investment back into Iran's petroleum industry has been hampered by ILSA and the preceding 1995 ban on US investment. And I think enough has already been said about that today that I won't go into detail other than perhaps to note that of the 11 projects that have not, in effect, been signed up for, only three are for oil or gas field development. The others are for infrastructure deals that hold little appeal for big oil firms in any case.

And the final point I would make on the 11 deals is that the separate theory development taken up by Totale is the one existing project going on with the foreign company in the country and that that looks to be grandfathered under ILSA. That said, Malaysian State Oil Petranos last year took 30 percent in that theory project alongside Totale. And the status of Petranos investment under ILSA is still somewhat murky as I understand it.

While impressive in many ways, this litany of thwarted achievement about which you've heard so much today does not tell the full story. Several other factors need to be understood to fully appreciate why so little international investment has gone into Iran's oil and gas industry to date and why it could become harder for the US to keep a lid on in the future. One is the unattractive nature of the investment terms offered by Tehran. Iran set out to attract foreign firms back into its oil patch in 1991. The aborted CONOCO deal in 1995 would have been the first fruit of those efforts. For the four intervening years no laws blocked even US firms from taking up Iran's offer, much less any others. Tehran's terms were simply not competitive in the global marketplace for investment capital. So it could be argued that the lack of foreign investment does not reflect the power of Washington so much as it reflects the failure of Tehran to offer attractive conditions for investment. If Iran made the terms sufficiently appealing, there might be little Washington could do to stop the stampede of foreign companies into Iran.

A second factor likely to influence the ease and effectiveness of US sanctions over time is the prospect that all developments will increasingly take a back seat to much larger natural gas deals since Iran ranks second only behind Russia in the size of its gas reserves. Totale's South Pars contract would be the first step down this road. Waiting in the wings is the $20 billion project agreed to last year by Tehran with Turkey and subsequently expanded to include Turkmenistan about which you already heard. Next on Tehran's list of chosen gas customers is Pakistan and beyond that India. The government of these rival states have been separately discussing gas purchases from Iran and elsewhere for years.

So far their mutual antagonism has blocked any joint project. However there are indications that that may be changing. Senior Pakistani officials have talked in recent weeks of a willingness to see a pipeline from Iran and possibly Turkmenistan extend on into India. Although New Delhi has yet to receive any firm proposal along these lines, Indian officials say they would welcome such an initiative which raises a third factor that may complicate the Iranian sanctions equation over time.

That is the likelihood that SIEastern (ph) oil and gas companies will play a growing role in Iran. Many of these are state owned and most are less amenable to US pressure than their European and Canadian counterparts. Besides its stake in Totale's -- (inaudible) -- Malaysian Petranos is in a consortium designing a next stage in South Pars development beyond that already negotiated by total. It is likely that this would be the gas targeted at Pakistan and India.

China National Petroleum Corporation or CNPC has here, among other places, been mentioned as a possible substitute for Pelfishman (ph) and Belgali (ph) in Iran's Belal Field. CNPC's recent expensive forays as far afield as Kazakhstan, Venezuela, and Sudan suggest that it's ambitions in Iran might well extend beyond Belal.

A final element that can only become more important over time is the role played by US sanctions in leaving the oil- and gas-rich former Soviet states of the Caspian dependent on Russia. However as numerous analysts have stressed recently that Iran provides the natural alternative to Russia as a path to open waters for the enormous oil reserve trapped in Kazakhstan and Azerbaijan. I will cut short at that point and submit a more extensive version of that, as well as my comments on Libya, for the record. Thank you.


REP. GILMAN: Thank you, Ms. Miller. Our next witness is Jeffrey Schott. Mr. Schott is a Senior Fellow at the Institute for International Economics in Washington. And during his tenure at the institute, Mr. Schott has been a visiting lecturer at Princeton and an adjunct professor of International Business Diplomacy at Georgetown University. Previously, Mr. Schott was a Senior Associate of the Carnegie Endowment for International Peace and an official of the US Treasury Department. Mr. Schott, we welcome you to the committee. We look forward to your testimony. You may submit your full statement for the record and summarize if you see fit.

MR. JEFFREY SCHOTT: Thank you very much, Mr. Chairman. I welcome the opportunity to come before the committee today.

And my comments draw on my 20 years of experience both within the government and without in issues relating to the use of economic sanctions. I have been a sanctioner myself and know the problems and the opportunities that can be taken advantage of through the use of these measures.

I will briefly summarize the written statement that I have prepared. I will submit the statement in its entirety for the report.

REP. GILMAN: Without objection.



Senior Fellow,
Institute for International Economics


MR. SCHOTT: Thank you very much, sir.

Let me start by saying that the policy objectives of the ILSA are laudable. And what is at issue is the whole package of initiatives that the United States can pursue to try to achieve those laudable policy goals. What I believe is that the tactics in the bill, in the law, could be improved. And as a result, we are finding problems in achieving rapid results in their achievement. US trade and investment relations with Iran have been essentially cut off for the past two years. The sanctions have been costly to both Iran and to the United States. And yet, when you look at the results to date, they are quite, quite modest.

There has been some delay in new investment in Iranian oil and gas fields and a modest cost imposed on the Iranian economy. There have been costs imposed on US firms and workers as well that would normally compete for sales to and investments in Iran. We have seen an intensification of US/European tensions that has hampered cooperative efforts in support of US policy objectives. And that was drawn out very clearly in questions that you and Mr. Hamilton and others on the committee raised with the witnesses from the State Department this morning. And finally, very little significant change to date in Iranian policy. Let me just briefly note a few points on each of these modest effects of the sanction to date.

Contract for the development of Iranian oil and gas properties have been delayed. US sanctions deserve some credit. Much of Iran's problems in attracting new investments derive from self-inflicted wounds. And Ms. Miller, I think, made that point very clearly just a moment ago. Will these delays significantly affect Iran's production capabilities over time? In effect, can these sanctions be sustained over the long term? The evidence so far is probably not. Foreign investments would have to be cut back for quite some time plus oil revenues would need to be curtailed if the US sanctions were to have a noticeable impact on Iranian production capabilities. And given the tension in US/European relations, I am skeptical that either of these developments is likely to happen.

Therefore, if you look at both the supply side and the demand side, if we cut back on -- if we are successful in cutting back on Iranian production, it will have an impact on the price and could over time drive up world oil prices and hence cushion the revenue impact on the target country. Indeed the costs of sanctions to Iran that have resulted already have been more than offset by the higher prices Iran has received for its oil exports in the past two years. So one must be very cautious. Simply imposed costs on the target country may satisfy a thirst for retribution, but it does not necessarily promote the achievement of the US foreign policy objectives.

Now I noted that there is a cost to US firms. This is often underestimated in the calculation of the sanctions policy. And yet it is important if the political process in the United States is to sustain that policy over a period of time. The more sanctions cost US firms an workers, the hardest it is going to be to maintain political consensus at home for the maintenance of those policies. We have done some studies at the Institute for International Economics that has shown the cost of unilateral sanctions imposed by the United States in 1995, 26 separate incidents, which result in a reduction in US exports in the order of 15 (billion dollars) to $19 billion dollars and also commensurate reductions in employment and export industries and the reduction in export wage premiums available to US workers. Those numbers are more fully covered in my testimony.

I think one of the concerns that has been raised most clearly in this hearing is the fact that the ILSA act has intensified US/European tensions. As Mr. Welch admitted earlier this morning, the threat of secondary sanctions against firms that participate in new Iranian oil field development has not encouraged our European allies to cooperate more closely with us in our policy on Iran.

If anything, the legislation has exacerbated frictions regarding the extraterritorial reach of US law and even provoked a European challenge to US law under the World Trade Organization. This is related to the European actions against the Helms-Burton Act regarding sanctions against Cuba. And indeed the vehemence of the European reaction to the Helms-Burton Act reflected in large measure their interest in preempting secondary embargoes that could be applied in the Iran and Libya context, where unlike Cuba the Europeans have substantial economic and political interests. And I'd be happy to discuss in more detail the viability of the European case if the committee is interested.

So as a last point: Have sanctions been successful in meeting the US foreign policy objectives? To date, the answer has to be there is very little evidence to support a view that there has been notable success. In light of the experience of the last two years, the recommendations that I would give the committee is that the United States should look at its use of sanctions and review it because sanctions need to be used with care. They are blunt policy instruments that are easily circumvented. Contrary to poplar belief, there is no such thing as smart sanctions that maximize benefits with minimal costs. And I think the smart sanctioner will realize these limitations and tailor measures to better match these costs of these policies with their anticipated results.

I agree with Mr. Hamilton in the remarks he made earlier. We need multilateral cooperation with our policies if our policy objectives are going to be achieved. And I believe that the ILSA is an obstacle to that result. Thank you very much, Mr. Chairman.

REP. GILMAN: Thank you very much, Mr. Schott.

I'll be asking some questions, but I'll first turn to Mr. Fox.

MR. JON D. FOX (R-PA): Thank you, Mr. Chairman. And thank you to the panel for their enlightening testimony. I would ask these questions: How should the United States respond to the election of Mohammed Khatami? Should any US sanctions on Iran be relaxed as part of an opening to Iran? And what concrete steps must Iran take that would indicate meaningful change on issues of most concern? Anyone on the panel.

MR. CLAWSON: Sir, Mr. Ayatollah Khomeini's report certainly suggests that so far his interest has been in domestic policy issues not in foreign policy issues. I think it would therefore be surprising if he were to take an initiative in the foreign policies sphere which could be highly controversial for him at home. That said, the United States may be interested in exploring with him, with his government, whether they are interested in making changes in policy. And I think, however, it would be inappropriate for the United States to assume that Iran will make those changes and therefore to change US policy unilaterally before Iran has taken some steps. I think that it is much more likely that what the United States will do is explore -- to state its willingness to explore with Iran whether or not some quid pro quos can be reached.

However the greatest barrier to this remains that the Iranian government has said it's not interested in dialogue with the United States. And to long as that policy remains in place, the prospects are poor that we will be able to have an opportunity to explore this matter further.

REP. FOX: Could you answer this question, anyone on the panel? Why have Qatar, Jordan, and other Arab allies of the United States called for a change in US policy towards Iran? Could improved relations with Iran benefit the Arab/Israeli peace process? And do Arab states in the Middle East feel vulnerable to an Iranian backlash against US policy toward Iran? MR. SCHOTT: Let me try to answer your question, Mr. Fox, about the same way I would have answered your previous question. I think there is a great concern that the United States and the European Union don't display a common front in confronting and objecting to the outrages in the Iranian society that Dr. Haeri has so poignantly mentioned. The fact that there is this tension makes neighboring states vulnerable of being caught in the crossfire or risk not being able to fully rely on the effective response of either the United States or Europe if they are working possibly at cross purposes. And I think causes their uneasiness.

REP. FOX: Thank you very much. Thank you Mr. Chairman. I appreciate the time you have given me to ask questions. And I'll turn back the balance.

REP. GILMAN: Thank you Mr. Fox.

Mr. Sherman.

REP. BRAD SHERMAN (D-CA): Thank you Mr. Chairman. I wonder if the latter two panelists could address the next couple of questions, the first of which is: Does the developments of energy resources in Iran require capital from abroad or expertise from abroad? Which of those two elements, or is it both, is Iran seeking from Europe and other countries?

MS. MILLER: I would say that it's seeking some combination with a probable emphasis at this time on the capital in the sense that where expertise might be of most value at a technical level would be in older fields, I'm sure, where they have not indicated any willingness to have foreign involvement in any case. The foreign involvement has been limited to projects off shore, presumably for reasons of not wanting a lot of foreigners in the country as well as the fact that those oil fields have been run for so long by the state companies. So in that sense I would say at this time the emphasis would be more on the capital, but it's a combination.

REP. SHERMAN: What would motivate foreign countries to invest in Iran where they take a very high political risk that the Doctor pointed out to us that American businesses faced nationalization a couple decades ago? Are European investors eligible for political insurance from their own governments? Or do they just see the rates of return being so high that they are willing to take the political risk, I mean the risk of expropriation or political violence?

MS. MILLER: Oh, you mean of political risk from the Iranian government as opposed to political risk from the United States government.

REP. SHERMAN: Neither. I'm simply thinking a European company making an investment in Iran could lose it all not as a result of business calamities but as a result of political calamities. Their investment could be expropriated or could be destroyed through violence. Given those risks, are they able to get insurance against those risks from some European analog of OPEC? Or is the rate of return so high that they are willing to endure those risks? MS. MILLER: Of course neither has been the case so far since with the one project exception with Totale they haven't done so. I would say that it's seldom discussed in those terms in the sense that I would say that by far the perception within the industry is that the highest -- the political risk attaching to a project in Iran would be largely from the United States -- which is why I asked that question -- that you are at risk from sanctions, other retribution. That relative to the instability of governments in a lot of places where the oil industry investments that Iran would be considered a relatively safe bet.

REP. SHERMAN: That says something about the countries in which oil companies invest.

MS. MILLER: Indeed. (Laughing.)

REP. SHERMAN: I would like to ask the Doctor whether he believes that a change in governments in Tehran could occur peacefully or whether only moderate changes can occur without either civil disruption or outright violence.

DR. HAERI: The present regime only understands force and sanctions and pressure and only responds accordingly. And containment is one of the workable solutions.

REP. SHERMAN: Thank you, Mr. Chairman.

REP. GILMAN: The gentleman's time has expired. Thank you, Mr. Sherman.

Dr. Haeri, you're affiliated with the Iranian National Conference. Can you provide us with an outline of where do the Conference's beliefs go and something about its membership. Could you be brief and give us a sketch of that?

DR. HAERI: The Iranian National Conference, INC, is a all- inclusive organization which has from monarchies to those in favor of a republic, socialists, and people with a variety of ideologies. And this is the first time -- the Iranian National Conference was formed 2 1/2 years ago. And it was the first time that such an umbrella group was created. And the hope is to create democracy and a parliamentary government in Iran.

REP. GILMAN: Thank you. Dr. Haeri, you were a disciple of Ayatollah Khomeini. And I note you are also a classmate of President- elect Khatami and that you relinquished your position in the high court of Ayatollah Khomeini because of your objection to -- that he turned out to be not a new Ghandi but turned out to be a Nero as you said in your testimony. Can you tell us what can we expect of the new President, Mr. Khatami? Will he be either willing or able to change the situation inside Iran for the better?


DR. HAERI: Khatami as a president has no power to implement change. The structure and the new Constitution, which Ayatollah Haeri has brought a copy of, gives all power to Ayatollah Khomeini who is the supreme guide, the supreme leader. President Khatami does not even have a military advisor which means he is not party to any intelligence. He cannot make any changes. He may have some good intentions, but he has no power to implement change.

REP. GILMAN: And what's the relationship between the military and Ayatollah Khomeini? Is there a good relationship between the two?

DR. HAERI: First, I need to add something he has said earlier which I omitted. And that was: If there was any change to be made it would have been done when Rabtin Jeni (ph) was elected because he was the only one who could stand up to Khomeini.

But now in regards to this relation with the military, the relation is very, very poor simply because Khomeini has sent nonmilitary people, people from the Revolutionary Guard and others. For example, one of Khomeini's friends who is a nonmilitary -- he is a veterinarian. Khomeini overnight has made him a two star general with seniority. So all other generals have to, of course, salute him and respect him and listen to what he says. And putting revolutionary guards into different branches of military has created a lot of dissatisfaction.

REP. GILMAN: Do you believe our nation can forge a new relationship with the Islamic Republic under its present regime?

DR. HAERI: The answer he said is: No, simply because the regime for 18 years has told its supports that the United States is a satanic regime and that we cannot have any dealing with. Even if they decide to make any changes, those people would not allow it. But the present regime, its present makeup, and the orthodox leadership -- because there is a center around Khomeini of 15 people that they control the government -- they would not allow it.

REP. GILMAN: Thank you for your analysis.

To all of our panelists, in your view how should our nation respond if it's conclusively determined that Iran was substantially involved in the June '96 bombing of the Khobar Towers complex? Dr. Clawson.

DR. CLAWSON: If it's conclusively demonstrated that Iran was involved in the Khobar Towers bombing, then I think that the United States government is going to have to take some firm responses. And that probably is going to involve the use of military force by the United States. I say this because the US government has stated rather firmly that it would respond in this circumstance. And failure to do so could create the impression on the part of rogues around the world that the United States does not stand up for its interests, does not follow through on what it has said it would do, and does not reaction whether its soldiers are killed. In theory we could take nonmilitary measures in consultation with our allies, for instance proposing multilateral sanctions of the sort that were adopted against Libya after the indictments of Libyan nationals for their terrorist bombing of French and American planes.

However, I would be skeptical that we could achieve agreement at the United Nations on such sanctions. And I think that we might exacerbate the relationships we have with the other members of the Security Council if we were to propose this there. Also it could make it look like we would respond to threats against the United States only if we got the approval of Security Council members.

And I think it's important to establish the principle that when our vital interests are at stake we are prepared to respond unilaterally if need be.

REP. GILMAN: Ms. Miller, Mr. Schott, do you agree with that analysis.

MR. SCHOTT: Not really. Having looked at the military possibilities, they are both very temporary and not very effective. Even if it's a bombing mission, it would have only transitory impact on the Iranian economy and perhaps a perverse impact on the political situation, causing a rally around the flag response or being used by the regime to further enrage the population against us. But it could be used very effectively in reopening the discussion with the European Union on how we can jointly react to Iran.

Perhaps, Mr. Chairman, you will recall back in 1995 hearings before a subcommittee of this committee on this problem when the State Department disclosed that it had not consulted with Europe before issuing the executive order. Our diplomacy has improved since then but it has been working with -- at a distinct handicap and that is that the sanctions or the threat of sanctions against the very people that we want to cooperate with us and change their own policies so that they will impose multilateral sanctions in lockstep with us.

I think if there is clear evidence of this terrorist activity, we could bring that evidence to Europe and say, listen, we are going to go forward and act unilaterally but it would be better if we visited the efficacy of multilateral sanctions and if you were to agree to go into that we could consult with the Congress about revising the types of penalties that were designed to promote the cooperation that we seek and I think that would be the appropriate way to proceed.

REP. GILMAN: Ms. Miller did you want to comment.


REP. GILMAN: Assuming that ILSA succeeds in reducing investment in Iran and Libya's energy sectors, how long would it take until their economies are affected? Anyone want to venture? Dr. Clawson?

MR. CLAWSON: Well, Iran has not been able to expand its oil production output and expand its gas income as quickly as it would hope. S one could say that it has already been affected in the sense that the hope for growth has not taken place. However, what would happen with less investment is that the income would over time fall short of what might have been hoped for. And that kind of a slow deterioration is hard to -- it's hard to notice. It's hard to grab people's attention when things just aren't going quite as well as you might like.

So I'm skeptical that there would ever come one moment in time when it was clear that the sanctions are working. I think that instead that the effect would be slow and accumulative and the kind of statements that we saw Khatami making about the poor prospects facing Iran unless there's some sharp change in policy suggests that we're already grabbing the attention of the leaders and I don't think that we'll ever see one moment in which things change over night in that regard.

REP. GILMAN: Dr. Haeri:

MR. KHORSHIDI: The ILSA has demonstrated is a fact and -- he's answering it this way: That if there was any way of bringing in to the picture the allies, the European community, utilizing the Mykonos (sp) trial and the threat of -- to Salman Rushdie. If the United States was capable of bringing them in to join in the sanction he feels that the regime would not last a year.

REP. GILMAN: Mr. Schott or Ms. Miller? Any comment?

MR. SCHOTT: Just one short additional point. It really depends on the price of oil and that will be affected by a variety of factors both related to the sanctions and unrelated to the sanctions. How much Iran can squeeze domestic or reduce oil consumption domestically and put it into exports, how much other countries will increase their production in light of tightening supply-demand balances in the world economy, a number of other factors. If the price goes up, there's more hard currency coming in that enables money to be put into oil field development so a lot of different factors are at play and it will be very hard to determine that. I think Mr. Clawson is right that there won't be any moment in time and that's why the sustainability of the policy is so important and why I stressed that in my testimony.

REP. GILMAN: Yes, Ms. Miller.

MS. MILLER: No, I essentially agree with that. Go ahead

REP. GILMAN: Should our nation press aggressively for resolution banning Libyan oil exports? Any comments?

MR. CLAWSON: So far we have concentrated -- that's in a resolution at the United Nations on banning Libyan oil exports. I think that it would be quite difficult for us to achieve such an agreement at the United Nations. Mr. Schott made reference to, for instance, the possibility of re-opening the European Union the question of sanctions against post Khobar Towers determination. That sort of skips the question of the Russians and the Chinese who are going to be the big barriers in any UN discussion and if we try to raise the issue of an export ban on Libyan oil at the United Nations, I think we would find that no matter how much we pressured the West Europeans, that we would not be successful at pressuring the Russians and the Chinese to agree to such a ban.

I think that they would regard that as altogether too intrusive an action that we were taking against the Libyans. So I would be skeptical, the chances for success and, frankly, I don't think we'd win a lot of propaganda victories by pressing for such a resolution. Sometimes you might press for a resolution knowing you're not going to get it but I don't think that would be terribly productive in this case. I don't think we'd win a lot of propaganda points by doing that kind of an action.

REP. GILMAN: Mr. Schott?

MR. SCHOTT: Yes, if I might add on that. I think we have tried and failed because Europe has substantially different security interests in the maintenance of supplies from Libya and the Persian Gulf. And a cut off of oil would dramatically affect Europe which is the principle purchaser of supplies from Libya. A bilateral deal even forgetting the problems in the UN that I agree with Dr. Clawson would be insurmountable, even a bilateral deal, would not be feasible given European attitudes and the recent reports that Libya has been purchasing various missiles from North Korea that could target certain countries in the Southern tier of the European Union, I don't think that has even encouraged them to rethink that policy. So I'd be highly skeptical of the Europeans moving forward to ban Libyan oil.

REP. GILMAN: Thank you. One last question. It also requires the administration to sanction foreign companies who invest more than 40 million in Iran's oil industry. And despite the legislation's remarkable success, there are indications that the French oil company Totale is preparing to sign a deal with the Iranian government to develop a natural gas field in South Pars, we discussed before. What should the administration do if Total or any other oil company to sign such a deal and do we expect Total to be able to find the necessary financial partners to in fact to go forward with the project. I set out to any of the panelists.

Dr. Clawson?

MR. CLAWSON: Yes sir, the South Pars deal is such a complicated deal that there really are only a handful of companies in the entire world that can manage such a complex deal and Total is one of those firms. I don't think that there are more than three or four other non-American firms that could handle such a deal. This is a high- priority issue. And I would say that we have to come to sort of an agreement behind the scenes that's not going to rub Total's face in the dirt because both the French government and the Total management has taken such a public stance that they're not going to pay attention to ILSA that I hope we can work out some sort of a behind-the-scenes deal that allows Total to claim that it's not paying attention to our sanctions, that meanwhile guarantees that our project does not proceed. I just think that it's unlikely that Total is going to climb down from its clear drive toward getting a -- toward signing a deal. I just hope that we can find ways to guarantee that -- that Total will guarantee that even though it signs a deal it doesn't actually proceed to carry that through to fruition.

REP. GILMAN: Dr. Haeri, did you want to comment on that?

MR. KHORSHIDI: He feels that Total by itself cannot finance the whole project and it needs partners and so far they have failed to appropriate the right partners and he feels that sanctions have had something to do with it.

REP. GILMAN: Thank you. Mr. Schott or Ms. Miller.

MS. MILLER: Well, I think it's probably the case that Total needs partners or would like them and that sanctions have played a role in delaying that. I also think that in time that that field is so large that the likelihood that we can prevent any company of substance, especially as the Asians become more interested in that, Asians who are simply not vulnerable to U.S. sanctions at an economic level that it will get developed. But, you know, I may be wrong.

REP. GILMAN: Mr. Schott?

MR. SCHOTT: I think once the law is implemented as it must be if this deal goes through, then diplomacy will be much more difficult and given the problems cited by Dr. Clawson and Ms. Miller in the near term, I think the preferred policy would be to take advantage of the delay to try to resurrect in effect an alliance with the European Union on this matter. But once the deal has concluded, there will be legal and political obstacles to trying to unravel it so the time to seek alternative solutions is right now.

REP. GILMAN: One last question panelists. What's the likelihood of our unilateral pressure on Libya to produce for trial in the U.S. or UK the two Libyan defendants in the Pan Am 103 case? Anyone want to voice an opinion on that? Dr. Clawson?

MR. CLAWSON: I'm just struck by how far the Libyan government has gone to try to desperately find some kind of a solution to this matter. They've made a whole variety of different proposals about where to hold the trial and under what conditions and circumstances to hold the trial and it seems like every six months they make another concession on this matter going so far as to provide a whole lot of information, very incriminating information, to a French investigating judge last year. So I think that if we just wait a while, frankly, the trend line suggests that at some point the Libyans will finally give in. We may have to make some minor accommodation to them so they can claim some victory. But I'm quite optimistic that at some point in the game the Libyans are going to give in on this matter just because they've done so much over the last few years.

REP. GILMAN: Dr. Haeri?

MR. KHORSHIDI: No comment.

REP. GILMAN: No comment. Mr. Schott or Ms. Miller?

MR. SCHOTT: I take a somewhat different view having dealt with a Libyan problems and sanctions when I was in the government and studied it since then. I think this is a classic case of salami tactics. And essentially they are making small concessions but really saying no. And how we can turn those "Yes, buts. . ." into "Yes, we will do it" is very difficult and I think the answer is going to be no for some time to come until we can find more effective leverage.

REP. GILMAN: Well, again, I want to thank our panelists for the time, the patience and for your excellent views. I'm sure it will be extremely helpful to our committee as we assess our sanction legislation.