House International Relations Committee Hearing: Threats from Iran (Panel II)

June 25, 2003

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REP. ROS-LEHTINEN: (Sounds gavel.) I would like to introduce our second panel. Patrick Clawson is the deputy director of the Washington Institute for Near East Policy. He is the author of more than 30 scholarly articles on the Middle East, and is currently senior editor of Middle East Quarterly. He has served as a senior research professor at the Institute for National Strategic Studies of the National Defense University in Washington, and a research economist for four years each at the International Monetary Fund, the World Bank and Foreign Policy Research Institute.

Roger Robinson, Jr., is president and CEO of Conflict Security Advisory Group, a Washington, D.C.-based company that offers impartial research and advisory services in the field of global security risk management. He is also president of RWR, Inc., a consulting firm providing strategic planning services and analyses of geopolitical developments affecting international equity, debt and currency markets. Prior to forming these firms, Mr. Robinson was senior director of international economic affairs at the National Security Council from '82 to '85. And we will begin with Mr. Clawson -- Dr. Clawson.



Deputy Director,
Washington Institute for Near East Policy, and
Senior Editor, Middle East Quarterly


MR. CLAWSON: Thank you, Madam Chairwoman. I have a statement for the record that I would like to submit.

REP. ROS-LEHTINEN: Without objection, thank you.

MR. CLAWSON: Thank you. And let me just offer some brief remarks. Iranian proliferation and terrorism remain serious problems, and the question that we should be asking is whether or not ILSA is an effective instrument for addressing these problems, with which more use could be made. To answer that question, I would pose three issues. First, are economic sanctions appropriate instruments against Iranian proliferation and terrorism, as ILSA presumes? Second, is European and Japanese cooperation important to making sanctions fully effective, as ILSA supposes? And, third, is the threat of economic pressure an appropriate instrument to secure European and Japanese cooperation, as ILSA presumes? And I would suggest that the answer to all three questions is yes. Let me suggest why.

First, are economic sanctions appropriate instruments against Iranian proliferation and terrorism? I would be the first to acknowledge that economic sanctions are imperfect instruments to use, but I would suggest that all of the instruments that we have available against Iranian proliferation and terrorism are imperfect instruments. And so that it's easy to criticize each of those instruments considered individually, and indeed I run through some of the options that are available for dealing with Iran's nuclear program to say that each one of them suffers some serious problems. For instance, multilateral diplomacy has made a lot of progress recently, but it's very optimistic to think that diplomatic pressure alone is going to lead Iran to reverse it's nuclear program. So too a grand deal with Teheran's hardliners, which some have proposed, when I see little interest that Iran's hardliners are interested in such a deal; and, besides which, they have a history of cheating on deals, and any deal we did with them would look like we were selling out Iran's democratic forces to support autocratic rulers.

Regime change. Well, it's true the vast majority of Iran's people detest the hardliners, but it will be optimistic to count on the Iranian people being able to seize power in the few years before Iran becomes a nuclear power.

Preemptive military action. Unfortunately, military action might not slow Iran's programs much. They may have unknown facilities we wouldn't be able to hit, and they could promptly reconstitute most destroyed facilities within a few years. Furthermore, Iran could retaliation, for instance with terrorism.

In other words, our policy choices for dealing with Iranian proliferation are really pretty bad. And in that context economic sanctions look pretty good. For one thing, economic problems are high on the screen for Iran's leaders.

So I would argue that ILSA's focus on economic sanctions is appropriate, and that indeed by focusing on Iran's oil and gas industry ILSA has the right focus for sanction, because the oil and gas industry is what provides revenue to the Iranian government. And what we should be primarily trying to do is to restrict the financing of the Iranian government, while at the same time reaching out to the Iranian people and encouraging people-to-people exchanges.

My second question was whether or not European and Japanese cooperation are important to make sanctions fully effective. And there the news, I am afraid, is not particularly good. Initially when we imposed sanctions, our unilateral actions had a lot of effect. Indeed, Iran's oil output has actually declined over the last four years. But, unfortunately, because of higher oil prices, Iran has built up a large cushion, a large reserve, and I'm afraid that in the future we are really only going to be able to influence Iran's economy if the Europeans and the Japanese join in with us. And indeed it is instructive to see that the Iranians have, are so eager for good economic relations with Europe that the Iranians have agreed in their negotiations with the Europeans about a trade agreement to talk about human rights, about proliferation, about terrorism, and about Teheran's undermining of the Middle East peace process.

So what we learn from these trade agreement negotiations the Europeans are conducting is that Iran is very sensitive to economic pressure from Europe. If we could get Europe to join in with us on economic sanctions, then we think we have good prospects for making change.

And then, very briefly, my last point is that the threat of economic pressure is an appropriate instrument to secure European and Japanese cooperation. It would be wonderful if Europe and Japan decided to join the United States in taking firm action against Iranian terrorism and proliferation solely on the basis of the excellent arguments that U.S. government officials offered. But I suspect that in fact U.S. government officials will get further if they can also have a big stick that they can threaten the European governments with, and not just a sweet tongue.

REP. ROS-LEHTINEN: Thank you. Thank you very much. Mr. Robinson.

MR. ROBINSON: (Off mike.)

REP. ROS-LEHTINEN: Hold on one second. Let's figure out -- he's got the big stick.



President and CEO, Conflict Security Advisory Group, and
President, RWR, Inc.


MR. ROBINSON: Very good. Let's try that again. Thank you, Madam Chair, and the committee, for convening this timely session. As you noted, I am testifying today in my capacity as president and CEO of Conflicts Securities Advisory Group, which specializes in impartially assessing the financial and reputational risks associated with the operation of publicly-traded companies in or with countries that sponsor terrorism. Our firm was founded in 2001 to help investors identify portfolio companies exposed to global security risk of the type described, as well as those firms that have been associated with proliferation-related concerns. I am also currently serving as chairman of the Congressional U.S.-China Economic and Security Review Commission.

By way of background, I have been evaluating the nexus between national security and global finance for over 25 years. Prior to my government service at the National Security Council, I was a vice president in the international department of the Chase Manhattan Bank, with responsibilities for the bank's loan portfolios in the former Soviet Union, Eastern and Central Europe, and Yugoslavia.

A determination was made by the SEC in May 2001 that significant corporate operations in U.S.-sanctioned countries, including Iran and Libya, can represent a material risk to investors and should be properly disclosed. Pursuant to this development, we launched our global security risk monitor online service in May of last year. The monitor is the world's only online research and risk assessment tool that identifies and profiles every publicly-traded company worldwide that does business in Iran, Libya and other terrorist-sponsoring states. Put simply, it allows investors and government analysts to know who is doing business where; and, more importantly, what specific operations are underway in these higher risk countries. It's recognized, for example, that there's a substantial difference between a firm selling soft drinks and one that is constructing a potential dual-use fiber optic network.

Due to time constraints, I would encourage interested parties to review our website at, for more information regarding global security risk and our global security risk monitor subscription service. The site includes some examples of at-risk companies and dozens of mainstream press and broadcast media pieces covering this subject.

As we now have over $1 trillion in funds under management that have subscribed to the monitor, it is reasonable to assert that corporate ties to terrorist-sponsoring states is a market issue that has taken on national prominence. To underscore this point, the announcement of the shareholder resolutions on this subject registered with the SEC by New York City fire fighters and police officers pension funds, which incidentally singled out three of America's largest corporations doing business in Iran through their overseas subsidiaries, and the unanimously-passed legislative resolution of Pennsylvania state assembly, are submitted for the record of this hearing.

I should emphasize at this point that as an impartial information provider we don't take a position regarding whether companies should or should not do business in Iran, Libya or other terrorist-sponsoring states. The relevance and use of our data is for the individual investor to determine.

We likewise assume that the operations of companies included in our monitor product are legal and commercial in nature. That said, we recognize the important public policy issues embedded in our research, hence the relevance of our findings to today's discussion.

Following an exhaustive seven-month research effort, our company and our partner firm, Investor Responsibility Research Center, determined that roughly 375 publicly-traded companies are operating in State Department-designated terrorist-sponsoring states, not including Cuba. There are over 200 publicly-traded companies with such links to Iran. Over 60 have business activities in Libya.

Based on our research findings, it's my view that these companies offer critical commercial infrastructure for the governments of Iran, Libya and other terrorist-sponsoring governments and nations.

Three major points underpin this view: First, as might be expected, it's primarily the largest and most well-known companies in the world that have the risk appetite to conduct business with government sponsors of terrorism.

Many of these firms are found in the retirement portfolios and mutual funds of millions of Americans. Some 70 percent of those firms identified in our monitor product are of European and Asian origin. Companies such as Total, Fina Elf and Alcatel France, ENI of Italy, Hyundai of South Korea and several leading Japanese firms come to mind. Notwithstanding U.S. sanctions, some 35 major U.S. companies have legal operations in these countries through their overseas subsidiaries.

Second, virtually all of these nations are afflicted with serious economic shortcomings and bottlenecks. Years of economic mismanagement, corruption and ill-advised policies have left these nations inordinately dependent on foreign corporate and government assistance.

Accordingly, it's common for these firms to be required to partner with state-owned enterprises in these countries to ensure that the government can access advanced technology, equipment and expertise, as well as maintain control over associated revenue flows.

Third, the sheer volume of business being conducted by publicly- traded firms in these countries is worth noting. Many companies don't disclose figures associated with projects in terrorist-sponsoring states or document how much revenue they are generating for these governments.

Our research, however, indicates that these companies are participating in projects in financial and commercial transactions totaling at minimum tens of billions of dollars in these countries. ENI alone is engaged in consortia energy deals in Iran and Libya totaling as much as $9 billion. Given the size of these economies, this level of foreign corporate involvement is of great significance.

In conclusion, publicly-traded companies are providing substantial hard-currency revenues and infrastructure support to terrorist-sponsoring governments. The fact that legal commercial transactions and revenue flows can, in select cases, be employed by these irresponsible governments for dual-use, militarily relevant purposes, has created a risk to the share values and reputations of many companies doing business in these nations. Such risks can take the form of official sanctions, lawsuits, negative publicity, shareholder activism, or military intervention.

Thank you, and I'd be pleased to take your questions.

REP. ROS-LEHTINEN: Thank you very much. Mr. Berman, I'd like to recognize you to begin the questions so that you could have an opportunity.

REP. BERMAN: Thank you very much, Madam Chairwoman. And I appreciate both of you being here.

I think -- just initially, Mr. Robinson, did you quantify how much of this corporate involvement was in the oil-and-gas sector of Iran, as opposed to other investments?

MR. ROBINSON: Very difficult to quantify the numbers. But I can give you a sense of the scale of corporate involvement in the energy sectors for both Iran and Libya.

REP. BERMAN: Okay. I'm particularly focused on Iran here, just --

MR. ROBINSON: Yes, okay.


MR. ROBINSON: First, in the case of Iran, we've identified some 58 publicly-traded firms worldwide doing business in the energy sector, as defined by the ILSA statute, of which as many as 41 appear to have investments totaling over $20 million.

REP. BERMAN: Any of those foreign subsidiaries of American corporations?

MR. ROBINSON: I would have to check, but I don't believe that's the case. Just one moment on that. (Pause.) I don't think so, but we can check that for you.

REP. BERMAN: Okay. Then, given that data of approximately $20 billion, Dr. Clawson, I'd like to go to the second question you posed, which was, ILSA picked that sector of the Iranian economy to focus on, on the theory that that was the most value-added kind of investments Iran could have. That would bring them more resources to continue their activities, both in the proliferation and the terrorism support effort.

The second question was Europe and Japan cooperation and the essentiality of -- ILSA was designed -- we didn't need ILSA to deal with U.S. company involvement. We already had an embargo on Iran; somewhat modified, as my colleague, Mr. Sherman, likes to point out recently, or in the last few years, but basically still prohibiting investments in the oil-and-gas sector.

ILSA was designed to deter, through what some refer to as extraterritorial sanctions, foreign investment, and in particular European and Japanese investment. It seemed like, in the first years of ILSA, it was having that effect.

Would you comment on the extent to which this long list of projects that are now underway, that are reported in our staff memo, to what extent our willingness to provide waivers of those sanctions has encouraged the level of investment that Mr. Robinson talked about?

MR. CLAWSON: Not only have we provided waivers, but we've often looked the other way, and that the United States government has not been noted for the effort which it's devoted to investigating whether or not companies are becoming involved.

And as someone who's for years had visitors from many of the companies that have become involved in asking my opinion and my advice as to whether or not the United States government would single them out for these investments, I've had to tell them candidly that so long as they can keep the investments off the front pages of the newspapers, it's likely that the United States government will do very little about these investments.

REP. BERMAN: And while that process started in the previous administration, I take it it has continued into this administration, that notion of both waivers and looking at but never deciding the investments and deals that have been made since that time.

MR. CLAWSON: Yes, sir. And in part, if I may say so, that's because Iranian incompetence and mismanagement has done quite a good job at slowing down many of those contracts, so that in many cases grant investments are announced and then not much happens for years and years.

REP. BERMAN: I think my time has expired. Thank you, Madam Chairwoman.

REP. ROS-LEHTINEN: Thank you, Mr. Berman. Mr. Sherman.

REP. SHERMAN: Thank you, Madam Chair, for letting me participate. I'm a member of the full committee, and it's good to be with you here in the subcommittee.

Looking at the Middle East, at the beginning of this year we saw two threats to the security of Americans, Iraq and Iran. And it's pretty clear that Iran was overwhelmingly the greater threat, far more advanced in its nuclear program, not suffering from the diplomatic infirmities of having invaded a country in the 1990s, not subject to any international inspections it wasn't happy with and easily able to evade.

And recent efforts to find weapons of mass destruction in Iraq have shown that it was a distant competitor with Iran in terms of which country was most likely to develop weapons of mass destruction, particularly nuclear weapons, and have the capacity to smuggle them into American cities.

It's odd that the administration has sacrificed the lives of American servicemen and women to go after this distant competitor of Iran and yet, when it comes to Iran, we have not even used the economic tools. It's as if we are more willing to risk the lives of our servicemen and women than we are to inconvenience the corporate sector.

You gentlemen have talked about the Iran-Libya Sanctions Act. You've made us even more aware of the tendency to simply waive it or our new "Don't ask, don't tell" policy toward whether countries are loaning and investing hundreds of millions of dollars.

I can add to that the fact that the United States has adopted a "Hear no evil, see no evil" policy with regard to the World Bank loaning roughly $200 million to this government just in the last seven months. Pursuant to laws passed by Congress, they voted no. And then, as I pointed out, I had tea and crumpets with the folks who outvoted us and voted yes.

Finally, we import $150 million from Iran. They can easily sell their oil elsewhere, but they can exploit our markets for caviar and carpets. I won't even ask the question of whether we have a caviar crisis in the United States that necessitates those imports for our own domestic needs.

I want to thank both of you for your testimony and ask, Mr. Clawson, whether -- the one bit of economic pressure that's being put on Iran to try to force it to not develop nuclear weapons and not support terrorism has been the possibility of not being able to conclude a trade agreement with Europe.

How is the importance of that trade agreement, on the one hand, compared to the things that we can have a more direct impact on, namely enforcement of ILSA, a withdrawal of the World Bank loans, which haven't been dispersed and which will not be dispersed if we threaten to withdraw from the World Bank, which would require us to actually aggravate people, and the closing of our markets?

So if you were an economic adviser to the government of Iran trying to deal with which is of greater economic importance, which would you fear most, a denial of a trade agreement with Europe or the withdrawal of the World Bank loans, an end to ability to export to the United States, and an Ileana Ros-Lehtinen approach to enforcement of ILSA?

MR. CLAWSON: Congressman Sherman, the Iranian government seems to have decided, after ILSA was enacted, that it wanted to reduce its vulnerability to U.S. economic pressure. And so it adopted really quite a belt-tightening approach. And that, combined with higher oil income, allowed them to repay a lot of their foreign debt and to build up a reserve of at least $12 billion and possibly as much as $20 billion in foreign exchange affairs.

So they seem to have decided that whatever economic pain the United States may inflict upon them, they're prepared to sustain, so that while certainly the measures that you mentioned which the United States could do would have a greater economic impact upon the Iranian economy, Iran's leaders seem to have decided, as a political matter, that they'd be prepared to sustain that kind of price if necessary, in part because they were reasonably confident, or in large part because they were reasonably confident they wouldn't have to sustain any economic pain from Europe.

So it would come to them as an unpleasant shock if Europe were to join in with us. And therefore, if Europe were to join with us, that might have a greater political impact on Iran's nuclear program, so that my answer to your question would be two parts. Which has got a greater economic impact? The U.S. action.

Which would likely have the greater political impact? I suspect the European action might have the greater political impact. And there is a good prospect that Europe might do this. I mean, the European leaders are talking about suspending the trade cooperation agreement negotiations unless there's greater progress on these political fronts by September.

REP. SHERMAN: So you're saying that rejection by Europe -- if they've got these billions in reserve, they could easily survive four or five years without the benefits of a trade deal that they don't have now?

MR. CLAWSON: That's true, Congressman. But I think the concern that the Iranian leaders have is that suspension of the trade cooperation agreement negotiations might be just one shoe dropping. The other shoe which might drop might be if Iran, in fact, is, as it may well be, found by the International Atomic Energy Agency board to be not in compliance with its obligations under the non-proliferation treaty, that then Europe might actually be prepared to consider some far-reaching economic sanctions.

We see in this morning's Wall Street Journal the former Israeli prime minister, Mr. Shimon Peres, arguing for comprehensive international economic sanctions against Iran unless it halts its nuclear program. And I'm afraid -- I think the Iranian leaders are afraid that those kind of arguments are gaining greater ground, even in places like Europe.

REP. SHERMAN: Well, I would hope this administration would be willing, if necessary, to endanger, as they've been all too willing to endanger in the past, our relations with Europe to achieve that economic pressure than to endanger American cities by allowing the culmination of the nuclear weapons program in Iran.

I want to thank you for your time.

REP. ROS-LEHTINEN: Excellent statement. Thank you, Mr. Sherman.

What role does ILSA play within the broader U.S. policy toward the Iranian regime? What message does the lack of ILSA implementation send to other rogue states in the region, such as Syria?

MR. CLAWSON: The lack of enforcement of ILSA, along with some statements indeed from President Clinton while he was still president, which suggested that sometimes the administration is forced to sign bills which are popular in Congress but which it then has no intentions of enforcing, has sometimes led to the impression in rogue states that the United States may take a tough rhetorical stance but you can ignore that because the actions may be less.

And that undercuts our position, when indeed we saw some former officials of the Bush administration, such as former policy planning director Richard Haass, who was well-known to be someone who is eager to find ways to reduce economic sanctions; this led to an impression in a number of these states that, "Well, all right, there may be tough words said by administration officials, but when it comes to actions, don't expect much."

MR. ROBINSON: And while I can't take a public policy position in ILSA as it could impact on companies profiled in our global security risk monitor, I would only say our research findings indicate that publicly-traded companies don't appear to be deterred by the legislation, based on the number of firms that I've just cited that are involved in Iran and Libya's energy sector.

A point that I was starting to make earlier; in the case of Libya, you have approximately 22 publicly-traded firms that are engaged in corporate operations in the country's energy sector, as defined, as we understand it, by ILSA. And of that 22-company total, about half appear to have investments of over $20 million. So these are at least numerical indicators of corporate attitudes on the matter.

REP. ROS-LEHTINEN: Thank you. Dr. Clawson, in your testimony, you note that Iran's nuclear program has acquired a dynamic which is going to be very hard to reverse. Do you believe that Iran's rush to go nuclear is also being motivated by the different approaches in the United States that we undertook against the Iraqi regime where our actions were preventative in nature versus the North Korean regime, which already has nuclear weapons?

MR. CLAWSON: It would certainly seem, from the public debate in Iran, that some people in Iran have concluded from the contrast between U.S. policy towards Iraq and U.S. policy towards North Korea that Iran would be well-advised to acquire a nuclear weapon as soon as possible, or at the very least to create ambiguity as to whether or not Iran has a nuclear weapon, because that could then deter the United States from military action against Iran, a military action which many in Iran erroneously believe is imminent.

REP. ROS-LEHTINEN: Thank you. Mr. Sherman, I don't know if you wanted another follow-up question.

REP. SHERMAN: What could be more entertaining? We've got a situation where the World Bank has approved these loans. It's a couple of hundred million dollars, but it's also the World Bank making the loan. Has this provided some degree of psychological solace to either the upper echelons of the Iranian government or Iranians in general, that they are approved by doing business on favorable terms with the major economic institutions of the world?

MR. CLAWSON: Yes, Congressman. And I would contrast that with Iran's considerable annoyance that its application for membership in the World Trade Organization continues to be blocked by U.S. action.

REP. SHERMAN: Now, we have a chance to put some political pressure on the Europeans, or just to encourage them not to trade with Iran. What effect would it have on Iran if Europe adopted a minimalist approach to trade, which I would define as a willingness to purchase oil at the world price, a willingness to sell European goods for cash on the barrel-head, but aside from that, no investments, no loans? If Europe adopted that approach, what effect would that have on the ability of the Iranian government to carry out its objectives?

MR. CLAWSON: One of the more dramatic impacts it might have is on political discontent inside Iran, where the growing unemployment problem is often attributed by the youth to the hardline regime in Iran's ability to attract foreign investment and to establish normal economic relations with the rest of the world. Indeed, I suspect the youth may exaggerate the impact. I suspect Iran would have difficult problems creating enough jobs under any circumstances.

But in the event of Europe adopting the kind of policy you described, I suspect that a great many of the young people in Iran who are dissatisfied about their inability to find jobs would feel that the Iranian government has once again taken steps to isolate the country and hurt their prospects for a better life. And that would make them more likely to join protests.

REP. SHERMAN: What effect would it have on likely European investment or Japanese investment in Iran if we were to announce that while we have no intention at the present time of any military action, that any dollars invested after today in economic facilities would be regarded as fair economic targets, should events require military action in the future? In other words, any investments you make are first on our target list, and on that basis you can go ahead and decide whether or not to make investments.

Mr. Robinson, do you think that your 300 some or 200 some companies would be investing in anything physical in Iran if they knew that our smart bombs already had the location programmed in to their GPS systems?

MR. ROBINSON: I think -- that's an interesting question. I think in the first instance it would be a test of -- they would be testing our political resolve to see something like that through. As I said --

REP. BERMAN: Well, they wouldn't know whether hostilities were going to break out or not. We simply issue the statement and then if you're thinking of building something in Iran and owning it, maybe there will be a war, maybe we have the GPS location of your facility recorded. I don't --

REP. BERMAN: And is there anybody in the world who would sell war hazard insurance if the target had been so speculated about or identified?

MR. ROBINSON: I think it's safe to safe that the risk profile of Iran would raise markedly, certainly among the publicly-traded companies in particular, which is the ones we focus on, because remembering that they have shareholders who read newspapers and who are, if they are prudent, taking a healthy look at the political and economic circumstances of the countries in which their portfolio companies are invested.

REP. BERMAN: So to cut to the chase, if we wanted to we could enforce ILSA. If we really wanted to, with one press release, we could pretty much prevent investment in Iran. You might see a willingness to make loans to the government on the theory that some way somehow they are going to repay. But if you owned a physical facility in Iran, you just -- you wouldn't make that investment after such a press release was issued.

MR. ROBINSON: Well, I would only say that I think it would clearly have a dampening effect. But as far as electrocuting investment, I tend to doubt it, only because in the real world the kind of European and Asian companies that comprise the bulk of firms that are investing in Iran have a substantial risk appetite, as I mentioned in testimony. They feel I think in part they are going to get some top cover from their respective governments, and they are -- those governments are loathe to see anything that smacks of extraterritoriality, as we well know. So leave it to say that I don't think it would vaporize investments in Iran, but I do think that it would be a very -- cast a substantial pall over the investment appetite.

REP. BERMAN: Can you think of anything that has been mentioned in this room that would cast a greater pall on investment appetite so far?

MR. ROBINSON: Not so far.

REP. ROS-LEHTINEN: Thank you very much. Thank you, witnesses, for appearing before us, and thank you to the audience members. In preparation for this hearing, and as an initial step in exerting oversight over ILSA implementation, I sent letters of inquiry to the State Department and Treasury, which I would like to include in the hearing record without objection. And the subcommittee is now adjourned. (Sounds gavel.) Thank you.