When the Iran-Libya Sanctions Act (ILSA) was being considered by Congress a year ago, critics claimed that the Act would hurt U.S.- European relations and would not affect Iran. The critics were wrong on both points. In fact, U.S. and European attitudes about Iran have come closer, and Iran has had significant problems attracting investment for its oil and gas industry.
European Policy Towards Iran
In the year since ILSA was enacted, European attitudes towards Iran have shifted. In 1996, European elites were openly dismissive of U.S. complaints about Iran, regarding them as motivated by domestic U.S. politics rather than by real concerns about security. Symptomatic of the European approach at that time was the effort in the EU to craft a compromise about the Rushdie affair. During the first half of 1996, while it held the EU Presidency, Ireland made a push to get the Iranian government to commit itself not to kill Rushdie on EU soil. The proposed letter made no commit about actions outside of the EU, nor by actions of Iranian citizens (the Iranian government insists that the bounty on Rushdie's head is from a private group unconnected to the government), nor to the murder of publishers and translators of The Satanic Verses (such as the attack on the Italian translator and the Norwegian publisher). After Iran refused to sign, the EU governments became embarrassed. As the London Times put it, "now that this squalid surrender document has been torn up, almost nobody will admit to having supported such a formula."
European toleration for Iranian misbehavior has significantly diminished in the last year. For instance, a stronger stand is evident about the Rushdie matter. After a November 1996 flap over an appearance by Salman Rushdie, the Danish Folketing (parliament) mandated more distant relations with [ran and dialogue with the democratic opposition. Norwegian State Secretary Jan Egeland announced in March 1997, "The Government of Norway calls for international economic sanctions against Iran over the Rushdie affair.
The issue which has done more than any other to change German elite opinion about Iran has been the Mykonos case, named for the restaurant in which four defendants were accused of killing Iranian Kurdish politicians on Tehran' order in 1992. In November 1996, prosecuting attorney Jost said in his closing statement, "it is not possible to avoid mentioning the state terrorist background of the murder" and "there cannot be the slightest doubt that the attack was planned and prepared by the Islamic Republic of Iran and its leading men." In reaction, thousands of demonstrators threw eggs and rocks at the German embassy, while one religious leader (Mansur Arzi) warned, "we shall take over this embassy as the second espionage den" (the U.S. embassy was usually referred to by Iranian revolutionaries as the espionage den). Two hundred of the 270 Majlis members signed a letter saying "Bonn does not deserve friendly relations with Tehran." An assembly of several thousand clergymen in Qom drew up a resolution saying that the German prosecutors' "insults...fall in the same category as Rushdie's Satanic Verses. The mercenary prosecutors must be given the maximum punishment for this crime."
On April 10, 1997, Presiding Judge Frithjof Kubsch read the verdict of the Berlin court, "Iran's political leadership made the decision .. to liquidate KDPI. The final decision on such operations lies with the Committee for Secret Operations' which lies outside the constitution and whose members include the state president, .. the top official responsible for foreign policy [and] the 'religious leader' [who] is a political leader [rather] than the spiritual head of the Muslims." That same day, the 15 EU states withdrew their ambassadors from Iran, as did Canada, Australia, and New Zealand. The EU also announced that the critical dialogue with Iran had been suspended, but not cancelled. While the EU Council of Foreign Ministers decided that the ambassadors would return to Tehran on May 29, Iran refused to allow the German ambassador to return, and the other EU ambassadors have since stayed away in solidarity. German opinion was furious at this insult. The reaction of newspaper columnists tell the story: in Die Welt, Karl- Ludwig Guensche wrote "the disgrace could hardly be worse"; in Suddeutsche Zeitung, Josef Joffe wrote "this game calls for a strategy of containment and isolation"; in the Berlin Tagezeitung, Dieter Rulfs column was entitled "Looking Like a Damned Fool" (all from May 5, 1997).
More recently, European concern about Iran has been fed by the fate of Faraj Sarkuhi, the editor of Adineh magazine. At each stage in the affair, the Iranian authorities have acted with inept thuggishness designed to inflame European opinion. In August 1996, Iranian police burst into the home of the German cultural attache in Tehran, locked him in a closet, and arrested his six guests, including Sarkuhi, after posing them for staged photos designed to suggest that they were members of a spy ring. When Sarkuhi decided to flee to Germany to join his wife and children there, he disappeared at the Tehran airport. After weeks of European protests, the Iranian authorities produced Sarkuhi, who was temporarily freed. After his rearrest, his wife produced a long handwritten letter from him describing how he had been tortured during his first time in jail. In the last two months, numerous statements have been issued and demonstrations held by European intellectuals and cultural leaders on the Sarkuhi affair. For instance, the editors of the Paris newspapers Le Monde and Liberation appealed for his release on June 5, while 50 British writers, including Harold Pinter and Tom Stoppard, signed a July 7 appeal for his freedom.
Meanwhile, the Mykonos verdict reverberates throughout Europe. The majority of the Italian Chamber of Deputies has petitioned the government to take a stronger stance against Iran, including reopening the murder case against Iranian diplomat Hamid Parendeh, who killed an Iranian opposition figure in Rome in 1993. After considerable media and parliamentary pressure, the Austrian government has been forced to admit that it knew Iranian diplomats were responsible for the 1988 murder in Vienna of another Iranian Kurdish leader. And a Swiss judge is pushing to reinvigorate the charges against 13 Iranian diplomats for the 1990 Geneva murder of an Iranian dissident.
European opinion now regards Iran as a problematic country and understands better the reasons for the tough U.S. policy. However, European elites still disagree with the U.S. about how to induce Iran to change course: they 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. Partly that is a matter of ideology, in that EU states have argued that economic relations should generally be separated from political considerations. In addition, the Iran market is looking more attractive in 1997 compared to its depressed state in the previous few years. Iran has overcome the worst of its foreign debt crisis, thanks to both the belt-tightening measures Tehran introduced to reduce its vulnerability to U.S. pressure as well as to the temporarily higher oil prices in 1996, which provided Iran with a $3 billion windfall, largely used for debt service.
In sum, while European governments and elites remain firmly opposed to ILSA, nevertheless there has been substantial progress in persuading them that Iran presents a problem which requires a firm response.
ILSA's Effect on the Iranian Economy
No one expected ILSA to have a dramatic short-term impact on the Iranian economy. After all, the Act aims to stop investment, and the impact of an investment shortfall is felt primarily after a delay of some years. In the short run, investment matters less to Iran's economy than do change in oil prices. Since ILSA was enacted, purely by accident, the price of oil has been lower than in the year before it was passed. Iran earned about $1 billion less in oil income in the year ending July 1997 than it did in the year ending July 1996. For 1997 as a whole, Iran's oil income will probably be about $16 billion, compared to $18 billion in 1996.
ILSA has had a major impact on oil and gas investment, which is what it targeted. Iran has been unable to finalize financing for a single one of the ten top-priority oil and gas projects that it has been publicizing for a year and a half. Several multibillion dollar deals have been announced, but in every case, the reality is much, much more limited. Take for instance the so-called $25 billion gas deal with Turkey. Contrary to what the officials of both governments have implied, this deal is not sure thing. The only part of the deal that is proceeding is a small pipeline which will allow some limited gas sales. The multibillion dollar figures would become relevant only if financing is identified for a much larger and longer pipeline, as well as the associated gas production facilities. This is by no means sure for a variety of reasons -- Turkey has several other alternatives for gas which it is actively exploring, the two sides have not agreed about the price for the gas, Iran may not be able to supply the gas until it completes a multbillion gas production investment, and so on. The situation with Turkmenistan is quite similar: a small pipeline is proceeding, but substantial investment remains blocked by many problems.
The failure to attract investment in oil and gas is preoccupying Iranian leaders. In his comments after his election as president, Mohammed Khatemi predicted that Iran would become a net oil importer within 15 years if current conditions persisted. The natural gas outlook is equally bad. Since the 1979 revolution, Iran has relied on a dramatic increase in natural gas consumption to meet its growing energy needs (gas went from providing less than 10 percent of Iran's energy in 1979 to 28 percent in 1995). But further development of Iranian gas will require massive investment in developing new fields and in transporting the gas hundreds of miles from the Gulf to the population centers in the north.
ILSA is well designed to hit at Iran's Achilles Heel. The Act targets investment funding, and Iran remains desperately short of investment capital. Iran's physical infrastructure, from roads to utilities, was badly neglected during the eight-year war with Iraq. The Iranian central bank is said to have concluded that the country is using up its capital stock rather than expanding it in line with the population, which has doubled since the 1979 revolution. And the Iranian government is doing little to address the problem effectively. It runs a large disguised budget deficit which drains the funds that could be used for investment. Foreign investors are discouraged by restrictive laws and poor terms. Despite all the talk from Tehran about wanting foreign investment in oil and gas projects, the terms offered have been much less attractive than available in other developing countries. The combination of poor terms and the prospect of ILSA retaliation has effectively discouraged most international investors.
Among the many stalled projects, one is vastly the most important: South Pars. The South Pars gas field is one of the world's largest. Plus the gas has suspended in it droplets of oil, which could provide several hundred thousand barrels of oil a day in addition to the gas. This is the project that bears watching closely. The French firm Total is actively negotiating to develop South Pars. There may well be some high visibility announcement made about a deal; both Iran and Total (and indeed the French government) are committed to reaching such a deal. If such a deal were reached, failure to respond by the U.S. would persuade international investors that ILSA is a paper tiger. Unfortunately, Total's managers seem to be under the impression that it has no reason to worry about U.S. sanctions. In an interview with La Tribune (May 22, 1997), Total managing director Thierry Desmarest explained why "the more or less real threat of sanctions is not deterring Total," namely, because "We are seeing a debate on Iran getting under way in the U.S."
It may not be necessary to have a confrontation with France in order to kill South Pars development. These big projects are so complex that they can easily get stopped despite highly touted deals. Iran has already signed one deal to develop South Pars -- announced in 1992, the formal contract was signed in November 1993, but the deal fell apart slowly over the next year. The best course of action regarding South Pars may well be to allow Iran and Total to claim they reached a deal but then for nothing to happen.
To date, ILSA has been quite effective as a deterrent to investment in Iranian oil and gas. However, there are a lot of clever lawyers looking for loopholes. The Westdeutsches Landesbank thinks it has found a loophole in the definition of what exactly is an investment. That bank came up with a peculiar arrangement that looks like an investment but which the bank insists is no investment. If this problem spreads, with other banks or firms trying end-runs around ILSA, it may be worth providing the administration with some discretionary powers to sanctions activities that are designed to act like investments.
Prospects for Iranian Policy
The Islamic Republic is not likely to soon change its aggressive foreign policy behavior. Iran expects that Washington will change course to become more accommodating towards the Islamic Republic. The firm U.S. stance against Iran's unacceptable behavior was seen as a personal vendetta by Warren Christopher, an attitude shared by much of the European press. There remains an expectation that Secretary of State Albright will eventually shift policy on Iran. This view is fed by the debate in the U.S. about policy towards Iran. Tehran has correctly concluded that the vast majority of U.S. foreign policy analysts and businessmen oppose current U.S. policy towards Iran. The Islamic Republic does not seem to realize the deep and broad support for present U.S. policy in Congress and in the halls of the executive branch.
Khatemi's election led many to hope that Iran might modify its stance towards the U.S. That is possible, but not at all likely. Khatemi's entire career have centered on the cultural and lifestyle issues that he put at the heart of his election campaign. He is a moderate on the issues of teens listening to Western music, men wearing blue jeans, and women sporting lipstick in public. These are the issues that most directly concern ordinary Iranians, who are not particularly interested in foreign affairs. Khatemi will face considerable opposition to reforming social policy, and he is likely to concentrate his effort on these domestic matters to the exclusion of foreign policy. Furthermore, talking to the U.S. would challenge the legitimacy of the Iranian government, calling into question the revolutionary legacy of Khomeini.
Quite separate from the issue of political dialogue is the question of business relations. There is broad consensus among Iranian politicians in favor of normal business ties with the U.S. That carries with it no connotation that Iran would in any way change its aggressive and unacceptable foreign policy behavior.
The U.S. is losing the propaganda war with regards to Iran. There is a widespread perception -- in the Middle East, in Europe, and in the U.S. -- that Washington's attitude is the barrier to dialogue, whereas in fact Tehran flatly refuses talks while Washington repeatedly and at all levels states its readiness for official discussions. U.S. sanctions towards Iran are seen as ineffective if not counterproductive, while in reality Iran has not been able to attract foreign investment or loans for a single one of Tehran's list of ten priority oil and gas projects. U.S. 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 come much closer to the U.S. 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 U.S. has not to date convinced Iran that the U.S. has the will to persevere, to outlast the Islamic Republic's unacceptable behavior. Nor has the U.S. demonstrated to Iran that America and its allies will stand together; Tehran expects that, despite U.S. opposition, it can acquire the finance and technology, including military. Until these circumstances change, the Islamic Republic is not likely to change its unacceptable foreign policy behavior.