Prepared Statement by Under Secretary of State for Political Affairs Peter Tarnoff Before the Senate Banking Committee Hearing: The Status and Effectiveness of U.S. Sanctions on Iran

October 11, 1995

On April 30th of this year, President Clinton announced his decision to sever all trade and investment ties between the United States and Iran. These new sanctions represent American willingness to take actions, even those that may hurt competing U.S. interests, to increase the cost to Iran of its irresponsible behavior. Iran engages in terrorism, obstructs the Arab-Israeli Peace Process, pursues weapons of mass destruction, pursues a threatening military build-up in the Persian Gulf, and abuses the human rights of its citizens. These activities, which threaten important U.S. interests, should be unacceptable to all members of the international community.

The cut-off in U.S. trade and investment with Iran took effect just four months ago. As this committee knows well, economic pressure is not an instant remedy, nor a popular cure. There are signs that our embargo is already squeezing the Iranian economy. But it is too early to expect conclusive results. We must look instead to the pattern of fundamental deterioration in Iran's key economic indicators. Our action is accelerating the decline. To press this condition further, the Administration is committed to working. Further, the Administration is committed to working, alone when necessary, and collectively, when possible, to increase the intensity of international pressure on Iran. Iran's policies threaten not only America's interest but those of our allies in Western Europe and Japan. We are asking them to forego the narrow economic benefits of trade with i Iran and to exercise responsible leadership in the face of Iran's threatening behavior. Adding their collective strength to our effort would increases significantly the price the Iranian leadership pays for its rogue activities.

We welcome congressional support for our policy of pressing Iran for change. Your voice is a powerful indication of America' unwavering resolve to stay the course.


The biggest economic problem faced by Iran today is the government's shortage of hard currency. Without adequate funds, the Iranian government cannot buy the imports necessary to properly sustain Iran's industry and maintain its infrastructure. Nor can the government fully pay the billions of dollars it owes in foreign debt. Hard-pressed by these expenditures, Iran has been forced to reduce imports of industrial goods and consumer items. Because of these cutbacks in imports, Iran's economy suffers from inflation and recession.

Our Iran policy is designed to make it even tougher for the Iranian government to obtain hard currency, and thereby constrict its ability to fund those policies that threaten our interests. While our embargo has just begun to take effect, it has already taken a bite out of Iran's wallet in three ways. First, the rial, Iran's currency, lost one-third of its value following President Clinton's announcement of the trade and investment embargo against Iran. The strict currency controls that Iran imposed to stabilize the rial will lead to slower growth or recession over the long term.

Second, our embargo forced a temporary drop in Iran's income from crude oil sales. Because U.S. oil companies are now prohibited from trading in Iranian oil, the government has had to scramble to sell an additional 400,000 barrels per day. Over the summer, industry reports indicated that Iran had difficulty in finding new buyers for about half that amount. To handle the remainder, Iran faced the choice of discounting the oil in order to unload it, or storing it in the hopes of selling it later at a better price. Iran chose to wait. The resulting costs include delayed oil revenues, increased tanker chartering costs and increased crude oil storage costs. Although these costs are short term expenses, it is clear that our embargo has cut into Iran's available hard currency. Iran's marketing difficulties have eased somewhat lately, in part from increased winter demand in Europe. We are continuing our diplomatic efforts to limit Iran's oil sales.

Our embargo has had a third adverse impact. By aggravating Iran's cash crunch, we are weakening the government's ability to meet its external expenses. Moreover, Iran's financial reputation will only worsen because the government's debt payments are scheduled to double in 1996.


Our embargo has exacerbated Iran's difficulty in gaining easy access to foreign capital. We need to keep it that way. Before we imposed sanctions on our commercial trade, other governments pointed to American commerce with Iran as a rationalization for promoting bilateral trade and providing financial assistance to Iran. Such assistance, which includes new official credits and development aid, gives Iran new financial resources. By severing the economic activity between the United States and Iran, we increased the political price of such dealings with Iran. Since we imposed the embargo, Iran's key trading partners have not extended any new official credits. Japan continues to postpone the second installment on a multi-million dollar loan to build a hydroelectric dam on Iran's Karun River. And the French government has told us it will not provide the French firm total with official support for its investment in the former Conoco deal. My point is this: Even if other governments have not rushed to copy U.S. policy, the steps we have taken have encouraged them to limit the scope of their commercial relations with Iran.

Our investment sanctions prohibit American contributions to the development of Iran's economy, particularly the petroleum sector. We want to make it harder for Iran to exploit these petroleum resources by denying it free access to international finance and government aid. That was why the President blocked Conoco, an American company, from working with Iran, and that is why it is important for us to convince other governments to take similar measures. A straight line links Iran's oil income and its ability to sponsor terrorism, build weapons of mass destruction, and acquire sophisticated armaments. Any government or private company that helps Iran expand its oil reserves must accept that it is indirectly contributing to this menace.

In the months ahead, we will be closely watching the actions of other governments. The decision of the French firm, Total, to take up the Conoco deal is extremely regrettable. We strongly urged Total to reconsider its decision, and advised others to refrain from similar actions.

Mr. Chairman, it is important to note that we do not underestimate the impact of our policy on American business. These steps were necessary to strengthen our efforts to pressure Iran to abandon those practices that affect our country's national security interests. We believe other governments should also act responsibly and take similar steps to deter Iran's threatening behavior. The issue of Iran remains at the top of this country's diplomatic agenda. The highest level officials in this Administration will continue to press our case on Iran with our counterparts from other countries.


Iran fears the impact of our efforts to mobilize international pressure. These fears caused Teheran to begin a campaign to secure foreign investment in the country's petroleum sector. The Iranian government has two objectives for this campaign: to acquire much- needed hard currency and to drive a wedge between the United States and our allies. We should not let Iran undermine our policy in either way.

It would be a mistake for us to exaggerate the gap between our policy and that of most other industrialized nations toward Iran. In my discussions with top officials of the G-7 countries, for example, my counterparts express their shared concerns about Iran's pursuit of weapons of mass destruction, its support of terrorism, and its continued military build-up. Because of these concerns, G-7 countries refuse to engage in any nuclear cooperation with Iran, and they prohibit exports to the Iranian military of arms or sensitive dual-use technology. In fact, a review of our regular consultations with these governments reveals much common ground. We have differed only in our view of the most effective way to counter this objectionable behavior.

We do not believe that engagement with Iran, as advocated by some or our friends, will alter Iran's objectionable behavior. Despite this engagement, Iran's actions have not changed, and in some areas have become more threatening. That is why we chose to intensify U.S. leadership by unilaterally imposing new sanctions. We acted decisively and effectively, as we have in the past. We were the first to prohibit exports to Iran of weapons and technology. Key friends and allies joined us. Now we have taken the lead to cut off the flow of revenues to the Iranian government. We have declared to the world that it is unacceptable to provide assistance -- whether through credit, aid, trade, or investment -- to a government that engages in policies that challenge our core interests.

The question at hand is: How can we most effectively convince other governments to join us?

One proposal calls for the United States to boycott those foreign firms that engage in any business activity with Iran. We have carefully reviewed this proposal, and rejected it for two reasons. We believe a full secondary boycott would put at risk the cooperation on Iran policy that we share with others--particularly cooperation on critical matters such as denying Iran weapons. We also believe that such interference in the international marketplace would backfire, hurting American businesses and harming the American economy.

Another proposal -- suggested by your new bill -- is to impose targeted sanctions on foreign companies that provide Iran's petroleum industry with equipment or technology. This action would create additional disincentives for European trade and investment with Iran. Yet, it could also have negative implications for U.S. economic interests by upsetting our relations with key allies and foreign industry.

For example, our partners in GATT, WTO and NAFTA would argue strongly that even a limited secondary boycott violates our obligations under these agreements. Their efforts to charge us with creating trade barriers could disadvantage U.S. exporters. Moreover, it would be difficult to square a U.S. secondary boycott with the free trade rhetoric with which we press Arab governments to remove their secondary and tertiary boycotts on Israel. The sharply contrasting natures of the two governments in question would not shield us from charges of inconsistency, which might lessen our ability to persuade other countries of our approach on either issue.

Other concerns we must all address include our ability to comprehensively monitor the activities of foreign companies, the likely negative reaction of some of our allies, and the impact on U.S. economic competitiveness. Most importantly, we would need to assess whether any additional action would contribute to our goal of gaining international support for pressure on Iran. The most effective means of increasing this pressure is through multilateral action. Prior to considering any change in the new sanctions, this Administration intends to engage our allies further in the pursuit of increasing Iran's economic isolation. Through continued consultations and information-sharing, we have endeavored to stress the damage to our common interests posed by Iran's activities, and argued that the most effective means of curbing these activities is through multilateral pressure. I believe in the coming months our extensive, high level contacts with other governments may well succeed in gaining a degree of increased cooperation. In addition to our exhortations, continued Iranian intransigence on such issues as the Rushdie Fatwa may finally convince European nations of the futility of engaging Iran. Iran's poor credit rating also adds an economic disincentive to the prospect of new assistance.

Our current approach of leading by example and working cooperatively with allies needs to be given a real chance to work. That will take time. Our patience, however, is not endless. If, after a reasonable period of time, diplomacy alone proves inadequate in achieving an acceptable level of multilateral support for our efforts,we could then consider additional approaches.


I would like to take this opportunity to remind the committee that our policy of economic pressure is complemented by our ceaseless efforts to convince other governments not to contribute to Iran's pursuit of weapons of mass destruction or its military build-up. Our diplomacy has affected a remarkable consensus among the 28 countries participating in talks for the Cocom successor regime. They agree on the need to prevent Iran and other pariah states from acquiring new weapons or military capabilities. We are equally vigorous in calling on all states to avoid any collaboration with Iran that might lead to a nuclear weapons capability. At Halifax, the G-7 leaders voiced their public support for this policy. Russian and Chinese cooperation with Iran remains a critical concern to us, and we continue our high- level dialogue with senior officials in both countries. Our efforts to persuade them to halt cooperation that can assist Iran's nuclear or other WMD programs are continuing. Ultimately, we hope that both Russia and China will conclude that any form of cooperation that even remotely assists Iran's search for nuclear weapons is simply too risky, and will eventually pose a threat first and foremost to their own national security.

In summary, Mr. Chairman, we believe that our efforts to intensify pressure against Iran are making progress, and that the embargo will make an important contribution. More is being done, especially to win greater support from our friends and allies, above all in the area of investment and financial assistance. American leadership has been and will continue to be critical to effectively pressing Iran to change its behavior. We are grateful for congressional support for our actions, and to you, Mr. Chairman, for your efforts to focus attention on this very important issue.