Prepared Testimony by Patrick Clawson Before the House International Relations Committee Hearing: Threats from Iran

June 25, 2003

Director for Research, The Washington Institute for Near East Policy Statement for June 25, 2003 Hearing of the House International Relations Committee, Sub-Committee on the Middle East and Central Asia on Enforcement of ILSA and Increasing Security Threats from Iran

I wish to primarily address the Iran side of the Iran-Libya Sanctions Act (ILSA).

ILSA's aim is not to sanction European or other foreign firms which invest in Iran. As set forth in its Section 3, ILSA's purpose is "to deny Iran the ability to support acts of international terrorism and to fund the development and acquisition of weapons of mass destruction [WMD] and the means to deliver them by limiting the development of Iran's" petroleum industry. Any evaluation of ILSA enforcement has to ask, has Iran's proliferation and terrorism been successfully limited, whether by use of ILSA or through other policies? If Iranian proliferation and terrorism remain problems, could more use be made of ILSA to address these problems? These are the issues which should be at the heart of the report on the effectiveness of actions under ILSA, due no less than 24 months and no more than 30 months after the July 2001 ILSA Extension Act. To be more specific, that report should acknowledge that Iran has remained the principal state sponsor of terror and that Iran is making great progress towards acquiring nuclear weapons and long-range missiles with which to deliver them. After that sober assessment, the report should answer three questions: Are economic sanctions appropriate instruments against Iranian proliferation and terrorism, as ILSA presumes? Is European and Japanese cooperation important to making sanctions against fully effective, as ILSA presumes? Is the threat of economic pressure an appropriate instrument to secure European and Japanese cooperation, as ILSA presumes?

The answer to all three questions is, yes. Let us see why.

Are Economic Sanctions Appropriate Instruments Against Iranian Proliferation and Terrorism?

Economic sanctions are imperfect instruments to use against Iranian proliferation and terrorism. But all the instruments available to the United States are imperfect, and sanctions make sense as part of a coordinated package.

To understand the problem, consider the urgent question of how the United States can stop Iran's relentless march towards acquiring nuclear weapons within the very near future. Iran's program has acquired a dynamic which is going to be very hard to reverse. Iran has accomplished the most difficult technical step, which manufacturing enrichment devices, in this case, centrifuges. Many experts think Iran will have a complete fuel cycle, capable of going from natural uranium mined in Iran to enriched uranium ready for a bomb, within a matter of months rather than years, though it would then take more than a year to produce the first bombs using that fuel cycle. Even Russian experts now write about Iran having missiles carrying nuclear warheads by 2006 - in other words, during the life of the next Congress.[i] That is not good news.

All of the options available for stopping this drive suffer from serious problems Multilateral diplomacy: In recent months, the United States has made considerable progress at persuading the European Union (EU), the International Atomic Energy Agency (IAEA), and even Russia that Iran's nuclear programs are troubling. But it is optimistic to think that Iran will cease or reverse nuclear proliferation because of diplomatic pressure. More likely, Tehran will do just enough to split the international community, while continuing with clandestine nuclear programs with Tehran: There is little reason to think that Iran's hardliners, who for years refused to even talk to Washington, are interested in a deal. Based on their history (e.g., the release of hostages in Lebanon), Iran and the United States are each convinced the other cheats and refuses to respond to overtures. Any deal might involve terms so generous it would like Tehran was being rewarded for being a proliferator, which could encourage others to proliferate. Plus, any deal would look like Washington was supporting Iran's hardliners, thereby selling out the democratic forces people detest the hardliners who control power, it would be optimistic to count on them seizing power in the few years before Iran becomes a nuclear power. It would therefore be prudent for the United States government to plan on having to deal with a problematic regime in Tehran for the indefinite future. It is not clear Washington can do much if anything to speed victory of democratic forces. And a democratic government would be intensely nationalist and so might be loathe to give up nuclear programs until it better understood the strategic cost such programs entail, e.g., the suspicion they cause known program involves several large facilities far inland which would require a large military action to destroy. Military action might not slow Iran's program much: it may well have other unknown facilities, and it could probably reconsitute most destroyed facilities (other than the Bushehr nuclear power reactor) within a few years. Iran could retaliate, e.g., with terrorism. And military action could lose the United States the sympathy of the Iranian people.

Given this set of bad choices, economic sanctions look pretty good. After all, economic problems are high on the mind of Iran's leaders. They are acutely aware that the youth protests threatening their rule are fueled by the poor prospects for the young. Schools are overcrowded, with three shifts common at high schools. The state universities accept less than one-fifth of those who take the entrance exam, and the private universities are beyond the reach of most Iranians (plus, they are not very good). Few of those leaving school find jobs readily: about 700,000 young men look for their first job each year, but less than 250,000 jobs become available, and the situation for young women is so bad that few bother even looking for employment. Iran's "baby boom generation" (born in the decade after the 1979 revolution) faces a dismal future, and they are frustrated. These young people blame the hardliners for their economic problems. High on the list of complaints is that hardliners have prevented normal economic relations with the United States. In this situation, the U.S. government is in a good position to say to Iran's leaders: stop proliferation and terrorism, and the United States will drop its sanctions. In other words, the sanctions provide a powerful leverage to advance the anti-terror, anti-proliferation goals of ILSA.

In the long run, the prospects for stopping Iranian proliferation and terrorism are good, because the Iranian people hate the current system, want democracy, and are friendly to the United States. Therefore, any policy should reach out to the Iranian people to support their hopes for change while taking a tough stand against those who engage in repression at home and terror abroad. For this reason, economic pressure on Iran should be primarily through restrictions on the oil and gas industry, because those industries finance the Iranian government. Restrictions on the oil and gas industry in no way slow the people-to-people contact which is so important for supporting democratic forces in Iran. Nor do restrictions on oil and gas directly hurt private Iranian business people, many of whom are fierce opponents of the present regime. For all these reasons, the focus in ILSA on the oil and gas industry is a wise choice.

Is European and Japanese Cooperation Important to Making Sanctions Fully Effective?

While initially denying that U.S. economic sanctions and ILSA would have much impact, Iran and international oil analysts now agree that in fact the U.S. actions significantly impeded investment in Iran's oil and gas industry, which is exactly its stated purpose. To be sure, the Iranian government's own incompetence-its corruption, inefficiency, and generally inflexible stance in negotiations with international oil companies -have had more impact than U.S. actions at reducing foreign investment in Iranian oil and gas. But Iranian commentators regularly ascribe the failure to attract foreign investment to U.S. pressure, even though the Iranian oil experts recognize that is not the case. In other words, Iranians see the U.S. government as being more powerful than it really is, which is a fine thing-if we can take credit for the actions of others, that magnifies our perceived power.

Because it has not been able to attract as much foreign investment as it hoped, Iran has not been able to increase its oil output in recent years. According to the most recent International Monetary Fund (IMF) report on Iran,[ii] Iran's oil output in 1997/98 was 3.623 million barrels of oil per day and that actually fell over the next four years to 3.441 million in 2001/02. In other words, despite the tremendous importance the Iranian government put on increasing oil output, it has not been able to do so. Unfortunately, however, higher oil prices have allowed the Iranian government to substantially increase its income. According to the IMF report, Iran's crude oil exports averaged $11.6 billion in 1997/98-1998/99, but then averaged $17.1 billion in 1999/00-2001/02, and I estimate they were at least that much in 2002/03. That extra $5.5 billion a year for four years has provided the Iranian government considerable margin. Tehran has used the money to reduce its vulnerability to external economic pressure, paying off at least $5 billion dollars in foreign debt and building up at least $12 billion in foreign exchange reserves. In what it told the IMF, Iran claimed its foreign exchange reserves were $17.5 billion in March 2002 and projected they would be $22.9 billion in March 2003. The sad reality is that Iran is extremely well positioned at present to resist foreign economic pressures.

Because Iran has used the high oil prices of the last few years to build up a cushion against foreign economic pressure, the United States is no longer in as good a position to press Iran on its own. Iran's leaders seem convinced they can outlast any economic pressure the United States can apply. On the other hand, they are anxious to secure closer economic cooperation with Europe and to a lesser extent Japan. Once the United States blocked Iran's application to join the World Trade Organization, Iran's hardline government bent every effort to reaching a "Trade Cooperation Agreement" (TCA) with the EU. To its credit, the EU insisted that the TCA had to include provisions about human rights (which has become the norm for TCAs) and, in an unusual move, that the TCA could only proceed if progress were made in parallel on three political issues: proliferation, terrorism, and Iran's undermining of the Middle East peace process.[iii] It is a sign of just how desperate Iran's hardliners are for a trade agreement with Europe that they agreed to discuss these issues. Several rounds of negotiations have been held. To be sure, the EU is making only mild demands of the Iranians, e.g., on human rights, the EU asked that stoning adulterers to death be stopped, and it appears to have accepted Iran's counter-offer to suspend the stonings.

The TCA negotiations show that economic pressure by Europe can bring Iran to the negotiating table to discuss the most important political issues. Therefore, a priority for U.S. policy should be pushing Europe, and if possible also Japan, into taking joint economic actions to stop Iranian proliferation and terrorism. This is the objective of ILSA.

Is the Threat of Economic Pressure 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 which U.S. government officials offered. Perhaps that can be done. Already, the EU has become active pressing Iran to do more to address the IAEA's concerns about Iran's nuclear program, and the EU has formally said that "coercive measures" have to remain a last resort to prevent proliferation. [iv]

Nevertheless, the record of the EU's "critical dialogue" with Iran during the 1990s and the more recent TCA negotiations suggest that the EU will be less than vigorous in pressing Iran to end terrorism and proliferation. Under those circumstances, surely it is helpful if U.S. policymakers have additional instruments they can use to influence European decisions. ILSA provides a wide range of instruments that can be held over the head of European governments. For instance, ILSA provides that if a government adopts a program to use economic pressure to impede Iranian proliferation and terrorism, then the president can issue a general waiver of any sanctions because of investments by nationals of that country. This provision has not been used. There are lots of ways that it could be productively applied. For instance, it would be very useful if the EU countries joined with the United States in applying economic sanctions on Russian, Chinese, and North Korean firms involved in the proliferation of nuclear and missile technologies to Iran. So long as only the United States is raising this matter, the Russians can dismiss the concerns as American exaggerations, whereas the Russian reaction might be quite different if it were faced with concern from all the G-7 countries.

Instead of making use of the general waiver provision, the Clinton administration concluded an agreement with the EU on May 18, 1998 under which it issued a waiver for a specific investment project.[v] In return, the EU agreed to a series of measures designed to tighten export controls on military and dual-use technologies for Iran and it signed eleven counterrorism conventions with the United States. Another aspect of the deal was that the EU agreed to suspend its complaint to the WTO about ILSA and the United States agreed that "like treatment for future projects [i.e., project-specific waivers] would occur only in the circumstance where we were getting the kind of enhanced cooperation on weapons of mass destruction and counterterrorism that we've gotten as a result of our May 18, 1998 agreement," to quote Undersecretary of State Stuart Eizenstat's testimony to this committee on June 3, 1998.

That may have been the best that could be gotten from the EU at the time. However, times change. With the problem of Iranian proliferation growing markedly worse, and with the EU becoming more cognizant of the grave danger from the nexus of proliferation and terrorism, the time has come to revisit whether we are getting the kind of enhanced cooperation Secretary Eizenstat spoke of. Surely as the problem grows worse, the cooperation we expect from Europe should grow. The 1998 agreement to grant future waivers was conditional upon such "enhanced cooperation." There are a variety of issues which could be raised with the EU about enhanced cooperation. And it would be useful to adopt the same approach with countries outside the EU, namely, to make waivers contingent on enhanced cooperation on Iranian proliferation and terrorism. Iran has been soliciting investments in its oil industry from Japan, China, Russia, Canada, and a number of other industrial and industrializing nations; all of these countries could be approached about enhanced cooperation against Iranian proliferation and terrorism.

Many in European circles regard ILSA has too intrusive on Europe's turf. I have never understood how the U.S. and the EU decide which issues are sufficiently important that the two sides will escalate the issue into a serious trade dispute. Offhand, I would have said that bananas are less of a threat to U.S. security and prosperity than are prospective Iranian nuclear missiles. But the United States and Europe have repeatedly gone toe to toe over bananas, imposing far-reaching sanctions against offenders, while the United States agreed to waivers to prevent a trade dispute about Iranian proliferation and terrorism. Unless some more effective policies are developed to prevent Iran's rapidly advancing nuclear program, it is time to reconsider risking a trade dispute if need be in order to secure European enhanced coooperation against Iranian proliferation and terorism.

Endnotes [i]. Andrew Jack, "Iran missiles a 'potential threat to 20m Russians,'" Financial Times, June 17, 2003, p 3, describing a report from the PIR Centre.[ii]. IMF, "Islamic Republic of Iran: Selected Issues and Statistical Appendix," Country Report No 02/212, September 2002.[iii]. The 2518th meeting of the European Council (the ministerial body directing the EU) on June 16, 2003 concluded, "The Council recalled that in deciding to open these negotiations [with Iran] it expected that deepening of economic and commercial relations between the EU and Iran should be matched by similar progress in all other aspects of the EU's relations with Iran. It identified in particular the need for significant positive developments on human rights, non-proliferation, terrorism, and the Middle East Peace Process."[iv]. In its Declaration on Non-Proliferation of Weapons of Mass Destruction adopted June 16, 2003, the Council concluded, "The proliferation of weapons of mass destruction and means of delivery such as ballistic missiles is a growing threat to international peace and security...We have a wide range of instruments available [against proliferation, including] as a last resort, coercive measures in accordance with the UN Charter. While all [these instruments] are necessary, none is sufficient in itself. We need to strengthen them all, and deploy those which are most effective in each case."[v]. As Undersecretary of State for Economic Affairs Sutart Eizenstat explained to this committee on June 3, 1998, the EU wanted a country waiver under ILSA's Section 4(c). What the United States agreed to instead was a national security waiver under Section 9(c) for one project (the South Pars project).