Renewing the Iran-Libya Sanctions Act (ILSA) is a good way to keep up the pressure on Iran about its hardline actions. Renewal should be accompanied by a hand of friendship extended to the Iranian people in support of their campaign for reform.

The Political Context in Iran

Iran is one of the great political enigmas facing U.S. policy. Tehran sponsors international terrorist groups, lends support to the violent opposition to the Middle East peace process, and spends scarce capital on developing long-range missiles and a nuclear weapons program. At the same time, Iran has a political system that, outside Israel and Turkey, may be the most animated, vigorous, and dynamic in the region. After the election of President Mohammed Khatami in 1997, there was an expectation that the reformist tide will win out over the hardliners. So far, that has not been the case. Despite whatever progress the reformists have made on the domestic scene, little has changed in terms of those Iranian policies that pose the greatest threat to U.S. interests and allies.

The prospects are poor that Khatami will do much to change Iranian policy during his second term. Indeed, what is striking about Khatami's situation is how' little he offers to address Iran's most pressing problems, namely, the stagnant economy, political repression, and security threats.

Consider Iran's security situation. To the east is Taliban-dominated Afghanistan, which is openly hostile to Iran and from which emanates the opium and heroin to which two million Iranians are addicted. To the west is Iraq, which sponsors the People's Mojahedeen cult whose members carried out more than twenty armed attacks inside Iran in the last year, including some deadly mortar attacks in Tehran. The United States shares Iranian concerns about both Afghanistan and Iraq, as well as the Armenian-Azerbaijani conflict that is right on Iran's borders. But the Khatami government is locked in a needless confrontational posture against America. Evidently, Khatami puts ideological disdain for America and venom against Israel ahead of Iran's state interests.

Overall, Khatami offers Iran little except an alternative to something worse. Khatami is popular both with the Iranian people and with the outside world because hardline opponents are truly dreadful. The search for "Iranian moderates" has a long history, and there is little reason to believe that Khatami will be any less hostile to the United States than were the "Iranian moderates" of Iran-contra days.

The Framework for U.S. Policy

So long as Iran continues to threaten regional stability by pursuing weapons of mass destruction and the means to deliver them, undermining the peace process (e.g., arming Hizbollah), and providing support for international terrorists, the U.S.-Iranian relations will be unfriendly or worse.erica's allies generally cooperate well on the most critical issue here, namely, limiting supplies to Iran of major new arms and dual-use technology. At the same time, the United States and its allies differ on how best to press Iran to change its activities of concern. The United States prefers an approach of containment; its allies, one of engagement. The two approaches need not be opposites. Indeed, the history of Western policy towards the Soviet Union shows how they can be used together to good effect. The "ostpolitik" policy of engaging the Soviets begun by German chancellor Willy Brandt in the 1970s did much to undermine the legitimacy of the Soviet system in the eyes of its people, while the military buildup under President Ronald Reagan (combined with the aid to the Afghan resistance) put the Soviet Union under so much pressure that it cracked. That said, during the Cold War, the United States usually took the lead on the containment policies and U.S. allies usually took the lead on promoting engagement. That difference is likely to persist in dealing with the difficult states of the Middle East, including Iran.

Washington has offered to reduce restrictions on Iran and resolve differences in a step-by-step process, so long as the process is reciprocal rather than one-sided. To demonstrate its continuing interest in such a process and to show its support for the Iranian reform program, the United States should take further steps to relax those sanctions which hit the Iranian people as distinct from the Iranian government. As with the effort to make the sanctions on Iraq smarter by concentrating more on the regime and less on the people, so too the sanctions on Iran could be changed to facilitate people-to- people exchanges. In particular, the current rules forbid transactions incidental to education and to non-governmental organization (NGO) activities, with the practical effect of making education and NGO activities very difficult. For example, the rules allow Iranians to study at American universities, but they must use subterfuges to pay the American company that administers the English language test required by American universities because direct payment is deemed an impermissible transaction with Iran. Similarly, Iranians can come to the United States for conferences, but NGOs cannot easily pay the travel expenses of these Iranian visitors nor for the costs of Americans going to Iran for conferences. I strongly urge that Congress express to the Administration its desire to promote a dialogue of civilizations with Iran by lifting the restrictions on activities incidental to education and on people-to-people exchanges conducted by American non-profit organizations (that is, those with 501.c.3 status under the tax code).

The United States should also continue with its efforts to encourage government-to government dialogue with Iran. Iran has refused to talk with the United States, not vice versa. Iran has the only government in the world which refuses to talk to the United States. It is difficult to engage with Iran when Iran refuses to talk to Washington. We can proclaim until we are blue in the face that Iran would benefit from talking to Washington about issues of common concern to the two countries, such as the Taliban or counternarcotics. But the fact remains that Iran steadfastly refuses contact.

At the same time as it pushes for diplomatic dialogue and extends a hand of friendship to the Iranian people, the United States will continue to press the Iranian government. In particular, will want to reduce the Iranian government's income, so long as Tehran uses extra money to finance terrorism and purchase destabilizing weapons.

ILSA

ILSA reduces Iran's ability to attract investment in its oil and gas industry--income which accrues directly to the Iranian government. To be sure, ILSA's impact is limited; Iran's oil income depends much more on the price of oil than on ILSA. We can all speculate about where the price of oil will go; no one has a good record at making predictions, because none of us can tell how OPEC politics will play out. Economic models have a singularly bad record at forecasting oil prices, precisely because oil prices are as much a matter of geopolitics as of markets. One thing we know for sure is that Iran has always been the most hawkish member of OPEC, that is, arguing for the highest possible price. The more powerful Iran is, the more likely it will campaign for tight OPEC quotas that drive the price up.

ILSA has reduced Iran's ability to export oil to finance its arms programs, but it has exacerbated trade tensions with America's most important allies including the European Union (EU) states. Most in Europe regard ILSA as 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 risk a trade war. 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. With strong support from the American business community, the U.S. government has imposed far-reaching sanctions against banana offenders, while Iranian proliferation and terrorism has not been seen as rising to that level of importance. I beg to differ; indeed, I would be prepared to accept Europe's silly banana trade rules if Europe agreed to stop investing in Iranian oil and gas.

However, there is a real issue of how to use ILSA to press Europe to be more helpful in containing Iran's destabilizing behavior. My preferred approach would be for the Administration to make more creative use of the provisions in ILSA for a country waiver--that is, a waiver on all investment from a country, as distinct from a waiver applying to only one project. The Administration should interpret those provisions broadly to allow consultations with the EU on measures the EU may take to reach our common objective of countering proliferation and terrorism. For instance, it would be very useful if the EU countries joined with the United States in applying pressure on Russia, China, and North Korea to stop the proliferation of dangerous 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. The Russian reaction might be quite different if it were faced with concern from all the G-7 countries. And G-7 cooperation might make a difference not only to governments but also to businesses. If the EU, Japan, and Canada were to join with the United States in ferreting out and sanctioning Russian, Chinese, and North Korean firms that supply nuclear and missile technology to Iran, exporting such dangerous technology to Iran might look more risky and less attractive. It is worth considering making cooperation on these matters the basis for exempting a country from ILSA restrictions.

In short, ILSA is a good law, and it provides the flexibility to allow the Administration to conduct vigorous diplomacy. ILSA will not stop Iranian or Libyan terrorism or proliferation; it will not even stop all foreign investment in their oil industries. But ILSA will reduce the income available to these governments and therefore put a crimp in some of their most dangerous activities.