SEN. SARBANES: And now we'll move on to our concluding panel. If they would come forward and take their places at the table, we'd appreciate that very much.

. . .

SEN. SARBANES: Thank you very much for a very strong statement. We appreciate it.

Mr. Clawson.

MR. CLAWSON: Thank you --

SEN. SARBANES: We will include everyone's full statement in the record, and so you can proceed on that assumption as you make your comments.

STATEMENT OF

PATRICK CLAWSON
Director for Research,
Washington Institute for Near East Policy

MR. CLAWSON: Thank you, Mr. Chairman. Thank you for having me here today.

After the election of President Mohammad Khatami in 1997, there was an expectation that the reformist tide would win out over the hard-liners in Iran. So far that has not been the case. Despite some progress the reformers 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.

Washington has offered to reduce restrictions on Iran and to resolve differences in a step-by-step process, so long as the process is reciprocal rather than one-sided. To demonstrates its continued 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 for big transactions incidental to education and to non-governmental organization 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 the Iranians have great difficulty taking the exam, the English-language exam required by the American universities, because payment for that exam is considered a forbidden transaction.

I would strongly urge that Congress express to the administration its desire to promote a dialogue with civilizations with Iran by lifting the restrictions on activities incidental to education and on people-to-people exchanges conducted by American nonprofit organizations.

The United States should also continue its efforts to encourage government-to-government dialogue with Iran. Iran has refused to talk to the United States -- not vice versa. Iran has the only government in the world that refuses to talk to the United States. It is Iran which generates isolation -- not the United States. We have consistently called for dialogue, which Iran consistently refuses.

At the same time as it pushes for diplomatic dialogue and extends a hand of friendship to the Iranian people, the United States should continue to press the Iranian government. In particular, the United States government should reduce the Iranian government's income so long as Tehran uses extra money to finance terrorism and purchase destabilizing weapons. We can't stop Iran's weapons of mass destruction programs, but we can slow them greatly. And personally I'm optimistic that some day there will come a change in Iran and that there will be a new government which won't be interested in pursuing those weapons programs, so that if we can slow them we will achieve ultimately success.

It is in this context that we should consider the renewal of ILSA. The Iranian government and every major oil industry magazine in the United States has said that ILSA reduces Iran's ability to attract investment in its oil and gas industry. Iran has proudly announced $11 billion in foreign oil deals. But that is hot air. Very few of those announced deals are now proceeding. Indeed, yesterday's Financial Times reported how one of the largest deals is at risk of unraveling. And ILSA is a major reason that few such investments have actually proceeded.

I am a frequent traveler to Japan these days, which is worried about U.S. reactions to an investment that it is considering. 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 can 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 in order to finance its arms programs. But at the same time, ILSA has exacerbated trade tensions with America's most important allies, including the European Union states. Most in Europe regard ILSA as too intrusive on Europe's turf. I never understood how the United States and Europe decide which issues are sufficiently important that the two sides will risk a trade war. Off hand, I would have said that bananas are less of a threat to U.S. security and prosperity than are prospective Iranian nuclear missiles. But with strong support from the American business community, the United States 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 press -- excuse me -- how to use ILSA to press Europe to be more helpful in containing Iran's destabilizing behavior. ILSA has already had a positive effect at promoting multilateral cooperation against proliferation. Indeed, then-Secretary of State Albright explained that the European Union accelerated cooperation about Iranian cooperation was the reason why the United States granted a waiver to the ILSA provisions regarding the South Pars (ph) project. My preferred approach would be for the administration to make more creative use of the provisions already in ILSA for a country waiver; that is, a waiver on all investments 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 that 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.

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 investments in oil industries. But ILSA will reduce the income available to those governments and therefore put a crimp in some of their most dangerous activities.

SEN. SARBANES: Thank you very much. The bell that just rang is there is a vote on, and I think the most sensible thing to do is we'll take a brief recess, and I'll go and vote, and then I'll return and we will hear the balance of the testimony and have questions for the panel.

Now, Mrs. Bernstein, I understand you may have to go. And if that's case, why, we quite understand and we very much appreciate your coming today, and we particularly appreciate your very strong and thoughtful statement.

The committee stands in recess.