Senate Committee on Banking, Housing and Urban Affairs: Minimizing Potential Threats from Iran: Assessing Economic Sanctions and Other U.S. Policy Options

July 30, 2009

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SEN. BAYH: (Off mike). Great. Thank you. I'm grateful that you're interested in what I'm saying, Bob. (Laughter.)

SEN. LIEBERMAN: It's very good to see the spirit of bipartisanship at the outset.

SEN. BAYH: Absolutely. No one goes without an adequate hearing in the Banking Committee. Thank you. Thank you, Senator.

I'm please to call to order this hearing of the Senate Banking Committee which will focus on how the United States can use sanctions and other forms of economic pressure to prevent Iran from acquiring a nuclear weapons capability.

I want to begin by thanking our chairman, Senator Dodd, for his assistance in arranging this hearing and for his support and leadership on this important issue, and to his staff and the staff of the Banking Committee as well. We all know that Senator Dodd has many other demands on his time, and his willingness to schedule this hearing despite those demands demonstrates his commitment to confronting this serious threat.

As we gather here today, there is perhaps no challenge more pressing or vexing than Iran's pursuit of nuclear weapons. The extent of the threat is well documented. The Iranian regime has refused to cease its illicit nuclear activities in defiance of multiple U.N. Security Council resolutions. It is the world's foremost state sponsor of terrorism and has provided arms and training to dangerous terrorist groups in Iraq, Afghanistan, Lebanon and the Palestinian territories. And has we have all observed so vividly in the past few weeks, it has engaged in brutal repression of its own citizens.

If this regime were to acquire nuclear weapons, it could spark a dangerous arms race in the Middle East, do irreparable damage to the global nonproliferation regime, and pose a serious threat to the security of the United States and our allies. In confronting a threat of this magnitude, a sense of urgency is in order.

I know that many senators share my concerns about Iran, as is evidenced by the legislation this committee has considered over the past several years. Last year, Chairman Dodd put forward a sanctions bill that included some very noteworthy measures.

More recently, I introduced legislation with Senator Kyl and Senator Lieberman called the Iran Refined Petroleum Sanctions Act. This bipartisan bill would give President Obama expanded authority to target what has been described as Iran's Achilles' heel: its dependence on imported refined petroleum products. Our bill has since won the support of 71 senators from across the ideological spectrum. This hearing, however, will not focus exclusively on any particular legislation; rather, we will focus more broadly on the relative advantages and disadvantages of different forms of economic pressure.

We are fortunate to have with us today several noted experts who have agreed to share their views on how the United States can best use economic pressure as a tool to advance our interests with respect to Iran. As we consider this question, we should keep in mind that when it comes to Iran's nuclear program there are unfortunately no easy answers.

Accordingly, all the different approaches we will explore today are bound to have some drawbacks and we are likely to be faced with a choice among difficult options. I firmly believe, however, that using economic pressure is far superior to the extreme alternatives of standing idly by as Iran goes nuclear, or relying solely on a potential military strike which could have grave consequences and should be contemplated only as a last resort.

As we consider our various options, we do so in cooperation with President Obama's historic outreach to Iran. This outreach has demonstrated to the Iranian people and the international community that the United States is prepared to engage in direct dialogue to resolve our difference between our two countries. The president's offer of engagement has also put the regime on the defensive and made it more difficult for Iran's leaders to blame the West for all of their problems.

While I have supported the president's outreach, I believe that we have been wise to set a deadline for Iran to accept his offer. I'm also pleased that the Senate last week unanimously adopted a resolution that I put forward, once again, with my friend Senator Lieberman, Senator Kyl and Senator McCain, that reinforced the deadline by making it clear to the Iranians that they have until the G-20 summit at the end of September to agree to negotiations or else to face sanctions.

While I sincerely hope that Iran's leaders seize this historic opportunity for dialogue, I believe that prudence demands that Congress begin to lay the groundwork for a different approach should Iran continue to reject meaningful negotiations. Such preparations with demonstrate to Iran's leaders that there will be grave consequences if they do not agree to forgo their drive for nuclear weapons.

To put it even more bluntly, if Iranian officials are unwilling to sit down at the table and negotiate, then Congress is prepared to authorize what Secretary of State Clinton has referred to as, quote, "crippling economic sanctions."

With each day that passes, Iran is installing more centrifuges and producing more fissile material. According to published reports, they have now accumulated enough low-enriched uranium for a nuclear weapon, should the regime decide to develop one, and by next February they will have enough for two weapons.

Conversely, our window of opportunity to stop Iran from acquiring nuclear weapons is rapidly closing.

The clock is ticking and at some point it will run out. As we have seen with India, Pakistan and North Korea, the clock can often run out sooner than we think, with grave consequences for the region and the world.

I hope that today's hearing will help underscore the depth of the Senate's concern over Iran's nuclear program and will demonstrate to Iran, and to the international community, that Congress is prepared to act.

As I have previously mentioned, we are fortunate to have with us today a distinguished group of panelists, beginning with our friend and colleague Senator Lieberman.

But before we hear from them, I would first like to give my distinguished colleagues an opportunity to share their thoughts, and we will begin with my friend and colleague, our ranking member, Senator Shelby.

SEN. RICHARD SHELBY (R-AL): Thank you, Mr. Chairman.

Once again the committee needs to hear testimony on Iran's support for terrorism and its determination to develop nuclear capability. This time, however, we meet at a time that is marked by weeks of unprecedented social, economic and political upheaval in Iran. While many things remain unclear about Iran and its future, two remain very clear: Iran's nuclear ambitions and its sponsorship of terrorism.

Iran continues to make strides in both its nuclear and missile programs. And it is still recognized as the so-called central bank for terrorism -- terrorist financing.

Over the years various administrations have attempted, with little or no success, to moderate the regimes nuclear aspirations and to curb its support for terror. Certainly, time and experience have shown that economic sanctions can be a mixed bag as a foreign policy instrument.

Sanctions and other financial measures, directly and indirectly, have restrained some of Iran's activities, but we have yet to implement a sanctions regime that produces the desired result. It has become clear that we need a fresh approach and that stricter controls may be necessary.

I appreciate our witnesses' willingness to appear before the committee today. I can't help but note, however, that the current administration is not represented at today's hearing. The members of this panel will undoubtedly provide valuable insight into the -- on the previous administration's efforts. Current officials, however, would certainly be in a better position to provide details, or even discuss generally how the president intends to engage Iran diplomatically and whether he would support further sanctions on the regime. I hope we will get the opportunity to have that discussion sometime in the near future.

Thank you, Mr. Chairman.

SEN. BAYH: Thank you, Senator Shelby.

I will recognize members in the order in which we arrived, alternating sides of the aisle.

Senator Tester.

SEN. JON TESTER (D-MT): Yeah, thank you, Senator Bayh. And I want to thank you and Chairman Dodd and Ranking Member Shelby for having this hearing. And I welcome Joe Lieberman.

Thank you for being here, Senator.

SEN. LIEBERMAN: Thank you.

SEN. TESTER: This is -- it's an interesting issue on a couple different fronts because I think that any sanctions that we apply -- we can't be the only ones on the block doing it, I guess, is what I want to say. We need to make sure that it is a community effort amongst the world. And how we get other folks to step up to the table -- because, quite frankly, Iran's potential nuclear capabilities, if they come to pass, will have a destabilizing impact on the world and so how we get other folks to step up and help us keep that region stable -- basically, that's what we looking for -- is important.

And then as we look and see what's transpired over the past while with the recent elections and the unrest that is occurring in that country due, I think, to poverty and unemployment and a government that is simply not responsive to the people, how do we not distinguish (sic) that flame that's burning? Because, quite frankly, I think that -- I think the people have figured it out and we don't want to stop them from controlling their own destiny.

So I look forward to the hearing. I look forward to the panelists. I want to -- I look forward to hearing what they have to say with the region. I, by no means, am an expert, but I certainly look forward to the information.

Thank you.

SEN. BAYH: Thank you very much, Senator.

Senator Corker.

SEN. BOB CORKER (R-TN): Thank you, Mr. Chairman.

Mr. Chairman, I, as you know, don't ordinarily make opening comments. I do want to welcome, though, Senator Lieberman. And there's a hearing -- Foreign Relations on Sudan. I just came from there. So I'm going to be in and out. I want you to know that's no disrespect to one of the most honored witnesses --

SEN. BAYH: Understood.

SEN. CORKER: -- we've had in recent times.

So I thank you for having this hearing. It's very important, and I look forward to learning from it.

SEN. BAYH: Thank you, Senator.

Senator Menendez.

SEN. ROBERT MENENDEZ (D-NJ): Thank you, Mr. Chairman.

I want to just briefly say that I appreciate this hearing. It is timely and important.

My personal view that Iran is not simply an existential threat to our ally in the Middle East, Israel, but it is a threat. And when I look at the fact that Iran has made dramatic progress in its nuclear program over the last 18 months, with the June IAEA report indicating that it had increased the number of installed centrifuges by 1,200 in the preceding three months and that its stockpile of low-enriched uranium is now at 1,339 kilograms -- an increase of 33 percent since the February report -- enough low-enriched uranium to produce a minimum amount needed to arm a bomb if the material were further enriched to weapons grade. And in addition to its growing enrichment process Iran continues to test-fire ballistic missiles at a rapid pace, missiles that now have -- capable of delivering a payload to Israel or our allies in Europe -- I am seriously, seriously concerned.

So I look forward -- I believe and respect what the administration is doing in terms of seeking to have a diplomatic track. But I think the Congress strengthens the hand of the president in having an alternate track, a parallel track at the same time.

And that's why I support your legislation, am a co-sponsor of it and look forward to hearing the witnesses today to determine how do we best ensure that what we universally do not want to see happen doesn't take place.

Thank you, Mr. Chairman.

SEN. BAYH: Thank you very much, Senator Menendez.

Senator Martinez.

SEN. MEL MARTINEZ (R-FL): Mr. Chairman, thank you very much -- a very important hearing, of course. We all agree.

Senator Lieberman, a pleasure to have you.

And the other distinguished panelists as well, thank you for being with us today.

No doubt that Iran is on a path to achieving nuclear power -- weapon. There's no doubt that that would be an incredibly destabilizing event to the region. But it's also equally a threat to the very existence of the people of Israel.

We can't allow for this to occur. I appreciate a diplomatic track, but I believe that all options must be available and on the table. And I think the longer we wait the more danger arises. And I think the time to act becomes closer and closer at hand.

I don't think there's any question that Russia does not care about this outcome that we so much care about. And so I think so long as they're a part of the P-5 plus one process that nothing significant is going to come out of that.

Obviously it's great to look at the diplomacy being a part of this, but I have no hope that Iran voluntarily will stop the path they're on. Even with the unrest that they've had there's really no indication that a changed government would have a different idea of how -- on the pursuit of nuclear weapons and perhaps even on the issue of the destruction of Israel that President Ahmadinejad seems so intent upon.

So I'm concerned, and I think the fuse on our time frame grows shorter by the minute. And I would love to hear the administration make a clear statement that all options continue to be on the table and also that time is of the essence and that simply hoping for a negotiation to begin that is in my view elusive, at best, particularly with a government that today you don't even know who you'd negotiate with, because I'm not sure that the power structures are intact in Iran at the moment.

I think that the time for more aggressive action draws really, really close.

So thank you for being here. I look forward to hearing from all of you.

SEN. BAYH: Thank you, Senator Martinez.

Senator Merkley.

SEN. JEFF MERKLEY (D-OR): Thank you very much, Mr. Chair. And I associate myself with the comments of my colleagues.

I'm hoping that in the testimony today we can really get into the details of understanding the potential features of a sanctions strategy. Why is it the 1996 Iran Sanctions Act didn't work so well? How do we bring in and strengthen and move from unilateral to multilateral sanctions that might be more effective? What are the levers with Russia and Europe and Asia -- and so that we have basically recognize over time that sanctions can -- are -- there's no magic bullet here, but what can we do that would make this tool the most effective one possible to try to prevent this unacceptable threat of a nuclear weapon in Iranian hands?

SEN. BAYH: Thank you, Senator Merkley.

Senator Johanns.

SEN. MIKE JOHANNS (R-NE): Thank you very much, Mr. Chairman.

Let me start out today and say it is good to be here.

And Senator Lieberman, I have so much respect for your thinking in this area. And I wanted you to know that. I really appreciate your strong leadership.

I look back over the events of the last few months with the election in Iran and I must admit that I am deeply worried by not only the rhetoric that has come out of that country on behalf of and by Ahmadinejad over the past years, but I'm deeply worried by this situation where I think because of the election, because of the just aggressive, violent suppression of any voice pushing back on the results of that election, that unfair election, that Ahmadinejad has been emboldened by what has happened.

For a long time I would express the view that I really felt that the religious leadership in Iran had complete control over Ahmadinejad and where he was at and what he said. And I have to tell you, after the election I certainly appreciate the power of the religious leadership there, but I also think that they have seen the train leaving the station, if you will, and they got on the train. And I worry about whether his power has now been solidified and strengthened in a way where as long as he pays deference to the leadership there -- the religious leadership -- he can do about what he chooses to do.

If that is the case -- and I'd like to hear your thoughts on that -- then I think the dynamic is changing. And the threats that sometimes seem crazy, the references to Israel that sometimes seem too bizarre to be real, maybe all of a sudden they're not bizarre anymore, and they are more real than bizarre.

Those things I think are things we have to be paying attention to. If in fact that is a new nuance that has occurred in this very difficult part of the world, then we really have to refocus on what our strategy is going to be, how we are going to deal with this, what sanctions can have an impact, because it seems to me so far we're not having an impact in terms of sanctions.

So my hope is that in today's hearing we can focus on: Has there been a new nuance added to this situation? Is Ahmadinejad in a more powerful position than maybe he has ever been? And what is -- what would the consequence of that be as we start to think about how we work with this situation?

Final thing I'll say, and I didn't expect to speak this long, but I feel so strongly about this relationship we have with Israel and its importance to us. This is a part of the world where it's hard to find friends. And this is a deep, deep friend. This is a part of the world where it's hard to find democracy. And this is a country that was established on the basis of democracy and freedom. And I just think in every way we can we have to stand by this friend and support them. And the stronger we can speak as a nation in that regard I think the better off we are in terms of our long-term strategy for this part of the world.

With that I'll just wrap up and say again, Senator, I'm so anxious to hear your thoughts and appreciate your leadership in this area.

SEN. LIEBERMAN: Thank you.

SEN. BAYH: Thank you, Senator.

Senator Bennett.

SEN. ROBERT BENNETT (R-UT): Thank you, Mr. Chairman. I'll be very brief. I want to first thank you for your leadership in the Congress on this incredibly important issue, for calling all of our attention to it and for Senator Lieberman's leadership as well.

Thanks for being here today.

This is an enormously important topic for us. The threat is real both to the United States and to Israel. And the profound instability that could result in the region if Iran were able to acquire nuclear weapons should be of concern to every American and every citizen on this planet.

And I just appreciate your willingness to hold the hearing and am deeply grateful, Senator Lieberman, that you're willing to come talk to the committee.

Thank you.

SEN. BAYH: Thank you, Senator. I appreciate your kind words.

As I mentioned in my opening statement, Senator Dodd was also instrumental in bringing us here today, so I want to let you know that you're gratitude should be shared with him as well.

So thank you -- and his staff. Thank you for that, Senator.

I'd like to thank our distinguished witness for his patience in listening to all of us.

And now the time has come for us to benefit from his insights. If there was ever a witness who truly needed no introduction to this panel, it is our first witness, Senator Lieberman, our distinguished colleague from the state of Connecticut.

Senator Lieberman.

SEN. LIEBERMAN: Thanks very much, Senator Bayh, Senator Shelby, members of the committee. Thank you for giving me the honor of speaking before you this morning. Thank you for your kind words during the comments you spoke.

I'm really honored to be here. I join you in giving credit to my friend and colleague from Connecticut, Senator Dodd, for the leadership role he and this committee -- Senator Shelby is a strong, principled partner to Senator Dodd on these matters -- last year reported out critically important sanctions legislation and endorsed it overwhelmingly.

I thank you, Senator Bayh, for your strong and persistent leadership on this matter and tell you what an honor it is for me to work with you on the amendment that passed on the Department of Defense authorization bill last week on the S. 908, the Refined Petroleum Products Sanctions Act -- all very important, as you said, quite remarkable.

Two things I would say about what this committee and members have done and the challenge before us. One is that the amendment passed last week -- you all have spoke so eloquently and well that I'm going ask that my statement be included in the record, because it's repetitious -- and just see if I can put in context I think what we're all feeling and what this moment of challenge is.

The Senate is picking up its pace of action here. The amendment that was adopted last week unanimously by the Senate for the first time puts an explicit time schedule on sanctions against Iran. And it adopts the schedule that President Obama and President Sarkozy have stated, which is that if there's not a reaction by Iran by the G-20 meeting that will be held in Pittsburgh in the third week of September that action will have to be taken.

And in our resolution last week we said that that action should begin with sanctions against the central bank of Iran.

Senator Shelby, you used the term that Iran has become a central bank for terrorism worldwide. The central bank of Iran is the central bank of support of terrorism and sustaining the economy of Iran and, may I say, end-running some of the other sanctions that a very creative, aggressive Treasury Department under the Bush administration and continuing now under President Obama have imposed on Iran.

So, "Do this, Mr. President," is what we said last week, at the G-20 or right after it if nothing is -- there's been no response from Iran, or if within 60 days of that summit they do not stop the production of the enrichment of fissionable material.

S. 908, as you said, has 71 Senate sponsors -- broadly bipartisan -- I would say if you look at the list some of the most liberal and some of the most conservative members of the Senate. And there's power in this because I think it sends a very clear message to Iran and the rest of the world that no matter what may divide us on other issues we are very united in our concern, our anger about the Iranian program of nuclear weapons development and our commitment to urge and push and pressure and legislate our government to be very strong in doing everything we can to stop that development.

Now, why does it worry us, just to put it in context? Iran is a great country with great people. The whole history of Persia is in this people: an extraordinarily bright, well-educated, highly developed culture.

In 1979 the government was taken over -- a complicated situation, I understand -- but the reality: taken over by a fanatical Islamist regime. And it has grown more fanatical over the years both with regard to its neighbors and the rest of the world and with regard to its people.

And too often in our discussion of Iran here we, quite understandably, talk about the threat it represents to Israel, the threat it represents to the United States, the threat it represents to stability in the Middle East. It has represented a daily threat, and not just a threat but the reality of suppression and the denial of freedom and the brutal treatment of dissenters to its people ever since this revolution took place.

In some sense -- well, let me step back a little bit.

What has all this meant? This is a fanatical regime that is also an expansionist regime. And it has chosen to work through proxies, terrorist proxies: Hezbollah, Hamas, the Shi'a extremists in Iraq who have on their hands the blood of hundreds of American soldiers who would not have been killed there were it not for the support that the Iranian Revolutionary Guard Corps was giving to those supported training -- those extremists in Iraq.

And now we have a situation where as a result of the public uproar over the blatantly unfair elections two things have happened. One, the world now sees what we can't see every day because it's a closed society: the terrible repression that this regime lives under. And I always remember -- I think it was Sakharov who said during the dark days of Soviet communist oppression that -- I'm paraphrasing of course, and I'm sure I'm losing some power in his words, but essentially: How can the world trust a nation whose people don't trust it? How can a world rely on the word of a nation that lies consistently to its own people and suppresses their freedom?

So that's clear now, but here's what I worry about -- and Senator Johanns, I think you've asked a very interesting question. I worry -- and history gives us I think a basis for this worry -- that nations, particularly dictatorial nations, when they are in domestic difficulty -- and this regime is in trouble right now in Tehran -- very often look for -- to generate an international crisis -- to through that crisis try to unite the people behind them again. So I think we're in perilous times.

As you've all said, every day that goes by more of those wheels are spinning, more fissionable material is being created. They have one bomb -- they have enough for one bomb now; they're going to be building more to have more than that. What happens when they achieve that capability?

Of course, for Israel it really does just -- not imagining, listening to the words of Ahmadinejad and all the others, including some who today are described as moderates -- death to Israel. It represents an existential threat. But we also have to remember that they all lead tens of thousands of Iranians in cheers of "death to America" too.

And, you know, we don't have to go back too far -- only, unfortunately to Osama bin Laden -- to know that at our peril do we not listen to threats against us that seem so fantastic that they're unbelievable? But it is a real threat.

Also, if you've been to the Middle East, as many of you have been, what's been striking to me is that the anxiety level about Iran and the Iranian nuclear weapons program is as high and intense in the -- at the leadership of the Arab countries as it is in Israel. The threats are not made to the Arab countries, but they feel the danger. And what they feel is if Iran gets a nuclear weapon, the balance of power switches in the Middle East.

For us this is very significant because over decades we have been committed to that stability, worked hard, spent a lot of money, lost a lot of lives to preserve that stability. That will be greatly disrupted if they get a -- if the Iranians get a nuclear weapon. There'll be a powerful motivation in some of the larger Arab countries to develop their own nuclear capability. It'll be, I think, the end of the international nonproliferation regime. And it will strengthen the terrorist proxies of Iran because behind terrorist action, then, will be nuclear blackmail.

I think it's about the most unsettling thing -- in a world that seems very unsettled, the most unsettling thing that could happen. The greatest threat to peace is for Iran to get a nuclear weapons capability.

So for all those reasons, and because time is not on our side, we have very few options to peacefully draw this to a close in a positive way. That's why I support President Obama's initiative to engage with Iran. We've got to test that, but we've got to test it, as you've said, on a time-limited basis. They can't drag this out as they did with the Europeans.

I think what is becoming increasingly clear, because of this initiative and the deadly silence of the Iranians in response to it, not only publicly but, from everything I can determine, privately, that the world has to recognize that the problem between Iran and the United States is not in Washington, it's in Tehran.

And I think it will become increasingly clear that only through what Secretary Clinton described earlier this year as crippling sanctions -- crippling sanctions -- do we have a chance to convince the Iranians to stop this nuclear weapons program and to save ourselves from exactly the choice that Senator Bayh described: the most difficult choice between doing nothing in regard to a nuclear Iran and taking military action, because that is the choice we will be faced with and to me, in that moment, I think there's only one choice. But we don't have to make it now and it's why these sanctions proposals are so important.

I think we're at this point: I think, as someone else said to me, who was an intelligence chief in a Middle Eastern country -- an ally of ours -- the only thing that the fanatical regime in Tehran cares more about today than the development of nuclear weapons -- because it's that important to them -- the only thing they care more about today than the development of nuclear weapons is the survival of their regime. And I think with the instability in Iran today politically, crippling economic sanctions may reasonably lead the regime to wonder whether it can survive and to lead it to do what it ought to do to become part of the family of nations.

So I think that S. 908 is the next significant step. They depend on refined petroleum products. This bill will basically say to companies worldwide who are selling gasoline to Iran, who are shipping it to Iran, or who are insuring or financing those shipments you've got a choice to make: You can continue what you are doing with Iran or you can do business in the United States of America. You cannot do both.

I think time is of the essence. I appreciate greatly that you're holding the hearing this morning. I hope that the committee will consider marking up this bill and reporting it out in September. Remember, it's not mandatory. It gives the president the authority to impose these sanctions. And I think only if the Iranians see that these sanctions are coming do we have any hope of avoiding the stark choice that you, Mr. Chairman, have laid out.

I thank you for -- there's always a danger here when you depart from your prepared text you speak longer than you otherwise would, but your opening statements really inspired me to do that. I thank the members of the committee and I have great confidence in your judgment on this matter and so many others that have come before you as well.

SEN. BAYH: Thank you, Senator Lieberman. First, without objection, I will order the entry of your full statement into the record.

So ordered.

Thank you for your very insightful and sobering comments today. You've been a longtime leader in this area. And I know I speak for the entire committee when I say how grateful we are for your leadership and your testimony today.

SEN. LIEBERMAN: Thank you very much, Senator Bayh. Good morning.

SEN. BAYH: Good morning.

I'd like to ask the next panel of witnesses to please join us.

While they're taking their seats, I'd like to ask my colleagues -- we're fortunate to have four very distinguished individuals with us today. That means the list of their accomplishments is rather lengthy. I've asked my friend and colleague Senator Shelby, if it's all right with him and the rest of the committee, I would like to have ordered the entire list of their credentials into the record, but in the interest of saving time, I'll just cite their current place of employment.

Is that --

SEN. SHELBY: That's good.

SEN. BAYH: With no objection, we'll proceed that way and I'll order their entire resumes entered into the record.

I'd like to thank our witnesses for joining us today. I'm well aware that they have busy schedules, and so I speak for the entire committee when I say how grateful we are for your time and for the benefits of your thinking on this important area.

As I mentioned, I'm simply going to list your current place of employment, and enter into the record your entire list of credentials. Because you are all so accomplished, it would take us quite some time to go through the entire list of academic accomplishments, employment history and that sort of thing.

We are first joined by Ambassador Nicholas Burns. He is with us today. He's a professor of the practice of diplomacy and international politics at the John F. Kennedy School for Government at Harvard University. Next we have Dr. Matthew Levitt, director of the Stein Center on Counterterrorism and Intelligence at the Washington Institute for Near East Policy.

Thank you, Dr. Levitt.

Next we have Dr. Suzanne Maloney -- I guess I'm skipping over one in the order of the table here, but that's the way it's been given to me.

I'll come back to you. Trust me, Danielle -- senior fellow at the Saban Center for Middle East Policy at the Brookings Institute.

And we also have Ms. Danielle Pletka -- I hope I pronounced that correctly -- vice president of foreign and defense policy studies at the American Enterprise Institute for Public Policy Research.

I'd like to thank you all for joining us today.

And, Ambassador, we will begin with you and then go in order down the table.

Ambassador Burns.

MR. BURNS: Senator Bayh, thank you very much, Senator Shelby and members of the committee. It's a pleasure to be here. I have testified before this committee as a government official during the Bush administration in the past. This is my first time testifying as private citizen, so, obviously, the views that I'm about to express to you are entirely my own. It's a pleasure to be here.

I will not read my statement. I'll take mercy on the committee. I've submitted it for the record, obviously, but I'd just like to say --

SEN. BAYH: We'll have to call you more often to testify, Mr. Burns.

MR. BURNS: (Laughs.) I'll just make a couple of points that are at the heart of my statement.

First, let me just say that I agree very much with the sentiment that I think every member of the committee made in your opening remarks and Senator Lieberman did. I can think of no foreign policy challenge to our country that's more serious and perhaps more pressing than the challenge of a nuclear-armed Iran.

There are three challenges to our national security that Iran poses. First, there's a nuclear weapons future that would destabilize the balance of power. It would confront Israel with a terrible strategic situation and confront our Arab friends with the same situation.

Second, as Senator Shelby has pointed out many times, Iran is the major funder of most of the Middle East terrorist groups that are a problem for us, a problem for the Israelis, a problem for the Iraqis and it even gets into other parts of South Asia.

And third, Iran is highly significant and highly influential in Afghanistan and in Iraq. So we have a real challenge here. We Americans should seek to maintain our position as the dominant power in the Middle East because our influence is positive in that region and Iran's is not. But that's a strategic challenge that is posed for the United States by the rise of power of the Ahmadinejad government over the past four years.

I would defer to other panelists, especially Suzanne Maloney, who is a great expert on the internal politics of Iran, but as many of you have said, I think the events of the last several months from the lead-up to the elections, the June 12th elections, the extraordinary aftermath and the opposition that we saw on the streets of Iran of all classes, all ages, all ethnic groups, that poses a real challenge now to the Iranian government.

And I believe the Iranian government has been weakened by this whole episode and we should seek to diminish its strength further. I think we do have the upper hand as a country, we and the coalition of countries with which we're working, and we should seek to diminish Iran's strength in the wake of this political crisis.

Now, I know that many people think we should at this time not deal with the Iranian government at all because, of course, people say well, if you deal with a government you might legitimize it and it might be an affront to the demonstrators. I have some sympathy with that, because I think most Americans looking at these events immediately sympathize with the people on the streets who wanted liberty and wanted a better government and wanted a better future. That's obvious.

I think the problem with isolating them now and not talking to the government at all is that it probably weakens our ability to be effective in opposing them and in providing for a more difficult and energetic sanctions regime to pressure them. So my view is that -- and I'm a former official of the Bush administration -- is that I think that President Bush's strategy of two paths, and that's how he and Secretary of State Condoleezza Rice articulated it, is the correct one. And I think that President Obama is essentially following that same basic strategy. And so I support what President Obama is trying to do.

Here are the two paths. We, the international community, would say to the Iranians, "We're willing to negotiate in a very short window," as many of the members of the committee have said, given the fact that they've stonewalled negotiations -- the Iranians. They've prevented them for three years now. "We're willing to negotiate and sit down with you."

The object of those negotiations, I believe, should be -- I think it's the Obama administration's idea as well, seek an end to the nuclear weapons project of Iran. If it's not possible to negotiate successfully that objective in a very short period of time, then I think we'll have much greater credibility to say to the Russians and the Chinese, the Europeans and others, you now need to join us with -- in draconian sanctions against the Iranian regime. I think that if we refuse to negotiate at all, we diminish our ability to be successful in arguing for subsequent sanctions.

I'll just make one further point on this. I think it's likely, if the parties even get to the negotiating table, the negotiations will likely not succeed, because I think the Iranian government under Ahmadinejad is so determined to create a nuclear weapons future for his country, he's not likely to agree to the object of these negotiations that I just cited, an end to that program.

Therefore, that sets up this important question of sanctions, which is at the heart of the bill that you've put forward, Senator, and that so many senators have co-sponsored. What type of sanctions? And what type of flexibility should the president and the executive branch have?

I would just say that you are right to consider sanctions of every kind, strong financial sanctions, economic sanctions and energy sanctions, because those have not been tried in the past, the energy sanctions, and that is Iran's Achilles' heel.

I would just say two things. I think it's important that the president maintain his flexibility to conduct foreign policy, because this is a shifting situation. It's a situation that's highly complex and I wouldn't favor any legislation -- or I wouldn't suggest any legislation that would tie his hands, that would mandate deadlines for him. But if he's given sufficient waiver authority, then I think these types of sanctions are likely to have the greatest potential impact on the Iranian government and they may be the only thing that would convince Iran to think twice about going forward with a nuclear weapons project in the face of concerted international opposition.

The second point I'd make on sanctions, Senator, would be -- I think it would behoove the United States, both the administration and the Congress, to try to convince other countries of the world to make these sanctions multilateral and not unilateral, because despite the best intentions of the Congress or our government, or any one of us on this panel, if Americans are the only ones sanctioning, those sanctions will not succeed.

We need to convince the Russians and the Chinese, the Europeans, the South Koreans, the Japanese, the Arab countries that are trading partners of Iran, to join us in these sanctions. So if there's going to be financial sanctions, then they have to be universally applied and the same is true of energy sanctions.

The last point I'd say is this -- and I'll finish on this point and forgive the length of these extemporaneous remarks. I think that we would be well served if we didn't allow our national debate to come down to well, either it's negotiations with Iran or it's war. I think that we can have a more complex strategy of negotiations combined with sanctions, of negotiations combined, as I think Senator Shelby said, the threat of the use of force.

We must keep all options on the table, in my judgment. I think we have to say that all options are on the table. The Iranians will understand that. They may be more impressed with that than anything else. And I think it's very important that diplomacy and the threat of force be combined here so that we bring the national power of the United States to greatest affect, to try to convince the Iranians, as well as to try to impress our negotiating partners on our side of the table that we are not going to live with a nuclear armed Iran.

And I would just end by saying that I don't think it's inevitable that we're going to have a war with Iran. I still maintain some hope that a combination of skillful diplomacy, with the threat of force, with the threat of very tough sanctions, might succeed in convincing the Iranians to back down. Should that not happen, then of course the president and the Congress will be faced with a truly excruciating decision: the use of force or the construction of a containment regime, in order to limit Iranian power against Israel, against the Arab world and against the United States.

That's down the road. I don't think you face that now. But that ultimately is what the stakes are, I think, in this very difficult problem. Thank you.

SEN. BAYH: Thank you, Ambassador, very much. I look forward to having an opportunity to explore your thoughts in further depth during the round of questions.

Dr. Levitt?

MR. LEVITT: (Off mike) -- honored to be on a panel of such distinguished experts. Allow me maybe to start off where Ambassador Burns finished in explaining a little bit about the sanctions strategy, as someone who was at Treasury when we first started implementing it, because lots of people ask me, "Well, if this hasn't ended Iran's pursuit of nuclear weapons, if it hasn't changed their calculus, if it hasn't prevented them from doing what they wanted to do, then really, how effective are these tools anyway?"

The answer is the target of financial sanctions were never intended to solve your problem. This is not a silver bullet. It's not a panacea.

On their own, financial tools can only do so much and they were always planned that way. But coupled with other tools, as Ambassador Burns said, especially robust diplomacy and a credible military presence in the region, financial measures, I believe, can effectively create leverage for diplomacy in particular. That diplomacy should focus on Iran but also on Russia, on China, on our European and Asian allies in the Gulf States, among others.

There are three critical things that sanctions can accomplish. The first is to disrupt Iran's illicit activities, make it more difficult for them to do what they want to do, constrict their operating environment. And even if it doesn't stop the program, that's effective.

The second is to deter third parties from knowingly or unintentionally facilitating Iran's illicit activities. And the third, and the most difficult, is impacting Iran's decision-making process so that the continued pursuit of these illicit activities themselves are reconsidered.

Some question the wisdom of employing sanctions when the administration is seeking to pursue engagement. Others question the wisdom of employing sanctions that might give the regime, in the wake of the elections, a straw man and a scapegoat to blame for all their ills, though now Great Britain has taken the number one slot and we're down to number two.

My own conclusion is just the opposite. This is exactly the time to use financial tools to build leverage for diplomacy. With the hard line regime so significantly de-legitimized at home, to the point that both moderates and hard-liners alike have overtly questioned the decisions of the supreme leader, the regime's ability to easily deflect criticism over the state of Iran's economy, over sanctions imposed over the nuclear program I think is significantly undermined.

The regime faces far greater legitimacy crises over its handling over the sham elections, the besieged IRGC-related crackdown on Iranian citizens protesting the election, the demonization of those protestors by senior leaders and the incarceration of protestors.

Given that Iran's nuclear program continues to progress, one thing is clear, as you've all said and as you've heard here already. We do not have the luxury of time. And therefore, the only question is not whether or not to use sanctions, but what sanctions? Targeting which entities under which tools and authorities and in what order?

And so here are a few ideas.

First, I think we should seek international consensus on multilateral sanctions including, as Ambassador Burns said, multilateralizing our efforts focused on energy. I think that the deadline of the G-20 here is critical. And among the targets that we should be focusing on first at the U.N. are those that the U.N. has already made a shot over the bow.

For example, UNSCR 1803 explicitly called on member states to exercise vigilance over the activities of financial institutions in their territories with old banks domiciled in Iran and their branches and subsidiaries abroad. There are several banks that we, the United States, have sanctioned that have not been sanctioned by the United Nations yet. We should take those actions. We should target Bank Mellat, we should target Bank Melli. We should certainly consider targeting Bank Markazi, the central bank of Iran, as you've heard.

I also think we need to focus on the IRGC elements that are involved specifically in the missile and nuclear weapons program and also in terms of the besiege and the crackdown more recently. Khatam al-Anbiya, the IRGC-affiliated engineering conglomerate, is very involved in the oil sector. We've already designated it. It would make a very good target for multilateral designation. In fact, it's already been listed by the European Union.

And IRISL, the Iranian shipping line which has also been called out by the U.N. Security Council as a company engaged in proliferations shipments and which we have already designated -- targeting that would have, I think, significant impact.

Multilateral action is very difficult. Russia is not on board yet. China is not on board yet. And so, if we're to do something around the time of the G-20, we may have to take some other unilateral actions, bilateral actions with other countries, with other regional bodies as well. And we should not shy from doing that.

Nor should we shy from actively supporting the efforts of multilateral technocratic bodies like the FATF. The FATF's multiple warnings on Iran have had a very significant impact on Iran's ability to do business. There are letters calling for enhanced due diligence, highlighting the shortcomings of their anti-money laundering system and most recently, instructing countries to begin developing countermeasures, as they described them, to deal with Iran's illicit financial activities have been very effective.

I do think, however, that it might be the time to engage in less targeted financial measures. The targeted financial measures campaign focusing on Iran's illicit conduct has been very successful in getting people on board.

But I agree, as we've all said today, that the true Achilles' heel of the regime is the energy sector. And even though the regime is expert at front companies and sanctions busting, if we were to have a robust program in place, especially if we weren't the only ones doing it, they would not be able to make up that 40 percent reimported refined petroleum. It would have a tremendous impact, I believe.

There are other things that need to be done, especially focusing on Iran's continued ability to transfer arms and technology. And I'll just cite one thing in that regard. For example, I think we should encourage implementation of the World Customs Organization's draft framework on standards to secure and facilitate global trade. This is something DHS has thought a lot about and I think it's something that would make a big difference.

We all saw earlier this year when the Monchegorsk, the Cyprus- bound, Iranian-chartered ship, was carrying weapons we believe for Syria, perhaps farther on. Clearly, we have holes in this program.

So to conclude, it seems clear to me that today Iran is politically and economically exposed. Even as it continues to pursue a nuclear program and other illicit activities, the sanctions are no panacea. The fact is, if properly leveraged, in tandem with other elements of national power, this tool will not solve anything by itself. The pinch of target of financial measures could ultimately have a much bigger punch.

I thank you very much.

SEN. BAYH: Thank you, Dr. Levitt.

Ms. Pletka.

MS. PLETKA: (Off mike.)

SEN. BAYH: Oh, we can skip over to Dr. Maloney?

Dr. Maloney, by the way, did I have the benefit of hearing you at an Aspen Institute conference once on the Middle East?

MS. MALONEY: You did.

SEN. BAYH: Yes. You were very impressive then. I'm sure you'll be as well today.

MS. MALONEY: Well, thank you. Thank you very much.

Senator Bayh, Senator Shelby and members of the committee, I'm very grateful for this opportunity to be here and very honored to be part of this panel.

The Islamic Republic today is contending with an almost unprecedented array of internal challenges.

The persistence of street skirmishes and passive resistance to the regime, the increasingly uneasy straddling of a broad array of conservative politicians, the mutiny against the supreme leader's unfettered authority by a quartet of veteran revolutionary leaders as well as senior clerics -- all this clearly marks the opening salvo of a new phase of existential competition for power within Iran.

At this stage, it's impossible to predict precisely where, when and how Iran's current power struggle will end. In the near term, the Islamic Republic will likely survive this crisis, thanks to the same tactics that have preserved it for the past 30 years: behind-the- scene deals and mass repression. But we don't know where Iran is going from here and I think that's an important point to make at the outset of our discussion of U.S. policy tools.

I was asked to say a few words about the Iranian economy. Let me tell you that Iran is an economy that has recorded respectable growth rates in recent years. It's a wealthy country, but it has serious economic problems: double-digit inflation, power shortages, a tumbling stock market, stubbornly high unemployment rates particularly among its large, young population, increasing dependence on volatile resource revenues, and, perhaps most ominously for the Iranian leadership, a rising tide of popular indignation about economic frustrations.

Ahmadinejad was elected on the basis of economic grievances, but he governed in an ideological fashion and, for his part, bears a lot of responsibility for the continuing economic problems of the country. What has really galled Iranians is the opportunity that's been squandered over the past four years. Iran's oil revenues during Ahmadinejad's first term exceeded eight years of revenues under either of its previous presidents. Forty percent of all of Iran's oil revenues in the past 30 years have come in under Ahmadinejad's watch and really very few people know where that money has been spent.

The unrest of the past six weeks is likely to exacerbate Iran's economic problems and puts solutions with long-term structural distortions that much further out of reach. And should the political situations degenerate, opposition economic actions may well further paralyze the Iranian economy.

And let me speak for a moment about U.S. policy options. The events since the June 12th elections have changed Iran in profound fashion and it would be counterproductive to suggest that this were not the case. The U.S. must adjust our assumptions about Iran and our approach to dealing with our concerns about Iranian policy.

But the turmoil within Iran haven't altered our core interests vis-a-vis Iran, nor has the turmoil manifestly strengthened the case for alternatives to the stated policy of the Obama administration to engage with the Iranian regime. Engagement will require talking to some particularly unpleasant people. But the administration's interest in diplomacy was never predicated on the palatability of the Iranian regime but on the urgency of our concerns. Like Ambassador Burns, I'm sympathetic to the concern that bilateral negotiations would somehow legitimize the regime.

But diplomacy does not confer a seal of American approval on its interlocutors. To the contrary, the Iranian regime, in fact, derives whatever remaining legitimacy it has from its revolutionary ideology that's steeped in anti-Americanism. If we can successfully draw them to the bargaining table on our urgent concerns, negotiations would only undercut their attempts to stoke revolutionary passions at home and rejection of sentiments across the region. And negotiations, even if they don't succeed, would help exacerbate divisions within the regime.

Negotiations are unlikely to succeed in the short term. There is a precedent I would cite and that is the successful negotiations over the hostage crisis in the late 1979 to 1981 period. They were difficult. We were not dealing with moderates. Our Iranian interlocutors were people whose authority, credibility and interest in resolving the crisis was very much in doubt. What made those negotiations eventually successful and produced what has been a durable agreement in the Algiers Accords were a variety of tools, including secret talks, the involvement of a third-party mediator, but also the presence of a fact that clarified the minds of our Iranian interlocutors: the Iraqi invasion of Iran.

In a similar respect, any U.S. effort to negotiate with Iran right now would benefit from the identification of incentives and counterincentives that will focus the minds of the Iranian leadership. In this respect, there is a direct and mutually reinforcing relationship between engagement and the identification of sanctions if Iran chooses to proceed with non-cooperation. The threat of sanctions may be the only effective means of persuading Iran's increasingly hard-line leadership that their interests lie in constraining their own nuclear ambitions.

In addition, the offer of dialogue with Iran represents the most important factor for creating a framework for long-term economic pressures. We know from the experience of the Bush administration that Russia, China, and, in particular, also the Gulf States have proven adverse to the steps that would really constrain their economic relations or their strategic relationships with Tehran. The minimum price for achieving their support for and participation in significantly intensified economic pressure will entail a serious American endeavor and direct diplomacy with the Islamic Republic.

As a result, we should be coordinating our next step as closely as possible with all these states. In particular, we should be stepping up our dialogue with Beijing, whose interests with respect to Iran diverge substantially with those of the Russians and whose investments in Iran reflect a long-run effort to secure prospective opportunities, rather than a short-term calculus, and I think we can leverage that long-term interest.

I understand now the buzzword in Washington is crippling sanctions, but the simple reality is that we alone, in the United States, don't have the capacity to cripple the Iranian economy with our sanctions, which means that multilateral steps represent the only real alternative to a negotiated solution. While Iran is certainly capable of change, we have to recognize that economic pressures alone in the past have not generated substantial modifications to Iranian policy. Where they have worked, it has been where they have particularly played into the perceptions and utility of swaying critical constituencies within Iran.

Let me just finish by suggesting that the choice posed in one of the previous panel member's discussions between doing nothing and military action, I think, is really a fallacy. We're the United States. We're a superpower. We deterred the Soviet Union and a Chinese regime that was responsible for the murder of 30 million of its own citizens. We can deter and contain Iran. Economic pressures will be part of that.

Thank you.

SEN. BAYH: Thank you, Dr. Maloney.

Ms. Pletka.

MS. PLETKA: Thank you very much, Senator Bayh, Senator Shelby, for all of your leadership on this issue and for inviting me to testify here today. It's a pleasure to be on such a distinguished panel.

For the first seven months of this year, the Congress has been extraordinarily -- unusually, I would say -- deferential to the president and careful to do nothing that might undercut the prospects for success in direct diplomacy with Iran. While the U.S. Congress and the United Nations have stood down, however, change has been in the air in Iran. My colleagues have talked a lot about the circumstances on the ground. What we've seen on the nuclear front is that Iran has continued its enrichment activities and claims to have now 7,000 centrifuges spinning at Natanz, an operational uranium plant at Isfahan, continuing operations at the heavy water facility at Iraq.

As Dr. Maloney detailed on the economic front, there's very little good news, despite some years of extraordinarily high oil prices, very, very high unemployment, inflation at over 22 percent, the central bank announced this week.

And on the military and paramilitary fronts, Iran has continued to refine its delivery system. In May, they tested a solid fuel ballistic missile with a range of 2,000 to 2,500 meters and they continue to deliver weaponry to Hezbollah in Lebanon.

Finally, on the political front, we're well aware of the aftermath of the elections, the fraud, outpouring by the Iranian people and the brutal repression and murder of protestors and opposition members.

I think even the closest of Iran watchers are unsure of what is next in Iran, but I think that many have failed to take into account the radical transformation of the country and the fact that the Iranian Revolutionary Guard Corps has quietly and very systematically taken over the reins of power inside the country. They've really come to dominate all sectors of Iranian life, including the economy, the military and, as we saw in the last month, domestic politics.

On the economic side, most interestingly, what that means for countries and for companies that are doing business in Iran, it means that if you're doing business there you're probably doing business with the IRGC.

It's always possible that the regime does have a surprise in store. The Iranian foreign ministry has promised us a package aimed at assuaging, this is a great phrase, the "economic, cultural and moral crises of the world." I know we're all looking forward to seeing that. And some have persuaded themselves, but only hard-liners in Iran can successfully deliver a credible deal to the Europeans and the Americans.

But I think that that optimism flies in the face of every statement that we've seen from every member of the government, including so-called reformers. Meanwhile, however, Iran has chosen not to accept the outreached hand of the Obama administration and others and rebuffed an invitation from Secretary Clinton to attend the G-8 meeting. Indeed, the regime explicitly attempted to embarrass the president by leaking a letter, a private and personal letter that President Obama had sent to the supreme leader, leaking it to an American newspaper, something I don't think that they've done in the past.

I believe that the time has come to reassess the value of our current policy. I think that those who suggest that we are in fact proceeding on two tracks are wrong. I think we have been proceeding on one track. That need not be a repudiation of engagement, but it should be an acceptance of the reality that free-pass engagement on an offer by the administration has brought little more than time for Iran to install more centrifuges. In part because of our silence, the decline in trade between Iran and certain countries of the European Union, now Iran's second-largest trading partner after China, has begun to reverse itself. More troublingly, the increases in trade with Europe have been dwarfed by the explosion in Iran-China trade. More than 100 Chinese state companies operate in Iran with bilateral trade reaching over $27 billion in 2008, by the way, a 35 percent increase over 2007.

Despite the growing movement for divestment from state sponsors of terrorism, there have been scores of major transactions in Iran in the last couple of years, most in the oil and gas and construction sector, with values in the hundreds of millions of dollars, including companies ranging from France's Renault, Peugeot, to Germany's Krupp, Siemens; Toyota, Royal Dutch Shell, Gazprom, Hyundai, Spain's Repsol and many others.

Perhaps more important that the moral and financial suasion of divestment, however, is the tool that has yet to be used by the international community to persuade Tehran of the wisdom of coming to the table and those are the restrictions that you yourselves have been talking about here today: restrictions on the export to Iran of refined petroleum products and equipment to enhance Iran's own refinery capacity. I think that S. 908 really does afford the president the opportunity to address that.

Iran is heavily dependent -- we know that, we've talked about it -- on imported, refined petroleum. They are trying to address that problem at home, though. Using this pressure point quickly and decisively will do more to convince the Tehran government of the world's seriousness than any number of videograms and letters and goodwill visits.

Iranian refinery capacity, imports and shipping are concentrated in fairly few hands. News reports indicate that supplies come largely from two Swiss firms, Vitol and Trafigura. And then there are the insurers, without which these shipments would halt, reportedly including Lloyd's of London, Munich Re of Germany, Steamship Mutual Underwriting Association and others of the U.K.

Companies helping Iran gain refinery independence, which could be subject to sanction under S. 908, include British Universal Oil Products, which is a subsidiary of the U.S.-based Honeywell, Axens and Technip of France, Sinopec, Hyundai of South Korea and others.

Mr. Chairman, even proponents recognize that sanctions are a blunt tool. They are, as we've all said, not a silver bullet, and they may not -- in fact, they will not, certainly, deliver an end to the Iranian nuclear program. But they will help force a decision inside the Tehran regime about the value of the nuclear program and the wisdom of remaining isolated from the world in order to further that program.

In truth, I think that the choice is really not between engagement and sanctions. Rather, it is only by applying the toughest possible sanctions that we stand any chance of persuading Iran's leaders to consider serious negotiations with the international community and it's time to give the president the additional tools he needs to do just that.

Thank you very much.

SEN. BAYH: Thank you, Ms. Pletka. I appreciate your very good testimony here and I particularly appreciate you joining us, even though you apparently may be under the weather a little bit, so thank you.

Is it still cold in here, in spite of all the hot air emanating from this institution?

Well, we'll now begin the round of questioning. And I thought this was an excellent panel. And we'll have five minutes per member and then a second round if there are sufficient questions thereafter.

So let me begin, and I think -- this is just for the record. I think, Dr. Maloney, you touched upon this, although at least indirectly, everybody else did as well. Following the invasions of Afghanistan, but particularly the invasion of Iraq, there was a brief window there where through back channels the Iranians were reaching out to us, looking for ways to cooperate, even suggesting that perhaps some accommodations can be made here. There are just tentative feelers, that sort of thing.

My takeaway from that was that they were very impressed by action and material consequences. They were worried. The regime on their east had been changed, the regime on their west had been changed. They were beginning to think, as some of you've suggested, that they care most about the regime preservation. They were beginning to think about their own situation. And so they began to moderate their behavior a little bit.

What insight does that offer us into how we can actually change their behavior with regard to their quest for nuclear weapons? Doesn't it suggest that the -- you know, at least a potential threat of or the thoughtful application of sanctions with material consequences is our best hope to change their behavior? Is there any useful insight to be gained from their outreach following Afghanistan and Iraq, at least for a brief window that then closed after they began to realize that Iraq was really a place we were going to get bogged down and might help them in the long run?

MS. MALONEY: I think what that episode shows us most clearly is that Iran -- the leadership as a whole is capable of making a rational cost-benefit assessment of its own interests, and at that time they saw the potential costs and the potential threat to their own survival as severe enough to generate perhaps some kind of unprecedented outreach to the United States.

It is not clear, I would say, that Mr. Ahmadinejad is capable of that same sort of assessment. But clearly the overtures that were made in 2003 could not have come without the approval of the supreme leader. He was influenced no doubt by people around him who were perhaps more moderate than those who are surrounding him today.

But that is of course what also makes the emergence and the potential empowerment of what we're calling an opposition but really is not an opposition in the sense of an opposition trying to oust the regime. The re-emergence of former President Rafsanjani in particular, former President Khatami, Mr. Mir-Hossein Mousavi and Mahdi Karrubi -- these are all people who appreciate that the nuclear program is not worth the potential cost to Iran.

And I think we've got to be watching their position very closely in hopes that some sort of -- that that kind of pressure can be reapplied, that that kind of calculation can once again be part of the Iranian leadership's decision making.

SEN. BAYH: Ambassador, I'd appreciate your thoughts on that.

And it seems there's consensus among the testimony today and I suspect on the committee that dialogue and negotiations is appropriate. But there are most likely to be effective, indeed will only be effective, if there's some meaningful consequences for a failure to negotiate in good faith or a failure to negotiate at all.

So I'm interested in your assessment of -- Dr. Maloney mentioned that the hostage crisis was only resolved when they began to worry about their own situation. They reached out to us at least temporarily and tentatively following the invasion of Iraq because they were worried.

What does that suggest about the importance of meaningful sanctions and any -- to have any hope of changing Iranian's behavior with regard to their nuclear program?

MR. BURNS: Well, I agree with Dr. Maloney that the Iranian government is more likely to respect strength than anything else. And I think, Senator, you're right to conclude that's one of the lessons perhaps of how they acted in 2001 after our invasion of Afghanistan and in 2003 after our invasion of Iraq.

For the record, I will say the Iranians had a golden opportunity to negotiate with the Bush administration in May and June of 2006 when the administration offered negotiations. The Iranians then turned those down over the next two years. So the onus is really on Iran to show that they're interested.

SEN. BAYH: Perhaps their assessment of their own situation had changed by 2006. But --

MR. BURNS: Well, that gets to my second point.

I think that strength of the United States is not enough. We have to have international strength. And we have to have a diplomacy that brings Russia and China in particular -- Russia sells arms to Iran. China's the leading trade partner with us.

And that's why I think that President Obama has done -- I've been impressed by his diplomacy towards Iran. I think setting up this construct of being willing to engage, willing to talk, seeming to go the extra mile with the likelihood that those negotiations either won't take place or will fail -- that allows the United States to have a stronger hand and then arguing for the type of sanctions that the committee is considering and the Senate will consider. And it gives us more options I think for the future than fewer.

SEN. BAYH: My time is about up on the first round. But I guess my point is -- and I gather it's the consensus of the panel that none of us want to impose sanctions on Iran if we don't have to. But our assessment is that at least the credible presence of material consequences through sanctions gives us -- gives the engagement the maximum chance of working and is our only hope of changing behavior if the negotiations don't work.

Is that sort of the bottom line you'd agree with, too?

MR. BURNS: It is, and I would say there's an additional benefit to tough-minded sanctions: It puts off a decision to use force. And that would be a fateful decision of the United States. We should keep that option on the table. But I still think there is room and time for a combined strategy of negotiations and sanctions to try to see if that's possible -- to lever, influence the Iranians to change their program.

SEN. BAYH: They demonstrate strength. And the stronger we are the more likelihood that we'll resolve this in an acceptable way.

Senator Shelby.

SEN. SHELBY: Thank you, Mr. Chairman.

Mr. Burns, how do you believe we should measure progress under the administration's engagement strategy?

And secondly, what do you believe that Iran wants to achieve from discussions with us? And is there anything that we should be prepared to give to Iran?

MR. BURNS: Senator Shelby, I think that President Obama has done a very good job of regaining the initiative in putting Iran on the defense. And I think taking the high road, the Cairo speech, the videotape message to the Iranian people -- he said that he would continue the Bush administration's policy of being with the P-5 in negotiations. All that's been very, I think, effective.

The Iranians are going to be extraordinarily difficult I believe at the negotiating table. And they'll want to divide the parties sitting on the table alongside of us.

SEN. SHELBY: Sure.

MR. BURNS: And they've effectively done that the last couple of years.

So I think the challenge for the U.S. now is to unite those parties against the Iranians. And that's why I think that giving the president not only waiver authority but some flexibility on sanctions is really important for him and for the effectiveness of our policy.

SEN. SHELBY: Mr. Burns, you alluded to this a minute ago: A key reason I believe that the U.N. sanctions on Iran are so weak is that Russia and China do not share our goal of preventing Iran from developing nuclear weapons. Can our sanctions regime, as it is now or under the various proposals you know we've heard here that you're aware of, work to encourage Iran to abandon, you know, their quest for nuclear weapons without bringing China and Russia to the table? I think they're very important to be at the table with us.

MR. BURNS: I agree with you, Senator. I was the negotiator for the U.S. --

SEN. SHELBY: I know that.

MR. BURNS: -- on the first three U.N. sanctions resolutions. And they were well intentioned, and they were a good start, but they were insufficient. And we knew that. We knew that we needed to get stronger sanctions. The time is coming for those stronger sanctions.

What would make the Russians and Chinese now decide to work with us? I think, number one, they need to know this is a vital concern of the United States. It's the top of our agenda, not at the middle or the bottom of our agenda -- number one.

Number two, they need to know that the United States is willing to keep all options on the table and willing to take any action necessary to deny Iran a future nuclear weapons capability. If both of those are in place, then I think they might be more inclined then to work with us.

And you know look at the Russians only. They live closer to Iran than any of the other countries negotiating. It cannot be in their interest to have Iran -- to see Iran have a nuclear weapons capability.

So the negotiations with Moscow and Beijing I think are the most important right now. And as I said in my testimony, if President Obama has said he's willing to negotiate, then I think the Russians and Chinese should be willing to promise the United States up front, "If negotiations fail we, Russia and China, will agree to sanctions."

They didn't do that in 2006, (200)7 and (200)8. They need to do it now.

SEN. SHELBY: Mr. Levitt, in her testimony Ms. Pletka -- I'm using all of you's (sic) testimony -- made reference to the notion that if one is doing business in Iran today that they're probably doing business with the Islamic Revolutionary Guard.

In October of '07, the Office of Foreign Assets Control listed the leading Iranian financial institutions as well as the IRGC among others as specially designated global terrorist organizations.

Are you aware of anyone who has mapped out a complete picture of who's trading with Iran?

And Ms. Pletka, I'll address this question to you: Do you believe having a full understanding of all of Iran's trading partners would help us develop a better, more complete sanctions regime?

I'll start with Mr. Levitt.

MR. LEVITT: (Off mike.) As usual you were right again.

If you're doing business with Iran there's no way to know that you're not doing business with the illicit elements of the regime, in particular the IRGC.

Now, I don't know anybody who has successfully -- certainly in the open source -- done a full mapping, even a partial mapping of who's trading with Iran. I do think it would be useful, but it would be limited.

And I think Dr. Maloney has talked about this before. And she's right as well, of course. Iran is extremely adept at sanctions busting. They are better than anyone else at operating front companies, et cetera.

One of the biggest problems we've had, one of the things that we've been able to leverage most effectively with our allies to get banks designated, for example, is their use of deceptive financial practices. So simply getting a list of who's trading with Iran is likely to be only the very tip of the iceberg and not necessarily address the most illicit activity.

Ms. Pletka, do you have any comments?

MS. PLETKA: I think that Dr. Levitt is right. It is an enormous challenge.

But of course, the truth is that eve what we can find out from open press sources -- and AEI has a project on our IranTracker website that actually keeps track of all of the open press reporting on such transactions.

Even if you keep track only of the open source, what you end up with is -- I've got here a six-point list of all of these companies that are doing business or reported -- and we've done a pretty solid job about trying to verify most of them. You've got hundreds and millions and billions of dollars worth of projects that aren't merely selling pencils and desks but are also in the Iranian oil sector and the construction sector.

And I think that naming and shaming is worthwhile. The truth is that the Chinese government and the Russian government don't really care. But I think that the German government cares a little bit more, the Italian government cares a little bit more and the taxpayers in those countries that are often subsidizing these transactions through state guaranteed insurance also care.

So I think it's very worthwhile.

SEN. SHELBY: Thank you.

Thank you.

SEN. BAYH: Thank you, Senator Shelby.

Senator Corker.

SEN. CORKER: Thank you, Mr. Chairman.

And I missed your oral testimony. I heard it was outstanding. We were in another hearing, but thank you for being here today.

And let me just -- are there sanctions today that we have in place that you would herald as having modest success? Is there anything you would point to under our present sanctioning process that is having modest success?

Any of you?

MR. LEVITT: Sure. But I'll caveat that it's very -- it's an almost impossible question to answer -- and I'll answer it anyway -- because there're so many things that we have now targeting Iran. People say, "Well, you know, what percentage impact has this one had or that one?" And it's really impossible to know specifically how much of an impact has any one had.

But I would argue that there are a whole bunch of sanctions targeting -- (inaudible) -- IRGC-related entities, most recently IRISL, the shipping line, and certainly the banks that have had an impact on, a, disrupting Iran's ability to easily conduct its illicit business and, b, there's plenty of evidence, even long before the June 12th election, these actions were having a domestic political impact and people were resigning and people were getting fired and people were pointing fingers at Ahmadinejad for his -- for economic policies.

I think there's no real argument that these have had no success, but they haven't had some significant success. So I think there's also unanimity that they have not been fully successful in the sense of undermining the regime's nuclear program or making it possible for them to achieve that program.

But honestly that was not the strategy's goal. We never thought that it would be able to accomplish that.

MS. PLETKA: I think that what's important to understand is not just what Dr. Levitt underscored but the fact that so much of the sanctions activity, particularly I think the really groundbreaking work that the Treasury Department did in the Bush administration and is continuing today, has raised the cost of business to Iran significantly so that Iran finds it very difficult, for example, right now to get letters of credit to bring in exports. They are finding it difficult to get trading partners.

Yes, it's true, there are still hundreds of millions' worth of business out there. But that's hundreds of millions' worth of business that may have cost a lot less in earlier days and probably was better quality.

Iran is much more isolated. But these are only tools. And that's the problem. None of these individual sanctions is going to cause the regime to turn around and say, "You know what, forget it, nuclear weapons really weren't a good choice for us." But the more targeted they are, the more that they discredit the regime in the eyes of the public -- and I think that they have done that to great effect. The more that they do that, particularly building on the opportunities after the election, the more likely we are to get the Iranians to the table to make agreements toward concessions.

SEN. CORKER: So I'm going to move on to another question. I appreciate the two responses.

The chairman has discussed earlier and I think introduced legislation dealing with the refined product issue.

I just came from a hearing on Sudan. And our foreign policy is replete with unintended consequences. I mean, that's the way life is. It's not a criticism, but it is.

So we have this movement inside of Iran right now where you know obviously many of the people who live there are very pro-Western. They actually respect our country. They respect democracy. We have a regime that certainly is the antithesis of that. And so we've talked about this whole issue of basically keeping refined product outside of the country, keeping it from coming back in.

We've had some people say that, in essence, the unintended consequence of that could be that the people inside the country that are pro-Western may in fact very quickly become not that, okay? We've also had people say that, you know, they could quickly, six months, eight months afterwards figure out other ways of getting refined product in the country.

Maybe that's not true.

But I would like to hear from each of you, I know my time is up, what your thoughts are about whether we absolutely should create this sanction where a refined product cannot make its way into Iran and then what the consequences of that might be with a population that, generally speaking, is -- seems to be, have quite a movement under way, if you will, as it relates to countering the regime right now.

MR. BURNS: Senator, thank you.

I think that one of the reasons why we ought to be focused on a diplomacy engagement and sanctions path, rather than a war path, is that if we resorted to military force, that would unite the country more than anything else. We ought to try to play on the divisions within Iran that were so apparent after the June 12th elections.

On the sanctions, I keep coming back to a basic problem, and that is that if the United States Congress or the executive branch asserts unilateral sanctions, they may make us feel good, and I support stronger sanctions, but they won't be effective unless they're multilateral. And that's why I very much believe that the president needs the flexibility to work with the allies to make those sanctions, if he can do it, multilateral. Striking on our own, I think, will not have the intended effect that we want and we wouldn't want a situation to develop where we create divisions between, say, Europe and the United States at a time when we ought to be united and focused on Iran itself.

So I think this is a highly complex maneuver here and that's why the waiver authority, I think, in the legislation is so important for the president to have. I hope he'll have the political strength. I hope he, President Obama, will have the political strength with the Russians and Chinese in particular to convince them that they've got to get on board these sanctions. And that's the test of our diplomacy in September and October of this year.

MR. LEVITT: I'd give one caveat maybe to Ambassador Burns's point. I completely agree that multilateral sanctions are far more effective and for the petroleum concept to be effective will have to be multilateral.

But I don't think that unilateral sanctions are ineffective, and in fact, you know, when I was at Treasury we used to see all the time that international financial institutions, for example, used to incorporate our unilateral sanctions in their due-diligence databases though they had no legal requirement to do so, and we have many, many examples, on Iran, on Hamas, on other cases where unilateral designations have had an impact -- although I don't think we disagree. In essence, the multilateral route is the only one that's going to have sufficient power to really get us where we want to be.

I'd also like to point, however, to some precedent. Consider, for example, the dramatic failure of the regime's gas ration card program in the summer of '07. The cards were loaded with six months' worth of ration. Iranians reportedly used the entire ration within weeks. It was a huge fiasco. As cold winters come, Iran worries about the possible heating fuel shortages. Neither of these, when I look back at them, at least in the open source, demonstrate a huge Iranian or really any significant Iranian reaction against the United States. There have been reactions against the economic policies of Ahmadinejad's regime.

MS. PLETKA: I know that time is up. I think that it's always ironic when people suggest that the sanctions that we're going to impose in an effort to get Iran to the table to talk about their nuclear weapons program could hurt the Iranian people and yet we're willing to stand idly by while the Iranian people are crushed beneath the jackbooted heel of the IRGC on a daily basis.

There is some risk that if we end up needing to impose draconian sanctions, whether unilaterally or multilaterally, that the Iranian people will, yes, blame their government, because they almost always blame their government for everything because it's so inept, but also may blame us.

But, at the end of the day, we're really not in this to talk about the tools that are available to us. We are in this because we want to stop the Iranian government from acquiring a nuclear weapon. And that seems to be a fairly urgent requirement. We actually haven't talked that much about what it would mean for Iran to have a nuclear weapon and how Iran would come to the negotiating table, or whether they would with nuclear weapons, and how the regime would feel empowered vis-a-vis its own people, not to speak of its neighbors, if they had a nuclear weapon, and the threat that they pose of course to us and our homeland.

So when we talk about these things, we do need to recognize that weighed very heavily on one side is this rather terrifying prospect that Senator Lieberman outlined at the outset, that all of you have talked about and, on the other side, these tools that are available to us which tend to take on the aspect of a discussion at a tea party when we talk about whether this would work and whether that would work and how we could all sit down around the nice table at Foggy Bottom or at Turtle Bay. We need to be serious and we need to recognize that there is some real urgency to achieving these goals.

SEN. CORKER: Thank you.

MS. MALONEY: In terms of Iranian public opinion, I can speak to my time there, although I haven't been now in a few years, and I would say Iranians generally aren't fans of American sanctions on their economy. However, at this stage, I think it's also quite clear that they look at the disastrous policies of Ahmadinejad and at this stage certainly look more toward the government for their economic problems than they do toward U.S. sanctions. And I think that would be the case. It's not to say the regime wouldn't be able to leverage the blame issue. And it's already beginning to do so. I see a lot of talk about the difficulties of getting spare parts for airlines and some of their recent aircraft disasters, and I think that's taking a page from the Saddam playbook in terms of trying to mobilize international and public opinion around the unfairness issue or the public safety issue with respect to sanctions.

But let me just say that I think it's also important to recognize that a ban on refined products is not going to be a silver bullet. It may not be the Achilles' heel of the Iranian economy, if only because the Iranians are well aware of this vulnerability. They've been investing very heavily in new refineries and expect to be self- sufficient by 2012. One of the countries that they're speaking with about major new investments is China and I think that is going to be something we're going to have to consider, the extraterritorial dimension of these potential sanctions, if we're looking to build our case for multilateral sanctions, particularly including the Chinese.

SEN. CORKER: Thank you for your excellent testimony.

And thank you, Mr. Chairman.

SEN. BAYH: Thank you, Senator, for your excellent questions.

SEN. MARTINEZ: Thank you, sir.

One thing that seems to me to be important that we've not talked a lot about is the question of regime change. This used to be a word that got thrown around this town a lot a few years ago. It isn't talked about too much these days. But what a better world it would be if there was a completely different regime in Iran.

The people of Iran have been in the streets trying to advocate for change. My question to perhaps all of you would be, what is the likelihood of a regime to be changed in Iran by the Iranian people and is there a likelihood that a different leadership, and we've mentioned Rafsanjani and some of the other leaders who now appear to be very much on the side of regime change as well, whether they would present any significant change in terms of the problem we're dealing with, which is nuclear power, nuclear arms, or whether we would see more of the same as it relates to that issue. While it might be more to the liking of the Iranian people, it wouldn't really be any different in terms of these international attitudes towards Iran -- I'm sorry, towards Israel -- or whether or not the pursuit of a nuclear weapon would continue.

MR. BURNS: Senator, I think that, obviously, looking at the actions of the Iranian government in the wake of the June 12th elections, all of us would wish to see that regime disappear and would wish to see a democratic regime take its place. Unfortunately, that's not likely to happen in the short term, over the next couple of years. And so I don't think regime change by itself can be a policy for the United States government.

And I do think that it's important that we understand that even Rafsanjani or Mohammed Khatami, two prior presidents to Ahmadinejad, well, they built the nuclear program.

SEN. MARTINEZ: Right.

MR. BURNS: They sustained the support for Hezbollah and for Hamas and for Palestinian Islamic Jihad. So these are not Jeffersonian democrats who might be the people who take over if Ahmadinejad should fall from power.

I think a far more realistic policy, frankly, is the one that President Bush had in his second term and certainly that President Obama has now. We have to deal with this government in Iran. We don't like it, but we have to deal with it. We dealt with Stalin's Soviet Union, we dealt with Mao's China -- and successfully, through containment.

And so I think we ought to practically focus on the issue of how do we coerce that government, internationally, to back down from its nuclear program? And if it doesn't, how do we sanction it effectively, hopefully in a way that prevents us from getting into a third war in the Middle East. I think that's the strategic challenge.

And I think President Obama deserves some time to see this strategy of engagement plus sanctions, which I understand is his policy, play out. I think he's done very well in his first seven months to set this up. But the crucial time will come in September and October. I think he's set his own deadline, as I understand, at the G-20 summit in Pittsburgh.

SEN. MARTINEZ: Well, unless someone has a different view, we can move to something else. Is there a --

MS. MALONEY: I don't think anyone would make the assumption that a Rafsanjani or a Khatami or a Mousavi presidency would have abandoned the nuclear program. Their track records are very clear.

SEN. MARTINEZ: Right.

MS. MALONEY: However, they did speak in the campaign about a different kind of attitude toward negotiations, and I think if we were to see some sort of change in the leadership, as unexpected as that is at this stage, it would create more room for a serious negotiation and potentially more room for concessions. It was under the Khatami presidency, of course, that the Iranians did agree to suspend uranium enrichment for several years.

SEN. MARTINEZ: Now, moving on to the current track and with the critical diplomacy in the months ahead, and there seems to be a fairly strong consensus that in order for sanctions to really function we're going to have to get the Chinese, the Russians, and to some extent, as well, the Europeans on board. What is it going to take to get Russian cooperation, and even the Chinese might be easier, but what is the likelihood of Russian cooperation when they are an arms seller as well as an important trade partner?

MR. BURNS: Senator, I guess I wouldn't want to twin the Russians and Chinese here in terms of analysis. I think the Chinese, unfortunately, have shown themselves to be devoted to mercantilism, to trade above all else. When the Europeans pulled back, in part, from the Iranian market in 2005 and (200)6, the Chinese rushed in and filled all those contracts.

The Russians seem to have a more strategic view based on their history with the Iranians. And so I think that we have to let the Russians know this is a vital concern for the United States and that we have options, and that we're willing to exercise those options to deny Iran a nuclear weapons capability unless Russia can join us in an engagement and sanctions regime. That's the test for the Russians. But the Russians have been cynical as well.

SEN. MARTINEZ: Ms. Pletka.

MS. PLETKA: I think the biggest problem that we have -- I agree with Ambassador Burns that I don't think we can see the Russians and the Chinese the same way. And although the Chinese are very mercantilist, I think that they have interests in North Korea and elsewhere that we can use to discuss our interests here. And, frankly, there's some prospect of them being maybe perhaps a little bit more cooperative than I think that the Russians have been.

I defer to those who have sat with the Russians on these negotiations, but certainly the evidence is that they've been very, very difficult. And I think the truth is that they need to be persuaded that we in fact have some credible other option. And the assumptions in each one of these capitals, whether it's the European capitals or it's in Beijing or in Moscow, is that the United States is not going to use force under any circumstance.

And if you're persuaded of that, then you're probably not going to be persuaded of the wisdom of moving toward any sanctions with any alacrity. That was the advantage that the Bush administration, for all that it's been vilified, had. There was some prospect that they were going to do that, although I think it was exaggerated. I think people believe, again, perhaps falsely, that the Obama administration holds out no prospect for the use of force.

SEN. MARTINEZ: On that vein, if I may just extend for a second, you touched on something that I think is very important, which is what would it mean for Iran to have a nuclear weapon? And Dr. Maloney also mentioned the prospects of containment and our success in the Cold War in containment.

I think the Iranian leadership is a little different and their motivation may be a little different than what we were dealing with in the Cold War. How do we deal with a nuclear Iran and what are the prospects for containment, as well as what alternative there would be beyond that, which I guess would be military action?

MS. PLETKA: Thank you for giving me the hardest question of the day.

I do think that the analogy between the Soviet Union and the containment of the Soviet Union during the Cold War and that of Iran is a false analogy. I think the Iranian leadership is a far more apocalyptic one. I think that the threats that they've articulated, frankly, are much stronger and much more consistent than the ones that were certainly in latter years articulated by the Soviet -- pardon me, maybe I am sick -- by the Soviet leadership. And we have to ask ourselves, I think, whether this is a risk worth taking.

Some have said that the Iranians -- in fact, I think Secretary Clinton said this during the campaign -- that the Iranians must know that if they used a nuclear weapon that they would be -- that they could be annihilated.

And all I would say to that is, first of all, that's not terribly credible. Second of all, I think it was President Ahmadinejad who said that it would be worth losing half of Iran in order to destroy the state of Israel. I think we should take people like that seriously. Senator Lieberman said that at the outset. We need to listen to people when they talk about the use of weapons.

SEN. MARTINEZ: Take them at their word.

MS. PLETKA: Exactly.

SEN. MARTINEZ: Yes, sir.

MR. LEVITT: I would just add that, you know, containing, deterring a nuclear Iran from using a nuclear weapon is only one part of the equation. As several of us have already said, there's the whole second part of it of how it would empower and muscle up Iran in terms of its regional intentions.

And here, when I travel in the region, it's not the Israelis who are the most vocal on this issue, it's the "Emiratis" and others in the Gulf practically taking me the lapels, saying, Matt, you don't understand -- after I've given them my spiel on Iran -- no, you don't understand exactly how hegemonic -- is the word they use -- their intent would become -- or they'd act on that existing intent, as they put it.

In the region, I think there would be a cascade of instability, other regions starting up nuclear programs. And just by virtue of having that power, it's kind of a, "So I support Hezbollah, what are you going to do about it? I'm a nuclear power." That is a whole second side of it -- that attitude that we'd have to contend with. It's not necessarily containable.

SEN. MARTINEZ: And it's not limited to the Middle East because it includes the Western Hemisphere as well.

Yes, I'm sorry. I'm way over my time, but if --

MS. MALONEY: I realize we're over our time, but let me --

SEN. MARTINEZ: That's all right.

MS. MALONEY: -- just make a couple of points.

SEN. MARTINEZ: Thank you.

MS. MALONEY: I recognize that the Gulf states spend a lot of time talking about the Iranian threat; they don't spend a lot of time doing anything about it.

SEN. BAYH: But when you're contemplating an apocalypse, Senator, it's worth taking some time.

SEN. MARTINEZ: I appreciate that. (Laughs.)

MS. MALONEY: The Gulf states don't spend a lot of time doing anything about it. And they may be grabbing Matt by the lapels, but they've been very averse to doing anything that would curtail their business relationships with Iran and their political relationships, both of which are quite substantial. So I will take that rhetoric much more seriously when I see them behaving in a way that suggests that they believe that threat is as real as they say.

In terms of the threat of force and the inability to contain the Iranians, or deter them, I think that that puts a very problematic sort of choice for American foreign policy. The inability to talk about deterring Iran in this capital is stunning to me. We have to recognize that we cannot necessarily control the outcome in Iran, and we have to be able to develop policies that are intended to deal with whatever we may face in the future.

And so we have to have a serious discussion about how we would handle a nuclear Iran because that eventuality could be upon us much more quickly than we expect. And for those who suggest that Iran is somehow much greater and much more severe of a threat than either Maoist China or Soviet Russia, I would say that your memories are probably very short.

SEN. BAYH: Ambassador, I think we'd like to hear from you on this question, but then, out of courtesy to Senator Johanns, we'll need to turn to him.

MR. BURNS: I'll be very brief, Senator. I did want to join this discussion.

I think it would be unwise to limit the president's options should negotiations and sanctions fail. And I would bet that they probably would. To be left with only one option -- military force -- when that option is fraught with difficulties for us -- a third war in the Middle East and South Asia in a decade -- I think would be very unwise of us as a country, and therefore, we need to look at containment.

The Soviet Union and communist China were far superior to Iran -- present-day Iran in their military strength and their threat to the United States. We have the means and we the partners in Israel and the Arab states to contain the Iranians. It ought to be an option along side the use of force that we ought to be looking at very carefully. And the president ought to decide what's best for our country if that time should come. It may come in the future.

SEN. BAYH: Thank you, Ambassador.

SEN. MARTINEZ: Thank you. I appreciate the indulgence.

SEN. BAYH: Thank you, Senator Martinez.

Senator Johanns, I apologize. In my intent focus on our witnesses' testimony, I did not notice that Senator Menendez re- entered and he is ahead of you on the queue. So I apologize for that.

Senator Menendez.

SEN. MENENDEZ: Thank you, Mr. Chairman. It's the first time someone has not been able to notice me, so I like that actually. (Laughter.) It means I've withered away a little bit over the process.

Let me thank you all for your testimony. I know that the G-8 has set the September meeting of the G-20 as supposedly a deadline for Iran to accept negotiations or face stronger sanctions. My question is -- and I saw Senator -- I mean, Secretary Clinton's speech discussing in the Council on Foreign Relations engagement but at the same time saying that the opportunity doesn't remain open indefinitely.

So how can the G-8 prevent Iran from stalling? And what is -- in your view, what would occur if Iran has refused to accept the invitation to engage? What should be done then?

MR. LEVITT: I think what should be done is an immediate movement to try and pick off the low-hanging fruit from multilateral designations at the United Nations. And by low-hanging fruit I mean those entities that we know designating them would have an impact and that have already been called out at the U.N. -- banks and IRISL, the shipping line, in particular. That should be done both because it would have an impact and it should be something we could do quickly because the U.N. has already called them out.

But we need to do much more than that. And as we've all said, if we really want sanctions to be able to have a significant bite, they're going to have to be multilateral. We can't go this on our own. Unilateral sanctions on the margins can be effective as well, and that might be a useful means of filling in the blank of some of the time as we try to negotiate multilateral sanctions. To me, the critical thing is that we do something and we do something quickly if Iran doesn't respond to our offer by the deadline that the administration has set.

I've often said that I think that what made the first U.N. Security Council resolution on Iran most effective was not -- of the several we've had -- is not just that it had the sharpest teeth, though its teeth were not all that sharp either, but that it was unanimous. And the fact that subsequent resolutions were not is something that the Iranians paid a lot of attention to.

So we should be working now -- I hope we're working now -- very, very hard diplomatically with our allies to secure agreement so that if the G-20 comes and goes we don't then have a whole bunch of other deadlines by which a few more weeks and a few more weeks and the UNGA and then something after that, because what everyone's clear on is that we don't have time and that the Iranian strategy will be to buy time.

SEN. MENENDEZ: Yes.

MS. PLETKA: I just want to make a point of clarification. I think that several members have alluded to the G-20 deadline. I know the Congress passed a sense of the Senate on it. It is not a deadline as it has been described.

You were about to say the same thing.

It has been described as a time to reassess. And so for those who are conceiving of this as a moment -- a launching point for decisive action, whether that action is multilateral sanctions or United Nations resolutions or whatever it might be, I think that that's not correct.

The president himself in his discussions with Benjamin Netanyahu said -- gave the Iranians, in fact, until the end of the year. But even there I don't think that we can think of that as a hard deadline. So --

SEN. MENENDEZ: Well, that raises the question -- so let's accept -- I accept that it is a time to reassess. We can keep reassessing this ad infinitum. The question is --

MS. PLETKA: (Laughs.

) We have been.

SEN. MENENDEZ: We have been, which is what worries me.

The question is whether it is a determination that you can't -- as Dr. Maloney said -- you're not going to affect the outcome. And if you come to that conclusion, then you have to look to your next step. Or the question is, do -- can you affect the outcome in some way, and if so, then what is that?

And it just seems to me that when we create the impression that we are reassessing without action, then I think if I was the Iranians and that my goal was theirs, that I'd love all these reassessments. So what's our action?

And when I hear you, Dr. Levitt, talk about multilateral actions, I agree. So how do you get the Chinese and the Russians to join you? What's your leverage there? Ballistic missile issues, you know? Anti-defense, you know, missiles? How do you get them engaged on these critical issues though?

MR. BURNS: Senator, I just would make two points in response to your question. First of all, the Iranians have had an awfully long time to consider this offer. It was first made by the P-5 -- most of those countries are in the G-8 -- in June of 2006. This is not a new offer. I think they're unlikely to accept the offer.

But let me speak up for reassessment. I think this is such a highly complex environment, following the elections, where we're going to want to try to capitalize on divisions in Iran that President Obama is right to say -- is right not to say right now, here's what I'm going to do. You've got to wait and see if the Iranians accept this offer.

If they don't, then he has a much -- he's much greatly strengthened to turn to the other members of the G-8 and G-20 and say we tried to negotiate. We had a good-faith offer on the table. Now you need to join us -- Russia and China -- in sanctions because this had gone on long enough. I think the president is actually in a very strong position internationally, stronger than, say, President Bush was a couple of years ago. And I worked for President Bush and of course wanted that policy to succeed.

So this is set up not so badly for us. And reassessment doesn't mean inaction. It means, actually, that we might be able to get to a period of action with greater international and multilateral strength. That'll be the test sometime this autumn. And I wouldn't want -- just as a former diplomat -- I certainly wouldn't want to impose on President Obama an outsider's view of what his deadline is. I think he'll be in the best position given his talks with Hu Jintao and President Medvedev and others of when the time has come to move toward that tougher sanctions regime.

SEN. MENENDEZ: Yeah, sure.

MS. MALONEY: I would just say the Iranians never actually turn down an offer. They always propose their own offer which tends to be something that is completely unreasonable by most external standards. And I think what we have to be prepared for is not an Iran that is simply unwilling to speak on any basis but an Iran that comes back to us with something way out there but which then is kind of grabbed by the Chinese and Russians and others. And potentially they will do this in advance of September as a rationale for refusing any further action.

And I think that's where our efforts have to be focused on -- how do we make the case that an Iran that's not capable of putting forward a serious offer is an Iran that needs to be the subject of serious multilateral sanctions.

SEN. MENENDEZ: And, Mr. Chairman, if I just may, one last -- how do you get the Russians, for example, to cease its arms sales, specifically sophisticated anti-aircraft systems to Iran? How do you incentivize them here to move in a direction that we want to see and that's in our mutual interests?

Any thoughts on that? Anyone?

MS. MALONEY: Well, I mean, I will say that I think what the administration has tried to do is, as they say, reset the relationship and develop a level of trust and understanding in our mutual interests and goals that the Russians will be willing to put some of their own economic interests on the backburner in order to continue and potentially advance this bilateral relationship.

The difficulty with that kind of a strategy is it's a long-term strategy. It's not a short-term strategy. And I don't think we're in a position yet where the Russians are likely to do that. I also don't think the threat of force terribly worries the Russians. They probably can see an upside to that, which is that oil prices would go up and they would be the primary beneficiary and supplier of choice under a set of circumstance where the Gulf were in flames.

I think where we do have some leverage is with the Chinese, because they have a long-term view. They're trying to sew up some opportunities in Iran, but they're also looking to all their relationships with the other Gulf oil producers because of the significance of energy for their economy. And I think that's where we may be able to create some new leverage. By moving the Chinese, we may, therefore, help move the Russians.

SEN. MENENDEZ: Thank you, Mr. Chairman.

SEN. BAYH: Thank you, Senator, very interesting questions and excellent responses.

Thank you for your patience. I just have a few more questions and then we'll wrap the hearing up.

Dr. Levitt, you testified and I think accurately that -- and several of the other panelists referenced the financial sanctions that have been put into place which have raised the cost of doing business on Iran but not modified their behavior. But there's something to be said for gaining some leverage through increasing the cost of them doing business.

I'd be interested in your assessment, or other panelists' assessments, if we could get some sanctions on the import of refined petroleum products. Now, they are moving, as Dr. Maloney suggested. They're aware of their vulnerability. They're moving to increase their refining capacity. But we do have a window here where they're not there yet. If we could get some sanctions on the importation of refined petroleum products into Iran that were reasonably successful, not perfect but reasonably successful, how much would that increase the cost of doing business for Iran?

MR. LEVITT: Significantly, but I can't measure it for you. In other words, 40 percent is a lot of oil -- domestically consumed oil. The big shift here would be moving from a targeted financial measure which is trying to target illicit actors engaged in illicit activity and not the people of Iran, moving towards one that begins to target the people of Iran in a way to put pressure on the regime since the fact is that regime stability is the only thing, as you've heard, that they care more about than the nuclear program.

I think that the idea of giving the administration this tool is a wise one. But we also need to think creatively. There are lots of ways to skin this cat.

For example, we've talked a lot about the formal sanctions. Many would argue that at least as effective have been the informal sanctions: the leveraging of market forces, going out and meeting not only with governments but also with the private banks, the Treasury dog and pony show, which State was actively engaged in as well. This was --

SEN. BAYH: Your testimony is that the combination of either formal or informal would increase the cost of doing business potentially a lot? I'd be --

MR. LEVITT: Correct. And especially -- I'm sorry.

SEN. BAYH: I was going to be interested, then and the next question would be enough that it might actually get them to think seriously about moderating their behavior or not?

MR. LEVITT: On its own --

SEN. BAYH: It's gone up the scale, but is it enough?

MR. LEVITT: I don't think it's going to be enough. I don't think it's going to be there yet, especially if -- unless it's a truly multilateral international effort focused on petroleum --

SEN. BAYH: I think there was an agreement between you and Ambassador Burns. I think you both agreed that ideally, a multilateral approach would be much more efficacious. But then you -- with your caveat that there was some utility in a unilateral approach, if you just had no recourse other than that. But you would agree that if we could get cooperation, as difficult as it might be, that a multilateral approach would be the ideal path?

MR. LEVITT: Yes, and there's a third option. And that is taking the informal sanction approach and moving beyond the financial sector, moving beyond State and Treasury to other agencies, Commerce in particular, and moving beyond, to the insurance industries, petrochemical industries and having this conversation. They too have shareholders. They too are concerned about reputational risk and due diligence and fiduciary obligations to shareholders.

There are other levers that we can press here. There can also be things we shouldn't be doing. None of this is an either/or.

SEN. BAYH: Thank you, Dr. Levitt.

Ambassador, you might have some thoughts on that. Again, my question is this continues to -- getting back to my original question, they respect strength, material consequences to them focus the mind, give us the best chance in moderating their behavior, leading to successful negotiations. The importation would ratchet up the pressure, but is it enough for them to begin to focus, "wait a minute, this is something we just can't ignore anymore; Perhaps we need to start thinking about some sort of negotiated settlement here"?

MR. BURNS: Thank you, Senator. I think the Congress would be right to give the president greater authority to impose sanctions in the future and I know that your bill intends to do that.

SEN. BAYH: It does, with the waiver provision that you've noted.

MR. BURNS: Exactly. Forgive me for sounding like a broken record here, but I do think that it's not enough to inflict economic pain on the Iranian government at a time when they're -- if you look at the IAEA reports -- proceeding vigorously on their nuclear research. And so I think we've got to go for a decisive -- we have to have a decisive impact and that would be an agreement that would encompass the Russians, the Chinese, the Europeans and Americans on truly decisive sanctions.

I do think the only way to get there is through an engagement strategy, showing the willingness to negotiate, which then enhances the power of the United States to say to the others, when those negotiations haven't worked out, you have to try it our way.

SEN. BAYH: What's your response to Dr. Maloney's testimony that well, the Iranians will probably at some point, after a delay, agree to negotiate and then put out incredibly unreasonable counterproposals that will be seized upon by some of the countries you've cited whose cooperation we need as a reason to do nothing? What do you think about that?

MR. BURNS: That's -- she's exactly right, as usual.

SEN. BAYH: So how do we deal with that?

MR. BURNS: And that's what happened over the last several years. How we deal with that, I think, is having prior agreements with all the governments that Iran will not have the capability of dividing and conquering, that we're going to stand together. If a certain amount of measurable progress is not made in a very short time in negotiations, all of those parties would turn to sanctions. I don't think that's too much for the United States to ask of these other negotiating partners like the Russians, the Chinese.

SEN. BAYH: You think that's a reasonable prospect, even given the Chinese commercial interests and the Russians' commercial interests?

MR. BURNS: I think it's a difficult prospect. I'm not sure this strategy will succeed, but it's worth trying because the only other alternatives, I think, would be worse, such as the resort to military force at this time. That would be worse for the United States, in my judgment.

SEN. BAYH: So your testimony is clearly that a unilateral approach gives us the best prospect of success, so we need to focus on what it takes to get the other countries, including India, I think, who is doing a fair amount of business there, to participate in this. And it would, according to Dr. Levitt, substantially increase the cost of doing business, perhaps so much if we can take a unilateral approach, Ambassador, that it would get them to contemplate modifying their behavior?

MR. BURNS: Well, my belief is that we cannot have a solely unilateral approach, that some of these steps might be helpful in constructing a larger strategy, but in essence, we have to lead a coalition. We have to start a coalition here, lead it and keep it unified. That's going to be very difficult to do, but it is worth trying and there is time to do it.

SEN. BAYH: Ms. Pletka or Dr. Maloney, have you any response to what your two co-panelists have said?

MS. MALONEY: Getting back to your original point about the impact of a ban on refined products, I think, you know, depending on the environment in Iran, it could play into some change in the regime's calculus. I play out what this would look like on the ground and potentially with smuggling, with disrespect of the provisions of the act, Iran might be down, say, to 20 percent of its refined products actually coming into the country. So they've got a deficit, potentially, of 20 percent.

What happens on the streets, you've got people waiting in long lines, you've got a lot of frustration. Now, the regime has been successful in cutting demand for refined products. It has imposed both a rationing program and also tried to gear up CMG vehicles around the country for public transportation, so it could cope for some period of time.

SEN. BAYH: Can I interject for just a moment? You previously had testified that, you know, with the controversy surrounding the election, the protests in the street, perhaps they're a little bit more worried about the stability of the regime. Although they're going to retain control in the longer term, might it not be true that if you added this additional economic element to what is already now a changed political situation that perhaps that increases their anxiety level a bit about their own situation?

MS. MALONEY: I think it absolutely plays --

SEN. BAYH: I was very impressed by your original statement to my first question about what could we learn from their behavior post- Afghanistan and Iraq and you said they do a cost-benefit analysis. Might this not increase the cost to get them to change that calculus a bit?

MS. MALONEY: Absolutely. I think that it plays into a very different environment in Iran and one in which the population would be far more willing to blame their own regime, rather than outside forces, for this action.

But I also would note the caveat that the Iranians are not terribly good at capitulation. This is a regime that tends to believe the best defense is a good offense and so I think we also have to be prepared that Iran under pressure from within, under pressure from greater sanctions from without would, at least in the immediate term, probably prove more difficult to deal with. It doesn't mean that it wouldn't change their calculations, but to the extent that we've got a timing issue here, and the ticking clocks metaphor gets used a lot, we have to try to think about exactly how we get them to the table if they feel entirely cornered.

So I think there's a cost-benefit to it from our side. And I think, like Ambassador Burns, the waiver is key because to the extent that the Chinese see their economic interests here threatened, they won't play ball.

SEN. BAYH: Having them at the table feeling cornered seems to me to be a better set of circumstances than the ones we are looking at today, because then at least if we can come up with a face-saving way out of it for them -- if they agree to modify their behavior, I mean, then you've made some progress. Right now it seems that they just feel they can kind of continue their current course without much -- at least without consequences they're perfectly willing to bear. But thank you.

Ms. Pletka, anything?

MS. PLETKA: The only thing I would say is to underscore and agree with what you just said. The wisdom of having an engagement policy is giving them a way out when they're backed up against -- into a corner. It's allowing them the -- it's allowing them the graceful exit.

The problem is, if you have an open door on one side and absolutely nothing pushing them toward it on the other side, or nothing credible pushing them toward it on the other side, then the engagement policy becomes nothing other than an open hand. We can stand waiting for an awfully long time and this is what we've heard over the course of many, many years. Don't do that, because around the corner is the persuasive moment when everybody will join with us. No, no, no, don't do that because it will really take away from our credibility and our bona fides.

But what the Iranians have seen over the same course of time is that we have changed our red lines every single time and we've always been willing to do it. First we didn't want them to do uranium conversion, then we didn't want them to do enrichment. Then we wanted them only to suspend enrichment and now we want them to suspend enrichment, but maybe we could even have an enrichment facility in Iran. Goodness me, what a great idea.

So I think the Iranians look at that and, just as we make assessments about them and we've all talked about them, they look at us. And what they see is a United States that isn't terribly decisive. They see an international community that isn't going to come together and they see the likelihood that they are going to continue.

When people talk about the possibility of containment, the way they see that, the way they reacted to Secretary Clinton's statement last week in Thailand was, the United States will accept a nuclear Iran. They'll talk about deterring us and containing us, but at the end of the day they will accept a nuclear Iran. And I think at the end of the day, the truth is that a lot of people aren't willing to say it, but they are willing to accept a nuclear Iran, a lot of people in this town.

SEN. BAYH: Well, the hope here is that we're taking a calibrated approach. And the hope is that we can take -- empower the president, working in a multilateral context to change the cost-benefit analysis in Tehran by -- in a different political environment now -- somewhat more unstable -- to add some economic and financial difficulties on top of that that might get them to feel cornered, Dr. Maloney, but not without a way out. And that's what we're -- they're going to moderate their behavior, then there's a way out. And in the fullness of time, God willing, the regime will change. But at least in the near term in their own minds they'll have thought they'll have relieved the pressure and perhaps they will be internally in a better situation from their own point of view.

I don't know. You look like you sound a bit skeptical -- thinking a bit -- it's incredibly difficult, but that's the challenge here.

I had one final question. And then -- that -- this might be a question I -- well, so many ways we can go, but you've been most patient.

Two final questions actually: I was in Moscow -- it's been some time. The world's changed a lot in the last year and a half -- but met with the energy minister there whose portfolio is to deal with some of these questions with Iran. And he used a word that caught my attention. He said that the Iranians were terrified -- that's the word he used, terrified -- at the prospect of perhaps some restriction not on their import of refined petroleum products -- that's the next step. We began with the financial issues Mr. Levitt worked on. We're now contemplating refined petroleum importation. He said they were terrified at the potential for any restrictions on their export of petroleum, because they rely so heavily upon that.

Now, that would have all sorts of consequences for the global oil market and at this moment in the global economy it's unlikely we would go there. And as I think maybe Dr. Maloney -- one of you pointed out the Russians actually think about that in terms of their own self- interest.

But I'd be interested then in any of your thoughts and the -- well, we can work with the Saudis and some others in a multilateral way to deal with some of the consequences of something like that.

Is that -- if the Iranians are terrified about that, isn't at least it worth us thinking about -- not doing today, but at least ultimately as an end-game strategy and perhaps doing some things to mitigate the economic consequences to us and the rest of the world of such a scenario?

MR. BURNS: I believe it makes sense for the United States to consider sanctions on energy, because that's the source of Iran's national power and its economic power.

The question is, will the Arab governments agree with that? Will the Russians and Chinese agree with that? It has not been tested. We've not put that on the table before. Giving the president that kind of authority therefore expands his options and I think enhances -- strengthens his diplomatic portfolio. It's a good thing to give him that authority.

I want to just say, however, I don't think we should consider the Iranians as 10 feet tall here. The Iranian threat to the United States, to Israel, to the Arab countries is not in any way comparable to what we faced in the middle part of the 20th century through to the early 1990s with the two great communist powers. That threat was far greater.

Therefore, we ought to have a little bit of self-confidence that with a skillful diplomatic approach that combines these various elements that we've been talking about, Senator -- they're in your bill -- you know, engagement and sanctions and keeping the threat of force on the table. That's probably -- that's the proper way for the United States to proceed.

And I very much disagree with the criticism that somehow President Obama has been soft or weak or indecisive or he's not keeping to deadlines. Frankly, I see President Obama continuing a lot of the strength that was in President Bush's policy. And I think what he's been able to do is to put Iran on the defensive internationally. And frankly, Iran is weakened now as a result of the political crisis over the past summer.

So I do not assume that somehow this is a strategy that's bound to fail. It may not succeed, but it's worth trying for the United States. And we ought to have self-confidence that our president has put in place a lot of different initiatives now that might come together, hopefully will come together for a successful policy.

SEN. BAYH: Well, the hope is to move progressively with timelines and real consequences for failing to meet them, to ratchet up the consequences, to change the cost-benefit analysis in Tehran and then, God willing, avoid very difficult decisions you know at the end of the day if all that doesn't work.

That's why I ask about the exportation, because if they are truly terrified about it, at least having some prospect of that out there might get them to focus on their cost-benefit analysis.

But I'm well aware that there are some -- that would be very difficult on us economically potentially -- and if we don't move to mitigate some of that.

So perhaps I'll end up with -- both you and Dr. Maloney have suggested -- you, Dr. Maloney, spoke about deterrents.

You've talked about the Iranians not being you know 10 feet tall and that sort of thing.

When you sit in these chairs and the chairs that some of you have served in previously, at the end of this road lies an assessment of their intentions and their psychology.

You're correct; the military capabilities of the former Soviet Union and some of our previous adversaries make what Iran can do pale by comparison. But as best we can tell, they were never suicidal. The Iranians may not -- very well not be suicidal.

At the end of the day, Dr. Maloney -- here's my question to all of you at the end of this -- at the end of the day, they may be rational cost-benefit analysis -- who was that, Jeremy Bentham -- they may view the world in those sorts of terms. But they do have some leaders that make apocalyptic statements. They do have some religious fanatics amongst their midst.

And if the consequences of error are the launching of a nuclear weapon, how great a risk do we run that our assessment of their psychology is wrong, even if there's a relatively small possibility that they might engage in such behavior?

The consequences of that are so great -- granted, the consequences of acting to try and prevent them from doing that -- if all these steps we've outlined here today are unsuccessful -- is certainly no walk in the park and should sober all those who advocate such a step. But that is ultimately the decision that we may very well be confronted with and why this hearing and these steps to try and change the analysis are so important, because the answer to that question may in large part be unknowable with consequences either way that could be potentially very adverse.

MS. MALONEY: Well, I mean, deterrence is effectively about risk and about the psychology of your adversary. And I think you're right to raise the extent to which we have not always forecast Iranian behavior accurately and the extent to which certainly the leadership at this stage is prepared to use violence to advance its aims and essentially secure its power.

At the same time, I think you could have made equally or perhaps even more compelling arguments about the psychology of communist Russia, about the psychology of Maoist China and their willingness to use violence, their ability to be deterred by the threat of violence and their interests in protecting or preserving their own citizens. And it worked.

And I think that the same laws of deterrence applied to Iran will work. They have worked. We have deterred Iran from engaging in some of the most -- worst behavior that certainly some within the regime would have engaged in without any sorts of curbs on their activities.

And I think we can certainly deter and contain a nuclear Iran.

Let me just say in answer to your previous question -- and I realize that I'm indulging here -- but I think that the export question is certainly far more of an existential threat to the Iranian regime. But it's one that they recognize that also has some costs to the international community, particularly in the wake of this global economic crisis.

At this stage there is sufficient spare capacity to -- for the world to live without Iranian exports. But it will have an impact on the price. I think the easier way to get at this -- because you will never get -- if you can't get multilateral agreement to the sort of very modest measures that Dr. Levitt suggested, you'll never get multilateral agreement on a ban on Iranian oil exports short of them testing a nuclear weapon.

I think the easier step would be to begin talking about targeting investment in their energy sector writ large, because the Iranians know better than anyone that they have a production decline, that they have technological -- and now, given the financial crisis, some financial, some issues of capital, that they need international involvement in their sector in order to avert potentially becoming an importer of oil rather than an exporter.

SEN. BAYH: So you would agree with the sentiments of the Russian energy minister I spoke with? He used the word -- they would view it as an existential threat. He used the word -- they would be very concerned about even beginning to discuss something along those lines.

MS. MALONEY: I think even those discussions -- the suggestion that the Chinese and others would be willing to go along with anything that involves energy investments would be very powerful.

MS. PLETKA: Senator, may I just --

SEN. BAYH: Yes.

MS. PLETKA: -- address an issue that has not arisen?

We've gotten drawn into the question of parallels and similes with the Soviet Union and Maoist China. And I think that Ambassador Burns is absolutely right. There's no comparison in terms of the might, the power or the threat that they represent to the United States. Neither the Soviet Union nor Maoist China were especially interested in annihilating the state of Israel.

Each of the members, I noticed, up here know -- regardless of party happened to mention our alliance with the state of Israel. And I think that we are interested in the security of the state of Israel as well as in the security of our own homeland and other allies. And in fact, Iran does have an ability to do significant damage --

SEN. BAYH: Well, and if I could interject, the Israelis obviously have an interest in their own security and --

MS. PLETKA: Right.

SEN. BAYH: -- we're not the only actors on this stage.

MS. PLETKA: That's exactly right.

SEN. BAYH: And if some others feel sufficiently threatened, they could engage in behavior that could then implicate us and a whole chain of events could take place.

MS. PLETKA: Exactly. That would be enormously destabilizing in the region. We haven't talked about that, but obviously the implications are very serious for us and for our allies.

And of course, you know, for us to stand by as the Jewish people twice in the space of 60 or 70 years face the prospect of genuine annihilation is something that is a fairly daunting prospect and not something I think that this Congress or most of us are willing to indulge in.

SEN. BAYH: Well, I think we would all agree that we have a strong interest in avoiding that.

Anything else?

You've been very patient and I want to thank you. This has been a very, very good hearing. And your testimony has been very thoughtful. And I want to thank you for that.

Anything else, Ambassador? Anything you'd like to add? Anything we didn't touch upon?

MR. BURNS: I just want to thank you for the opportunity to testify.

And I wanted to agree with you that the prospect of a nuclear- armed Iran is unthinkable for our interests and for Israel's interests. But I'm convinced that the best way to protect Israel's interests -- and everyone wants to do that -- as well as ours is not to leap to the solution of military force at this point; it is to engage in the more complex diplomatic move that I think President Obama is currently engaged in.

SEN. BAYH: Well, as Senator Lieberman indicated in his testimony and I tried to indicate in my opening remarks, the purpose for this hearing and for some of our initiatives is to try and make -- maximize the chances that we don't reach that point, to try and buttress the negotiations with real consequences from a position -- thank you all very much.

Hearing is adjourned. (Sounds gavel.)