SEN. BAUCUS: (Sounds gavel.) The hearing will come to order. The Earl of Mountbatten said, "If the third world war is fought with nuclear weapons, the fourth will be fought with bows and arrows." Few goals can be as momentous as preventing that third world war, and central to that end is continuing the proliferation of nuclear weapons to unstable, provocative regimes in strategic regions.

Just such a regime is that of the Islamic Republic of Iran. Today we will address S. 970, the Iran Counterproliferation Act of 2007. This bill takes action to achieve the worthy end of a nuclear-free Iran. S. 970 seeks this end by tightening and expanding economic sanctions against Iran, and it seeks to deter foreign countries from cooperating with Iran. But S. 970 has its critics. Some argue that the bill will not achieve its goal. Some believe the potential negative consequences of the bill outweigh its benefits. Others argue that America should not impose unilateral sanctions on any country. Still others have expressed concerns about the potential humanitarian effects of the bill, and others, including this senator, hope to address some WTO questions that the bill raises. These are valid concerns, but we cannot fail to act because we have concerns. Rather, we must address and resolve the concerns. Today we will hear from both supporters and critics of the bill. We will seek to have a frank discussion about the effect of the bill on promoting a nuclear-free Iran. We will closely examine the trade and economic effects of this bill, including its WTO implications. And we will analyze the bill's effect on American businesses to be sure that we are not punishing ourselves in our efforts to deter Iran. We also look at the role this bill plays in a broader multilateral sanctions regime. America is a leader in the international community. As such, we are often called upon to take tough actions to ensure the safety and security of ourselves and our allies. But time and experience have shown that multilateral sanctions are more effective. We should ensure that any actions that we take can be used as building blocks for broader international action to deter Iran from its nuclear ambitions. And finally, we will examine the humanitarian effects of this bill. We must make sure that this bill does not undermine our humanitarian goals. We seek to heighten pressure on the Iranian government but not lower the living standards of the Iranian people. I thank today's witnesses for helping us to consider the implications of the bill. I hope that they will give us their ideas about the benefits and the consequences of this bill, the role of this bill in a broader, multilateral sanctions regime and the humanitarian effects of the bill. So let us learn about S. 970, what it can do to help prevent the proliferation of nuclear weapons. Let us learn what this bill means for America, our allies and the people of Iran, and let us work to find the most effective means to lessen the threat of a nuclear-armed Iran. Senator Grassley.

SEN. CHUCK GRASSLEY (R-IA): Thank you, Mr. Chairman. This is a very important hearing because of the threat that Iran poses to the rest of the world -- particularly being armed with nuclear weapons, this is a reason for us to address this issue. Iran also is a leading state sponsor of terrorism, supporting groups Hezbollah and Hamas. The president of Iran has vowed to destroy Israel. It is working to enrich uranium for purposes of developing nuclear weapons. It continues to pursue missile arsenals to deliver weapons. Iran should not be allowed to develop and possess nuclear weapons. The international community has been clear in opposing Iran's efforts. This is a multilateral approach to Iran -- not just the United States' approach to Iran. The United Nations Security Council has passed three separate resolutions demanding that Iran suspend all uranium enrichment. Yet, Iran continues to defy the international community. A nuclear Iran poses a serious threat to peace in the region, to our allies, and -- if not right today, eventually -- our own national security. The Iran Counterproliferation Act of 2007 is another important tool then for the United States to use to put even more pressure on the Iranian regime to abandon its quest for nuclear weapons. The bill has strong bipartisan support. I'm glad that we're taking a serious look at this legislation. While I agree with most of the bill -- maybe I'd better say the overwhelming part of it -- I don't yet support all the trade provisions as they're currently drafted, but we're working to see what we can do to change those. For instance, I'm not comfortable with the way that the bill links sanctions to the extension of preferential trade treatment and the process of accession to the WTO. I want to ensure that we end up with a strong, targeted bill that is fully consistent with general policy interests in promoting and enforcing the rule of law in international trade. So we're engaging -- through my staff and Senator Smith's staff -- on these issues, and I want to thank Senator Smith for his willingness to address some of our concerns. That's assuming we can get together. I look forward to continuing to work with him then. I hope that the Iranian regime and the Iranian people will see that their interests are not served by the pursuit of nuclear weapons. I look forward to working with my colleagues on efforts to continue to apply political and economic pressure on the Iranian regime. Its leaders must understand that their quest for nuclear weapons will not be tolerated and a measure like the Iran Counterproliferation Act is a strong signal for our position on that issue. Thank you then, Mr. Chairman.

SEN. BAUCUS: Thank you, Senator, very much. Appreciate that. Today's panel begins with Phillip Gordon, who is a senior fellow for foreign policy at the Brookings Institution, and Mr. Gordon formally served on the staff of the National Security Council. Following Mr. Gordon is Professor Orde Kittrie, a visiting professor of law at the University of Maryland and professor of law at Arizona State University. And our third witness is William Reinsch, president of the National Foreign Trade Council. Is it "Reinsch"?

MR. REINSCH: It is.

SEN. BAUCUS: I apologize. Mr. Reinsch previously served as undersecretary for export administration in the Department of Commerce. And our final witness, who is on her way, is Danielle Pletka, the vice president of foreign and defense policy studies at the American Enterprise Institute, and Ms. Pletka formerly served on the staff of the Senate Foreign Relations Committee. Mr. Gordon, why don't you begin? And as you all know, our usual role is witnesses speak five minutes, and prepared statements will automatically be in the record.

MR. GORDON: Thank you, Mr. Chairman. It is an honor to be here, and I appreciate the opportunity to testify on this issue. As I note in my written testimony, I have some concerns about certain aspects of S. 970, but I would like to begin my summary by saying that I applaud Congress's involvement in this issue and I think that the basic approach in the bill, designed to increase the price Iran pays for its pursuit of a nuclear weapon, is the right one. And I want to begin by saying why. There is little doubt to me that Iran is actively working towards a nuclear weapons capability, even if its final decisions on whether to build an actual nuclear weapon may not have been made. In that sense, the conclusion of the December 2007 National Intelligence Estimate that Iran had, quote, "halted its nuclear weapons program," unquote, I think was misleading. By defining a nuclear weapons program only in terms of weapons design and covert enrichment programs, the NIE gave the impression that Iran had ceased to move towards a nuclear weapon capability when in reality our concern -- and the international community's concern -- has always been the declared enrichment capability. Even using the NIE's narrow definition, it reported that until just a few years ago Iran was working on military aspects of a nuclear weapons program -- in violation of the NPT -- and that it can accumulate enough enriched uranium for a nuclear weapon within a few years. Despite the U.N. Security Council resolution that you referred to, Mr. Chairman, demanding that Iran suspend its enrichment program because it had hidden aspects of that program for nearly two decades, Iran continues to enrich -- it's operating 3,000 P1 centrifuges at Natanz that, if operated efficiently, could generate enough highly enriched uranium for a nuclear weapon in about a year. Recent reports from the International Atomic Energy Agency suggest that Iran has now started operating 300 much more efficient centrifuges, and Iranian President Ahmadinejad announced yesterday that they are installing 6,000 more, possibly of an advanced type. Iran also has plans to build an industrial-scale enrichment facility of 54,000 centrifuges which, when completed, would be able to produce enough highly enriched uranium for several nuclear weapons within weeks. The lack of transparency, the scale of these projects in the absence of a large-scale nuclear energy program, and the willing (sic) to absorb all the international costs of isolation suggest that the Iranian enrichment program is not designed for civil purposes but rather to give Tehran a real nuclear weapons option.

In the context of S. 970, therefore, it seems to me that the logic of the bill is right because the best option to deal with this challenge is indeed to increase international pressure on Iran. If we on one hand acquiesce to Iran's nuclear weapons development, we would tilt their cost-benefit analysis in the direction of doing so and basically imply that U.N. Security Council resolutions, even binding ones under Chapter 7, have no meaning. The policy option at the other end of the spectrum, using military force, however, is equally unpalatable. I believe that targeted air strikes could no doubt set the Iranian program back for a number of years, but our intelligence is far from perfect, it would have major consequences, and Iran would no doubt respond, including asymmetrically against our interests in Iraq and Afghanistan. Because those options are so bad, I think the option, the philosophy, behind S. 970 is the right one, using all possible political, diplomatic and economic leverage to convince the Iranian leadership that the costs of defying the international community are greater than the benefits. And that, it seems to me, is the merit of this bill.

I support many of the measures in this bill, but let me conclude my summary rather by talking about very briefly what I think the principles should be as we consider these different measures, and that's my greatest concern with the bill. What we need to keep in mind is that any step in this bill that would lead to legal challenges from allies at the WT (sic) or elsewhere I think could be counterproductive. We've discovered in the past with various challenges to the Iran Sanctions Act that most countries, even among our closest allies, reject the extraterritorial application of U.S. sanctions, and they're willing to act to defend that principle, the principle that countries should not impose their foreign policy priorities on others. So it seems to me any measure in S. 970 deemed to provide for mandatory secondary sanctions, especially if they limited the president's ability to waive those sanctions, could be counterproductive. The principle is that sanctions, as Deputy Treasury Secretary Kimmitt has said, have their most comprehensive impact when applied cooperatively and collectively, and this I think is particularly true at a time when the international community is actually moving forward to increase pressure on Iran. And I have detailed that in my written testimony. You're all familiar with the four U.N. Security Council resolutions. But there's also the reality that I think increasingly international companies and banks are refusing to work with Iran, and that is major progress.

Finally, let me just say that I think that these positive trends in the international community would be reinforced by U.S. diplomatic pressure on these countries, reporting requirements that name and shame the countries and companies that are contributing to Iran's proliferation activities, and efforts to promote U.S. disvestment (sic) from Iran and the companies that invest in Iran. And all of that is I think quite usefully in this bill. Lastly, let me say that I think that the bill could be strengthened with elements to make clear not only that Iran must pay a price for its refusal to cooperate but that more flexibility on its part would be rewarded. So just as the bill proposes to increase IAEA funding for the creation of a nuclear fuel bank, I think it would do well to reiterate the offer that the United States and others made to Iran in 2002 to ensure its access to peaceful use of nuclear energy.

My last point is that pressure from Congress can play a useful and constructive role in making sure that foreign governments and companies uphold their responsibility to contain the nuclear risks from Iran. I believe that S. 970 adds to that pressure in some useful ways but also that we must take great care not to provoke divisions in the international coalition that has been forming to contain Iran, and I hope the Congress will keep that principle in mind as it moves forward. Thank you very much, Mr. Chairman.

SEN. BAUCUS: Thank you, Mr. Gordon. Mr. Kittrie?

MR. KITTRIE: Chairman Baucus, Ranking Member Grassley, distinguished members of the committee, thank you for the opportunity to speak with you about S. 970. Today, April 8th, is the date Iran has marked as its "national day of nuclear achievement." This date commemorates the April 2006 day on which Iran for the first time produced enriched uranium. Last year, 2007, Iran celebrated this national day of nuclear achievement with an announcement by President Ahmadinejad in a ceremony accompanied by chants of "Death to America" that Iran had begun to enrich uranium on an industrial scale. This year, today, Iran is celebrating its national day of nuclear achievement by announcing it has started to install 6,000 advanced enrichment centrifuges at its Natanz uranium enrichment facility. Under international law, any uranium enrichment by Iran is flatly prohibited by three legally binding resolutions of the U.N. Security Council. So Iran is today explicitly celebrating nuclear progress explicitly prohibited to it by international law. It's anyone's guess how Iran will celebrate its national day of nuclear achievement next year. In 2010 at the current rate of development, Iran just might celebrate it by detonating a nuclear bomb. The sanctions imposed on Iran thus far, including by the Security Council, the EU and the U.S. have obviously failed to dissuade Iran from continuing to pursue its nuclear program. It could be tempting to conclude from this experience that sanctions can under no circumstances succeed in stopping Iran's nuclear weapons program. Such a conclusion would be both unfortunate and incorrect. The international community has learned in recent years that strong sanctions can stop illicit nuclear weapons programs. For example, it was discovered in the wake of the U.S. occupation of Iraq that strong U.N. Security Council sanctions had destroyed Iraq's nuclear weapons program and succeeded in preventing Saddam from restarting it between the Gulf War in '91 and the coalition occupation of Iraq in '03. Strong U.N. Security Council sanctions also induced Libya's government to both forsake terrorism and completely and verifiably relinquish its nuclear, chemical and biological weapons programs.

Unfortunately, the sanctions imposed on Iran by the international community thus far are much weaker than the sanctions which stopped the Iraqi and Libyan nuclear weapons programs. The Security Council resolutions imposed on Iran thus far are too weak to coerce Iran into compliance, to contain Iran's ability to advance its nuclear weapons program, or to deter other states from following Iran's lead in developing their own nuclear weapons program. This is unfortunate because Iran's heavy dependence on foreign trade leaves it potentially highly vulnerable to strong economic sanctions. Why are the Security Council sanctions on Iran so weak? In considerable part because Russia and China are prioritizing the short- term profits to be gained from business as usual over the long-term security to be gained by forcing Iran to stop before it develops nuclear weapons. The EU has played a more constructive role but could do much more. If the EU, which supplies one/third of Iran's imports -- including a high proportion of Iran's sophisticated machinery needs -- were to follow the U.S. lead and impose a nearly comprehensive embargo on Iran, it might quickly succeed in coercing Iran to cease its nuclear weapons program. Diplomatic tools traditionally include incentives as well as sanctions, but Iran has already been offered generous incentives and consistently rejected any suggestion that it halt or limit its nuclear work in exchange for any incentives.

S. 970 could contribute to convincing Iran's regime that the price for its nuclear program has become too high, that the risk from sanctions to the regime's survival has become so great that the regime is better served by halting its nuclear program rather than further risking its grip over the Iranian people. Some will argue that S. 970 is wrong because it is unilateral or because it runs afoul of our international trade commitments or because it will have inappropriate humanitarian impact. None of these is correct. The U.S.'s recent success with unilateral banking sanctions, about which the committee heard just last week, demonstrate that unilateral sanctions can be very effective in both directly impacting Iran and persuading third countries to lessen their ties to Iran. S. 970 would help build on those successes. In addition, S. 970 would not run afoul of our international trade commitments. Rather, it falls well within the security exceptions provided by Article 21 of the GATT. With respect to the concern that S. 970 might harm humanitarian interests, I would stress that S. 970 would deprive Iran of neither food nor medicine. Indeed, S. 970 explicitly exempts exports to Iran of food and medicine. If the people of Iran are not as prosperous today as they would like to be it is because their government has grossly mismanaged the Iranian economy and chosen to isolate itself from the international community by persisting in its nuclear program in explicit defiance of international law. Whatever inconvenience the Iranian people might incur from a tightening of sanctions attributable to S. 970 would pale in comparison to the humanitarian costs to the U.S. and its allies of an Iranian nuclear arsenal, including the greatly increased risk of stepped-up terrorism under an Iranian nuclear umbrella, a likely spread of nuclear proliferation to Iran's neighbors, and the greatly increased risk of a nuclear 9/11. By impeding an Iranian nuclear arsenal, S. 970 would therefore advance rather than hinder humanitarian interests.

In conclusion, stronger U.S. sanctions on Iran would impose costs on U.S. business. Yes, they would. Stronger multilateral sanctions would impose costs on Russia, China, Europe and other sanctioning countries. As my written statement discusses, sanctions are investments in protecting against the far higher price of an Iranian arsenal. In light of Iran's advancing nuclear program, a failure by the West to quickly improve its peaceful leverage over Iran will inevitably leave us with a terrible choice, taking military action to stop Iran's nuclear weapons program or allowing Iran to obtain a nuclear arsenal. I urge you to pass S.970. Thank you.

SEN. BAUCUS: Thank you, Professor Kittrie. Mr. Reinsch.

MR. REINSCH: Thank you, Mr. Chairman. It's a pleasure to be back with you, although I think I'm in the rather lonely position of having to tell you why it would be a mistake to pass this bill and to express serious concerns that my organization, the National Foreign Trade Council, and also the USA Engage Coalition, have with it. There's no question that Iran's behavior imposes grave concerns to the United States and for our allies. Iran's pursuit of a nuclear program is deeply troubling, and its documented support for terrorist organizations is unacceptable. It's important, however, to consider what approach is most likely to change the behavior that we all want to see changed. By picking fights with our allies and limiting the ability of this and future presidents to negotiate directly with Iran, legislation like S. 970 would make it more difficult for the United States to address the threats that the other witnesses and I have described. Members of this committee, as well as members of the Banking and Foreign Relations committees who've also been working on this problem must balance the need to stand strong against Iran's unacceptable behavior, against the risk of doing something counterproductive in an effort to address it. We believe that passing S. 970 would come at a heavy price. As a general matter, unilateral sanctions rarely achieve U.S. foreign policy goals. The Peterson Institute for International Economics has concluded that unilateral U.S. sanctions in place from 1970 through 2000 were effective only 19 percent of the time, and most successes came where a modest policy change, like release of a political prisoner, were sought. Moreover, sanctions may make the problems they are intended to address worse by providing an excuse for the targeted government to blame its failures on outside pressures and to rally support for its regime. In the case of Iran, our ability to change behavior through future sanctions is further limited because the United States already maintains comprehensive restrictions. More pressure by the United States alone is very unlikely to convince Iran to change its behavior. Instead, the best hope of altering Iran's behavior is through vigorous and unified multilateral pressure in concert with our allies and Security Council partners, combined with direct diplomacy with Iran.

Unfortunately, S. 970 would make it more difficult to unify our partners behind further multilateral measures. It would also impede efforts by this and future presidents to conduct direct diplomacy. Section 8 of S. 970 would expand current unilateral U.S. sanctions to foreign companies by making a parent company liable for the actions of its foreign subsidiaries. This bill would draw international attention away from the core problem of Iran's threatening behavior and instead focus -- instead effectively penalize entities and individuals in the very countries whose cooperation we need to counteract Iran's behavior. These other governments could draw on already existing blocking statutes or implement new measures to counteract the threat of U.S. penalties. If enacted, this provision would override and preempt provisions of the 17 executive orders issued over a 28-year period that provide legal authority for the current sanctions. This is a dramatic departure from current policy. The last time the United States attempted to sanction foreign companies in this way it caused a major rift with our allies and ultimately forced the president, in that case President Reagan, to back down. The fact is that extraterritorial sanctions, as these are, are more likely to cause a trade war than they are to change Iran's behavior. Moreover, it's important to remember that adequate authority exists in current U.S. law for the United States government to target sham corporations that exist to circumvent domestic sanctions. Simply put, if a subsidiary is independent and legitimate, it should not and cannot be held to U.S. law for conduct outside the United States. If it is not independent and legitimate, then the U.S. government already has adequate enforcement authority.

Mr. Chairman, the Senate has considered and rejected this particular provision three times in the last four years, and I recommend that you continue that record. S. 970 would also limit the ability of the president to conduct diplomacy. Codifying existing prohibitions would remove the ability of the U.S. president to offer incentives or to respond to positive developments in Iran. For example, in the 1990s the United States allowed imports of caviar and rugs in response to what was perceived then as a political opening in Tehran. It is essential that future presidents have the same tools available to them, even if there are no present plans right now to employ them. Equally important under the current wording, this provision would seem to prohibit the export of medical devices to Iran and could hinder the ability of NGOs or news organizations to work on humanitarian activities in Iran. Banning the export of medical devices to Iran could compromise basic medical treatment of Iranian citizens, while prohibiting the export of civil aviation parts, which this legislation also does, could compromise air safety not only for Iranian passengers but for European and other passengers on Iranian airlines. Further, this provision could inhibit the ability of NGOs, international organizations such as the U.N. and news bureaus and other organizations from working on humanitarian activities. Sanctions often end up hurting ordinary people, while having little impact on the government leaders we're trying to influence. In the case of Sudan, for example, poorly drafted state laws have discouraged American business activity in southern Sudan at the same time the federal government is trying to encourage it. These are just some of the problems with S. 970. USA Engage has compiled a list of concerns with the legislation, which are attached to my testimony, which I hope will be placed in the record.

Finally, Mr. Chairman, we believe that the best way to change Iran's unacceptable behavior is through multilateral pressure and direct talks with Iran. The United States should continue to work with the Security Council on ways to pressure Iran on its nuclear program and with our allies around the world to confront its support for terrorist activities. The Congress should also consider endorsing and funding a high-level special envoy for Iran with the authority to engage in direct bilateral talks in partnership with the international community. The United States has made some progress negotiating an end to North Korea's nuclear weapons program through direct diplomatic engagement. When it comes to Iran, there is already a framework for cooperation: security talks in Baghdad; and precedent: United States and Iran cooperated in the past to support democratic governance in Afghanistan. In addition, the Treasury Department has also been successful in convincing European banks to curb their dealings with Iran. This type of back-channel economic diplomacy with our allies is a much more effective way to influence the behavior of foreign companies then the sledgehammer approach of S. 970. Finally, let me just say, Mr. Chairman, based on my experience dealing with these programs when I was in the government, I can guarantee you that if this bill is passed, it will have serious unintended and unforeseen consequences, which will be manifested rather quickly and which would make our efforts to change Iran's behavior significantly more difficult. I strongly urge the committee to reject this approach and instead to endorse diplomatic efforts with our allies and with Iran that are much more likely to result in a positive outcome. Thank you.

SEN. BAUCUS: Thank you, Mr. Reinsch. The materials referred to will be included in the record. Ms. Pletka, welcome to the committee. We're anticipating your arrival.

MS. PLETKA: Mr. Chairman and members of the committee, thank you for the invitation, and thank you for your forbearance with my late arrival. I left a panel on nonproliferation in the middle of their talk, walked out and left, so forgive me for my bad organization.

SEN. BAUCUS: No, no, no, fine. Glad you're able to participate in both forums.

MS. PLETKA: Well, thank you. It's a pleasure for me. I ask that you accept my full statement for the record, and I will briefly summarize my remarks as well. While there are some who have suggested that Iran's intentions regarding its nuclear program are in question, that is not the view of any of the professionals worldwide with whom I have consulted. Iran's record of concealment, pattern of procurement and unwillingness to agree to even de minimis concessions should inform our opinion about their intentions. The real question before us is not what is Iran up to, but how should we react to Iran's weapons programs? Should we rely solely on multilateral sanctions as the only credible, if so far ineffectual, means of talking Iran off the ledge? Should we weigh options to sharpen our own sanctions, making them more biting and, we hope, more persuasive to those in the Iranian leadership not committed to this nuclear weapons folly? Should we do so notwithstanding the inconvenience to certain ardent trade groups, or should we throw these coercive measures out and offer ourselves up to the Iranians for unconditional dialogue despite the fact that successive administrations have refused unconditional dialogue, despite the fact that our European allies have demanded the same conditions as we for moving forward in discussions with Iran, despite the fact that the Iranian regime clearly believes that an agreement to dialogue without preconditions represents a major concession from the United States?

We can debate these various options and our different philosophies of approaching rogue states, but a few things should be clear. The first is that dialogue too often means negotiation, and if we are to negotiate, I ask proponents of negotiation, exactly what do you propose to give away in exchange for Iranian concessions on their illegal nuclear program? And do you propose that once those concessions that presumably secure a verifiable dismantlement of the Iranian nuclear weapons program are delivered that we accept Iranian sponsorship of terrorism or sponsorship of death squads in Iraq or domination of its region? Second, we should have no doubt that sanctions do have an impact. Whether they have the desired impact in the desire time frame is another question entirely, but both unilateral and multilateral sanctions imposed by the United States and the international community have bitten hard into the Iranian economy and into the ease of doing business, into Iranian credit, and into the bank accounts of Iran's corrupt leadership. Raising the cost of defying the international community is what sanctions are all about, and I think there is clear evidence that we've done so. Interest rates are high for Iran. Despite high oil prices, the economy is in a shambles. Investment in Iran's oil and gas sector has declined. Iran's exports of oil have declined over the last years. In other words, there is a cost to Iran and that is all to the good. Finally, there's the question of loopholes in American law. It's hard to argue persuasively that the U.S. is committed to stopping Iran while we subsidize Iran's nuclear trading partners -- I mean Russia -- and Iran's aid donors -- I mean the World Bank. It's hard to argue to foreign companies that we wish them to cease and desist their business with the mullahs when American companies are permitted to use foreign subsidiaries to do that same business. Some skeptics have argued that sanctions will not achieve their desired effect. I think there's ample evidence to indicate that engagement has also failed abjectly, and while both sanctions and engagement may ultimately fail to bear fruit, American leadership and American conscience dictate that we do our best to achieve our goals without getting into bed with the Tehran regime. Fewer and fewer companies and banks are willing to do business with the Islamic Republic.

We are gaining ground. And for those who believe we should cede that ground, I remind you -- and I had to include this quote because it is so apropos -- I remind you of Thomas Jefferson's wonderful letter of 1808 discussing an earlier challenge to American national security. He said: "Three alternatives alone are to be chosen from: one, embargo; two, war; three, submission and tribute, and wonderful to tell, the last will not want advocates," close quote. If economic pressure fails to persuade Iran to change course, we will be left with few options. One is to accept a nuclear-armed Islamic Republic and the other is war. I suggest that an enhanced commitment to persuasive economic measures remains the best option for the moment. This bill is an important step in that direction and I commend its sponsors and this committee's leadership. Thank you.

SEN. BAUCUS: Thanks, Ms. Pletka. Frankly, I think everyone in this room agrees the United States can do more and should do more to stop Iranian nuclear proliferation. I don't think there's much doubt about that. The real question is what works, what's effective and what's not effective, and I do think probably some unilateral actions are effective, some may not be effective and have unintended consequences. A concern I have, frankly, is the provisions in the bill which have basically banned products that are substantially transformed in third countries, which I think is WTO-inconsistent, and Mr. Kittrie, you said perhaps -- you alluded to maybe there's a security exceptions clause in WTO that may make that provision not objectionable under WTO rules. But my main -- I'm asking a broader question, and that is what provisions in this bill need to be modified because they otherwise have unintended consequences that are adverse? I was a bit struck with Mr. Reinsch's point or somebody's point that some of these provisions may have the unintended effect of causing international debate among allies, among friends, and so we're getting off the track here. We're just trying to sanction Iran effectively. So I just -- anyone who wants to, just, you know, pipe up here and tell me what needs to be changed here in this bill and how do you change it to minimize unintended adverse consequences that may otherwise be caused by this bill? Mr. Reinsch, I think you've got some in mind, so I'll call on you first.

MR. REINSCH: We have a long list, Mr. Chairman, and it was appended to my testimony. I commented on some of the things. I think that clearly the section -- Section 6, which relates to Russia's nuclear cooperation, would have I think a significant impact on our bilateral relationship with Russia in a number of ways, that we think it would have the effect of undermining -- let me go back one step. I think in general, our concern about this is not -- I mean, I don't think anybody on the panel disagrees with the seriousness of the problem or the nature of the problem. You're quite right in your comment about that, and we certainly don't oppose multilateral sanctions. I think multilateral sanctions, multilateral pressure is the way to get there. What the debate over this bill is about, I think, is the best way to get to a multilateral approach. Our problem with this bill is that it, you know, it attempts to bring basically the Russians and the Chinese and the Japanese -- and some of the Europeans are the countries we're talking about here -- it attempts to bring them along by beating their companies over the head, and we don't think that that's a useful way to get their governments to cooperate. Telling Russia that, you know, blocking Russian accession to the WTO, which is what this provision would effectively do, unless it stops its nuclear cooperation with Iran, we don't think is an effective way to obtain Russian cooperation.

SEN. BAUCUS: Just to get a little discussion on that one point, let me ask Mr. Gordon, you know, to respond to that, as well as Professor Kittrie and Ms. Pletka, to that point about Russia -- you know, the provision with respect to Russia, the accession to the GATT -- or to WTO.

MR. GORDON: I think that the administration should take into account what Russia is doing on the Iran issue as it considers whether it would support Russia accession to the WTO. The problem I would have in making this a law and taking away any flexibility from the administration is that there are circumstances in which I could imagine Russia having some nuclear cooperation with Iran, notably on the Bushehr nuclear reactor, that we would want to allow it to continue if Russia was cooperating more broadly on Iran, that should not stop us from having a 123 agreement with Russia or from allowing it into the WTO. The Bushehr reactor we have opposed for a number of years. Russia has gone ahead anywhere (sic). In an ideal world, Russia would not have anything to do with any nuclear reactor in Iran. It does, and even the Bush administration in the context of the recent Russian agreement to start delivering fuel to Bushehr, noted that this could be a positive aspect -- a positive tool in our arsenal because it shows Iran that it is possible to have peaceful use of nuclear energy while relying on foreign fuel supplies. So I would -- if the bill makes it impossible for Russia to continue with that arrangement, it is hard for us to go to Iran and say: "You can rely on others for nuclear fuel. You can, as made clear by the NPT, use peaceful use of nuclear energy, but by the way, we're going to confirm to you that we're prepared to take it away by denying Russia the ability to provide that fuel." So I think that more flexibility than is in this bill is required on the issue of how to leverage Russia's nuclear cooperation with Iran.

SEN. BAUCUS: Ms. Pletka.

MS. PLETKA: I agree with Phil to a certain extent. Flexibility is the clarion call of the executive branch no matter who is in power, and we all know that all too well. I would caution against viewing the idea of a 123 agreement, an agreement for nuclear cooperation with Russia, as somehow an entitlement for the Russians. To the contrary, it's been the policy of every administration, including the Bush administration in an earlier incarnation, that Russian cooperation with the Iranian nuclear program was incompatible with the idea of Russian nuclear cooperation with the United States, and people should understand what the implications of that cooperation are. It is not just a nice piece of paper that's signed; it is a potential for the export of spent fuel, for example, to Russia, which will be source of enormous -- and when I say enormous, I mean even in the current Russian context -- enormous amounts of profit for, likely, the Russian government. So, again, you know, we need to think this through very carefully. I think the argument is a little bit more easy to make on the question of trade, and there one wants to argue in favor of flexibility. On the other hand, we have to say that having given Russia a significant number of incentives, including initialing that selfsame 123 agreement last summer and beginning discussion on WTO, they have proven themselves nothing if not more intransigent in the Security Council.

SEN. BAUCUS: I appreciate that. My time's expired. Senator Grassley.

SEN. GRASSLEY: Mr. Chairman, before my five minutes start, Senator Kyl, I was going to give him some of my time, but then he got a call. He had to go meet with other people, so he won't be here. He wanted me to apologize to the panel, and he is going to submit some questions for answer in writing. He's our Republican leader -- he's our Republican leader, so he's got a bigger agenda.

SEN. BAUCUS: One of them. One of the leaders.

SEN. GRASSLEY: Yeah, that's right. Yeah. Our assistant leader. I'm going to start with Mr. Gordon and a little bit different approach than the discussion we just had on Russia but somewhat close to it. Mr. Gordon, you testified that we should avoid provoking division in the international community through unilateral sanctions. On the other hand, Russia and China appear to be opposed to applying significant pressure on Iran. If we're forced to choose, which is more important, effective sanctions or keeping Russia and China on board?

MR. GORDON: Thank you, Senator. I guess I would say I don't think that is the choice. I think we can do two things at the same time. We can and do impose a whole range of unilateral sanctions on Iran. We haven't traded with Iran for almost 30 years, we don't talk to Iran, we don't invest in Iran, and we can pursue -- we have frozen the assets of Iranian banks and individuals and we can continue to do all of those things and in many cases we should. We would like more Russian and Chinese cooperation, no doubt. The choice can come in the context of secondary sanctions when we make relations with those countries conditional on what they do towards Iran, and that's the context in which I think it can be problematic when we do things that will cost us their cooperation. And the basic principle again is, if we are honest with ourselves, our own unilateral sanctions have a very limited impact. I mean, the reality of the modern world is there are a lot of other countries out there with money and banks and who buy oil, and that's why it's so important -- as much as possible -- to get countries like Russia and China on board. You know, to the extent our sanctions are designed to limit funds to Iran in order to put pressure on Iran, we cannot buy oil from Iran -- we don't. We cannot invest in Iranian energy development -- we don't. But, especially given the current price of oil -- around $100 per barrel -- Iran is making more than $70 billion more per year from oil exports than it was eight years ago. So we shouldn't -- we need to understand that what we can do alone as a country is going to have a very limited impact. And in that sense, it is in many cases more important to have broad and weak sanctions than very narrow and strong sanctions. And that's why I think it's important, as much as possible, to get Russia and China on board. And I think it has helped. Having U.N. Security Council resolutions is useful not only in sort of putting the diplomatic squeeze on Iran but with other countries. It's a lot easier to persuade the Europeans and the Japanese and the Indians that they should not deal with Iranian banks when Russia and China have agreed at the Security Council that no one should deal with Iranian banks.

SEN. GRASSLEY: Ms. Pletka, you testified that the sanctions in effect today have done a better job than previous regimes in targeting leadership elements and sources of income without imposing a heavy burden on the Iranian people. Others have asserted that the sanctions have led the Iranian public to question whether nuclear ambitions of the regime are worth the economic cost. Question: Do any of the sanctions provisions in our bill run the risk of hurting the Iranian public and thereby causing nationalist backlash?

Ms. PLETKA: It's a difficult question to answer, Senator, for the simple reason that Iran has become, under President Ahmadinejad, so much more of a statist and state-run economy. Where there were businesses in private hands under previous government, things have been drastically centralized. And so, on the one hand, you can say that sanctions have an impact on the government because so much is in fact controlled by the government. The other side of that argument is because so much is controlled by the government, it has a significant impact on the Iranian people. I think that there's no doubt that all sanctions have an impact on a population. If I had to look at where sanctions had an impact right now, I would say in terms of their ability to procure consumer goods from Europe -- luxury imports. Those kinds of things in Iran have gone up in price. But there should be no doubt that when you weigh the cost of sanctions on the Iranian people versus the costs of immense economic mismanagement on the part of the regime, that certainly has a heavier burden. The only comment I would make about the specific provisions of the bill in terms of the Iranian people is the note that Bill Reinsch made, which is that if in fact -- and I didn't pick up the provision that he mentioned -- if in fact, obviously there is a question on medical devices, then clearly the United States is not interested, up to a reasonable point, understanding that lots of medical devices are in fact dual use and that if the Iranians are seeking to exploit that loophole in order to get technology for their nuclear program or their missile program, we do need to be particularly vigilant.

SEN. GRASSLEY: Mr. Chairman, I'm going to submit the rest of my questions for answering in writing because I can't stay for a second round.

SEN. BAUCUS: Okay. Thank you very much, Senator, very much for your comments here and questions. Senator Salazar, you're next.

SEN. KEN SALAZAR (D-CO): Thank you very much, Chairman Baucus and Senator Grassley, for this morning's hearings. And thank you for all the witnesses for your testimony this morning. I'm a co-sponsor of S. 970 along with, I think, 69 or 70 of my other Senate colleagues. I share the concern of those 70 senators that Iran's continuing violation of its obligations under the Nuclear Nonproliferation Treaty is a concern not only to America but to the world. When you take Iran's nuclear activities together with Iran President Ahmadinejad's inflammatory statements concerning the elimination of Israel and his statements against the West, it is clear to me that we need to keep our focus on Iran and try to do everything that we can to make sure that they don't move forward with nuclear armaments. A nuclear-armed Iran would be a threat to the United States and our allies around the world and would likely function to destabilize the already fragile -- very fragile -- political situation in the Middle East. I think most of us view that situation as unacceptable. Let me be clear, however: The U.S. should make every attempt to resolve the Iranian challenge through diplomatic and economic challenges. This includes working with our Security Council partners and the United Nations to ensure Iran cooperates with nuclear weapons inspectors from the International Atomic Energy Agency and, pertinent to this hearing, expanding upon the economic sanctions against the Iranian regime that are already in place. I believe S. 970 will work effectively to intensify the economic pressure on Iran, as well as any country that assists the Iranians in developing its nuclear sector. The bill provides for new sanctions, expands upon sanctions already in place under the Iran Sanctions Act, significantly curbs exceptions to current import-export bans, and also provides the financial support for the peaceful production of nuclear energy. With the passage of this bill, in my view, the United States would send a clear message to Iran that its pursuit of nuclear weapons will come at a significant cost that they cannot afford. As we examine issues related to this legislation, I have been very interested in hearing your views on how effective or ineffective our past efforts have been with respect to the Iran nuclear program. I have a longer statement for the record, Mr. Chairman, and I will submit that for the record, but let me ask a couple of questions to our witnesses. When we try to see what's happening in Iran -- there have been many of us who have been focused on what's happening with their nuclear program for many years -- it seems that we aren't being very effective in terms of getting them to cut back on what they're doing. They're moving full speed ahead. Part of it, I think, has to do, Mr. Gordon, with what you stated, which is that they're making $70 billion more a year now than they were five years ago because we're paying $105-a-barrel oil. When we look at where the money is coming from -- that is financing the Iranian nuclear enrichment program today -- you speak about Russia, you speak about China, you speak about financial subsidiaries -- do any of you have a breakdown of the quantum of where that foreign assistance is coming to Iran to move forward with its nuclear enrichment program? And we'll start with you, Mr. Gordon.

MR. GORDON: Well, Senator, the vast proportion of Iran's revenues are from oil sales -- oil and gas sales. More than 85 percent of Iran government revenues comes from selling oil and gas. That's again why our leverage here is so limited, because -- for all of the sanctions we have imposed and for all of the sanctions the international community has imposed -- there's not an oil embargo on Iran. It is selling oil. It's fungible. We don't buy Iranian oil, of course, but that doesn't matter because they can sell it to someone else, and oil being fungible, you know, as long as there's one or two countries that are willing to buy it, they can sell, and the oil price is the oil price.

SEN. SALAZAR: Do we know which countries -- which of those two countries or three countries -- where's that -- who is buying that $70 billion of oil from Iran today?

MR. GORDON: I don't have the list, but I think the point I would make is it doesn't really matter, because very few countries don't buy any Iranian oil at all, but because most do -- China, India, and other Gulf states that don't have oil -- the oil price is the oil price, and Iran gets this tremendous revenue from that.

SEN. SALAZAR: Should we then, as we deal with this issue in this committee and in this Senate, focus in only on the oil issue, or when we start bringing in the foreign subsidiary support for the nuclear enrichment program are we bringing in the wrong target?

MR. GORDON: Well, the oil issue -- you know, in an ideal world we would and we could, because if you really wanted to pressure Iran economically you would go after their oil exports. That's the only thing, frankly, that would really have a major impact on Iran. The reality is, I think no other country in the world would go along with us in having a total ban on Iranian oil -- especially with the oil at $100 a barrel. Iran exports 2.5 million barrels per day. If we were to take that off, oil would go up to I don't know what but, you know, 10, 20, 30 more dollars per barrel.

SEN. SALAZAR: Thank you, Mr. Gordon. Ms. Pletka, I'd like to hear from you. I know my time is about up.

MS. PLETKA: First of all, it's not -- when we talk about foreign subsidiaries or foreign companies, we're not talking about their support for the specific weapons programs, we're talking about their general support for the economy. And I think that Phil is right, that clearly if there is a silver bullet out there it is a total embargo of Iranian oil exports, and -- but there are, I think, other important points of weakness. And I'm speaking quickly, because I know your time is limited, as is mine. Iran imports 40 percent of its gas. It actually imports it because its refining capacity is so low. That is a real point of vulnerability for Iran. Going after that, working with our allies, working with Iran's neighbors that are exporting to it is in fact very useful. But also, Iran is interlinked into the world economy, and we have at AEI a compilation of all the companies that do business in Iran, including companies that do business with the Iranian government and specifically with the Revolutionary Guard. There are hundreds of companies and they do make it possible for Iran to be part of the global economy. That is --

SEN. SALAZAR: Ms. Pletka, I --

MS. PLETKA: -- the point of isolation.

SEN. SALAZAR: I would appreciate if you would get a copy of that list to us. I will have my staff in contact with you.

SEN. BAUCUS: Thank you.

SEN. SALAZAR: My time is up, but --

SEN. BAUCUS: Thank you very much, Senator. Senator Smith.

SEN. GORDON SMITH (R-OR): Thank you, Mr. Chairman. And our witnesses, thank you all for being here. I think your presence here is motivated by the same factors that caused Senator Durbin and I to introduce this bill back over a year ago now. Obviously the sham democracy we see there, the outrageous anti- Semitism that is expressed in the highest councils of Iranian leadership and their continued flouting of international law in this reckless pursuit of a closed nuclear cycle so that they can weaponize the rockets that have already been sold to them -- I think that leads us all here to look for what to do and to get beyond -- that leads to a conclusion, as Mr. Jefferson put it, is dandy. So I think eloquently stated, the options are embargo, the option is war, or the option is paying tribute. The focus of this is an embargo that is actually meaningful, so we can avoid those other two most unacceptable options. Shortly after I introduced this bill and we began signing up colleague after colleague -- 16 members of the Finance Committee are co-sponsors of this, 70 members of the U.S. Senate, veto-proof majorities in both bodies. Fortunately, the administration then reached out to me and said what does it take to slow this down? And I said implement it. They have substantially implemented many of the features of the bill, and yet we continue to see this onward rush towards a train wreck that is certainly "millennialistic" and it's -- at least as I can imagine it. But shortly after I introduced it I had a visit from a major European country and its ambassador to the United States who had an earlier posting in Tehran, and I posed to him this question: I said, based on your experience among the Persian peoples, what's this all about? Is this about the Jews in Israel or is this about the Arabs in Arabia? And he said oh, it's no question, it's about the Arabs in Arabia -- that that is their greater hatred, that is their greater competition, that Israel is more the excuse. I wonder then if you have any comment about his conclusion, and if that's true, doesn't this -- the weaponizing of these rockets that Iran has -- doesn't that lead us to a nuclear arms race in the Middle East that we've never contemplated before?

MS. PLETKA: Senator, I think you're right in appreciating Iran's thinking about these issues, which is not frankly restricted to the current leadership but was very much part of the shah's thinking about his region. We just finished a study, just observing what Iran's activities are in its own region -- in Syria, in Lebanon, in Afghanistan and Iraq -- and what you can see is that Iran is reaching its tentacles throughout the Middle East, throughout its neighborhood, throughout Afghanistan, linking countries into their electrical grid, creating aid dependencies. It's the biggest exporter of electricity in the area. Isn't that a little bit strange?

SEN. SMITH: Very.

MS. PLETKA: Again, Iran has very broad ambitions. And that's one of the reasons why the Saudis in particular but other Iranian neighbors view the program with such trepidation. It's another reason why, as we think about the threat, we don't just think -- we should not just think about the bilateral threat but should think about what kind of a nuclear arms race this will trigger. Saudi Arabia's government has made manifestly clear -- not just to the United States but to many European leaders as well -- that if Iran succeeds in developing a nuclear weapon, it will procure for itself nuclear weapons, if not --

SEN. SMITH: They'll just buy it. And they have the ability to buy it.

MS. PLETKA: They will buy it off the shelf. And then, who's next? And that's a --

SEN. SMITH: Egypt is clearly next. Is that your understanding?

MS. PLETKA: I know that Egypt has expressed interest in it, but we should also worry frankly about Syria and other countries as well.

SEN. SMITH: I wonder if any of you can speak to this. I mean, obviously what we see is that moderates in Iran are not even allowed to run for public office. The mullahs set the ballot and you choose -- the Iranian people choose between radicals. How is this debate penetrating on the streets of Tehran? I mean, do the Iranian people understand the cost that they're paying and the cost they may yet pay if they continue this? Do any of you have any sense of Iranian public opinion on this?

MR. GORDON: Senator, it's hard to get accurate public opinion data in Iran. I think it's probably fair to say that if you had a referendum on the nuclear program in Iran, you would have strong support for having a nuclear program. Iranian people don't understand why other countries are allowed to enrich uranium and they're not. Actually, moving -- weaponizing, going to a nuclear weapon, might be a different story because, I mean, of course the government officially says they're not pursuing a nuclear weapon anyway. But just the question of national pride, looking around the world at countries that have civil use of nuclear energy and frankly countries that have nuclear weapons -- I think you mentioned the point of pride and national -- Iran is a great and long-standing civilization; they look around not only at the five recognized nuclear powers but Pakistan, India, Israel, and they say why shouldn't we as well. So I think it's -- unfortunately for us who are trying to persuade them not to -- a popular thing among the Iranian people. What may be possible is to get to a point where they are satisfied that they have expressed their right to the peaceful uses of nuclear energy and mastered the technology of enrichment but don't move towards a nuclear weapons capability. And that, taking it back to your original point, is our job, is to convince them that the cost of doing that, as much as they might like to, would outweigh the benefits that they perceive.

SEN. SMITH: Mr. Chairman, I notice my time is up. I would ask for the record that my longer statement be included, and I just want to note as well that Russia, that holds itself out as a leading nation in the civilized world, is not being sufficiently helpful on this issue. They could do a lot -- they're not. As long as they're not, they shouldn't be in the WTO or any other international institutions which afford them -- which assume a certain level of responsibility that they are not demonstrating as it relates to Iran and this cataclysmic event that they're helping to aid and abet. Thank you.

SEN. BAUCUS: Thank you, Senator. Senator Lincoln.

SEN. BLANCHE LINCOLN (D-AR): Thank you, Mr. Chairman. Thanks for holding the hearing. And we appreciate the panel, and your wisdom, joining us in trying to come to come to some conclusion or at least some action that will work. I, like my other colleagues here, I guess come to express the serious challenges to the United States and to our allies that the Iranians pose. Certainly their efforts in seeking to exert greater influence in the Middle East through the funding of extremist groups, supplying weapons to extremists in Iraq, and certainly the continued enrichment of uranium in the face of three U.N. resolutions requiring them to cease doing so, creates concern for all of us. And that's the reason I, along with many of the others -- I am a co-sponsor of S. 970 because I believe more has to be done. And we in the Congress and the administration, we've got to do more in terms of the pressure on Iran to abandon its pursuit of the highly enriched uranium. More punitive trade sanctions, in my opinion, are an appropriate strategy, but I'm not sure it's one that's going to completely work. And you all have expressed that as well, I think. I also believe in some of what you have expressed and that is that economic pressures have to be coupled with strategy to work through the kind of diplomatic channels that are necessary in the international community to bring Iran into some compliance with the U.N. resolutions. So I'm sure today will not be the first or last conversation that we have on this, and I hope that you all will continue to offer your insight and opinions as we move forward on what the positive benefits and what the drawbacks of S. 970 would be. I know that some of the members here on the panel have serious concerns about the implications of passing the legislation. I guess my question to you all would be: What, if any, or what else might the members of the Senate Finance Committee and members of the Congress do in particular to work to change Iran's behavior in pursuit of the highly enriched uranium, recognizing that time is of the essence? Also, what impacts do you think in terms of the deteriorating relations between the U.S. and Russia, what effects will 970 have on that, which targets Russia for its cooperation with Iran? What does that have on our U.S.-Russian relations? I don't know if you all have answered that before I got here, and I apologize if I'm being redundant. And if we do as a Congress pass harsher unilateral sanctions on Iran, does it give the administration or even the next administration that comes along greater leverage to influence Iran to cease that nuclear enrichment? I don't see that necessarily as happening, but anyway, your insight, particularly in terms of our relationship with Russia, would be good, and any suggestions you have to us as members of the Finance Committee.

MR. REINSCH: May I?

SEN. LINCOLN: Please.

MR. REINSCH: This may not be a welcome response, but I have to say this is, from my point of view -- and I don't say this very often about this administration, frankly -- but I think this is one area where the president is doing the right thing, and the best thing the Congress can do is to let him do it. He has perceived in this circumstance that the best approach, because of the peculiar difficulties of the Iranians which have been very clearly explained by Dani and by Mr. Gordon, the best approach is multilateral. How do we get the Russians and the Chinese, in particular, and the Japanese, who are the ones that are engaging in a lot of economic activity in Iran -- along with a number of European countries -- how do we get them to all move in the same direction? He has concluded that we need to do that, and I think has been working not with -- not yet 100 percent effectiveness but clearly making progress in bringing them along. And it's a fair point that maybe it's two steps forward, one step backwards, and maybe some months it's the reverse -- one step forward and two steps backward -- but we're making progress. We have a number of Security Council resolutions, and the Russians and the Chinese, as Mr. Gordon has pointed out, have begun to evolve in the direction that we want. I think that's the way to get there and that one of the things that's required is some degree of patience in allowing the administration to continue to do what it's been doing because I think it's having, you know, not the success you want at this point, but it's making progress. One of the biggest problems with this bill is that if you put into statute things that would remove the president's flexibility, it would make it harder for him to do that. The president should be able to, if he sees an opening down the road, to engage in some kind of direct contact with Iran, and he should be able to, I think, be able to provide some kind of an olive branch or make some gestures should circumstances warrant. This bill would effectively preclude that, and would lock the president into a framework in which essentially only Congress could remove the sanctions that have been imposed. I think what you need now is flexibility and nuance and not, you know, a black/and/white situation. And the problem with this bill is that it provides the latter and takes away the former.

SEN. LINCOLN: Well, do you think that this president would engage in that?

MR. REINSCH: Pardon me? SEN. LINCOLN: Do you think that this president would engage in that, in that outreach or c

ontact or negotiation or -- MR. REINSCH: Not now. And he may run out of time under the circumstances. But you're not legislating for this president.

SEN. LINCOLN: No, you're right.

MR. REINSCH: You're legislating for the long term.

SEN. LINCOLN: So you think it's equally as important to have that flexibility for future administrations as well?

MR. REINSCH: Yes, ma'am, I do.

SEN. LINCOLN: Yeah. Anybody else?

MR. KITTRIE: Yeah, I think S. 970 would on the whole have a positive impact with respect to Russia. I think it would send Russia a strong message that it can't both shield Iran and conduct business as usual with the United States. However, it could probably use -- and this goes back to a question earlier I think from Senator Baucus -- as to tweaks maybe to the bill. The formulation of all nuclear assistance to Iran would appear to cover both the Russian-built Bushehr reactor and also Russian activity under the proposed deal by which Iran would cease its enrichment activity in exchange for Russian enrichment at Angarsk. As currently written, this provision would mean that even if Russia voted in the Security Council for much stronger sanctions on Iran and limited its nuclear cooperation with Iran to the current Bushehr arrangement, the U.S. could not enter into a 123 agreement with Russia absent congressional amendment of the provision. So I would say that in light of developments regarding Bushehr, I would say that S. 970 should be revised to reflect that the foremost Russian obstacle to stopping Iran's nuclear program is Moscow's blocking of strong sanctions in the Security Council. Revision of the provisions by a tweak there would enable the administration to more usefully deploy it as leverage in achieving U.S. goals for Iran- related diplomatic negotiations with Russia.

MR. GORDON: May I just add, Senator, I didn't jump in because I agreed with everything Mr. Reinsch said, but if I might just add a word, I have great sympathy with Congress's desire to do more, which is what you expressed.

SEN. LINCOLN: Right.

MR. GORDON: You're all right to want to do more. Congress has already done a lot. Congress has put great pressure on the administration and on allies. They know how Congress feels. The risk is overreaching and doing things that would turn what is right now general momentum towards the international isolation of Iran at the Security Council and our allies in Europe and elsewhere into a spat among allies rather than putting the pressure on Iran. And we've been there before. We were there in the late '90s. We were there in the early 2000s. I think we're in a better place now. You asked, and I agree. I think credit to -- the Bush administration over the last few has started to implement this approach, and it has some positive effect. Since finally agreeing to support European Union diplomacy with Iran in 2005, they have taken steps to show Iran that there could also be incentives for cooperating on the nuclear dossier and they have made clear // no, I don't think either that this administration would be ready to talk to Iran, but they have taken a step to talking with Iran about Iraq and they have said if Iran suspended enrichment, they would talk to Iran about the nuclear issue. I would actually suggest going one step further and talking to Iran even without suspension of uranium enrichment. Last point -- and I'm somewhat more hopeful, even though I agree with the general sentiment that neither engagement nor containment is working particularly well -- Iran is not Saddam Hussein's Iraq and it's not Kim Jong's North Korea. It is a much more diverse and vibrant society with a lot of business people and young people and bloggers and anti/clerical activists, and there is a chance that over time, if we do show that this country under the right circumstances can be integrated into the international community, I think we have a chance of persuading them that it's in their interests not to cross that threshold and become a nuclear weapon state.

SEN. LINCOLN: Can I just follow up on that? You mentioned the middle class and the working class there as really the democracy movement in Iran. How do the sanctions affect them? I mean, is it -- does it -- I mean, what I'm hearing from you from my first question was just have patience. And when I say what can we on this committee do, you're saying be patient, let things work as they're going. But if this were to become law, what do those sanctions do to the --

SEN. BAUCUS: Briefly.

SEN. LINCOLN: -- pro-democracy?

SEN. BAUCUS: Very briefly.

MR. GORDON: Very briefly, it cuts both ways. I think there's an advantage of the sanctions because they do frustrate Iranians and they are a signal that the international community is unhappy with their regime, as they should be.

SEN. BAUCUS: Thank you. I'd like to focus a little more on the concern that many have that the provision of the bill that expands the import ban to include goods that are substantially transformed in third countries may violate the World Trade Organization's provisions. In fact, on the surface, I think it's pretty clear that it does. The next question is what do to about that. So my question really is how can that provision be modified, because I think we don't want a big spat among various countries claiming that this is WTO- inconsistent. How can this be modified and still be WTO-consistent? Anybody who wants to. Ms. Pletka, I'll ask you that question.

MS. PLETKA: I could see you looking at me, and I was hoping you weren't going to call on me. I'm not a trade lawyer, and I'm not even going to pretend to provide a good answer for you on that.

SEN. BAUCUS: Okay. Let me turn to anybody else who might -- I'll ask Mr. Gordon.

MR. GORDON: Well, I'm not a trade lawyer either, but I have an opinion anyway --

SEN. BAUCUS: Well, go ahead.

MR. GORDON: -- which is take it out. I mean, you know, as we've discussed, Iran is making $100 billion a year in oil revenues. The idea that some marginal tweak that could lead to a huge trade spat with allies in a WTO suit is worth doing in order to cut down by a tiny fraction their revenues, I think that would be out of balance.

SEN. BAUCUS: Professor Kittrie, your view on that point?

MR. KITTRIE: Yeah. I would say that from what I can tell, that particular provision could use a little bit of tweaking. The language there could perhaps be correlated with the language that we use in our customs law having to do with articles of Iranian origin. I also would note that that provision may go a little bit too far, as Mr. Reinsch mentioned. If in fact the reference there to medicine does not include medical devices, I would support including medical devices which are not dual use. I also compared that provision last night with the provisions of IEPA, the International Emergency Powers Act, that I used to implement when I was a lawyer at the State Department, and that comparison reminded me of a few more items that may need to be exempted from Section 7 when you mark it up. These include postal letters, informational materials such as publications and films and, so long as we're going to permit travel between the U.S. and Iran, the importation of accompanied baggage for personal use and such. So long as such changes are made to the import and export provisions of Section 7, it seems to me that it would have a positive effect in closing off the $200-or-some million a year in trade that we currently have with Iran, would send a message to our allies that we're not being hypocrites here, and also would ensure that S. 970 would not harm humanitarian interests, which was a concern expressed earlier.

MR. REINSCH: May I comment as well, Senator?

SEN. BAUCUS: Absolutely.

MR. REINSCH: Two points. On the last point that Orde made, I want to second that. This bill stomps all over the Berman Amendment, which is the provision in IEPA that permits the flow of information and books and things like that, and this bill would seriously interfere with that, which I think would make it harder for us to communicate our message directly to the Iranians. On the question you asked specifically about looking at the language -- it took me a few minutes to find it -- certainly I would prefer Mr. Gordon's solution, which is to take it out. That's the simplest thing. I think the narrower way to address the WTO problem that you described is to simply remove the word "indirectly" and limit it to -- limit the prohibition on imports to direct imports, first of all.

SEN. BAUCUS: Isn't that somewhat a restatement of current law?

MR. REINSCH: Well, it's a restatement of current executive order.

SEN. BAUCUS: Okay.

MR. REINSCH: And that's the significant difference I was commenting on earlier. I wouldn't be a fan of codifying these things. One of the advantages of being old like me is you remember these things, and I remember when the Congress in its wisdom banned the import of coffee from Uganda because of Idi Amin, which seemed at the time like a perfectly sensible thing to do; the only problem was, because it was codified, it took Congress two years after Idi Amin had left to repeal the ban. So at the very time that you wanted to help the Ugandan economy, you had locked into place statutory prohibitions instead of giving the president the flexibility to deal with changing circumstances. That's one of the problems here. But the WTO problem that you've described I think would be addressed very simply by removing the word "indirectly." That doesn't address the other problems.

SEN. BAUCUS: Correct. Before we adjourn, does anybody want to say something that needs to be said? That is, has anybody said something so outrageous it deserves a response or something that is left unattended that is very important?

MS. PLETKA: I don't want to use the time to snipe at my colleagues. I do want to say something that is not said often enough, and it is actually in sympathy to Bill Reinsch, who is sitting here by himself ideologically a little bit. There's a tendency in these sanctions -- legislation -- to go after low-hanging fruit. It is always easier to sanction our friends, and it is always easier to sanction countries which have transparent systems. In other words, we know Deutsche Bank is doing business in Iran. We know Commerzbank is doing business. We know USB -- actually, these banks have all actually since pulled out. We're really not sure about Chinese companies doing business in Iran; ditto for Russian companies; ditto for a whole variety of other states where there's much, much less transparency. And because of that lack of transparency, we tend to pay less attention to their transgressions, and that is not right. So all I would encourage -- and I've made this point in the newspapers as well -- is that as we move forward in rightly, I believe, tightening sanctions, in closing the loopholes in our own law about American subsidiaries, is that we pay close attention not just to the easy ones -- the Europeans who are selling tankers or even the South Koreans who are selling tankers -- but that we also pay attention to countries like the United Arab Emirates, where most of the money that's been squeezed out Iran has now gone, and other countries where there's far less transparency. I think that's a very important task, and it's a hard one.

SEN. BAUCUS: Good point. Anyone else? Mr. Kittrie.

MR. KITTRIE: Yeah, I would say that, just to add to what Ms. Pletka said, we do know what Chinese companies are doing, and Chinese companies are not being helpful at all. During the week prior to the passage of the first resolution -- Resolution 1737 in December 2006 -- China's national offshore oil corporation signed a $16 billion agreement to develop Iran's North Pars oilfield. We need to think about the fact that those deals fall smack within the Iran Sanctions Act criteria for sanctioning investments. One disincentive we might use to help influence China's approach would be for the executive branch to consider going ahead and imposing Iran Sanctions Act sanctions on these Chinese companies. With respect to the bill before us, unilateral sanctions are indeed, as has been mentioned, almost inevitably less effective than multilateral sanctions, and we do need to be pushing multilateral sanctions forward at the same time we push forward unilateral sanctions. However, contrary to what Mr. Gordon said, it seems to me that the weak multilateral sanctions imposed thus far in Iran by the Security Council are simply not up to the task of slowing Iran's nuclear program. The calculus is not going to change unless we make it change, unless we make it clear to foreign countries and companies the profits to be made in Iran from continuing to do business with Iran will be dwarfed by the profits they will lose in the United States from continuing to do business with Iran. We cannot allow our national security to be held hostage to the lowest common denominator of the U.N. Security Council. S. 970 would help return our fate to our own hands.

SEN. BAUCUS: Generally a response prompts a counter-response. I see you raised your hand, Mr. Reinsch.

MR. REINSCH: Well, I wasn't going to say anything, but I can't let one comment that Orde made pass. I think Dani's point about low-hanging fruit and lack of transparency is a good one, and it's an important one. I just urge the committee as it moves forward on this to also remember that even when things appear to be transparent, they're not always. Most of what we know -- much of what we know, rather -- about foreign investment in Iran is the product of very visible press conferences in which announcements of the deals like the one that Mr. Kittrie just referred to are announced with considerable fanfare. If you talk to people at the State Department, as I have, about this, there's a big difference between the announcement of a signing and the announcement of a deal and the actual transfer of any money. A number -- many of these -- first of all, a number of these deals are announced three or four times for a variety of purposes and even though it's the same deal, and a number of them end up not being consummated and end up not having the transaction actually occur. One of the problems that you get into -- and Mr. Kittrie in his original testimony alluded to naming and shaming, which is, you know, an easy concept to have -- is we end up naming and shaming a lot of people that actually haven't done anything because we are using, you know // we don't have sophisticated enough techniques to figure out what's actually happening. So I'd urge the committee as it moves forward to operate on the basis of very clear factual information about what's going on, and I'd encourage you to work with the State Department in that regard because they have a lot of information. They may not want to share it with you, but they have a lot of information, and I'd encourage you to try to extract it from them.

SEN. BAUCUS: I thank you all very, very, very much. This bill clearly addresses one of the most important issues of our time, that is, nuclear proliferation in the world, especially in this case Iran. I thank you very, very much as you were all very, very thoughtful in your comments, your observations, and I again thank you for taking the time. The hearing's adjourned. (Sounds gavel.)