Iran Sanctions and International Security

Chairman Ackerman, Congressman Pence, distinguished members of the Subcommittee:

It is an honor and a privilege to appear before you today to discuss the issue of sanctions against Iran, as well as their potential implications for regional security. In recent months, the question of what to do about Iran's expanding nuclear ambitions, and when to do it, has taken center stage on the agenda of policymakers in Washington.

This discussion is all the more urgent because of Iran's apparent proximity to "the bomb." In February of this year, Director of National Intelligence Mike McConnell told the Senate Armed Services Committee that the U.S. intelligence community estimated that Iran could field a nuclear weapon by "early to mid next decade."[1] Today, however, new evidence suggests that the Islamic Republic may be much closer to an atomic capability than originally thought. Officials in Paris have told reporters that they believe Iran will have nearly 3,000 uranium enrichment centrifuges running by the end of this month. They base their assessments on a new analysis by the UN's atomic watchdog, the International Atomic Energy Agency, which states that the Iranian regime is expected to have 18 separate centrifuge cascades—totaling nearly 3,000 centrifuges in all—operational by late October.[2]

The finding is significant, and ominous. Nuclear experts say that 3,000 centrifuges represents a key atomic threshold. With that number of centrifuges spinning continuously for one year, a nation can generate enough highly-enriched uranium for one nuclear weapon. Based on these projections, and barring any technical glitches or other unforeseen eventualities, Iran will have enough fissile material to field a nuclear weapon by sometime next fall at the latest.

Currently, American strategy is not calibrated to respond to this development. Rather, for the past several years, the Bush administration's approach has centered on a slow-moving diplomatic effort to coerce Iran to abandon its nuclear ambitions via the United Nations.

To date, this track has tallied only modest results. In December 2006, the United Nations Security Council passed Resolution 1737, imposing sanctions on a number of known WMD suppliers to the Iranian regime, and setting the stage for additional financial measures if the Iranian regime continued its nuclear defiance.[3] Four months later, in March of this year, the Security Council passed Resolution 1747, which widened the scope of previous sanctions and imposed an embargo on weapons-related trade going into and out of the Islamic Republic.[4]

More robust action, however, has proven elusive. Despite continued Iranian intransigence and months of deliberations, the P5+1 (the United States, Great Britain, Russia, China, France and Germany) have been unable to reach consensus on supplemental sanctions against the Iranian regime. As a result of this deadlock, passage of a new, tougher sanctions resolution against Iran by the Security Council has been pushed off until at least November.[5] And even that deadline could slip considerably, should major disagreements remain.

This state of affairs is hardly surprising. After all, two members of the Security Council—Russia and China—are major strategic partners of the Islamic Republic. Over the past two decades, both countries have provided significant assistance to the Iranian nuclear effort. And while each has demonstrated a degree of cooperativeness with regard to sanctions against Iran, neither has been eager to impose truly comprehensive measures to curtail the Iranian nuclear effort. This reality means that the United Nations process will at best yield only incremental progress—and then only on those punitive measures that are deemed acceptable by Moscow and Beijing.

Even if Chinese and Russian cooperation is secured, another problem remains. It is already evident that Security Council action has failed to keep pace with Iran's nuclear progress. Fully a third of a year elapsed between the two existing Security Council resolutions, and the seven months since have passed without further UN action. Iran has used this time wisely, working diligently to add permanence to its nuclear effort. Given the compressed timeline for Iranian nuclear acquisition now confronting the international community, as well as the difficulty of attaining Security Council consensus, it is highly unlikely that the United Nations will be able to produce a resolution that significantly impacts Iranian capabilities, or alters regime intentions, in enough time to prevent Iran from crossing the nuclear threshold.

But if the United Nations track is indeed moribund, what options are available to the United States? Conventional wisdom has it that the United States possesses little leverage that it can bring to bear in order to deter and contain Iran's nuclear ambitions. In point of fact, however, the United States has a considerable number of economic tools at its disposal, despite its lack of trade relations with the Islamic Republic. America's allies and trading partners, who almost without exception maintain extensive economic ties to the Islamic Republic, possess even more. What has been missing so far has been a coordinated strategy that exploits the latent vulnerabilities in the Iranian economy. These include:

Gasoline dependency
Despite its massive oil production (some 3.8 million barrels daily), Iran is a voracious consumer of foreign refined petroleum, importing approximately 40 percent of its total annual gasoline consumption from abroad. During the last Iranian calendar year (March 2006 to March 2007), it spent some $4.2 billion on gasoline purchases from sixteen countries: the United Arab Emirates (UAE), India, the Netherlands, France, Singapore, Turkmenistan, Azerbaijan, Sudan, Belarus, Turkey, Kuwait, Taiwan, Spain, Sweden, Saudi Arabia, and Bulgaria.[6] These deliveries were not surplus; the Iranian regime currently lacks a substantial domestic strategic petroleum reserve, maintaining just 45 days worth of gasoline inside the country.[7] And without one, even a partial cutoff of supplies would leave Tehran with just two options, both potentially threatening to regime stability: to raise prices, or to limit consumption.
Notably, the Iranian regime is acutely aware of this vulnerability, and actively attempting to eliminate it. In June, the Islamic Republic instituted a rationing plan establishing strict monthly quotas on gasoline for ordinary Iranians.[8] It likewise has attempted to institute steep cuts to its petrol purchases from abroad.[9] And regime officials have launched a major effort to ramp up domestic refining capacity, commissioning upgrades to existing refining facilities and the construction of new plants (although these added capabilities are not expected to come online until the end of the decade at the earliest).[10] All of which suggests that while the United States still has time to implement a petroleum embargo against the Iranian regime, its window of opportunity to do so is closing rapidly.

Economic hierarchy
Today, the vast majority of wealth in the Islamic Republic is concentrated in the hands of a small group of people, whose associates and relatives dominate the Iranian economy. The most public of these is the extended family of former Iranian president (and current Assembly of Experts chief) Ali Akbar Hashemi Rafsanjani, which now virtually controls copper mining in Iran, the regime's lucrative pistachio trade, and a number of profitable industrial and export-import businesses.[11] A related economic power center is Iran's bonyads, the sprawling, largely-unregulated religious/social foundations overseen by Iran's Supreme Leader. The sums controlled by these organs are enormous—estimated at more than 30 percent of Iran's national GDP (and as much as two-thirds of the country's non-oil GDP).[12] Likewise, Iran's powerful clerical army, the Islamic Revolution Guard Corps or Pasdaran, is a major—and growing—economic force within the Islamic Republic, in command of numerous construction, industrial, transportation and energy projects and enterprises valued in the billions of dollars.[13]
Given this centralized economic hierarchy, targeted financial measures that restrict the ability of those "super-empowered" individuals and organizations to access international markets—and curtail their capacity to engage in commerce—are likely to have an immediate and pronounced effect on regime decisionmaking. Such measures include travel bans, asset freezes and account seizures. Many are already being considered by the United Nations as part of potential "smart sanctions" against the Iranian regime. But if consensus on their implementation cannot be reached at the UN—and even if it is—such steps are valuable tools that could be implemented by the United States and its allies in their efforts to pressure the Islamic Republic.

Foreign direct investment
Since the start of the War on Terror, Iran's economic fortunes have experienced a dramatic reversal. During the late 1990s, plummeting world oil prices had left the Iranian regime virtually bankrupt. Today, however, the energy-rich nation has reaped an unprecedented economic windfall as a result of global political instability. As of March 2006 (the end of Iranian calendar year 1384), officials in Tehran were publicly estimating their country's hard currency reserves at some $50 billion.[14] Yet all of this has done little to diminish Iran's need for foreign direct investment. According to authoritative estimates, Iran's energy sector still requires some $1 billion annually to maintain current production levels, and $1.5 billion a year to increase this capacity.[15] Without such sustained capital, it is believed that Iran could revert from an energy powerhouse to a net energy importer in the span of very few years.[16]
Will it be possible to completely cut the Iranian regime off from international commerce? The answer is no. However, by using measures that target foreign investment and technology transfers into Iran, it is possible to slow the Islamic Republic's nuclear progress, complicate its access to foreign funding and/or force a further depletion of the hard currency reserves amassed over the past several years. Already, the Treasury Department's efforts—which include the blacklisting of two Iranian state banks from the U.S. financial system and the announcement of plans to designate the Pasdaran as a "specially designated global terrorist"—have had considerable effect. In recent months, a number of foreign companies and banks have given notice that they plan to scale back, if not sever outright, their financial dealings with the Iranian regime.[17] An important adjunct is the effort now visible at the state and local level to compel companies and financial institutions to scale back their level of investment in the Islamic Republic. "Divestment" has made significant strides since its start some two years ago; three U.S. states—Missouri, Florida and California—have already passed laws prohibiting their pension funds and state-owned enterprises from investing in Iran, and a number of others (including Pennsylvania, New York, Michigan, Massachusetts, and Georgia) have similar legislation pending or in the works.[18] With dozens of billions of dollars in U.S. funds still invested in companies that trade with Iran, this effort can have great utility in reducing the Islamic Republic's economic influence, if it becomes harnessed by the Executive Branch as part of a comprehensive effort to economically isolate the Iranian regime.

Trade relationships
Today, Iran boasts a combined total foreign trade of nearly $100 billion annually.[19] The regime's largest trading partners are the European Union, Japan and the United Arab Emirates, which cumulatively account for over half of Iran's total global imports and exports each year.[20] (Germany alone boasts more than Euro 4 billion ($5.45 billion) in trade with the Islamic Republic.[21]) The Iranian regime, moreover, is actively working to expand these economic relations, and to establish new ones (particularly with the countries of the "post-Soviet space"). It has been able to do so without major impediments because successive U.S. governments—irrespective of political affiliation—have consistently prioritized bilateral trade over international security. As a result, they have repeatedly failed to respond to violations of laws such as the Iran Libya Sanctions Act, which are aimed at curtailing Iran's support for international terrorism and ability to acquire weapons of mass destruction. In turn, waiver after waiver has convinced foreign countries and businesses that trading with Iran is effectively a cost-free venture.
This is deeply counter-intuitive, since the vast majority of Iran's trading partners boast far more extensive economic ties with the United States. In 2004-2005, for example, Japan's annual two-way trade with Iran totaled some $3.7 billion a year, while its commerce with the United States was nearly fifty times that: $180 billion annually.[22] If forced to chose, therefore, Iran's trading partners will inevitably prioritize their commercial relationship with the United States over keeping the current regime in Tehran in business. The goal of American policy should be to compel such a choice through aggressive application of existing legislation and new measures (such as the Iran Sanctions Enhancement Act) that convince foreign nations that they can trade with the United States, or with Iran, but not with both.

Today, despite years of diplomacy and international pressure, Iran's nuclear effort remains resilient—and has become increasingly mature. As a result, the United States and its allies are rapidly approaching a critical choice: whether to allow the Islamic Republic to cross the nuclear threshold, or to use force to prevent it from doing so. If they hope to avoid such a fateful decision, policymakers in Washington will need to implement a serious economic warfare strategy that leverages Iran's latent vulnerabilities to convince the regime in Tehran that the tangible costs of moving forward with its nuclear program far outweigh the perceived benefits of atomic acquisition. The time to do so, however, is running out.

NOTES:

[1] Director of National Intelligence John M. McConnell, "Annual Threat Assessment," statement before the Senate Armed Services Committee, February 27, 2007, http://www.odni.gov/testimonies/20070227_transcript.pdf.

[2] "French Officials: Iran Set to Run Nearly 3,000 Uranium-Enriching Centrifuges by Late October," Associated Press, October 3, 2007, http://www.iht.com/articles/ap/2007/10/03/europe/EU-GEN-France-Iran-Nuclear.php.

[3] United Nations Security Council, S/res/1737 (2006), December 27, 2006, http://daccessdds.un.org/doc/UNDOC/GEN/N06/681/42/PDF/N0668142.pdf.

[4] United Nations Security Council, S/res/1747 (2007), March 24, 2007, http://daccessdds.un.org/doc/UNDOC/GEN/N07/281/40/PDF/N0728140.pdf.

[5] Edith M. Lederer and Matthew Lee, "Key Nations Agree to Delay Iran Action," Associated Press, September 30, 2007, http://ap.google.com/article/ALeqM5hIYBt5PA9hCg85Ze1WxFQB8btuNgD8RUJ6581.

[6] "Iran Imported Gasoline From 16 States in 2006," Mehr (Tehran), May 20, 2007.

[7] Study by Iran's Institute for International Energy Studies, as cited in Ali Nourizadeh, "Exploring Iran's Military Options," Al-Sharq al-Awsat (London), January 23, 2006, http://aawsat.com/english/news.asp?section=3&id=3528.

[8] See, for example, "Iran Bans Negative Petrol Stories," BBC (London), June 28, 2007, http://news.bbc.co.uk/go/pr/fr/-/1/hi/world/middle_east/6249222.stm.

[9] "Iran Cuts Petrol Imports to Save Nearly $3 Bln," Fars (Tehran), September 26, 2007, http://english.farsnews.ir/newstext.php?nn=8607040520.

[10] "Iran Faces a Gasoline Time Bomb," Petroleum Intelligence Weekly 45, iss. 38 (2006), 4.

[11] Paul Klebnikov, "Millionaire Mullahs." Forbes, July 21, 2003, http://www.forbes.com/forbes/2003/0721/056_print.html.

[12] Ibid.; See also Kenneth Katzman, Statement before the Joint Economic Committee of the United States Congress, July 25, 2006, http://www.house.gov/jec/hearings/testimony/109/07-25-06_iran_Katzman.pdf.

[13] Mehdi Khalaji, "Iran's Revolutionary Guard Corps, Inc.," Washington Institute for Near East Policy Policywatch no. 1273, August 17, 2007, http://www.washingtoninstitute.org/templateC05.php?CID=2649/.

[14] Aftab-e Yazd (Tehran), May 10, 2006, as translated in Mideastwire Daily Briefing, May 12, 2006, http://www.mideastwire.com.

[15] "NIOC Undertaking Host of Projects to Boost Oil Output," Middle East Economic Survey XLVIII, no. 19 (2005), as cited in A.F. Alhajji, "Will Iran's Nuclear Standoff Cause a World Energy Crisis? (Part 1 of 2)," Middle East Economic Survey XLIX, no. 13 (2006) http://www.mees.com/postedarticles/oped/v49n13-5OD01.htm.

[16] Kenneth Katzman, The Iran-Libya Sanctions Act (ILSA) (Washington: Congressional Research Service, July 21, 2003), 2; See also "Iran: U.S. expert predicts oil-export crisis within a decade," Radio Free Europe, January 12, 2007, http://www.rferl.org/featuresarticle/2007/01/DC93E2C3-0923-4575-84E9-808C49EEB513.html.

[17] "Iran: Top U.S. Official Says Financial Clampdown Is Working," Radio Free Europe/Radio Liberty, October 17, 2007, http://www.rferl.org/featuresarticle/2007/10/80f509a4-06d7-4416-9a28-0410a0e9113b.html.

[18] Michael Barone, "Divest Iran," RealClearPolitics, August 27, 2007, http://www.realclearpolitics.com/articles/2007/08/divest_iran.html.

[19] Extrapolated from "Country Profile: Iran, Islamic Rep. of," World Trade Organization, April 2007, http://stat.wto.org/CountryProfiles/IR_e.htm.

[20] Ibid.

[21] Ralf Beste, Christoph Pauly and Christian Reiermann, "US Pressures Germany to Cut Iran Business Ties," Der Spiegel (Hamburg), July 30, 2007, http://www.spiegel.de/international/business/0,1518,497319,00.html.

[22] "Islamic Republic of Iran—Statistical Appendix," International Monetary Fund Country Report no. 04/307, September 2004, http://www.imf.org/external/pubs/ft/scr/2004/cr04307.pdf; Wendy Cutler, Testimony before the Ways and Means Committee of the U.S. House of Representatives, September 28, 2005, http://waysandmeans.house.gov/hearings.asp?formmode=view&id=3793.

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Iran Sanctions and International Security