More Than JustSanctions

By Kenneth R.Timmerman |January 5, 2007


Nobody believes that United Nations sanctionswill make Iran’s leaders do anything they don’t want todo. And yet, the step taken by the United States and our allies onDec. 23 to impose sanctions on Iran was tremendously significant forits economic, political and psychological impact.

On the economic front, Iran is extremely vulnerable. While its GDPhas grown to around $180 billion thanks to the spike in oil prices,this is spread across a growing population of close to 70 million andcomes to just
$2,770 percapita. That puts the Islamic Republic ona par with Pakistan, Belarus and Albania – a pitifulperformance, especially when compared to Iran’s ranking in thelate 1970s during the final years of the Shah.[1]

Today Iran imports an estimated 43% of allrefined oil products its citizens use, thanks to investmentdisincentives and high government subsidies. Forecasts from theEnergy Information Agency, a U.S. government body, suggest that Iran’soil exports could decline by half within five years, and ceasealtogether by 2015, if the regime doesn’t pump huge amounts ofcapital and foreign technology into its ageing oil fields.

That vulnerability creates tremendous potential leverage, and atleast one man in the U.S. government has shown he knows how to useit.

Since taking office in July, Treasury Secretary Henry Paulson hasbeen meeting face to face with the chairmen of major internationalbanks, arguing that they have an interest in making sure the bankingsystem can’t be used by Iran to fund international terrorgroups and WMD programs.

In London, Paris, Rome and at the
SeptemberAsian financial conference inHanoi,¬ÝPaulson has been briefing his counterparts on the“deceptive tactics” Iran has employed to exploit theinternational financial system for their terrorist ends.

Undersecretary Stuart Levey has been leading Treasury’sfinancial intelligence efforts for some time. Since taking office,Paulson has beefed up Levey’s shop and given him new powers,which Levey has put to good use.

On September 8, for example, Levey
announced¬ÝthatTreasury was placing new restrictions on so-called “U-Turntransactions,” that allowed the Iranian government’s BankSaderat to use other international banks as covers to fund terroristgroups worldwide.

Iran has been using Bank Saderat to funnel money to Hezbollah, Hamas,the PFLP-GC and the Palestinian Islamic Jihad. “For example,since 2001, a Hizballah-controlled organization received $50 milliondirectly from Iran through Saderat,” Levey said. “Hizballahuses Saderat to send money to other terrorist organizations as well.”

Through quiet, back-door cajoling, Paulson, Levey and other TreasuryDepartment officials have convinced major international banks overthe past year to cut-off new lending to Iran and in some cases scaleback outstanding loans. Credit Suisse First Boston and Switzerland’sUBS bank announced they would not do any new business with Iran.Holland’s Holland’s ABN Amro bank and Britain’sHSBC bank have also said they would scale back their business inIran.

While not as dramatic as seizing a ship full of Iranian-made weaponsheading for Palestinian terrorists in Gaza (as Israel did in 2002),these financial steps represent tangible successes in the war onterror.

By choking off access to international financial markets, Levey saysthat Treasury’s newly-created Office of Terrorism and FinancialIntelligence has actually caused terrorist cells to complain they are“having difficulty raising money or paying salaries orbenefits.”

In one recent case, Levey said the U.S. has seen “at least oneinstance of what we look for most - a terrorist organizationindicating that it cannot pursue sophisticated attacks because itlacks adequate funding.”

While the impact on Iran’s missile and nuclear programs has yetto be seen, the quiet pressure from the U.S. Treasury could prove tobe a more effective tool than other, more visible efforts.

On the political front, the UN sanctions – if they are enforced– will require that Russia and China make a choice betweencontinued support for Iran and their relationship to the UnitedStates and the West.

China has inked a number of mega oil and natural gas deals with Iranin recent months that clearly run counter to the Iran SanctionsAct.

In November, Sinopec signed a $100 billion oil development contractwith Iran (with Shell taking a 20% stake) that the United States hasso far refused to sanction. In early December, Iran announced thatCNOOC had signed a preliminary $16 billion deal to develop naturalgas exports from Iran’s South Pars field. On December 21,PetroChina announced that it intended to buy large quantities ofliquefied natural gas from in the coming years.

So far, no foreign company has faced U.S. sanctions for investing inIran’s oil and gas sector, despite a clear call for suchsanctions in the Iran Sanctions Act. After the Chinese deals wereannounced, Tom Lantos (D, CA), the incoming chairman of the HouseInternational Relations committee, said he would hold hearings on thedeals to “examine whether this agreement activates UnitedStates law requiring sanctions against companies involved in Iranianenergy development.” Such hearings are long overdue.

Iran’s leaders are taking the UN sanctions seriously, and arebehaving as if they were under siege.

''From Sunday morning, we will begin activities at Natanz -- the siteof 3,000-centrifuge machines -- and we will drive it with full speed,”said Ahmadinejad’s top nuclear advisor, Ali Larijani, just oneday after the UN Security council vote. Accelerating the nuclearprogram “will be our immediate response to the resolution,'' hesaid.

Ahmadinejad also warned that the UN action was compelling Iran toaccelerate its nuclear development program, and hinted that hisregime “will celebrate our atomic achievements in February,”well ahead of earlier boasts of unveiling a nuclear surprise in lateMarch 2007.

The United States must press its economic, political, andpsychological advantages on the Iranian regime, and couple them withconcrete measures to undercut the legitimacy of Tehran’srulers, if we to have any hope of avoiding a full-scale confrontationwith Iran at a moment of Iran’s choosing.

But we mustn’t have any illusions that sanctions and economicpressure will motivate the Iranian regime to change its behavior inthe ways that we seek. What these steps will do, however, is increasethe likelihood that Ahmadinejad and his Revolutionary Guardssupporters will make a dramatic miscalculation, and strike outagainst us before they are fully prepared, just as Saddam Hussein didwhen he invaded Kuwait before his nuclear bomb-makers had completedtheir work.

Now is the time for the Bush White House to build the internationalcoalition it will need to confront Iran when that day arrives.


[1] It baffles me whythe CIA WorldFactbook¬Ýcan take these samefigures, and arrive at an estimated¬Ýper capita incomefor Iran of $8,400. But then, this is the same CIA that stillbelieves Iran is 5-10 years away from the bomb.

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Kenneth R. Timmerman is the author of Countdown to Crisis:the Coming Nuclear Showdown with Iran (Crown Forum, New York),and Executive Director of the
Foundationfor Democracy in Iran.