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The Logic of Our Iran Sanctions

Accelerate them now.

Jan 3, 2011, Vol. 16, No. 16 • By REUEL MARC GERECHT AND MARK DUBOWITZ
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Using the preamble of Security Council resolution 1929, which establishes the nexus between Iran’s cash-generating energy sector and the sanctioned nuclear program, the United States and its allies can also pass additional measures to prohibit long-term purchase contracts for Iranian oil and natural gas. And large up-front cash payments by foreign companies for Iranian oil and natural gas can be banned, as well as any energy bond issued by an Iranian entity (by prohibiting any foreign underwriter, purchaser, or financial institution from facilitating the issuance of a bond). 

Current U.S. and EU rules severely limit investments in the Islamic Republic’s oil and natural gas sectors. In the case of U.S. law, the investment limit is $20 million per year. Large upfront cash payments on oil or natural gas purchases give the Iranians instant access to money to invest in their increasingly capital-starved energy sector. And by using long-term supply contracts to collateralize billions of dollars in energy bonds, the regime could circumvent sanctions. Bondholders require evidence that Iran can make payments on bonds, and one simple way to produce such evidence would be to sign a long-term supply contract, using the resulting guaranteed revenue stream in hard currencies to collateralize the paper issued.

The United States and the EU need to close any loopholes that would allow this kind of investment activity. Using the political cover of the preamble of resolution 1929, Washington or the EU can also introduce measures to sanction any pipeline project (and its participating partners) transporting Iranian oil or natural gas, or any shipping company, insurance company, or financial institution that provides support to an Iranian oil or natural gas trade. Needless to say, Washington or the EU can disqualify for any government contracting in America or Europe anyone buying Iranian oil or natural gas. As crude oil and natural gas buyers find it increasingly difficult to use banks to settle or extend credit for Iranian oil and natural gas trades, these buyers will seek alternative sources. Washington can also bar the participation in any U.S. energy deal (shale and offshore leases, for example) of any company that buys or facilitates the purchase of Iranian oil or natural gas. Nor would it be difficult for Western governments to sanction any company participating in overseas energy development or production involving an official Iranian company or any Revolutionary Guard Corps-affiliated entity.

Such punitive measures could significantly reduce the Islamic Republic’s ability to produce 3.7 million barrels of oil per day, just over 4 percent of daily world production. Provided the United States and its allies could get more oil on the market—the Iran-loathing Saudis could increase production, for example, and more oil from Canada’s enormous tar sands could hit the market, and President Obama could lift the moratorium on offshore oil rigs in the Gulf of Mexico—then the world oil market would have considerably more elasticity than does the Iranian economy, which is already under stress. 

Some of the possibilities above have been introduced into the Sherman-Casey-Brown bill in Congress. It would probably take little time for this legislation and other measures like it to cause a financial crisis in Tehran the likes of which the mullahs have not seen since the Iran-Iraq war.

The issue for the Obama administration is whether it will have the foresight to accelerate sanctions that are probably coming in any case. The next round of Euro-American talks with Iran is scheduled for January. Gary Samore, the White House’s nuclear proliferation point man, has already let it be known that more sanctions are on the way. Yet it is one thing for the administration to know intellectually that Khamenei will not buckle without the severest pain; it is another matter to overcome the State Department’s love of diplomatic gradualism. Anyone who has spoken to administration officials who are doggedly trying to stop the Iranian bomb knows how easily the love of the sanctions process can turn that process into an end in itself. But the key to successful diplomacy with Khamenei’s Iran is to view engagement as the supreme leader does: All scenarios are win-lose. If the West is to stop Tehran’s quest for a nuke, it must convince the supreme leader, and the Revolutionary Guards who oversee Iran’s nuclear program, that their pursuit of the bomb will destroy the regime.

When dealing with Tehran, it’s always good to remember Ruhollah Khomeini, whose iron-willed charisma gave birth to the Islamic Republic. The ayatollah relented in his war against Saddam Hussein, who’d invaded Iran in 1980, when he finally saw that the conflict would destroy his new nation. One of the men who convinced Khomeini that Iran had to sue for peace was Khamenei. He understood that the Islamic Republic could not possibly win with the West​—​especially the United States​—​aligned against it. (The accidental downing of Iran Air Flight 655 by the USS Vincennes in the Persian Gulf in July 1988 was viewed as an intentional, heart-stopping act of war by Tehran’s ruling elite.) Khamenei undoubtedly remembers what it took to break his will​—​what it took to crack Khomeini’s bellicose determination​—​to fight. The objective of American diplomacy should be to reanimate those memories.

Indirect demand-side sanctions on the Islamic Republic could possibly accomplish what an embargo could do without the diplomatic trauma. If the European Union can lay the groundwork for the slow-motion death of Iran’s oil and gas exploration business, which it already has, it can probably see its way to further constricting Iran’s energy sector. Nuclear counterproliferation is a holy of holies for Europeans. This is even truer in Washington, where surrender just isn’t an option for a Democratic president soon facing reelection. 

So let us see whether Khamenei can withstand a united West. With these sanctions, we just might not need the Chinese and the Russians to help out. Even though the Stuxnet virus has bought us some time, Iran’s nuclear program is still advancing. The old Persian counsel against complacency and sloth would be wise to remember. Harcheh zudtar behtar​—​the sooner we find out whether we can make the supreme leader conceive again of the awfulness of 1988, when surrender became thinkable, the better. Current sanctions and the regime’s atrocious economic management have brought hard times. For the United States and its allies to be successful, the times need to be made a good deal harder still.

Reuel Marc Gerecht is a contributing editor to The Weekly Standard, a senior fellow at the Foundation for Defense of Democracies, and the author of the forthcoming The Wave: Man, God, and the Ballot Box in the Middle East. Mark Dubowitz is the executive director of FDD.

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