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Can Sanctions Be Effective in Halting Iran's Nuclear Program?

Discussants: Matthew Levitt, and Peter Crail
Updated: October 19, 2007


U.S. efforts to stop Iran’s uranium enrichment program are centered at the moment on building an international coalition to punish and isolate Iran through global sanctions until it alters its plans to build a nuclear program. Tehran maintains it is interested in only peaceful uses of nuclear power. But it has refused both carrots and sticks offered by Western states to suspend its uranium enrichment program and many of these states believe the regime is intent on developing a nuclear weapons capability.

Matthew Levitt, a senior fellow and director of the Stein Program on Terrorism, Intelligence, and Policy at the Washington Institute, and Peter Crail, a research analyst at the Washington-based Arms Control Association, discuss whether sanctions can have an impact on Iran’s nuclear ambitions.

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Peter Crail

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October 19, 2007

Peter Crail

Dr. Levitt is correct that sanctions create leverage for diplomacy. However, leverage only goes as far as the weight you bring to the table. The United States has had fairly comprehensive sanctions in place on Iran for twenty years that the Iranians, though strained, have learned to live with. Right now, though, the approach that “plan B is making plan A work” is producing the same response we have seen for two decades.

While prospects for expanding existing sanctions are considered, we face a situation where we find it difficult to apply those already on the books. As Danielle Pletka of the American Enterprise Institute observed recently, “Washington has been doing an unaccountably poor job implementing the first two resolutions it expended so much effort to get passed.” She notes that accounts or travel restrictions are in place for only 17 of the 50 entities contained in the resolutions. If Washington, which is most eager to ensure the effectiveness of such sanctions, is having such difficulties—what about states that are less enthusiastic? After all, the meager reports submitted to the UN by Moscow and Beijing on their sanctions efforts are far from reassuring.  

More important, however, is that the economic impact is only a means to an end. Remember, if this were purely a matter of economics, Iran wouldn’t have a uranium enrichment program in the first place—it would be far cheaper just to purchase nuclear fuel from abroad. Iran’s interest in a nuclear weapons capability stems largely from its threat perceptions. For Iran to alter its course, this issue must also be addressed.

Only the United States, which continues to entertain notions of regime change, can adequately address Iran’s security considerations. To do so requires direct dialogue. Such a process can draw lessons from the current progress with North Korea and should be acted upon before Iran, like Pyongyang, acquires nuclear weapons. In particular, this means preliminary agreements to halt the expansion of its nuclear program while a broader arrangement is negotiated. The key components of a resulting arrangement would include security guarantees in exchange for sufficient assurances that Iran is not seeking nuclear weapons.

Of course, the direct negotiations process is a strategy, not a panacea. If a good faith effort is made by the United States to engage directly with Iran and Tehran fails to take advantage of that opportunity, then that would leave less room for foot dragging by other countries which are not enthusiastic about the sanctions process, but wish desperately to avoid a nuclear-armed Iran or war.

Sanctions are a useful tool, but what the United States can offer Iran is far more significant. This is where the real weight of Washington lies, and this leverage should be used while there is still time to prevent a nuclear-capable Iran.

Matthew Levitt

October 18, 2007

Matthew Levitt

Mr. Crail and I seem to agree that sanctions are working, even if they have not yet solved the Iran problem. That caveat should not surprise, since the graduated and targeted financial measures now being employed have only been in effect a relatively short period of time. But where Mr. Crail concludes it is time to alter course, I conclude sanctions can be improved.

Recognizing that Iran is actively seeking alternative investment partners to compensate for those that it lost, Treasury Deputy Secretary Robert Kimmitt recently warned (FT) China, Russia, and other countries not to step into this void, and to respect the Iran sanctions regime. Both Russia and China are members of FATF [Financial Action Task Force], giving still greater significance to the statement by the premier standard-setting body that Iran represents a “significant vulnerability within the international financial system” (PDF). Iran is the only country FATF has publicly identified as a significant vulnerability.  FATF announced it is also working on a study of the trends and techniques involved in WMD [weapons of mass destruction] proliferation and financing activity, and has already issued new guidance (PDF) on implementing financial prohibitions to prevent Iranian WMD proliferation.

This week the Treasury Department’s Financial Crimes Enforcement Network (FinCEN) also issued an advisory on the increasing money-laundering threat posed by illicit Iranian activity (PDF).

There is no denying, however, that the multilateral UN sanctions process has bogged down. It is therefore important that action be taken soon to lay the groundwork for substantive sanctions before the year’s end, following Iran’s report to the International Atomic Energy Agency next month on its past nuclear activities. French officials have already stated that if there are no new UN sanctions by the end of the year, the European Union (EU) should “look at more individual kinds of sanctions.” 

The United States could also lead by example, as it did with Bank Sepah, which was designated unilaterally by the United States before being multilaterally designated under UN Security Council Resolution 1747. For example, the United States could unilaterally designate an Iranian bank like Bank Melli, which was implicated in the December 2005 fine of ABN Amro for using the Dutch bank’s Dubai office to conceal its role in illegal bank transfers to Iran. Speaking to the Washington Institute in May 2007, Mr. Kimmitt stated that if the United States found an Iranian bank engaged in illicit activity, “We’ll go after them.”

As Washington Post columnist David Ignatius put it, “these new, targeted financial measures are to traditional sanctions what Super Glue is to Elmer’s Glue-All.” Addressing deficiencies within the program of targeted financial measures to make them more effective is most likely to create the leverage for diplomacy and avoid a military confrontation. Short of creating such leverage, negotiation and diplomacy alone will not convince Iran to give up its nuclear program.

Peter CrailOctober 17, 2007

Peter Crail

Targeting Iran’s oil and gas sectors certainly seems to be the linchpin in whether sanctions will be effective. After all, energy is a double-edged sword for Iran. It is both Iran’s greatest vulnerability, due to its reliance on energy exports and foreign investment for its energy infrastructure; but it is also Iran’s ticket to enduring increasing economic burdens while expanding its nuclear program.

With recent headlines depicting oil prices at record highs (NYT), that ticket likely started to look quite golden. Most of this revenue is poised to be in euros and yen (Thomson Financial) as Iran has attempted to reduce its exposure to the dollar.

Moreover, in spite of increasing cooperation by our European partners to cut off Iran from investment, Iran’s ability to find alternatives has limited the success of that strategy. For example, over U.S. objections, Chinese state-owned firms have entered into oil and gas development deals with Iran in the last year, and Turkey has agreed to self-finance  (WSJ) an Iranian gas project in spite of failing to find foreign financing.

It is a credit to the sophistication of these financial sanctions that they depend on the risk calculations of private institutions, but it also means they can be undermined by firms, especially state-run entities, willing to accept those risks. So long as the Iranian leadership sees that it has such alternatives, it will be less inclined to halt its nuclear expansion.

As for multilateral sanctions, they are of course vital for the message they send, but there is currently no interest in expanding them to Iran’s critical energy sector.

At present, the U.S. strategy is dependent upon a mix of unilateral and multilateral sanctions to pressure Iran into changing course. Unfortunately, the conditions that might make such a strategy truly effective do not appear to be forthcoming. And while there are valid concerns that starting negotiations without preconditions would only allow Iran time to expand its nuclear program, it is already doing so now and will continue to for the foreseeable future.

It is time to alter that strategy to offer a chance to test Iran’s willingness to engage in negotiations and its assertions that it does not desire nuclear weapons. The June 2006 P5+1 offer (PDF) [package of incentives proposed by the permanent five members of the Security Council plus Germany] is a good starting point, which Iran itself said offers “useful foundations.” Building on those foundations while Iran is still trying to figure out how to run three thousand centrifuges will be better than when they can competently manage ten thousand.

Matthew LevittOctober 16, 2007

Matthew Levitt

The IAEA process illustrates that Iran is less than forthcoming, and certainly not forthright, in negotiations over its nuclear program.  As our European partners have insisted, a direct negotiation process with Iran without the precondition that Iran comply with the UN Security Council’s orders would only enable Tehran to buy more time for its nuclear program.  In any event, sanctions don’t undermine diplomacy; they create leverage for effective diplomacy.  Our diplomatic position vis-a-vis Iran, whether focused on the limited issue of security in Iraq or larger issues, is severely undermined when Iran is able to pursue its nuclear ambitions, support terrorist groups, and undermine security in Iraq and Afghanistan without consequence.

To be sure, international consensus for multilateral sanctions is difficult to come by.  That’s one of the reasons UN resolutions 1737 and 1747 (and most recently the FATF announcement) were so powerful – China and Russia signed on.

So far, two rounds of targeted and graduated sanctions have had a significant impact on Iran but have failed to change Iran’s nuclear calculus enough, though they have led Iran to reluctantly promise to ultimately answer long-standing IAEA questions.  To be more effective, and minimize the likelihood of military conflict, subsequent rounds of sanctions should target additional Iranian banks and focus on Revolutionary Guard companies, especially those involved in the oil and gas sectors. We cannot know in advance what will be the tipping point, but we can say with certainty that the international economic sanctions with the greatest impact on Iran’s economy would be those targeting Iran’s oil and gas industries.

It should also be said that while multilateral sanctions are preferable, regional or unilateral sanctions are also very effective.  The EU is now debating whether that body should impose its own sanctions targeting Iran.  The German and French governments have announced that they are advising their firms not to invest in Iran. And the impact of unilateral U.S. sanctions, such as those under Executive Order 13382, still have multilateral implications; major international financial institutions incorporate U.S. Treasury designation lists into their due diligence databases. The OECD raised its risk-rating for Iran, and within months Iran’s oil minister acknowledged Iran was having trouble financing oil projects.

To be sure, our strategy must include carrots, not just sticks.  The West should clearly communicate the incentives Iran would enjoy in return for full cooperation on its nuclear program even as it continues to sanction Iran as long as the regime continues to engage in illicit activities.  Sure, Iran has reacted to sanctions with bellicose statements and attempts at “facts on the ground,” but the evidence is that sanctions are working

Peter CrailOctober 15, 2007

Peter Crail

Dr. Levitt strikes on a fundamental point regarding the effectiveness of sanctions on Iran: their purpose is not just to punish Iran, but to influence the regime to change its behavior. Sanctions can certainly have some impact on Iran ’s economy, but there is little indication that they will be a significant enough disincentive to change Tehran’s mind about the direction of its nuclear program.

In fact, if Iran’s actions in the year since UN sanctions were first imposed are any indication, Tehran has decided that it would rather retaliate against, and take steps to mitigate the damage of sanctions, than change its current course.

In response to the adoption of resolution 1747, for example,Tehran scaled back the inspection capabilities of the International Atomic Energy Agency (IAEA) at nuclear sites under construction.

Let’s also not forget that Iran’s centrifuge installation campaign followed the onset of multilateral sanctions over the last year. Between February and August Iran installed about 1,800 centrifuges at its commercial facility. Iran appears far more concerned with establishing “facts on the ground” than with any of the repercussions from defying demands to cease its work on uranium enrichment.

Dr. Levitt’s point about the targeted nature of the current crop of sanctions also demonstrate a conundrum for additional sanctions against Iran: targeting financial restrictions against specific entities of concern limits their economic impact, but broader restrictions may only serve to jeopardize the multilateral support necessary to make them effective.

Russian Foreign Minister Sergei Lavrov recently cautioned against “parallel steps to impose sanctions on Iran” unilaterally. Even states closer to the U.S. position, such as Germany, have demonstrated reluctance to impose further sanctions outside the UN context.

This is not to say that the sanctions process should be abandoned entirely. As Dr. Levitt correctly states, “no one tool can fix this problem,” and every tool in the toolbox should be used where it can. However, so long as Iran is awash in oil revenues and continues to curry investment partners like China and India, it has some insulation from financial restrictions.

Right now, the key tool that should be employed is a direct negotiation process with Iran without preconditions for suspension. If Tehran’s cost/benefit calculus is truly to change, Washington itself must demonstrate both what those choices are and its willingness to make them happen.

Matthew LevittOctober 15, 2007

Matthew Levitt

Can sanctions be effective in halting Iran 's nuclear program?  

Absolutely, if used as part of a comprehensive strategy to create leverage for diplomacy.  Asking Iran nicely to kindly halt its nuclear program is not going to get the job done.  Absent increased diplomatic leverage, which is what today’s financial, travel, and other sanctions targeting Iran are all about, decision makers will eventually face the unenviable task of having to decide whether to use military force or tolerate a nuclear Iran.

Targeted financial measures represent the strongest non-military tool to convince Tehran to change its behavior.  It is a myth that policymakers have to choose between sanctions, diplomacy, and military action.  In fact, these tools are best employed in a complementary fashion.  On its own, no one tool can fix this problem.  Together, financial sanctions, international diplomatic censure, and a military option in the form of ships stationed in the Gulf, offer the most effective option for dealing with the threat posed by the Iranian nuclear program.

And let’s be clear: these are not your grandfather’s sanctions.  Unlike the regime-wide sanctions applied against Iraq, today’s sanctions are graduated and targeted. First, they target those elements of Iranian society specifically engaged in illicit conduct (think Bank Sepah, Bank Saderat, Iranian companies engaged in proliferation activities).

Second, employing sanctions in a graduated manner demonstrates that the purpose of such measures is not simply to punish Iran but to encourage a change in the regime's behavior.

Already there are signs of domestic discontent within Iran, and targeted financial measures can produce further political pressure within Iran. Iran’s former chief nuclear negotiator, Hasan Rowhani, recently decried Iran’s increasing international isolation and said economic sanctions were indeed impacting Iran. Rowhani noted that despite high prices for Iran's oil, "we don't see a healthy and dynamic economy."

This should not surprise.  According to the Economist Intelligence Unit, the nuclear crisis (and subsequent sanctions) "is imposing a heavy opportunity cost on Iran 's economic development, slowing down investment in the oil, gas and petrochemical sectors, as well as in critical infrastructure projects, including electricity."  Several major banks have cut or curtailed dealings with Iran , and on October 11 the Financial Action Task Force (FATF)—which works by consensus and includes Russia and China—issued a statement warning that “Iran's lack of a comprehensive anti-money laundering/combating the financing of terrorism regime represents a significant vulnerability within the international financial system.”

Combined with Treasury’s parallel efforts to leverage market forces in direct discussions with the private sector, targeted financial measures are already showing signs of success.

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