Iran Sanctions and Regional Security

Philip H. Gordon
Philip H. Gordon Former Brookings Expert, Mary and David Boies Senior Fellow in U.S. Foreign Policy - Council on Foreign Relations

October 23, 2007

Mr. Chairman, Members of the Committee,

Thank you for the opportunity to testify today. The question of how to achieve greater international support for U.S. efforts to isolate Iran politically and economically – with the goal of preventing it from acquiring nuclear weapons – is critically important. To be perfectly frank, it is uncertain whether even if the United States does receive the full cooperation of its European and UN Security Council partners it will be able to stop the Iranian nuclear program – Iran seems determined to move forward with plans to develop a full nuclear fuel-cycle that would leave it a short step away from a weapons capability. What is certain, however, is that without broader international support American efforts to isolate Iran will fail. The United States has not significantly traded with or invested in Iran for nearly 30 years; it is only by persuading other major countries not to do so that it stands any chance of convincing Iran that the economic and diplomatic costs of developing nuclear weapons are greater than the perceived benefits.

The good news is that none of America’s most important partners wants to see Iran develop nuclear weapons, and most have already taken at least some steps to sanction the Iranian regime. Since July 2006 the UN Security Council has passed three resolutions demanding that Iran suspend all enrichment-related activities, the last two of which imposed limited economic sanctions against Iran, including constraints on Iran’s arms exports, restrictions on nuclear trade with Iran, and a ban on financial dealings with individuals connected to Iran’s nuclear and missile programs. The European Union has taken the lead in diplomatic efforts to stop the Iranian enrichment program, most European governments are cutting back on loan guarantees to Iran and encouraging their major companies not to invest there, and the EU is now considering economic sanctions outside of the Security Council if Russia or China refuse to move forward.

At the same time, the limits of international support for political and economic pressure are also apparent. Russia and China often seem more intent on blocking U.S. leadership than on containing Iran and continue to oppose more than limited economic sanctions at the Security Council, while many European countries remain reluctant to sacrifice economic interests in Iran to strengthen sanctions that they doubt in any case will work. In this complex and challenging context, I’d like to focus my testimony on two main areas: an assessment of European attitudes and the dynamics within the EU, and to a lesser extent in Russia and China; and proposals for how the United States can most effectively encourage its allies to support effective economic and diplomatic pressure on Tehran.

European Attitudes and Policies

Europe’s motivation for taking a leading role in the Iranian nuclear issue stemmed in part from fears in the fall of 2003 that without a new diplomatic effort the United States might use military force against Iran. Iranian dissident groups had just revealed the full extent of Iran’s secret nuclear enrichment program, and after the U.S. invasion of Iraq the Europeans feared that Washington might consider regime change in Iran if Europe could not demonstrate the effectiveness of a diplomatic alternative. The result was a new diplomatic structure – the EU3 (Britain, France and Germany) taking the diplomatic lead on behalf of the rest of the EU, and a deal in which Iran agreed to suspend enrichment of uranium while negotiating with the Europeans.

The EU3 approach to the Iran issue has had several benefits. It has kept the Europeans relatively united and made it more difficult for Iran to play different member states off each other. Even more importantly, however, EU leadership has given the Europeans a major stake in the Iran nuclear issue. By stepping forward to demonstrate that Europe can take the lead and that diplomacy can work, the EU has put its credibility on the line and Europeans are less likely to hide behind or blame the United States. This dynamic has certainly affected the European negotiators themselves – by experiencing directly Tehran’s obstreperousness and lack of transparency on the nuclear issue, the Europeans who have been dealing with Iran have been driven to advocate an increasingly hard line on the issue.

Even while noting the relative EU unity on Iran, it is important to recognize the differences of they key European actors, even among the EU3. Britain, with its own historic difficulties with Iran (most recently the capture of 15 British sailors that Iran accused of trespassing in Iranian waters) and relatively limited economic interests there, has from the start taken the hardest line on the Iranian nuclear program. Like other European countries, it prefers that sanctions be implemented through the UN Security Council but it is prepared to support national and EU sanctions outside of the Council if UN agreement cannot be reached. The British acknowledge that steps taken so far have not persuaded President Ahmadinejad to back down but believe that in the long run a different Iranian leadership might be willing to compromise on the nuclear issue.

France also takes a relatively hard line, and increasingly so. Whereas former President Jacques Chirac had privately suggested an Iranian nuclear weapon would not pose a major threat and was strongly opposed to any EU sanctions not approved by the Security Council, President Nicolas Sarkozy has taken a much tougher line. Calling an Iranian bomb “unacceptable,” Sarkozy has taken the lead on the issue within Europe and is now seeking to persuade his European partners to impose EU sanctions if the Security Council refuses to do so. Sarkozy has also broken with the Chirac approach by publicly appealing to major French energy companies like Total not to invest in Iran. In a speech in Paris in August, Sarkozy called on Europe to act to prevent an ultimate choice between “an Iranian bomb and the bombing of Iran.” Foreign Minister Bernard Kouchner has also suggested that the failure to prevent an Iranian nuclear weapon diplomatically could result in “war.” Both French leaders have made clear that they are not advocating military force but instead warning their EU partners – as well as Russia and China – that the consequences of diplomatic failure could be catastrophic.

Germany is more reluctant to support economic sanctions – whether at the Security Council or outside it. This reluctance derives in large part from Germany’s considerable economic interests in Iran, which include some $5.7 billion in exports to Iran in 2006 (compared to less than $1 billion for Britain and $2.6 billion for France) and exposure of over $5 billion dollars of export credit guarantees. But it also stems from a general uneasiness with coercive measures. German diplomats argue that tightening sanctions on Iran will lead to greater tensions, increase the risk of conflict, and make Iran even more determined to develop nuclear weapons for its defense. They argue that sanctions outside of the UN would be ineffective, would undermine multilateral diplomacy, and would harm relations with Russia and China. There are also splits within Germany’s coalition government on the issue: Chancellor Angela Merkel of the conservative Christian Democratic Union takes a relatively hard line on the issue (About Ahmadinejad, she has said that “a president that questions Israel’s right to exist, a president that denies the Holocaust, cannot expect to receive any tolerance from Germany”) while her Social Democratic Party coalition partners, including Foreign Minister Frank-Walter Steinmeier, are more skeptical of a coercive approach.

Some other European countries – Italy and Austria, for example – are even more reluctant to strengthen sanctions on Iran. Italy is one of Iran’s largest trading partners, with bilateral trade last year totaling over $7 billion and over $4 billion in export credits at risk. It is also a major investor in Iran, notably through the energy company, Eni. Italy also resents its exclusion from the EU3 and lack of a seat at the negotiating table.

Winning greater European support for isolating Iran is therefore difficult – but not impossible. For all the European reluctance to pursue sanctions, the combination of rising American pressure, EU3 leadership, and Iranian behavior – both its refusal to cooperate on the nuclear issue and the provocations of its president – has led to an increase in the economic and political isolation of Iran. European banks – including Deutsche Bank, HSBC, and BNP Paribas – have largely stopped doing business with Iran. New German export credit guarantees to Iran have fallen from $3.3 billion in 2004 to $1.2 billion in 2006, and German exports to Iran fell by 18 percent in the first half of 2007. Major investments in the Iranian energy sector – such as those planned by France’s Total, Spain’s Repsol, and the Anglo-Dutch group Royal Dutch Shell – have been delayed repeatedly. These new constraints are having an effect on Iran’s already troubled economy and particularly on its ability to make badly needed investment in its energy sector. EU leaders have said that if the Security Council is unwilling to follow up on its threats to impose further sanctions for Iran’s lack of compliance they will agree to do so at the EU level.

The greater challenge is with China and Russia. Although both surprised Iran with their willingness to agree to Chapter VII UN Security Council resolutions making Iranian uranium enrichment illegal and imposing limited economic sanctions, they have since resisted further economic pressure, despite Iran’s continued lack of compliance. Russia, in particular, seems more intent on denying the United States a diplomatic victory than on increasing economic pressure on Iran. Russia also argues that since the United States already does not invest in or trade with Iran, Moscow would bear the brunt of any new sanctions that would interfere with its nuclear trade with Iran and arms sales. President Putin claims that he opposes Iranian nuclear weapons but has seen no evidence that they are pursuing them, and his recent visit to Tehran seemed to be a signal that little can be expected from Russia on this issue. China would probably not stand in the way of action against Iran if Russia changed its stance, but Beijing has shown little interest in sacrificing its considerable economic interests in Iran (China’s $14 billion annual trade with Iran is more than any other country in the world) for the sake of nonproliferation.

Moving Forward

The United States must continue to work to persuade its partners to increase economic and diplomatic pressure on Iran. There is of course no guarantee that escalating political and economic sanctions will succeed in changing Iranian behavior or contribute to a change in the Iranian regime, but given the alternatives – acquiescing to Iranian nuclear capabilities or a military strike that could prove costly and counterproductive – it makes sense to find out. Many argue that sanctions never work, but this argument overlooks experiences in places like South Africa, Serbia, Libya, and even the former Soviet Union, where economic problems exacerbated by limits on Western investment helped produce the Gorbachev era and the end of the regime. When international economic and diplomatic sanctions have been broad-based, multilateral and sustained, they have sometimes had important, positive effects, at least in diverse societies with educated populations, active civil society groups, and at least partially democratic institutions – like Iran. The current Iranian regime seems determined to continue developing a potential nuclear-weapons capability, but economic development is a higher priority for the Iranian public and a far greater imperative for the country as a whole. (In polls conducted in summer 2007 by the bipartisan group Terror Free Tomorrow, 80 percent of Iranians said they favored Iran offering full international nuclear inspections and a guarantee not to develop or possess nuclear weapons in return for outside aid.)

To most effectively increase international pressure on Iran, the United States should pursue a number of separate tracks simultaneously. First, it should continue the process of trying to reach consensus at the UN Security Council for a new resolution imposing further sanctions on Iran. Russia and China continue for now to oppose such a resolution but they also share the West’s interest in preventing Iran from acquiring nuclear weapons. If Iran continues to move in that direction – and if it fails to answer the International Atomic Energy Agency’s unresolved questions about its past nuclear work – Moscow and Beijing might choose to send another message to Tehran, as they did in July and December of 2006 and in March 2007. While necessarily pursing its own interests and standing for important international principles, the United States should also take care to avoid unnecessary clashes with Russia and China, which only make them even less willing to work with issues of importance to Washington.

Second, the United States should continue to apply political and diplomatic pressure on its European allies to increase their economic isolation of Iran. As noted, the Europeans have already taken significant steps in this direction, but there is much more they could do. This includes ending the practice of extending government backed loans to Iran (still some $18 billion for the EU as a whole as of 2005), convincing European banks to stop doing business in Iran, and cutting off major European investments in the Iranian energy sector. If the Security Council proves unwilling to apply the further sanctions currently under consideration, the EU should be encouraged to do so on its own. “Unilateral” EU sanctions would not mean abandoning the UN process, only that the Europeans would move forward while continuing to press the Security Council to do so at a later date. While American encouragement and diplomatic pressure have in recent years succeeded in getting Europeans to cut back their economic relationships with Iran, I believe that U.S. legislative efforts to force them to do so could backfire. Legislation that took away the President’s ability to waive U.S. sanctions on European countries investing in Iran could result in legal challenges at the World Trade Organization, an EU determination to fight the principle of secondary sanctions, and EU retaliation against American companies. A better approach is to continue to support British and French leadership in getting the EU to uphold its moral responsibilities as a key international actor.

Third, the United States should do more to put public pressure on the companies that are making significant investments in Iran. It should, together with EU allies, publish the names of the companies that are making major investments and encourage others – including public sector firms and public and private pension funds – not to do business with them. It should provide legal protection to private fund managers and state and local governments who divest assets from companies that are propping up the Iranian economy.

Fourth, the United States should remind its allies that the failure to take action to isolate Iran increases the risk of military conflict. This need not – and should not – take the form of a threat to use force against Iran but is simply a recognition of the reality that, as President Sarkozy has noted, the failure to deal with this issue diplomatically could reduce the international community’s options to military force or an Iranian nuclear weapon. The allies should be made to understand that the less they do to contain Iran politically and economically, the more likely it is that the Bush administration – or Israel – will use force against Iran.

Fifth and finally, the United States should complement its efforts to increase the price Iran pays for lack of compliance with the will of the international community with incentives for Iran to cooperate. So long as Iranians believe the United States is implacably opposed to their country no matter what they do they are unlikely to compromise on the nuclear issue. But if Iranians can be convinced not only that there are high costs of pursing nuclear weapons but also concrete benefits for not doing so, there is a chance that an agreement can be reached. U.S. openness to dialogue with Iran is also important for convincing Europeans and others that the failure to resolve the issue is not simply due to American stubbornness. Indeed, the Bush’s administration’s gradual willingness after 2005 to engage with Iran – backing the EU3 process, offering potential incentives like spare aircraft parts and WTO membership, supporting various ways to provide fuel to Iran for a civil nuclear program, and talking directly to Iran about Iraq – has helped make it easier for the Europeans to match these “carrots” with “sticks” of its own. The United States should consider further steps in this direction, including direct talks with Iran about the nuclear program.

As I noted at the beginning of this testimony, there is no guarantee that even U.S. success in persuading its partners to further isolate Iran will persuade the current regime to freeze its nuclear enrichment program. That goal seems highly unlikely to be achieved in the short term, and may even prove elusive in the long term. The only way to find out, however, is to increase the costs to Iran for lack of compliance while holding out the possibility of a better future for the Iranian people if Iran is willing to compromise. Even if tighter economic sanctions do not persuade Iran to halt its nuclear program now, there may well come a time in one year, two years, or later – perhaps with a different Iranian leadership in place – when serious negotiations will begin, and the United States and Europe will need leverage to use in those negotiations. We should also be clear – and make absolutely clear to the Europeans, Russia, and China – that if we do not impose costs on Iran for developing a nuclear weapons capability, we are effectively announcing that the nuclear nonproliferation regime is dead. For if the international community is not prepared to make a country with Iran’s track record pay a price for developing nuclear weapons, any threats to punish other, less dangerous proliferators would be manifestly hollow.

This is a frustrating and uncertain policy course: but it is far better than the alternatives of acquiescence or war.