February 24, 2010 | Foreign Policy
The Sanctions on Iran Are Working
After months of fruitless efforts to engage the regime in Tehran, and a raging Washington debate about “targeted” versus “broad-based” sanctions, or “smart sanctions” vs. “crippling sanctions,” Barack Obama's administration has finally moved to punish Iran for failing to come clean about its suspicious nuclear program. The U.S. Treasury Department announced Wednesday that it has designated the four subsidiaries of a major engineering and construction firm, as well as the firm's commander, Islamic Revolutionary Guard Corps (IRGC) Gen. Rostam Qasemi.
So it seems the Obama administration is carrying out its threat to target Iran's leaders, but not enact broad sanctions on the country that could harm its population, right?
Not so fast. The firm in question, Gharargah Sazandegi-ye Khatam al-Anbia, or Ghorb, which was first designated by the Treasury Department in 2007 because of its role in supporting the proliferation of weapons of mass destruction (WMD) and terrorism, is a major player in the Iranian economy, including in its energy sector. In 2006, Ghorb received more than $7 billion in contracts including, as reported by International Oil Daily, a $2 billion contract to oversee the development of the South Pars gas project and a $1.3 billion no-bid contract for a gas pipeline running from a Persian Gulf port near South Pars to the border with Pakistan.
These designations will give further pause to the international companies partnering with Ghorb and its affiliates, including in the energy sector, now that the Treasury Department has put them on notice that their business, in the words of sanctions chief Stuart Levey, “ultimately benefits the IRGC and its dangerous activities.”
Treasury relies on these “smart sanctions” that focus on actors engaged in dangerous or illicit activity that violates international law norms. Since 2006, under Levey's guidance, it has designated more than 40 Iranian entities involved in supporting the regime's WMD-related and terrorist activities, including state-owned banks.
The more than 80 foreign financial institutions that terminated or reduced their business with Iran over the past three years were not legally bound to comply with U.S. sanctions. But after Treasury revealed Iran's extensive use of deceptive financial practices and front companies, foreign bankers did so anyway. The benefits of their Iranian business were outweighed by the costs of being linked to bad actors, as well as the real risk of losing access to U.S. financial markets.
Treasury's move against Ghorb and its subsidiaries is a good start. To have any meaningful impact on the activities of the Revolutionary Guards, targeted sanctions must focus on the Guards' leaders and other front companies active in Iran's energy sector, which is the lifeblood of the regime. Oil alone provides about 80 percent of Iran's export earnings and half of government revenue. Given the dominance of the Revolutionary Guards in the country's energy sector, Asian and European companies might find it difficult, as a result of Treasury's actions, to do business in the energy sector without transacting with designated entities.
The U.S. Congress also is moving aggressively against Iran's energy sector and the Revolutionary Guards by targeting what some have called Iran's economic “Achilles' heel” — the regime's need to import, by some estimates, between 30 to 40 percent of its gasoline from foreign companies. In December, the House of Representatives passed the Iran Refined Petroleum Sanctions Act by a 412-12 vote; in January, the Senate unanimously passed an even more comprehensive companion bill. The two bills now go to conference committee, where they will be reconciled for a final vote and sent to Obama for his approval.
The legislation would extend the 1996 Iran and Libya Sanctions Act to provide the president with the authority to sanction foreign companies involved in selling refined petroleum to Iran or helping Iran improve its domestic refinery capacity. The House version of the legislation also would require the administration to report to Congress every six months on international companies doing business with the Revolutionary Guards and their affiliates involved in this trade.
The mere possibility of these sanctions has already persuaded three companies (BP, Glencore, and Reliance) to terminate their direct sales of gasoline to Iran. Most banks have rescinded the lines of credit they had previously offered to finance Iran's gasoline deliveries. Some of the insurance and reinsurance companies that underwrite the trade — including Lloyd's of London — already have indicated that they will leave the market when the legislation is signed into law.
This legislation would complicate the business dealings of the remaining companies. Like the Iran and Libya Sanctions Act itself, which has persuaded many international companies to reduce or terminate their investments in the Iranian energy sector, including those that could have helped Iran address its domestic refinery problems, this legislation would act as a sword of Damocles hanging over the refined petroleum trade. Even with the president's authority to waive sanctions against any company found in violation of the act, it would remain a useful deterrent for those companies unwilling to risk the ire of Congress.
Iran's energy partners, gasoline suppliers, and insurers have an additional reason to be concerned. In addition to the risk of legislative sanctions — through either the Iran Sanctions Act or the Iran Refined Petroleum Sanctions Act — they also should worry that they might be unwittingly involved in a complex supply chain with front companies linked to the Guards.
Iranian government sources indicate that the Guards are deeply involved in Iran's gasoline trade. This is not surprising, given the strategic importance of imported gasoline to the Iranian economy and military, and the opportunity for lucrative profits from a gasoline trade estimated at $6 billion to $9 billion annually.
The efficacy of these energy sanctions has also been plagued by a bipolar debate. Energy sanctions, particularly gasoline sanctions, have been characterized by some as a silver bullet that would cripple the Iranian economy, inflict a mortal wound on the regime, and drive an angry Iranian public to rally around the flag. Others have deplored the sanctions as a pinprick that would cause a mere flesh wound while enriching Chinese and Russian mercantilists at the expense of Europeans and Americans.
Both views are wrong: Energy sanctions are an extension of a comprehensive economic warfare strategy designed to weaken the Revolutionary Guards and feed the flames of discontent. Whether through denying the Iranian regime much-needed capital and technology, or curtailing Iran's access to the world's banks, the strategy has shown some success. The regime is despised by many Iranians not only for its human rights abuses but also because of the disastrous state of the economy.
Despite the regime's attempts to blame the sanctions policies of the United States for these economic problems, many, if not most, Iranians put the blame squarely on their leaders. For example, in November 2008, a group of 60 Iranian economists criticized President Mahmoud Ahmadinejad for his “tension-inducing” foreign policy that had “scared off foreign investment and inflicted heavy damage on the economy.” The economists said the current sanctions had cost Iran billions of dollars by forcing it to use middlemen for exports and imports. Hooman Majd, who served as an advisor and interpreter for Ahmadinejad in New York, wrote in his 2008 book, The Ayatollah Begs to Differ, that “President Ahmadinejad's promises to alleviate Iran's economic woes were no longer believed, and the style of his foreign policy was viewed as having both exacerbated the economic crunch and contributed to the sense of insecurity, even if it continued to defend a nation's rights.”
As Iranians mark the 31st anniversary of the Iranian revolution by taking to the streets Thursday to protest against the brutality and illegitimacy of the clerical regime in Tehran, they will be once again facing off against the Revolutionary Guards. In the end, “smart” sanctions are those that can cripple the Iranian energy sector — the lifeblood of the men who rule Iran. But both the Obama administration and Congress have an important role to play in achieving this goal; it's not a question of one approach or the other.