April 18, 2010 | Wall Street Journal

Hitting Tehran Where It Hurts

After three decades of an Islamic revolution that has neither upheld Islam’s virtues nor brought revolutionary change from repression, many Iranians have had enough. But political transformation, if indeed that’s what we’re seeing the start of, won’t necessarily be immediate. For instance, nine years elapsed between the first Solidarity strike at Gdansk and the collapse of communist rule in Poland. So while longer-term hope still exists for a free Iran, Europe and the United States must prepare for a more dangerous Iranian regime over the short- or even medium term. Their legitimacy wounded and their paranoia increased, Iran’s leaders now may be more repressive at home and intransigent abroad.

This raises a pressing question: What can be done to stop the regime’s march to a nuclear bomb? Leaders in Tehran are more likely to view a successful nuclear program as their best hope of winning back the international influence and domestic legitimacy they lost in the election debacle. For negotiations to succeed, supreme leader Ayatollah Khamenei and his coterie must be made to pay a higher cost for their nuclear weapons pursuit.

To date, words have meant little. The U.N. Security Council has passed five ineffectual resolutions, and will do little more given Russian and Chinese veto power. President Obama has described an alternative path, “tough direct diplomacy,” to curb Iran’s “unacceptable” nuclear development. This, too, has yet to bear fruit.

So Europe and her allies must be willing to peacefully exploit Iran’s economic Achilles heel: the regime’s heavy dependence on gasoline imports. Due to limited refining capabilities, Iran imports approximately 40% of its domestic gasoline consumption. Iran is the second-largest importer of gasoline in the world. That gasoline is supplied primarily by five companies: the Swiss-Dutch energy trading giants Vitol and Trafigura, the Indian multinational Reliance Industries, the Swiss trader Glencore and the French energy firm Total.

Leaders in the West are starting to focus on the opportunities this Iranian energy dependence presents. Recently, members of the U.S. Senate and House of Representatives introduced legislation to impose sanctions on any entity that provides, or helps Iran obtain, refined petroleum, including suppliers, shippers, insurance and reinsurance companies. During the presidential election, Mr. Obama twice endorsed the idea of squeezing Iran’s gasoline supplies to dissuade Tehran from proceeding with its nuclear program. Treasury Secretary Timothy Geithner is due to discuss sanctions against Iran this week during a tour of Europe and the Middle East.

Then again, legislation might prove superfluous if gasoline suppliers take full stock of their own self-interest. At the top of the list are the reputational risks they increasingly take by doing business with Iran’s current regime. Fairly or not, Iranians and others may come to believe that these companies are fueling the armored vehicles and motorcycles used to brutally repress those standing for freedom on the streets of Tehran. Ending their gasoline supplies to the Iranian regime would be a business decision worth making. BP reached this conclusion in 2008 after calculating that its U.S. business interests outweighed the importance of its Iranian gasoline profits.

If the major gasoline suppliers exited the market, either voluntarily or because of pressure, other companies might pick up the slack. But it is not clear that substitute suppliers could fulfill all of Iran’s gasoline needs. They also could demand higher prices. Even if suppliers were willing to provide the gasoline, the legislation would make it hard for the shipments to reach Iran’s shores. Shippers need insurance and reinsurance companies willing to underwrite shipments. Were those companies, many of which are based in Britain, Germany, Norway and Japan, willing to continue insuring shipments despite the U.S. legislation, they still could demand an increased political risk premium associated with this trade, leading to higher costs for Iran.

Iran’s government definitely would feel the pinch if its current gasoline suppliers stopped trading with it. In the summer of 2007, riots followed Tehran’s decision to ration gasoline supplies. Drivers torched gas stations. A concerned Iranian parliament pressed the government to scrap the rationing plan. While a gasoline embargo is not a “silver bullet,” it may be “silver shrapnel,” and shrapnel also wounds. This is especially so since President Mahmoud Ahmadinejad is already under immense pressure from the public, the opposition and even the ruling establishment for his economic mismanagement.

The recent Tehran Spring might lead to a future Iranian government that ends its illegal nuclear program, support for terrorist organizations and abuse of its own people. But it also may lead to a Nuclear Winter. Given the consequences of a nuclear-armed Iran, putting hope above experience is not a policy.

Europeans, in particular, need an effective policy response. With European companies heavily involved in the Iranian gasoline business, European policy makers need to stop this trade. If the regime faced damaging economic pressure from a significant reduction in gasoline supplies, Khamenei might decide that a nuclear bomb, instead of being the guarantor of regime survival, could be the catalyst of its demise. At that point, he might be in the mood to compromise. If not, no one could argue that countries threatened by Iran had ignored peaceful alternatives.

Mr. Dubowitz is executive director of the Washington, D.C.-based Foundation for Defense of Democracies and co-leads FDD’s project on researching Iran’s energy vulnerabilities.