January 4, 2011 | National Post

Bringing Tehran to its Knees

Where sanctions against Iran are concerned, the issue is timing: Can the West put enough pressure on Iranian Supreme Leader Ali Khamenei and his praetorians to either crack the regime or make its leadership believe that the country’s nuclear program threatens its rule?

United Nations Security Council resolution 1929, approved by the Security Council in June, has been much more powerful than the three Iranian-sanctions resolutions that preceded it. The trick for Washington now is to ratchet up the economic pain in Tehran even further.

Washington needs an incremental approach — implemented rapidly — that does not spook the oil markets, and that allows for increasing oil supplies from Iran’s competitors to dull the effect of less Iranian crude being traded. Thinking always of Khamenei’s Achilles’ heel, Washington should aim its efforts at cutting foreign Iranian crude oil purchases.

The Europeans already have cut tech transfers to, and future investments in, Iranian oil and natural gas, severely damaging Tehran’s ability to sustain current production. The Chinese, while backfilling on some of these investment deals, are sharply reducing their purchases of Iranian crude. China cut crude imports from Iran between January and September 2010 by approximately 17% from the same period in 2009, even as the world’s biggest energy consumer bought more oil overall. The Japanese, meanwhile, reduced purchases of Iranian crude by over 19% in the first eight months of 2010. While Iran was Japan’s third-largest supplier of oil in June 2010, by August of 2010, it was in sixth place. Neither the Japanese nor the Chinese want to bet their economic security on an Iranian energy sector in decline.

Washington can greatly intensify the “hassle factor” in buying Iranian crude by exposing the role of Iran’s Revolutionary Guards in the crude-oil export supply chain — and then using the U.S. law prohibiting commerce with the Guards to sanction foreign enterprises involved with them. The Treasury Department’s recent decision to sanction the Pars Oil and Gas Company, which is a Revolutionary Guard front involved in gasoline trading and the development of some of the largest oil and natural-gas fields in the Middle East, is a good example of the type of punitive designation that can greatly complicate Iran’s energy planning.

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. But large up-front cash payments on oil and natural gas purchases give the Iranians an alternative source of capital. Another way for the regime to circumvent sanctions is through the use of long-term supply contracts, through which Tehran can collateralize billions of dollars in energy bonds. (Bondholders require evidence that Iran can make payments on bonds, and a simple way to produce such evidence is to sign a long-term supply contract, using the resulting guaranteed revenue stream in hard currencies to collateralize the paper issued.)

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 close this loophole by passing additional measures to prohibit long-term purchase contracts for Iranian oil and natural gas. 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).

Washington or the EU also can 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, any government buying Iranian oil or natural gas could be disqualified from bidding on any government contracts in America or Europe.

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, buyers will seek alternative sources. 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 help, too — the world oil market will remain stable.

Some of these possibilities have been introduced into the Sherman-Casey-Brown bill in the U.S. 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 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 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. Khamenei undoubtedly remembers what it took to crack Khomeini’s bellicose determination to fight. The objective of American diplomacy should be to reanimate those memories.

So let us see whether Khamenei can withstand a united West. Current sanctions and the regime’s atrocious economic management have brought hard times in Iran. 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, where a longer version of this article originally appeared. He is also a senior fellow at the Foundation for Defense of Democracies (FDD), 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, where he heads up the foundation’s Iran Energy Project.

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