IRAN UPDATE
October 30, 2007

IRAN AND THE BOMB (#2):
A Strategy of Economic Warfare

The Bush administration was wise last week to impose sanctions on Iran’s clerical army, the Islamic Revolution Guard Corps (IRGC), as well as on the IRGC’s feared Quds Force and several banks, businesses, and individuals, for their support for terrorism and proliferation of weapons of mass destruction.  But, if the White House hopes to convince Tehran to drop its nuclear weapons program, it must view the sanctions as just one piece of a larger strategy of economic warfare that skillfully exploits the vulnerabilities of the economy over which Iran’s radical regime presides.

Under such a strategy, the Administration would impose an embargo on refined petroleum products, target the full complement of families and organizations that wield vast control over Iran’s economy, block the foreign investment on which Iran’s economy is heavily dependent, and force U.S. allies to choose between trade with America and with Iran. The reasons why are clear:

Gasoline dependency. Iran may be one of the world’s top oil producers, but it currently lacks the capacity to refine enough to satisfy the needs of its own people. As a result, Iran imports about 40 percent of its total annual gasoline consumption. That makes the Islamic Republic extremely vulnerable to a petroleum embargo. But the United States would have to act fast; to eliminate this vulnerability, Iran is already rationing gas, reducing its imports from abroad, and investing heavily in additional refining capacity.

Economic hierarchy. The new sanctions against the IRGC target a key Iranian economic power center, one that controls a host of construction, energy, and other projects that, together, are worth billions of dollars. Other power centers include the extended family of former President Ali Akbar Hashemi Rafsanjani, which controls copper mining, the pistachio trade, and other key industrial sectors, and the regime’s socio/religious foundations (or “bonyads”) that are controlled by Iran’s Supreme Leader, the Ayatollah Ali Khamenei. Sanctions that target all of these economic power centers would surely get the attention of Iran’s radical regime since, to a great extent, they are the regime.

Foreign direct investment. Iran’s energy sector, which is the heart of its economy, requires $1 billion a year in foreign direct investment to maintain current production levels and $1.5 billion a year to increase them. By targeting banks, businesses, and individuals (along with the IRGC and Quds Force), the Administration’s new sanctions are part of its ongoing, and commendable, efforts to discourage such investment. Those efforts have already proven effective: the Administration’s earlier blacklisting of two Iranian state banks from the U.S. financial system convinced some foreign companies and banks to reduce, or even end, their financial dealings with Iran. In the states, meanwhile, efforts to force pension funds and other financial institutions to cut their ties to companies doing business in Iran are gaining momentum. But we need more on both fronts.

Trade relationships. Over the years, administration after administration has provided waiver after waiver from U.S. legislation, such as the 1996 Iran Libya Sanctions Act, aimed at curbing the flow of funds to Iran. This has enabled foreign countries and businesses to trade, cost-free, with Iran. But Iran’s major trading partners, which include the European Union, Japan, and the United Arab Emirates, tend to trade much more with the United States than with Iran, and they can ill-afford a cut-off from the lucrative U.S. market. By enforcing current U.S. laws and pushing for tougher ones, the Administration can force these nations to choose between trade with America and with Iran. They surely will choose the latter, thus tightening the economic screws on Tehran even further.