Counterterrorism Blog

With world attention focused on the faltering international financial system, only back page notice is being given to the frightening progress Iran continues to make toward achieving nuclear weapons capability. An expert report now circulating within the halls of the IAEA reportedly indicates that Iran may soon have enough enriched uranium to fuel a bomb. That information is further complemented by Israeli intelligence assessments indicating that Iran’s work on nuclear weapons design and missile delivery systems is also moving apace. The confidential IAEA report is scheduled for further IAEA council discussion on November 27th and subsequent transmittal to the Security Council. In the meantime Iranian President Ahmadinejad continues in the same pattern of strident threats toward Israel and claims that Iran’s nuclear program and intentions are peaceful.

Israel’s outgoing Prime Minister Ehud Olmert has reportedly been asked by US officials to hold off taking any steps that could push the Iran nuclear issue back into crisis mode, at least until the Obama Administration is established in office and has had a chance to explore the options. These options range from engaging Iran in discussions a la the EU-Iran negotiating process to threatening (and perhaps even taking) military action. Enhanced political and economic sanctions on Iran also remain a key option. The question is whether any sanctions option can be made to work?

Critics of sanctions vis-à-vis Iran point out that such measures have been ineffective to date. They argue that the current international economic downturn is not conductive to sanctions implementation or enforcement, and doubt that the US will ever achieve Security Council consensus on sanctions measures sufficiently stringent to convince Iran to change course. Yet, Iran may, in fact, now be more vulnerable to sanctions than ever before.

Iran’s economy is already in shambles. The downturn in the price of oil has left Iran’s government with serious budget shortfalls and significantly reduced its ability to support and subsidize its extensive ongoing energy sector and other infrastructure projects. It has also significantly reduced the profit incentives that previously enticed foreign businesses and banks to compete for Iran’s business, even when that meant irritating their American relationships. Iran’s cost of doing business is soaring, and the stepped up measures adopted by the U.S. Treasury Department, and the US campaign to dissuade financial dealings with Iran, are now actually having a significant impact! More and more Western banks are reducing their Iran exposure and pulling out of the Iran marketplace. Even non Western banks in Dubai are beginning to view triangular transactions with Iran more cautiously. These factors may serve to enhance the chances of engaging Iran in a more constructive dialogue on its nuclear program than previously.

The set of sanctions put in place last year by the Security Council were never really designed to have a broad impact on Iran’s economy. Rather, they represented a lowest common denominator approach and targeted only those specific individuals and entities directly related to Iran’s uranium enrichment and missile development programs. The United States was pretty much left on its own to impose broader economic sanctions measures, which, over time, were either digested or circumvented by the Iranian marketplace. The Bush Administration had little success in convincing European countries to join us in this unilateral sanctions approach --at least, until the Treasury Department began to use its extensive leverage over foreign financial institutions, making them fearful of running afoul of our extensive sanctions regulations.

As the Obama Administration looks at its options, it should seriously consider whether it may now be possible, working with our European friends and allies, to engage Iran in a new dialogue backed up with an expanded set of threatened (or applied) sanctions. These measures should be aimed at Iran’s real economic vulnerabilities - its fragile financial system; its energy, transportation and communications sectors; and its urban commercial class. This commercial class is key to holding Iranian urban unemployment figures from plummeting, and may well represent Iran's Achilles heel.

With the substantial decline in the price of oil, and with international financial institutions now scrambling to bolster their balance sheets with government guarantees and bailouts, the US may be in a much better position now to convince Europe, Japan, China and Russia, and the businesses and banks in these countries, to cooperate with us, at least tacitly, in threatening broader sanctions as the best way to avoid a necessary military option further down the road