Analysis: Tough sanctions may tame Iran

WASHINGTON, July 27 (UPI) -- Strengthening existing sanctions against Iran and divesting state pension funds of Iran-connected assets may offer the best hope to change the regime's behavior.

Recent outrage over the billions of dollars in U.S. state pensions that are invested in companies that do business with Iran -- inadvertently supporting terrorism and Iran's nuclear ambitions -- has triggered a divestiture movement in several states to rid pension funds of assets connected to Iran. Congress has also introduced a number of bills since last fall to strengthen sanctions.

Sanctions to date do appear to be working -- at least to slow Iran's nuclear activities, said Patrick Clawson, senior fellow at the Washington Institute for Near East Policy.

Speaking Thursday during a conference on divestment from Iran at the American Enterprise Institute, Clawson pointed out that Iran has developed only a few more centrifuges than they had a few years ago.

"If we can slow down Iran's nuclear program, we can have some success," he said.

Even though sanctions may not have a detrimental impact, Clawson told United Press International that sanctions aim not to cripple Iran, but to convince the leaders to change their behavior.

Ian Bremmer, president of Eurasia Group, a global political consulting firm, agrees, but, he told UPI in a phone interview: "We need to recognize that we don't have a lot of leverage."

The Iran Sanctions Enabling Act of 2007, introduced in both the House and the Senate, would strengthen existing legislation by mandating a comprehensive federal list of companies that invest more than $20 million in Iran's energy sector, directing states to divest such company holdings, and protecting pension-fund managers from lawsuits if purified pension funds have poor returns.

The Iran Sanctions Act, first passed as the Iran-Libya Sanctions Act in 1996, forbids most business activity between American firms and Iran and threatens penalties for foreign firms that invest more than $20 million in one year in the energy sector. Enforcement has been weak, however, in part because the executive branch has utilized the waiver provision.

Foreign investment is critical for Iran's mismanaged economy and has totaled almost $100 billion since 1999. Clawson referred Thursday to the "stunningly poor" condition of Iran's economy in light of "the incredible opportunities of the last five years."

Oil revenues pay for social services and subsidies on imported gasoline, but experts predict Iran's declining oil exports may cease entirely by 2015. Otherwise, there's just a little industry and revenues from permitted exports: nuts, caviar and carpets.

Pension fund divestment could make a sizable dent in Iran's finances because the amount invested in Iran-invested companies is in the tens of billions of dollars. During the AEI conference, Missouri State Treasurer Sarah Steelman, a pioneer in state pension divestment, discounted the perceived lack of fiduciary responsibility, pointing to the high performance of Missouri's purified funds. Florida Democratic state senator Ted Deutsch emphasized that the outrage of pensioners outweighs the resistance of fund managers who'd rather not deal with divestment.

Several other states are close to passing divestment legislation.

Bremmer told UPI that state-driven pension divestment will be difficult to legislate since pension funds involve numerous companies and hedge funds.

"If that becomes more than a symbolic step by a couple of states, it's going to be hard."

Bremmer argues that sanctions overall are both unlikely to become very tough and unlikely to have the desired effects. Sanctions are a bad policy for nations on the left side of the J-curve, which means that they are highly authoritarian with very little openness, as his book "The J-Curve: A New Way to Understand Why Nations Rise and Fall" describes, because they rally support around the regime.

While Bremmer pointed to ISA's successes in limiting the availability of foreign management skills and technology in the Iranian energy sector, he noted that sanctions led to the rapid expansion of Iran's nuclear program because Iran saw that it would have a problem getting oil and gas and wanted more leverage.

He said Iran's recently imposed gas rationing is a bad sign.

"The fact that they took a politically unpopular step says to me clearly that they are not exactly planning on sitting down and moving toward a diplomatic resolution."

Bremmer noted that only an embargo on Iranian oil and gas, which is very unlikely, would seriously harm Iran's economy, so sanctions probably won't prevent a nuclear program. Moreover, the Iranians are in a better geopolitical position than three years ago, given the violence in Palestine, Lebanon and Iraq. And with high oil prices, they don't think they need to back down.

Another unlikely scenario that could hurt Iran is if oil prices fell to $30 per gallon -- through increased production in other countries, he said.

Short of these unlikely scenarios, more pressure is needed and that has worked, particularly to persuade German and Swiss banks to comply.

At the conference, Clawson also emphasized the use of carrots, including advanced technology and inclusion in the world economy, such as through membership in the World Trade Organization.