American Enterprise Institute

Wednesday, May 9, 2007

[Edited transcript from audio tapes]

2:45 p.m.	Registration
3:00	Panelists:	Patrick Clawson, Washington Institute for Near East Policy
		Danielle Pletka, AEI
		A. William Samii, Center for Naval Analyses
	Moderator:	Omeed Jafari, AEI
4:30	Adjournment

Proceedings:

Omeed Jafari:  Ladies and gentlemen, please.  I'd like to welcome you to the American Enterprise Institute.  My name is Omeed Jafari, I'm a research associate here, and I'll be moderating today's event.  Before we begin with the introductions, I'd like to introduce you first to our global interactive map, which is, I believe, the reason why all of you are here, in addition to some of the – sorry, not for you, Dany.  Excuse me. I'd like to briefly run you through it.  In your conference packets, you'll find a copy of the CD, which is exactly what you see on the board.  You can take it home and peruse through the files as you wish.  Additionally, you can find the website, located on the AEI homepage, for now.  Down the line it can be found at www.AEI.org/iraninteractive.

To begin with, as you see up here, the global interactive map has broken down our data into three fields, the first of which is the country listing, the second of which is our interactive map, and the third of which is our company listing.  I'd like to first run you through the project details, just to give you a brief overview of what we've done. 

With this project, we went ahead and surveyed a variety of public open source outlets on the Internet, publications, both trade and newspaper, from 2000 to the present.  Now, I won't bore you with too many of the details, I'll continue to where it's more interesting, but the research methods then broke down our data into four different groups, the first of which was the year of the transaction that was recorded, the second of which, the commercial and financial sectors in which those transactions were made, third, the countries or the companies in any given country who made those transactions with the Islamic Republic, and lastly, the companies themselves.  Within each category, you'll find subcategories. 

In the analysis section, you'll see that we've broken down our findings into two groups, the global focus, and also, the regional focus, the first of which, the global focus, will provide you with some information on how activity worldwide and investments worldwide have been progressing.  Of note is that in 2000, we recorded approximately 111 transactions.  Since then, the number has declined.  Interestingly enough, the number has actually, sorry the value of transactions have increased exponentially in the last four months alone.  However, in order to get a better idea, you can click on any one of these, and it will provide you, one, with a ranking of every country by the number of transactions -- below that -- I apologize, the first of which was by value of the transactions, the second is by the number of transactions.  As you can see, many of America's allies fit the top echelon.

And, finally, you can go to the global analysis, where you'll find statistics, charts, that will give you a better impression of how global activity -- global investment activity has progressed over the last few years. 

And finally, for a more specific focus, you can go to our regional area, Asia and the Pacific, again, giving you breakdowns by year, and charts to follow those.  Europe, Asia, and the Pacific, the Middle East, and North and South America, which include the United States.  For any questions that you might have, you can then go to our FAQ section, which will give you information on one, how to print the information from the tool, secondly, if you have any questions or concerns or have found information that might conflict with what we have, you can then e-mail us at iranproject@aei.org, and a variety of other questions that we hope will facilitate the use of this map.  Lastly, if you want, you can go ahead and e-mail this link to any one of your friends by using this link in the middle top of the page.

Moving on, our interactive map.  As you'll see, every country is shaded in a graduated color scheme, each indicating the degree and the amount of investment that companies headquartered within any given country have committed to over the last seven years.  Just as an example, you can click on Asia, and then continue to China.  To the left you'll find countries' statistics which we found using the International Monetary Funds'-- excuse me -- Directions of Trade Statistics CD.  There you can click and find out the amount of money that this particular country, in this case, China, has exported to Iran in value, imported from Iran, its rank relative to the other countries on the map, and lastly, the total volume of trade.  In the middle, you'll find a list of the companies headquartered in China that have underwritten business transactions with the Islamic Republic of Iran.  And you can scroll down and they'll be categorized by the sector in which they've invested.

Interestingly, and I'll point this out later on, companies, for instance, based in China we've had to find information on through non-Chinese sources, and that's a testament to the lack of openness and transparency that you find in Chinese media.  Then you can move on and click on any given sector by year.  2000 is a good example.  And we'll provide you with information on the bank, for instance, the project it financed, and the value of the finance.  You then move on to construction, power, and energy, and do the same.  Years in which there were no transactions will indicate as such, and to return to the country overview, you can click on its little map in the top left. 

I'd like to highlight France since it's the most active in Iran, and show you just the same.  Here, however, in the middle, where you see banks for instance, COFACE, which is France's state-owned export lending agency, Crédit Lyonnais, these companies, we've been able to find very accurate and detailed information on, both through public sources, and also in contacting the banks themselves.

By clicking on countries, which is in the top right, you'll be provided a list of all the countries that we found in which companies or their state-owned agencies are headquartered.  We have approx- I’m sorry- we have exactly 38 in our database.  Below that, you'll find a list of the active loans made by the World Bank to the Islamic Republic since its inception in 1979, as well as an asterisk by every country who is both a member and has also participated in the World Bank loan.  From here you can also click to any other country as you would wish. 

And lastly, is our companies listing.  We have approximately three hundred companies, I believe just over.  From here, you can click on any company that's highlighted in green, and it will direct you to their Website where you can find detailed information on their activities, not necessarily in Iran but in general, as well as investor information, which we've also included here, in addition to a company overview, its subsidiaries, the type of company, whether it's public, private, or government-owned, the sectors in which it's done work in Iran, where its headquarters are, and, if at all possible, the markets on which that company's shares are traded, as well as the major shareholders of those companies.  Those that are highlighted in gray, however, have not been - are either subsidiaries of companies that we've listed, and you'll see that by a "see", for instance, see Abbot Group, or, we were just unable to find information on those companies.  Clicking on "home" will return you back to our home page.

Great, with that, I'd like to segue into introducing our guest speakers for today, who will address eventually some of your questions.  First is Dr. Bill Samii, sitting in the middle here.  Dr. Samii is currently an adjunct research analyst at the Center for Naval Analyses.  He is on leave of absence from Radio Free Europe, Radio Liberty, where he is Regional Analysis Coordinator, and the author of The Weekly Iran Report.  To his left is Dr. Patrick Clawson, the Deputy Director of Research of the Washington Institute for Near East Policy.  He also serves as Senior Editor of the Middle East Quarterly.  Among his many publications, Dr. Clawson recently coauthored Eternal Iran, with AEI's own Michael Rubin, and last and certainly not least is Danielle Pletka, Vice President for Foreign and Defense Policy Studies here at the American Enterprise Institute.  Before coming to AEI, she served for ten years as Senior Professional Staff Member for the Near East and South Asia on the United States Senate Foreign Relations Committee.  Dany?

Danielle Pletka:  Thank you, Omeed.  Thank you, everybody, for being here.  I'm really pleased that we have so much attention being paid to this map, it really is a terrific piece of work, and I have to commend Omeed for doing the vast bulk of it with our own Elizabeth Roodhouse, who is responsible for it being so, if I may use the proper term, "technically cool".  It actually works because of her, so we're very proud of that.  I'd like to make a couple of important clarifications just quickly.  When you see a list of financing, you'll see in the categories that were listed to the right, there was a number.  That is the maximum.  In other words, when there's a line of credit that's been issued, that is the reporting on it, in fact, they may not have -- the relevant bank may not have underwritten that amount, they may have only underwritten part of it, it may not have gone forward exactly as written.

 That is really one of the limitations of doing open source research.  That is that it is based on press reports and it's not often clear whether the deal was fully consummated, whether it changed in its nature halfway through.  On the other hand, we have put contact information and disclaimers at the bottom to encourage people who have more information, and to encourage companies and banks and governments to contact us to provide corrections.  And we did send out letters prior to putting this together, listing the information about banks and export credit agencies to a whole – to the entire list of banks and financial institutions, and we have received back some corrections, some additions, and we hope to hear more.  But it is important to understand that. 

I think that really is one of the biggest problems with this kind of thing, and what Omeed highlighted is the question of China, but it is also true of Russia, and certainly of North Korea, as well.  These are countries that do not do insignificant business with Iran.  It tends to often be relatively nefarious in its nature, particularly when it comes to North Korea.  And you're not going to find a lot of public information about the value of the transaction.  I doubt there were many banks, although certainly there has been one, that was willing to underwrite North Korea in business with others, but perhaps there are more out there.  But in any case, there's a limitation on that kind of information, and so we know a lot about France, and we don't know a lot about China or North Korea, and I think we would be certainly eager to add to it but we are limited by what is in the public domain. 

That being said, just a quick couple of comments before I turn to AEI's guests here today.  Why did we put this together?  One of the main reasons why we were interested in trying to compile this information in one place was because it appears over the last year and even more that there's been a certain caricature of American debate on foreign policy toward Iran, that really we only have two options. 

Option A is for an embrace, a dialog, what some people like me perhaps would call appeasement, but others would call engagement, sitting down and trying to help the mullahs understand that it's really not in their interests our ours to have a nuclear weapon or support terrorism.  And then there is the other option, and the option is to drop a bomb on them tomorrow, to send the 82nd Airborne from next door, whatever it may be, but that there's really no serious discussion of what actually might exist between doing nothing and doing everything. 

That seemed to us to be a very important gap, not necessarily because economic sanctions are the only way forward, or because they are the right way forward, but because it is important that people understand just how Iran fits into the international trading community.  In fact, Iran is not North Korea, Iran is deeply tied into the rest of the world, and highly dependent, not just on selling, but also on buying from the outside world, and highly dependent on the good will and good credit that private banks and export credit agencies extend to them. 

And just for those who may not know what an export credit agency is, there are always different terms of art [indiscernible].  This is basically the equivalent of the Exim Bank.  This is a government using taxpayer finances to underwrite business with a particular country.  In the case of Italy, for example, they've got more than six billion dollars worth of export credits to Iran.  So, should something go wrong, then those companies are comfortable, they're all right, because they've been underwritten by the Italian government, by SACE.  The Iranians are presumably okay up to a point, but the Italian taxpayer is left holding the bag.  The same is true for France, Germany, Japan, Korea, and a number of other countries, all of whom have chosen to extend export credits to Iran.  That amount has dropped in the last couple of years, but it has not dropped completely, and Iran is still benefiting from it. 

So, in fact, this does, it seems to us, provide a whole set of new understandings and policy options that may be available to us.  It's not just, as I said, about sanctions, it's also about companies and shareholders thinking about risk.  It's also about the wisdom of doing business with Iran.  In fact, if you were a shareholder in a particular company, or an investor in a particular company, and you were aware that your company was doing significant business with Iran, might you ask whether this was a good risk?  Certainly, if it were I, I would ask whether this was a worthwhile risk.  In fact, what you see around the world today is that there are a number of banks, and a number of businesses that have made the decision that the risk is not worth it.

And I think that that's very important because it sends a message about the costs of their foreign policy to the Iranian regime, and I would say that not withstanding two U.N. Security Council resolutions, and draconian American unilateral sanctions, that that message really hasn't gotten through.  That in fact the regime has not paid a significant -- I will say a price, but not a significant price for the fact that they are the world's lead exporter of terrorism and supporter of terrorism and developing nuclear weapons and the missiles to deliver them. 

Right now, what you see in the policy community is that there are a number of different measures being considered.  The Congress has several different bills before it, and I believe there are about a number of others that are going to be introduced shortly that do everything from renew the idea of secondary sanctions on companies that invest in Iran, to pushing for divestment in Iran. 

I think that you will see increasing pressure on people who do business, people and companies that do business with Iran.  In addition, two states, and that's all that I'm aware of, there are probably more.  The state of Florida just passed divestment legislation that will force its pension fund to divest from businesses that are doing business with Iran's petroleum sector, and the same for Sudan, I should add, and this is also in the process of being passed in the California legislature.  These are not insignificant pension funds for those who are aware of them.  A billion dollars’ worth of business is a pretty significant chunk of business coming just from Florida alone. 

Then there is what the Treasury Department of the United States is doing.  Treasury has become an increasingly important actor on our foreign policy stage.  They have really, I would say, been far more effective in the year or two that they have been pretty active on Iran and the State Department has been in many years.  They have gotten the Iranians’ attention.  I think four banks fully have pulled out of business with Iran from overseas.  They have ended u-turn transactions with Iran. 

So again, there's increased scrutiny on the kind of business that is going on.  This is, at the end of the day, why we were interested in this.  Nowhere were we able to find a single place where all of this information was gathered together.  The Treasury Department doesn't have it, foreign governments and research institutions don't have it, the Congress of the United States doesn't have it.  I know because we asked, we would have been happy to have someone else do the majority of the work, and in fact it just wasn't done.  So this is meant to be a resource, it's not meant to be a tool to advocate any particular steps forward, because I think there are just a variety of options available to us.  It does, however, shed light on what those options might be.

With that, I think I will turn to Patrick, you're next.  Thank you very much.

Patrick Clawson:  Thank you, Dani.  So, as a macroeconomist and a former IMF and World Bank staffer, my job is to paint something of the economic context.  Why is Iran vulnerable to economic pressure right now, and, in particular, why is Iran vulnerable to pressure about financial inflows into the country?  Now, by the way, my remarks today are almost entirely based on the most recent and excellent report about the Iranian economy issued by the IMF in March this year.  It is a wonderful source of information, and as with many IMF reports, it’s written to be totally impenetrable, so that it will not embarrass the Islamic Republic too much.  So the conclusions I'm drawing from the data are my own.  I'd be shocked if they weren't those of the authors, but that's my projection.

It would seem strange for us to be saying that Iran is vulnerable to foreign economic pressure, because, in case you haven't noticed, the price of oil is kind of high.  And indeed the IMF says that Iran this year will earn from oil export some $58 billion dollars, which is $21 billion dollars higher than they earned three years ago.  So it would seem that Iran should be rolling in money -- twenty-one billion dollars higher than what they had three years ago. 

But in fact, that is not the case.  In fact, as the IMF reports, Iran last year ran a budget deficit, and will run another budget deficit this year. Well, how can that be for a country which exports $58 billion dollars worth of oil?  The answer is that Iran spends one quarter of its GDP on subsidies.  Actually, the IMF puts it, total subsidies are estimated at over twenty-five percent of GDP.  So we don't know how much over twenty-five percent of GDP.  By the way, they say this year's GDP is $248 billion, a quarter of that, if you do the math, is $62 billion dollars. 

Iran spends more on subsidies than it earns from oil and gas exports.  That's impressive.  And most of those subsidies are on energy products, the absurd price that they charge for gasoline and diesel fuel.  I'm impressed by the current debate in Iran as to whether or not to raise the price of diesel fuel to a shocking level of eleven cents a gallon.  This would be a tripling of the price, and is going to be resisted.  And the proposals, in fact, are to ration gasoline.  Well, it's supposed to start in twelve days.  Fat chance. 

The fact is that the Iranian government is very tight on money.  And that is the reason why the Iranian government has not been able to pay teachers, who make up more than half of civil servants, the promised pay raises for the last few years.  So the point that this year, the annual demonstration by teachers got to be very nasty, and the Teacher's Union members faced arrests in numerous cities around Iran.  So the teachers have not been given the raises they were promised, and in some cases, they have not been paid their salaries on time.  The government has had to do considerable contortions in order to pay the end-of-year bonuses that are due each year before the spring Norouz Festival. 

And the IMF in its delicate and understated way says that the fiscal situation will be broadly in line with the sustainable pact over the medium term.  In other words, Iran’s sort of okay if the price of oil is at sixty-five dollars a barrel or higher.  Hint, it's below that now.  And I don't think it's going up, that's my personal forecast, and Iran is going to need that kind of money for the medium term. 

Now, with that kind of money, what can Iran do?  With that kind of sixty-five-dollar-a-barrel oil, if they're lucky enough to have it over the next few years, Iran will have modest growth, but no more than modest growth, this year five percent falling to four percent to a few years.  This year's IMF report left out a line which is in last year's IMF report which is what will that mean for the unemployment rate?  Last year's IMF Report said that unemployment's going to rise every year for the foreseeable future, and by the way, this year they've adjusted the expected growth rates downwards from what they expected last year.  Unemployment is an explosive issue at the core of why Ahmadinejad was able to win.  The IMF says it's going up.

Well, what is the government response to this?  The government response to this is to introduce more and more distortions into the economy.  Ahmadinejad's genius ideas for how to solve the country's economic problems are to introduce more extensive price freezes and to reduce prices of items, which only exacerbates the problems.  I mean, we have often talked about the vulnerability that Iran faces because it doesn't produce enough gasoline, and has to import gasoline. 

Well, why doesn't it produce enough gasoline?  Well, as the head of the National Refining Company says, "Why should I make gas when I have to sell it so cheap?  I lose money on every gallon I sell".  And so, sure enough, he is not interested in putting money into upgrading the refineries because it's only a guaranteed loser.  He loses off everything he sells.  Why is he going to build more?  He doesn't make it up in the volume.  And indeed, when we come to Iranians, we all know that Iran is a country with a very vibrant, bizarre culture, and lots of very active people. 

But, as the IMF Report states it bluntly in its opening description of the Iran’s economy, "Iran's economy is state-dominated.  The private sector's role in large scale economic activity remains negligible.”  That's an accurate description.  A very accurate description.  And that explains why, when Iran's oil money ends up in the hands of well-to-do individuals, they take it abroad.  I recently had the pleasure of visiting Dubai and taking a tour of all those apartments for sale, and I can tell you – lots of them -- they're not being sold to Emirates.  There are thousands of apartments being sold to people from Iran.

So, to sum up, Ahmadinejad is not going to be able to deliver on his promise to bring the oil wealth to the Iranian people.  That's what got him elected, and he is making, running around the country making promises to people.  Now, Khatami when he ran around the country making promises to people was smart enough to promise dialog of civilizations.  If you live off in some little town, you don't know if it's happening or not.  Ahmadinejad shows up, and he's promising a swimming pool.  Well, you're going to know if that swimming pool was built.  And guess what?  It’s not going to be built.  And this is not going to be good for Ahmadinejad in the medium term. 

So I'm describing a situation in which the Iranian economy is going to face serious problems and Ahmadinejad is going to get blamed for them.  I think we ought, in that situation, we ought to take credit for the country's economic problems.  The art of politics often consists of figuring out how to take credit for the sun rising in the east.  We can tell that the sun's going to rise in the east, so let's predict that it's going to rise in the east, and say that we are the ones making it happen.  And indeed, we are in a very good situation with the Iranian people, who are quite prepared to believe that it's Ahmadinejad's outrageous comments, and his isolation in the country, which is responsible for their economic troubles.  Okay, let's pile it on.

A. William Samii:  Excellent.  Thank you, Patrick, thank you Dany, and thank you Omeed, and thanks to all of you for feigning interest in what I have to say.  Basically, I think this is actually a very useful exercise, just to understand the involvement of other countries in the Iranian economy, but what I'm going to talk about today is the commercial activities of the Islamic Revolution Guard Corps, and their approximately, it's estimated that there are about a hundred enterprises associated with the IRGC.

I'm probably going to focus on just one major one during my comments, but what I think is valuable from my perspective, anyway, the IRGC is an institution which commercially, actually benefits from the country's economic isolation.  So it would be helpful to identify means by which the IRGC itself can be affected and its economic interests can be affected.  So anyway, Constitutional Article 150 of the Iranian Constitution says that the Guards Corps is to be maintained so that it may continue in its role of guarding the revolution and its achievements.  This is in contrast with the conventional military of Iran, which is tasked with protecting the borders and the things that it normally does. 

Now, the IRGC Commander, Yahya Rahim Safavi, announced in a speech at the end of April, sort of a typical statement from an Iranian Military Commander, he said the IRGC is, "The Guard and protector of the revolution and its achievements," and like I say, that's pretty much boilerplate for these officials.  Then he says something which struck me as incongruous.  He said, "The IRGC is ready to provide engineering services and support for the administration."  He went on to say, "Today, the IRGC is very strong in engineering, supply, and logistics, and without obstructing the business of private contractors, it is ready to provide services at the national level." 

Now, Rahim Savafi on that day was speaking at the Khatam-ol-Anbia base in Chabahar [indiscernible] which is on the Persian Gulf in Sistan va Baluchistan Province in the southeast.  Now, Khatam-ol-Anbia is sort of the Corps of Engineers of the IRGC.  And it's now gotten involved increasingly since the end of the Iran/Iraq war in commercial activities. 

Again, this might strike you as a little odd, but according to Constitutional Article 147, "The government has to use the Armed Forces in construction and reconstruction during peacetime."  In other words, find something for the soldiers to do, and find something for military assets to be a productive use for the military assets.  So, the Khatam-ol-Anbia was created, it's also known as Ghorb, in fact, Omeed has written a very good forthcoming article I think in the Weekly Standard, ok Daily Standard on Khatam-ol-Anbia.  But you all want to read that and renew your subscriptions.

Now, the IRGC itself reportedly has a hundred and twenty five thousand members.  The Khatam-ol-Anbia has forty thousand members.  In other words, one-third, approximately, of the Rev Guards are involved with construction activities.  And this doesn't even include members of the Basij, or contractors who are working for the Khatam-ol-Anbia.  They also publish a popular magazine called Road and Tunnel Magazine, which you may want to check out on the Web.  My subscription ran out. 

Okay, now, why is this an issue?  In June of 2006, Khatam-ol-Anbia was awarded a no-tender contract worth roughly three billion dollars by the petroleum industry to develop two phases of the South Pars gas field.  That same month, Khatam-ol-Anbia signed a contract to expand the Tehran Metro Line, and another contract to build a gas pipeline from an Iranian gas field to the Pakistani border.  The total value of these contracts is approximately seven billion dollars.  That's seven billion bucks in one month.  That's pretty good business, especially if one of them is a no-bid contract. 

Members of the Iranian Legislature actually protested this, they objected and asked in an open letter, "Does the daily increasing presence of the IRGC in economic projects not inflict damage on the actual duty of this hallowed institution, that is, maintaining military readiness?"  The legislators also asked if the wording of such contracts would not be construed as creating an IRGC monopoly, and the exploitation of political privileges to pursue their economic interests. 

Now, there has been talk, or there was talk during the Khatami administration from '97 to 2005 of a so-called oil mafia.  And when Mr. Ahmadinejad ran on this sort of clean government, no corruption platform, one of the things that he talked about was getting rid of the oil mafia.  Who is the oil mafia?  Hashemi Rafsanjani and his associates, by implication.  I, of course, have no knowledge of this.  But we can assume that's who is meant by this. 

So there's this criticism of a sort of mafia-like institution, a military institution turning into a mafia-like institution.  In defense or in rejection of these accusations, Brigadier General Abdol-Reza Abed, who is commander of the Khatam-ol-Anbia base, said that private sector contracts have as good of chance of winning contracts as his organization does.  He initially said that his company has to submit a tender like any other company, and this is a legally regulated process.  And this General goes on to say that, you know in fact, sometimes Khatam-ol-Anbia has actually lost, it's been the, you know, fifth- or sixth-place bidder. 

So, trying to make it sound like everything is quite equal.  Then it was pointed out to him that there was no competition in the South Pars deal.  And his response was pretty good.  It's typical, I think.  "That’s because they've seen our work, we must have done something for them to be willing to award us the contract without bidding.” 

And then, if this isn't curious enough, most of the bidding, or excuse me, most of the funding for the project that they’d won without any tender came from the foreign exchange reserve.  So you know, this is not, I mean somehow they're getting all this money in sort of a windfall, and they're going to -- actually Khatam-ol-Anbia contracts out the work, it doesn't do much of it itself. 

Now, there've been other incidents involving Khatam-ol-Anbia, and I'll just touch on these.  One was involving, I believe it was last October, when a Romanian oil rig, that was in the Persian Gulf, was purchased by a company called Oriental Oil, which was owned by people associated with Hashemi Rafsanjani.  Very, sort of contractually twisted and legally twisted ways.  Eventually, Oriental Oil went over to the ownership of Khatam-ol-Anbia.  As the Romanian owners of this oil rig tried to get it back, because they hadn't been paid in a while, suddenly the IRGC Navy showed up, boarded the oil rig and took it over. 

So it shows that the Khatam-ol-Anbia, despite its protestations of being a purely commercial enterprise, is willing to work with the revolutionary guards to sort of, or the armed aspects of the revolutionary guards to pursue its economic objectives.  There are several other deals involving the IRGC, for example, with the Imam Khomeini International airport, and these are the open issues -- the things that we all know about.  But the IRGC is also connected with some of the parastatal foundations in the country, it's been connected with the smuggling of oil from Iraq during the sanctions era, and there have also have been allegations of IRGC involvement with narcotics smuggling, which I'm sure would be denied vehemently.  Then there are also political aspects of the IRGC's involvement in the country's affairs, and if you have questions about that, I will field them at that time.  Thank you.

Moderator:  Great, thank you very much.  We have plenty of time for a question and answer period.  But before we entertain your questions, I'd like to lay out four ground rules, the first of which -- wait for the mike to get to you, I'll call on you.  Second of which, please identify yourself and your affiliation, and last, please ask one question and only one question.  Oh, fourth had A and B, or third had A and B, sorry. So, any questions?  Yes, ma'am.

Roberta Steinman:  Thank you, I'm R. G. Steinman with the Government Accountability Office, we're working on a report about Iran sanctions, I have a question about how you define transactions.

Danielle Pletka:  Omeed punts this one to me.  That's a really good question, and in fact, I was talking to Patrick about it before we started.  Omeed and I have talked about this a great deal.  It’s very, It's a very generic term.  And the main reason that we used a generic term is because the word "deal" didn't sound quite right.  Right, it's not always financing, it's not always underwriting, it's not always a direct business-to-business transaction.  In fact, what you have are just a whole variety of business arrangements.  As Patrick very nicely said, frameworks.

You have a lot of apples and oranges in here.  You have transactions where there's clearly going to be, where there’s clearly a service that is going to be provided for cash.  In addition, you have transactions in which there is a service that is provided in exchange for repayment by gas shipments, for example.  And what we put there would be the value, the stated value of the transaction.  In addition, as I qualified in my presentation, when you talk about a line of credit, there are a couple of different issues there. 

First of all, you can have a line of credit and the beneficiary may not in fact use that entire line of credit.  Second, many of these lines of credit are financing from consortia.  So, how much is with Credit Agricole Indosuez and how much is with a bank in Japan or another bank?  None of that was clear.  In addition, as a subset of that problem, some of them are export credit underwriting for other lines of credit, and all I can tell you is that where it was possible to find additional information and to drill down into a particular story, we did so.  Where we were able to contact a particular bank we did so.  We did not get a lot of elucidation on the details of particular transactions.  So, this is what has been reported. 

And it wasn't just, you know, it wasn’t just something in sort of passing, it was a lot of, you'll see most of our sources are listed in the interactive.  A lot of trade press, Middle East Economic Survey, Middle East Economic Digest, Translated Press, so it really is a bald retelling of what was reported.  Does that help? Am I missing anything?

Moderator: Just one other thing -- what was reported, and we're talking about transactions, and we're talking about major transactions.  And this is something that I did fail to mention earlier but I'd like to talk about now.  Everything that we've recorded in this database is no less than ten million dollars.  Most of them, however, extend to at least half a billion or more. 

So, when we're talking about major transactions, we're not talking about, as Dany had mentioned earlier, Iran buying pencils worth a thousand, I’m sorry a billion dollars.  We're talking about, for example, OMV's recent agreement with the Islamic Republic to fulfill needs for its gas industry.  That was worth eighteen billion dollars.  Or, Total and Repsol’s agreement with the Islamic Republic to fulfill another aspect of Iran's liquid natural gas needs which was totaled to ten billion dollars.  We're not talking about little deals, we're talking about big transactions that make the press.  Yes, sir, back there.

Chris Schaffer:  Chris Schaffer, C&O Resources:  Dr. Clawson, could you maybe put Iran's current economic problems in some historical context over the last couple decades, as someone who has been following this for a long time?  Are these problems a lot more pronounced today?  If we had picked up an IMF report, say, a decade ago, would it have sounded a lot different than today’s report?

Patrick Clawson:  Right after the Iran/Iraq war, Iran went on a borrowing binge and then used the money poorly so that it hit a debt crisis about 1992/'93.  And that was just about the same time the United States was turning up the heat on Iran because of Iranian opposition to the Arab-Israeli peace process and because the US intelligence quite correctly picked up indications Iran had started up its nuclear program. 

So, Iran ran into a very serious debt crisis in that period of time, the early-to-mid 1990s, and it had to really yank back its belt in order to pay back the debt.  And unfortunately for Iran, that happened about the same time the price of oil was quite low.  So, they went through a difficult spot for a number of difficult years.  But, by the late 1990s, the debt was being pretty well repaid, and oil prices started to pick up, and Iran was in a good situation to take off. 

And what they did with the additional revenue that became available and the additional space because of having repaid the loans is adopt under Khatami, President from 1997 to 2005, was to twiddle their thumbs, not do anything substantial to reform the economy, introduce a few more distortions here and there, and a few extra subsidies, and managed to blow the opportunity.  Along comes Ahmadinejad and they get this windfall, coincidentally of oil money, and they're blowing that. 

So, for the last decade, the tone of IMF and World Bank Reports is to say, "Hey, guys, you've got a real opportunity here to clean up your act and grow.  And you ought to do this, because you've got this burgeoning youth bulge that's going to be joining the labor market, and you're going to have a real unemployment crisis unless you do something about it.  But your current situation ain't so bad.” 

And that's more or less the situation we're at now.  The current situation's not so bad -- the Iranian economy's okay, but that's a stunning fact, because there's so much money rolling in with the high oil revenue that the Iranian economy ought to be a whole lot better than just okay.  It's not.  And they're not saving for what may well be a rainy day if the price of oil goes down.

I want to make it clear, Iran is not in economic crisis.  Iran's economic situation is really quite decent, but that is a stunning indictment of Iran's economic policies, because they should be having a real boom.

Warren Nelson:  Warren Nelson from the Iran Times (International) here in town.  That earlier question.  I want to know if you've distinguished between contracts, MOUs, heads of agreement, and other things.  You mentioned the OMV eighteen billion dollar deal, but that's only a heads of agreement.  There's no money invested.  China has signed a contract over a year ago, India about three years ago signed, excuse me, their MOUs, neither one of those has materialized.  Nothing has materialized on the investments in the last couple of years in South Pars.  Have you distinguished, or are your dollar amounts in your tables recording MOUs and heads of agreement when they're signed rather than a contractual agreement?

Danielle Pletka:  It's a terrific question.  When we first put this together, what we tried to do was use, for lack of a better expression, fonts and shading, to make clear when deals had been consummated, if I may use that phrase.  And it became very quickly clear to us that in fact it was very hard to find out that in fact when things go well with Iran, which they don't always do, people are not quick to advertise it, and when things go badly, no one wants to write off the possibility of some future opportunity at South Pars or some other -- or an L&G facility or anything else, and so they don't advertise that, either. 

Patrick once used a very felicitous phrase with me, to describe doing business with Iran, that lots of people will agree to sell you their grandmother, only the Iranians won't deliver.  And I think that that's right, and so we wanted to try to reflect that in here.  But it became very difficult, and so what we did, and I hope what we've also made clear in the introduction, is that these are all potential agreements. 

This is the value.  In fact, the company was perfectly willing to put this amount in.  The country where the company was headquartered was perfectly willing to see a company headquartered in that country put that amount of money in, and the bank that underwrote it was perfectly willing to finance it, even understanding what risk might be entailed, what the IMF might suggest, or anything else. 

So again, lots and lots of question marks about whether things came through.  But I think an important obverse to that is, that there's a lot of information that also isn't in there.  In other words, as Omeed suggested, the Iranians are also buying desks and pencils and toilet paper.  The things that all countries procure, some are made at home, some are exported from overseas, and that most of those transactions aren't in here.  So this isn't intended to be the global Iranian trading activity, we simply weren't able to get access to it.  What this really was meant to reflect was the amount of business that certainly it is possible for Iran to do, that Iran may well be doing, and there's probably a lot more out there that we don't know about. 

But I think that your question is important, and I hope that we made that caveat very clear.

Moderator:  Thank you.  The lady over there.

Kerry Anderson:  Kay Anderson with Oxford Analytical -- I was just wondering, if sanctions are really going to work to change Iranian behavior, do you have to have the Asian companies, in particular the Chinese ones, on board?  And if so, is that possible, especially given that some of them will have a somewhat different risk assessment than a lot of western companies might?

Patrick Clawson:  Look, so far, the main sanctions that have been adopted by the United Nations Security Council in Resolutions 1737 and 1747 are designed to stop Iran's acquisition of dual-use technologies for nuclear and ballistic missile programs.  That is something which Asian countries had been quite prepared to do.  In fact, India and Japan, to my knowledge, and I believe a number of other Asian countries, have already issued quite stringent regulations implementing those security council resolutions. 

So, this is not symbolic as it's often reported.  That's not accurate.  It's targeted.  And, since many people in the business press have argued for targeted sanctions, when the Security Council adopts them, I think it's rather surprising that they then describe this as only being symbolic.  No, guys, it's targeted -- that's what you said you wanted.  That's what we're doing. 

And I think it's a very important target, because if we can slow down Iran's nuclear program, by slowing down their access to things like Marajan [sounds like] and Steel, then that gives us more time to work out diplomatic solutions to the problem, so I think it can have a considerable impact.  At the end of the day, is this going to be what leads Iran to decide whether or not to continue the program? 

Well, I think it is going to be a factor that goes into Iranian thinking.  It's probably not going to be enough, I mean, the study I wrote about forcing hard choices on Iran which you can find in our Website, I argue that economic pressure is not enough, we have to combine it with political pressure and security pressure.  But I'm trained as an economist, I believe in marginalism, and every little bit helps.  So, I do think that this can, in fact, make a difference. 

Similarly, what the, to the extent to which people in the Iranian business community feel that it’s harder and harder to get financing for deals, it's harder and harder to carry out ordinary business transactions abroad, they're going to get more and more unhappy with what the government's doing about the nuclear program.  And that's going to be a factor in decision-making. 

Now, as Bill pointed out very correctly, we got a problem, which is we've got to simultaneously move up against the Rev Guards, because if we just crack down on general businesses, then what may happen is the Rev Guards see an opportunity to make a profit, and so we have to make sure that we take special actions designed to shut down the Rev Guard's stream of income.  And as we saw with the North Korean case, that can be very effective if you go after the leadership's personal income.  And I think it's very important that we reach out and say to the Iranian businessmen, let us know about the Rev Guards who are trying to horn into your business, and we'll try and shut them down.

Moderator:  Thank you, in the back over there?

Faysal Souissi:  Thank you, my name is Faysal Souissi, I'm from the Embassy of Tunisia.  If you allow me, I noticed from the map that you displayed, only seven countries are Muslim countries, namely Tunisia and the six Gulf countries which are business partners of Iran. 

Now, knowing that Iran is an Islamic Republic, and it is of course submitted to specific Islamic rules, which are not necessarily the same as applied at the international level, Iran normally as an Islamic Republic has not submitted to the international monetary and financial laws that are applied the world over.  And they are submitted to the Islamic rules, which forbid the use of the profit and the banking service commissions.  To what extent do you think that this aspect inhibits or enhances international transactions with the non-Muslim countries?

Patrick Clawson:  Look, Iran's approach towards Islamic finance is well demonstrated by what they've done in the banking system, which is that there are serious arguments to be made, in fact, serious economic arguments to be made about why it might be appropriate to go to an Islamic banking system in which risk is shared.  Islam is not in any way hostile to making money; it is hostile however to what it perceives as making money without putting funds at risk.  But that's not what the Iranians did. 

What they adopted was an extraordinarily hypocritical method of re-baptizing the interest rate as the rate of return.  And this corresponds to what the Iranians do in many spheres.  I mean, I particularly love the Islamic lottery that the Iranian government runs.  Games of chance, of course, are forbidden in Islam, and so therefore, when you buy a lottery ticket in Iran, you have to answer a question and then the prize is awarded at random to somebody who answers the question correctly.  And the question tends to be things like, "What's the capital of Iran?"  "Who is the prophet of Islam?"  And a surprisingly high percentage of ticket purchasers actually answer the question correctly. 

Now, one might think that that's somewhat hypocritical.  But that well describes the Iranian approach towards many of the things that they do with restrictions of Islam that they find inconvenient.

Moderator:  Yes, sir.

Mike Miyazawa:  Mike Miyazawa:  In the Middle East, there are many other oil-producing countries where the government continues to give huge subsidies to gas and food, where the government continues to run huge budget deficit year after year, where the bulk of the economy is controlled by state-owned enterprises, and the capital flight is norm. So, Iran is no exception among those oil-producing countries in the Middle East.  My question is, how does the state of Iran's economy compare with other oil-producing countries in the region?

Patrick Clawson:  Iran is the only oil-producing country in the region running a budget deficit.  The table in the IMF report shows that Iran's oil prices are much lower than that of any other oil-producing country.  And those are two big facts about them.  And indeed, thanks to the modest steps that the Iraqis have taken, it's the case now that Iran has by far and away the largest subsidies relative to GDP in the region.  The Iraqis used to be number one on that category, but they have in fact fallen behind the Iranians.  And Iraq is reducing its subsidies; Iran is increasing them. 

So, I think it's by any measure, by any measure Iran's economic situation's the worst of the oil-producing countries. I'm talking about the major ones.  OPEC members, not the Yemens and Sudans of the world.  Certainly, Iran is the only one for which the IMF's medium-term forecast it's going to run a current account deficit within four years.

Moderator:  Thank you.  Yes, sir.

Ken Timmerman:  Ken Timmerman from NewsMax:  From having done this kind of work before, both for Congress and privately, I must say you've done a great job, Omeed, and it’s really -- this is a terrific resource, and it's something I hope all of us here will use, and will turn to, and it's more than just heads of agreement.  This shows the intentions of companies, and of Iran to do business together, so it's an important statement that you have made company-by-company of their intentions, and as you said, Dany, it gives people policy options. 

My question is, I'm going to violate your statement, your condition earlier.  I want to ask Bill about the IRGC, and have you been looking at IRGC companies involved in procurement in Dubai, in particular, but also in Europe, because there are quite a number of them that are doing that, and Pat, I wanted to ask you very quickly, what do you know about Iranian purchases of gold on the open market as a way of liquidating foreign currency holdings so they cannot be seized by the US and others?  Thank you.

A. William Samii:  Thanks, Ken, actually, that's a very good point, there are a lot of these smaller IRGC-affiliated companies based in the Persian Gulf states also in Dubai, or also in Europe, I guess Dubai is in the Persian Gulf, and they are used basically as cutouts for buying dual-use goods, for buying military goods, or just for doing smuggling operations and so on, but it wasn't really something that I worked on.  I think that's the kind of issue where you really have to be in that location to do the right kind of research, whereas the work I was doing on sort of bigger things, like Khatam-ol-Anbia and some of the other companies, can be done just through open source research.

Patrick Clawson:  Ken, I don't know, but I would be surprised about gold purchases.  The Iranian Central Bank buys a lot of gold on the open market because they issue these coins that are very widely used by ordinary Iranians, and in fact there are a lot of transactions -- like marriage contracts are almost always written in terms of how many of these gold coins and tradition people.  In fact, lots of modern middle class people as well like to actually get the gold coins and there are lots of places that have handed out actual gold coins at Norouz -- so they sell a lot of these gold coins.  And so, Iran Central Bank buys a lot of gold for these gold coins.

Danielle Pletka:  Ken, I wanted to take a second, even though you didn't address that to me.  I think that everything we've said today would lead you, would lead people to believe that in fact Iranians aren't such good planners, that in fact they would be hoarding money away in gold reserves.  But some of Omeed's research was particularly interesting in that regard, because I think that the Iranians have cottoned on to the fact that the international community and the United States in particular is looking at some of these issues and they're trying to figure out how they can best leverage what is attractive about them to insure that in fact, companies remain engaged and interested, and countries decide to stay in. 

And so, as Omeed pointed out at the outset, what you see is that while the number of transactions go down, the value of the transactions go up.  Now again, these may not ultimately be consummated, but certainly the Iranians are willing to dangle pretty large deals in front of the international community.  The other thing that Omeed said to me just a couple of days ago, which I also think is of great interest is the fact that the Iranians just announced that they're going to open up two foreign bank branches, correct?

Moderator:  Yes, it's proposed legislation, it hasn't actually been passed into law yet.

Danielle Pletka:  And I think that that's another way for them to try and draw in outsiders in a way that makes it much more difficult.  This is exactly what you see the North Koreans doing on Banco Delta Asia, and I think that has a huge number of lessons for rogue regimes, because what the North Koreans are doing is saying to the United States government, "No, it's not okay that you give us the money from Banco Delta Asia, we don't just want the money.  Not only do we want the money, but we want the money from a legitimate bank.  Not only do we want it from a legitimate bank, but we want to actually be reinstated in the International Banking System so that we can use all of these banks as if we were an honest, above-board player in the world financial system." 

And I think that the Iranians have learned a lot from that.  The North Koreans are smart, the Iranians are smarter.

Patrick Clawson:  Dany, I’m not so sure about that.  I mean, well, look, Steve Perles was able to seize $600,000,000 dollars in an Italian bank account last year.  He doesn’t stay frozen too long because of the way liquid proceedings go, but you might think, after that, that the Iranians would move their money out of Italian banks.  No.  A couple months ago, he did it again.  And that money is still frozen.  And this time he thinks he’s going to get it. 

So, in fact, these several billion dollars in punitive damages that have been levied against Iran in these court cases that I was an expert witness in, and got paid nicely for, thank you, it was really – what a scam.  I had to stand up in a court and swear that Iran supports Hezbollah.  That was really – for that they need to pay me?  But anyway, the Iranians have not been particularly swift about moving their money out of banks where it’s in danger of getting seized.

Moderator:  Thank you.  Yes, all the way in the back.

Tom Omestad:  Hello.  I’m Tom Omestad with the US News and World Report Magazine.  You know, in past conversations with European diplomats and European analysts, discussing recent US pressure tactics on Iran, we’re led to believe, broadly, that this has been efficacious as far as the Bush administration would be concerned that access to financing, the interest of European banks, even the consideration of particular potential investment deals, all have suffered, from the Iranian standpoint, moved in the direction that the Bush administration would prefer. 

So I’m interested in your findings, whether they bear that out, or directly disagree with that, and suggest, rather, that investment, at least in terms of overall levels, is continuing apace or even increasing.  And secondly, whether you’re able to draw any conclusions about the effectiveness from the administration’s point of view, in its efforts to pressure European and Asian commercial entities to restrict or reconsider their potential business dealings with Iran.  Thank you.

Danielle Pletka:  I’d like to hear what my colleagues have to say about this as well, but I think one of the points I’ve highlighted already once, which is that I think that you see that there has been, at least again by the indicators that we have available to us, a slowdown in the number of transactions, that that seems to be going down.  And if you look, again – now, it may be that companies are more leery of the information getting out, and, in fact, there’s the same amount of business going on.  But certainly in terms of what we were able to find, we have numbers – the volume of transactions is going down while the dollar value may be going up. 

In terms of the Bush administration, I think that there are two important points here.  The first is that I think that their conversations, particularly the Treasury Department’s conversation – I know Hank Paulson and Stuart Levey have been traveling around the world on this – have been not ineffective.  I think that where you see government banks, export credit agencies are pulling back.  There’s no doubt about that.  I’ve certainly had Japanese officials complain to me that they don’t want to hear any more pressure.  I think that they are feeling the pressure.  I think they are looking at Iran differently, and, frankly, Ahmadinejad is a huge help in that regard.  He’s not a smooth talker, he doesn’t have a dialogue of civilizations, and he’s really kind of a creepy guy, and that puts the best of people off.  And that is an important factor for a lot of considerations. 

So in part, I think people are looking twice.  They are thinking about it.  Governments are ratcheting back.  You saw COFACE, the French export credit agencies, reporting on Iran has downgraded them.  All of those are important, but at the end of the day, what is effective is when everybody acts together.  There should be no doubt about that, and I think even those of us who are strong proponents of unilateralism or coalitions of the willing, understand that the ideal remains multilateralism, when you can have an effective set of limitations that apply to everybody, and don’t allow opportunists like Russia or China or even South Korea to squeeze around everybody else.  Then it does make more of a difference. 

I think we have seen an effect, and certainly inside Iran, and here Bill and Pat can tell you much better than I can.  Inside Iran, you see a lot of anger at Ahmadinejad by others who suggest that this is not the right way to do business.  I think that is a sign of some effect as well.  So a half and half answer, but perhaps they have –

Patrick Clawson:  Well, I would say that part of the reason the United States has had some effect is because we’ve had a focused approach, and the focused approach has been on bank financing.  It has not been on investment, and it has not been on trade.  It’s been, instead, on financial transactions.  Not just bank financing, excuse me.  Financial transactions in general.  It has not been on investment and it has not been on commerce. 

And what we have done is taken advantage of the fact that these financial transactions often involve US dollars.  And we said, “Hey, don’t do that.”  So we have found a way in which we had some legal right to say that we’ve got a say here, and we’ve been very aggressive in pushing that, and the Europeans have been complicit with this in that sometime, they would in other circumstances might object, but they didn’t in this case, because we are pushing the edges of what constitutes extraterritorial imposition of our rules, but we have couched it all in terms of why we have a legal reason to object. 

And I’m not aware, at all, of any effort by the United States government to discourage trade generally with Iran, and, in fact, I would criticize the administration for not doing enough to implement the restrictions in Security Council Resolution 1737 and 1747.  I think we should be more active sharing information with other governments about Iranian efforts to acquire some of those materials.  And I’m also not aware of US government efforts to discourage investment in Iran.  Indeed, there’s a lot of noise up on the Hill, trying to get the administration more active on that front. 

And there, it’ll be interesting to see what happens.  But at least my reading of the discussions are if the Security Council wants to move in the direction of additional sanctions on Iran that there would be some serious consideration to prohibiting future investments in Iran’s oil and gas industry.  This is, after all, something which has been broached by the European three, and in the negotiations about Security Council resolutions, and I wouldn’t be surprised if we were to see something like that.  But anyway, the US has had a focused approach, and we have – the US government has been quite careful to find always a legal hook for its actions.

A. William Samii:  I was just going to add building on something you said, that Ahmadinejad has alienated a lot of people in the international community with his ineptitude.  And I think that – you know, when we talk about, or when we read about the opposition that’s growing within the Iranian political lead against him, it’s often portrayed as a willingness, perhaps, to back off on the nuclear issue, perhaps to give some ground to western and European international concerns.  But the reality of it is that a lot of these people, Khatami, Hasan Rohani, and Rohani’s associates and Hashemi Rafsanjani’s associates in the Expediency Council, the resentment is, or the anger stems from the fact that Ahmadinejad has effectively reversed a lot of the diplomatic gains they’ve made over the last eighteen to fifteen years.

And there is a resentment over that.  It has an adverse impact on them commercially, and also that these are people who grew up in a generation during a war when they realized that the country was harmed and fought from a very weak position because of its isolation, it alienated everybody, it was isolated, and that’s why it had to basically surrender to the Iraqis.  And I think there’s concern with the opposition to Ahmadinejad that they might be backed into this kind of corner again, and that’s why there’s opposition to what he’s doing now.

Danielle Pletka:  I want to make sure you don’t walk away.  What Patrick said is right, that the US government has been very focused.  But I do think – and I don’t want to characterize this as a pincer movement, because I don’t think it’s quite that effective.  But I do think that the Congress and the states are interested in companies, and in investment in Iran.  The US government has absolutely been focused solely on banks.  And I mean when we’ve shown this to them, they’ve said exactly that. 

This is terrific -- we’re really focused in on financial transactions.  But I do think that the states and the Congress are particularly interested in the divestment.  And, again, it’s a lot easier to bully people who are doing business with Iran than it is to bully Iran it turns out.

Moderator:  Yes, right here in the front.

Mario Loyola:  Mario Loyola, Foundation for the Defense of Democracies.  My question is for Miss Pletka and Mr. Samii.  One of the biggest obstacles to understanding Iranian behavior is understanding their political structure.  Could you, both of you, please, shed a little bit of light on what the relationship is between sort of normal civilian typical government of Iran, the kind of government that every other state has, and the parallel religious authority, and the IRGC as a power center, and who controls what in terms of economic policy vs. foreign relations, military strategy, and that sort of thing?  And is it really useful to try to shape US policy around the supposed conflict between reformers and hardliners, rather than a much more complicated conflict of interests within the regime? 

A. William Samii:  Basically, how many hours do you have?  In terms of characterizing the utility of US foreign policy, I’m really not – I’m not the person to do that.  It’s not within my remit.  However, I can tell you the way the Iranian government works.  I mean it’s pretty easy to understand, really.  At the top you’ve got the Supreme Leader who was appointed back in 1989, when Ayatolla Ruholla Khomeini died.  And the supreme leader is basically the guy who has the final say on everything.  However, he somehow has to consult with the Expediency Council, which is also made up of individuals he has appointed.  And it’s run by a former president who’s been there since 1989.  That’s the advisory body in terms of foreign policy, and let me just go to that side first. 

In terms of foreign policy, the top institution is the Supreme National Security Council.  The chairman of that council is the president.  It’s actually run by the secretary, who is sort of appointed by the president, but that appointment has to be approved by the Supreme Leader.  The Supreme National Security Council has -- for example, it’s made up of the Foreign Minister, the Minister of Intelligence and Security, head of the Rev Guards, head of the armed force’s general staff -- I think two representatives of the Supreme Leader.  So, effectively, it’s the Supreme Leader who runs that, too.  Or, if he doesn’t run it, he has the final say over its decisions.  Then you’ve got the president who appoints the foreign minister.  But all his cabinet appointments have to be approved by the legislature and then signed off on by the Supreme Leader. 

In terms of domestic policy, you’ve got the usual cabinet ministries, and so on.  You’ve got a legislature that is popularly elected.  However, candidates for the legislature have to be approved by the Guardians Council, six members of which are clerics appointed by the Supreme Leader.  The other six are lawyers who are selected by the head of the judiciary, approved by the legislature, but the head of the judiciary is, in fact, a cleric appointed by the Supreme Leader.

Danielle Pletka:  You asked.

A. William Samii:  Yes.  Basically.

Patrick Clawson:  Can I get comment about this?  Look, there are lots of countries in the Middle East which have government structures [indiscernible] Byzantine.  But nobody particularly cares about the recent Syrian parliamentary elections because we all know how much the Syrian parliament really matters.  Now, the difference in Iran of this divided and Byzantine government structure is that there actually is some power in these various institutions.  But, at the end of the day, there’s also a guy who’s the wizard behind the curtain who calls the shots.  And that’s the supreme leader. 

But the idea of a divided and Byzantine government is really rather common in the Middle East.  The difference is that in this case, in Iran, all these different institutions actually do have a little bit of power.  [indiscernible]

Ahmadinejad has relatively limited impact over the nuclear policy.  However, he has much more say over the government budget, and over price controls, and over some other aspects of economic policy.  At the end of the day, the economy, however, is primarily in the hands of revolutionary foundations.  That’s when the IMF calls it state-dominated.  That’s what they really mean, which Ahmadinejad has very limited control over.  But he has a lot of say over the government budget.

A. William Samii:  Just – not finished yet.  But no, I mean, but one can drone on about the structure of the government, and it looks really well organized, and it’s all very impressive, but it’s like Patrick says.  There are few unelected decision-makers involved.  They’re the ones who have the final say on things, and one sort of stakeholder in the whole government process is sometimes ignored -- is the actual public.  That public opinion – you know, it’s not an ideal democracy, by any means, but public opinion does matter, and it affects the decisions the leaders make.

Moderator:  Any other questions?  Yes.

Edwin Williamson:  Edwin Williamson, Sullivan and Cromwell.  This is slightly off the what – the main theme today, but you got into it.  Let me just ask.  Does the – have you done any work on the impact, on the role of the US dollar as the premier reserve currency and the US banking system, which is one of our true, you know, national crown jewels, of the use of these two levers in the enforcement of unilateral economic sanctions by the US?  For example, Syria has gotten – no longer keeps its reserves in US dollars.  I think about two thirds of oil sales are no longer done in US dollars.  We’re constantly seeing major transactions that are being done in – staying away from the US dollar because of the fear of future sanctions. 

Iran, surprisingly, still keeps its reserves in US dollars, I think probably because of the U-turn transaction.  I’m not sure that those banks that you refer to stopped as having stopped doing business with Iran have really stopped, or have stopped doing US dollar transactions with Iran.  So what is the impact of that?

Patrick Clawson:  You know, when I was in the IMF’s research department many, many years ago, and we used to do work on this, and it was really hard to find great advantages to the United States government from the fact that so much world trade is denominated in dollars, that the [indiscernible] that the US government earns off of this turns out to be remarkably small.  And it’s very hard, if you do a search of economic literature, to find much of – to find many economic studies that have been able to come to the conclusion that the people in stock exchanges, in trading positions, and many businessmen regard – it’s just so obvious, namely, that the dollar denomination of trade must be terribly advantageous to the United States. 

So I share that professional prejudice – that’s correct.  That’s exactly correct.  I challenge you to find a study in any major economic journal – [indiscernible] economic journal, finding much impact.  And I would just suggest, also, that in this particular case, that what the United States is doing is, without a doubt, pushing the envelope. 

But let me just suggest to you that if you think that when the Undersecretary of the Treasury, Stuart Levey, goes over and sees two Swiss banks, and tells them that they face a reputational risk if they continue to conduct transactions with Iran, do you think he’s not talked to the Swiss government about this?  Do you think that after he leaves, the Swiss banks don’t go talk to the Swiss government about this? 

Well, if you do, you’re entitled to your opinion.  Right?  I just don’t share it.  And I would just suggest that when those Swiss banks announce dramatic restrictions on the transactions and engagement with Iran, I doubt that this came as a surprise to the Swiss government.

Danielle Pletka:  I think that you’re onto an issue that really has a lot to do with perception, and let me just back Patrick up, and say that I’m not an economist, but AEI is loaded with them, and I’ve had exactly this conversation with them in the context not of the Middle East but of China, because, of course, a lot of our external debt is held – a significant amount of our external debt, and they all say the same thing, which is, “Your honor, so what?  The United States accrues no benefit from the fact that transactions are conducted in dollars, and, in fact, incurs very little risk from the fact that a lot of dollar holdings may be concentrated in a particular place.” 

I think countries have latched onto this.  As a symbolism, the South Koreans announced we’re going to be doing more business in euros, and I think it was when they were particularly annoyed at us over North Korea, and it surprises me that the Iranians are doing this, and continue to do business in dollars, because it, in fact, has become a pretext.  And what Patrick alluded to is exactly right, even by the Russians, which, to me, was quite fascinating. 

A pretext not to go forward with things, where the Iranians say, “Well, no, no.  We would rather not pay you in dollars” and their interlocutors say, “No, no, the contract specifies dollars.  Please pay us in dollars.”  And Iran says, “No, we’ll pay you in euros.”  And the contractor says, “No, no, we want it in dollars”. 

And the Iranian are, in fact, barred now from – banks are barred from doing these u-turn transactions.  It’s no longer permitted.  So those – no, not allowed.

Patrick Clawson:  Anybody who thinks that the dispute about Bush errors has to do with what currency there are payments being made in are entitled to their opinion–

Danielle Pletka:  That’s why I say – it’s become a pretext.  But I don’t – that it has any substantive meaning or value either to – certainly not to our own economy, and not to our financial system, and I think that our economists agree with that. 

Moderator:  Well, thank you very much for speaking today.  I’d like to thank all of you for attending today’s panel, and have a good day.

Danielle Pletka:  Wait.  No, no. Let me say thank you to Omeed again, to Rudy again, and to Jasmin, who is holding our microphone, who did a huge amount of research for this project, because it was very labor-intensive.  Now, thank you.

[End of audio]

[End of transcript]