American Enterprise Institute

July 26, 2007

[Edited transcript from audio tapes]

9:30 a.m.	Registration
9:45	Opening:	The Congress and Divestment
	Speaker:	Representative Brad Sherman (D-CA)
10:30		Panel I: Divestment and Its Policy Implications
	Panelists:	Patrick Clawson, Washington Institute for Near East Policy
		Ken Katzman, Congressional Research Service
		Danielle Pletka, AEI
	Moderator:	Omeed Jafari, AEI
Noon		Luncheon and Keynote Address
	Introduction:	Christopher DeMuth, AEI
	Keynote Speaker:	Senator Jon Kyl (R-AZ)
1:00 p.m.		Panel II: State Divestment
	Panelists:	Senator Ted Deutch (D-FL)
		Senator Craig Johnson (D-NY)
		Sarah Steelman, Missouri State Treasurer
	Moderator:	Danielle Pletka, AEI
2:30	Adjournment

Proceedings:

Danielle Pletka:  Good morning everybody.  Good morning. Welcome to the American Enterprise Institute.  I am Danielle Pletka, the vice-president for Foreign and Defense Policy Studies here at AEI. 

This year has seen a bipartisan groundswell of support for divestment from Iran and the Sudan on both the state and the federal level.  Today, we will have an opportunity to hear from two prominent Congressional leaders, Representative Brad Sherman and later, Senator Jon Kyl; two State officials, State Senator Ted Deutch and Missouri State Treasurer Sarah Steelman. 

Divestment is often confused with sanctions, but the concepts are really quite different.  Divestment is a choice made by individuals, funds and/or financial institutions not to hold stock in a company or bank that does business with the particular rogue state and, often, with state owned institutions.  This is a moral choice about where to put money and a conscious decision about our national security interests.  But it is also a financial choice.  Is Iran, which is the topic of our conference here today, a good risk?  Are the Mullahs who run Iran’s National Oil Company good business partners? 

There are upsides and downsides to divestment and to the many bills now pending in state and federal legislatures.  Identifying who is doing business in Iran and who is not, is a real challenge.  Here at AEI we have done our best to use open-sourced information to identify companies, banks and export credit agencies around the world that are doing business in Iran.  We have identified billions in businesses and underwriting and more than 300 separate transactions between 2000 and the present.  Our database, which is at www.aei.org/iraninteractive for those who would like to look at it, is not perfect and we have really welcomed corrections to it and we will continue to welcome them in the future. 

So, how will divestment actually go forward?  Which bill will pass in the Congress?  I am pleased and honored to welcome Congressman Brad Sherman to AEI for the first time. Mr. Sherman is a Democratic member of the House of Representatives, representing California’s 27th Congressional District since 1997.  He is a member of the House Foreign Affairs Committee and Chairman of its Subcommittee on Terrorism, Nonproliferation and Trade.  He is also a member of the House Financial Services Committee and the Budget Committee and a member of the House Iran working group.  He is also the co-sponsor of the Iran Counter Proliferation Act of 2007, which calls for the elimination of the national security waiver for the imposition of sanctions on companies and entities that operate in Iran.  It will also ban imports from Iran and severely restrict exports to Iran and prevent foreign subsidiaries of U.S. companies from doing business with Iran.  Congressman Sherman is also the co-sponsor of the Iran Sanctions Enabling Act of 2007, which authorizes state and local legislatures -- governments, excuse me  -- to direct divestiture from and prevent investment in companies with investments of US$20 million or more in Iran’s energy sector.  Congressman, this is a most important topic, one of the very, very few about which the Democratic Party and the GOP truly agree and we thank you for joining us today.

 Brad Sherman:  Hello.  I am Brad Sherman from California’s best-named city, Sherman Oaks.  It is a pleasure to be with you.  I will be talking about our overall policy toward Iran, focusing on economic pressure and focusing within that on divestiture efforts.  With me is Don MacDonald, in the back; he is the staff director of my Subcommittee on Terrorism, Nonproliferation and Trade.  Don and I have a good division of the work in the office.  He does all the thinking, the strategizing and the research; my job is to stand here and look beautiful, and I do it so well.  This should be the beginning of a dialogue with everyone, even those around the corner who I cannot see.  And so if you can get Don your email address, we will keep you informed as things develop.  We will be on the floor with a major bill on Monday so things are developing quickly. 

Now I see there are a few reporters here.  I have just one interesting tidbit.  You have finally found the source that will attack the Bush administration’s foreign policy from the right.  And it is a Democrat with 100 percent ADA voting record at the AEI.  For all the loud bluster and statements about national security, 9/11, the threat alerts, and WMD, the centrifuges continue to turn at Natanz and we could prevent that, especially if we began at the beginning of this administration or even in the last administration, but even if we act now by putting economic pressure on this regime. 

The reason we do not is because so much of this town, especially the administration, has a deep ideological anathema to anything that would inconvenience a multinational corporation.  And the key to preventing Iran from having a nuclear weapon is to be able to use our broadcasting facilities - and we have got them - to get a message to the Iranian elites and the Iranian people that their economy will be strangled, their diplomats will be isolated, their country will be in a tailspin if they continue to develop a nuclear weapon.  The reason that message is not getting through is because I cannot lie that well in Farsi.  The fact is -- and we will see this as I develop the speech and we will see it in the rest of this conference - that we have used only the tiniest degree the economic and diplomatic pressure that we can put on Iran. 

Now, both the far left and the far right and some not so far have an attitude toward Iran: “Well they will develop nuclear weapons.  It will not be a problem.”  The far left says, “As long as we smile at them, hold hands and sing Kumbaya, so what if they have nuclear weapons?”  Well, first of all, a nuclear Iran would shred our nonproliferation policy.  The Gulf Cooperation Council has already announced that they are going to do whatever Iran does.  And if medium-sized countries in the Middle East start having nuclear weapons, why should Argentina, Brazil, or Burma act any differently?  Second, you embolden the number one state sponsor of terrorism, rated that way by the State Department for the last decade and longer, to engage in even bolder and more obvious terrorist acts around the world. 

Those terrorist acts then guarantee eyeball-to-eyeball confrontation with the United States.  What happens when Hezbollah grabs 100 Americans in Lebanon?  What happens when the Strait of Hormuz is interfered with?  You go eyeball-to-eyeball with a hostile nuclear power.  Now, you can say, “Hey, we did that in 1963 and things still turned out all right.”  Yes we played Russian roulette with our friends in Moscow, again and again, particularly in the Cuban missile crisis.  Do you want to play that game again with a new partner?  And finally, if this regime is on its way out - and many of us pray for that day - they could hit the United States either in an effort to regain popularity with the Iranian people or to go out with a bang. 

Now there are those on the right who are equally naïve; they say, “Oh, Iran will have nuclear weapons.  No problem.  We will have missile defense.”  And I know despots around the world dream of the ultimate despotic Viagra which is an ICBM, just like the big boys in the Cold War.  But the fact is if you look not emotionally at Iran’s geopolitical position but, rather, strategically, you will see that they will focus on smuggling a nuclear weapon, not on sending one, because you do not have to be a rocket scientist to get a nuclear weapon into the United States.  A nuclear bomb -- they vary in size; they are about the size of a person, which also varies in size.  But a nuclear bomb is a lot easier to smuggle than a person.  It does not complain when it is in a trunk; it does not make noise; it does not eat; it does not drink and it is harder to detect than a person. 

I am from California; it has come to my attention that there are people who have been able to smuggle people across the U.S. border.  And just in case you think our southern border will become impervious, not only to itinerate workers but even to sophisticated national intelligence organizations, the number of people employed by the federal government in making sure a nuclear weapon is not smuggled, say, from the United States into Alaska, in case you think Anchorage is dispensable -- the number of people on that mission right now is zero.  So smuggling a nuclear weapon into the United States is phenomenally easy.  It may get slightly harder; it will become just extremely easy. 

And furthermore, an Iranian nuclear bomb smuggled into the United States gives that country so many more options than an ICBM: plausible deniability, creative ambiguity, the possibility not of detonation upon arrival but, rather, proof and an announcement that a nuclear bomb is somewhere in some apartment building somewhere in the Washington area.  Now, would you like to negotiate?  I think that we could well be in this situation in a few years.  Some would say ten; some would say five, or four.  The steps we have to go through is to change American policy, change the policy of multinational corporations, change policy at the U.N., change policy in Moscow, have that affect --the politics of Iran and get Iran to change its policy all before they have enough nuclear material.  We have very little time to wait. 

Now, the focus here is on divestiture, and let me focus on the Iran Sanctions Enabling Act and divestiture in general.  Iran needs multinational corporation participation in its economy.  When we look at Iran in trying to change its behaviors, we are blessed with two advantages.  The first is that the ayatollahs have mismanaged the Iranian economy to a great extent.  How great an extent?  They are rationing gasoline in Tehran.  Now, why is this?  It is not because Iran has to import 43 percent of its refined petroleum, although that is an Achilles heel for Iran if we were able to get U.N. sanctions or anything else that prevents Iran from importing refined petroleum products.  No, Iran can currently get all the refined petroleum products it will pay for.  The problem is, it has to pay world prices or forego world prices on the oil that it would export and it traditionally sells that gasoline for 25, 30, 35 cents a gallon; they find that to be expensive.  So you have a regime that is willing to see angry motorists in gas lines who, by the way, are aware of kind of the irony of being in a gas line in Tehran in order to avoid the cost of subsidize in gasoline.  This is not a regime with unlimited economic resources. 

The second advantage we have in Iran is a very complex and dynamic political situation.  It is not a democracy but it is a state where you can complain in a gas line and if too many people are complaining in a gas line, you may see a change in policy.  That is very different from North Korea where no one has ever been recorded complaining about anything and lived to tell about it. 

Now, in terms of divestiture, the goal is not to divest.  The goal is to change the behavior of companies by convincing them, first, that investment in Iran is really not good business.  They face an expropriation risk and many assets have been expropriated in Iran over the decades; they face a host of other business risks; they face a loss of opportunity to invest elsewhere and then, finally, they will be getting a reputational risk in the United States generally, in the United States investment community and they will lose investment dollars.  Galvanizing this country to divest has an additional advantage than its effect on companies and that is that it helps mobilize us here in the United States to get the U.S. government to change its other policies independent of the ones that deal with investment in corporate stocks and bonds. 

Now, the barriers to investment need to be swept away at the Federal government and then we need to agitate nationwide. And I know I am with leaders here in State government who have persuaded their state governments to be well better than the Federal government and to actually go ahead and divest.  Here at the Federal government, we will be lucky if we partially remove what I regard as the insubstantial barriers to divestiture because these barriers are probably more of an excuse than a reason.  But let me review them in what we ought to be doing about them. 

The first affects ARISA plans, that is to say, any private sector pension plan plus mutual funds.  And that is the argument that you have a fiduciary duty to maximize your return and any political considerations are to be ignored; if you lose an opportunity because you are concerned about these political -- then you can be sued.  I do not know of any one who was sued with a recovery when they divested from South Africa and I cannot imagine any court deciding that, as a matter of law, investing in terror is good business.  Imagine a judge turning to an expert in managing finances and saying, “Oh, you could have made more money and less risk investing in Iran.”  It is clearly false and, certainly, fiduciaries have got to be given a broad range.  But those who manage money are putting this forward as a reason or excuse not to divest. 

State governments face this issue, plus they face another issue, which is that state and local governments are part of a federal system in which the Federal government is supposed to establish what our foreign policy is.  We will have a bill on the floor on Monday, I believe; I will be managing that bill.  It is the Iran Sanctions Enabling Act by Chairman Frank and Lantos and it does not go, perhaps, as far as I would like.  In fact, an amendment that I got adopted in committee is being fine-tuned now and so just because the bill is out of committee does not mean that I can publish for you the version that will be on the floor Monday. 

The chief -- what the bill does is it sweeps away these arguments.  It allows a private sector divestiture [sounds like] without worrying about the fiduciary duty arguments.  It also frees state local governments the arguments that they are acting disharmoniously with U.S. foreign policy.  By the way, existing law does a pretty good job on that second argument, anyway.  The courts have been good except in matters involving banks, in saying that states can divest from Iran and we have already the Iran Sanctions Act, which I will discuss a little bit later but, clearly, makes it Federal policy to divest from those companies that invest US$20 million in the Iranian oil sector. 

Now, the issue to be worked out in the Iran Sanctions Enabling Act is what are the target corporate entities.  One view, the view I would favor, is let the investors decide.  You may have Florida take one view, Missouri take another view.  This should be a free decision for investors.  Believe it or not, we are getting pressure from those who manage money saying, “Do not give us total freedom to divest; it will tie our hands, at least a little bit.”  And these folks are politically powerful here in Washington.  Furthermore, there may be a good public policy argument to narrow the scope of what we are trying to get people to divest from.  I admire those who have divested from any company that would so much as sell a paper clip to stationery store in Tehran. 

But my own view is it may be the best policy and I am gravitating toward this view not just as a result of political reality that I face in Washington but also as to what I think is good economic pressure policy on Iran to say that we should focus on three things:  First and foremost and most obviously, those companies that invest US$20 million in the oil sector in Iran.  Secondly -- and this is included in the bill that we passed last week, the Overseas Private Investment Corporation Bill.  It is a bill governing a part of American foreign aid and export promotion policy that says that you cannot benefit from these OPEC investments and international insurance.  And if you do either of two things - invest the US$20 million in the oil sector or, secondarily, if you make loans to the Iranian government, which includes all the agencies controlled by the Iranian Revolutionary Guard Corps. 

Now, included in the definition of a loan to the Iranian government is any sale to the Iranian government, not on a cash basis or a pay within 30 or 45 days basis.  This not only deals with disguised loans where you sell a product now and collect for a couple of years but it also pretty much rules out large infrastructure projects dealt with in the ordinary way.  Everywhere these -- in the world these infrastructure projects go forward, they are not paid for in cash on the barrelhead and so it affects all of those doing large infrastructure projects.

And, finally, a third group of companies we ought to be targeting are those who sell ammunitions to Iran of any sort.  Now, that third group -- no U.S. Company could be involved but you may -- but in your divestment efforts you are talking about a lot of European and Japanese-based companies and one or two of them may very well be selling conventional arms to Iran. 

So the Iran Sanctions Enabling Act will probably pass Congress on Monday.  It will certainly provide a safe harbor for states and municipalities from the federalism argument, and for ARISA and mutual fund investors, from the fiduciary duty argument -- of course, the fiduciary duty argument for states and localities as well.  But it will apply, by its terms, either just to those companies defined in the Iran Sanctions Act, the US$20 million investors or, if I am successful, include those companies making loans to the Iranian government who are providing munitions to the Iranian government. 

A couple of other provisions that will be in this bill: one is no negative [indiscernible].  We are not going to allow anybody to wave this bill around here and say, “Hey, Congress in 2007, you could divest from these companies so, obviously, you are not allowed to divest from those companies.  There is no negative [indiscernible] in this bill.  This bill moves the ball forward and as I said in my discussion of fiduciary duty, I think the ball is already in the end zone, anyway. 

Second, we are going to make an effort to grandfather in any state statute passed before yesterday or the end of this year or some other date.  So we hope to go a little further for those states that have gone further, all in an effort to allow you to do things that I think you are already allowed to do.  What we also need to do for State and local governments -but this would have to be a separate bill for a separate committee - is provide the same standards for procurement decisions as for investment decisions. 

Now, let me take a moment to put this divestiture effort in the context of all of the pressure that we could bring, and for the most part are not bringing, on the Iranian government.  At the state level we can see divestiture and procurement changes.  At the private investor level, we need to see divestment and I have talked about the fiduciary duty issue which is dealt with in the bill we are dealing with on Monday.  We have got a more difficult issue, a more expensive issue to deal with, and that is the tax issue. 

As I am sure many of you involved in business understand, if you sell stock of bad company at a profit today, you pay a tax for your decision to purify your portfolio.  We should encourage portfolio purification and that is why I am putting the final touches on a bill that will provide carry-over basis, which means you bought Total at 10; it is now at 20.  You get out of Total; you invest in some other stock; you pay no tax when you sell Total at 20, but your basis in purification company or -- is only 10.  And so, you will eventually pay your tax when you sell that company.  We should be encouraging, not taxing, divestiture. 

Then, there is a number of actions the Federal government can take, not relying on the goodwill of those who are making investments or making procurement decisions at the state level.  First, we can focus on procurement at the Federal level.  Second, we can - and we began to do this just last week in the OPEC Bill - deal with a host of other Federal programs and say those companies that are investing in Iran cannot participate.  Now, when we draft this legislation, as we did in the OPEC Bill which I am the author, it is not enough to just say the particular corporate entity cannot get a Federal benefit if it is investing in Iran.  You have to look at the entire affiliated group of corporations. 

So you turn to a multinational based in Zurich or Paris which may have a hundred subsidiaries in 50 different businesses around the world and say, “Your Nebraska Company may lose this or that at the federal or state level if your Qatar-based company does this or that in Iran.”  We have to stop imports from Iran.  Right now, we do not import oil from Iran; we only import the stuff we do not need and they could not sell elsewhere. 

To give you an idea of the lack of political will we have on this issue, we have been unwilling in Washington to stand up to the epicureans who want Southern Caspian caviar.  So we import caviar, which is controlled by some of the conservative or Islamic interests in Iran, here to the United States.  If the Bush administration cannot stand up to the epicureans, they cannot stand up to anybody.  So we can deal with imports to the United States.  That can be done by federal executive order; it was a Clinton administration order in 2000 that opened our markets and the Bush administration has continued this.  They could close it tomorrow; they choose not to. 

And finally, we can do what we supposedly have been doing for well over 10 years, long before I got to Congress, and that is, we could actually impose sanctions on international oil companies that invest US$20 million in the Iranian oil sector.  Fresh new idea -- it is called the Iran Libya Sanctions Act; it worked so well against Libya, we took the “L” out of it.  Now it is the Iran Sanctions Act, which we have never applied with regard to Iran.  Now, in Congress our first action is to fix the statute, improve the statute.  We are doing that with HR1400, the Iran Counter-Proliferation Act, and what this would do is close some loopholes in the Iran Sanctions Act by saying that, first and foremost, if a company is found to be making these investments, you cannot just waive all sanctions.  When the President finds a violator, he has to impose some sanctions or she has to impose some sanctions. 

It reinforces a total embargo on imports from Iran. It tells American oil companies that they cannot do business in Iran through their subsidiaries and eliminates tax benefits for oil companies whose affiliates violate the Iran Sanctions Act.  These are all important changes in the statute, but the single most important thing we could do vis-à-vis the Iran Sanctions Act is have a President who takes his oath of office to enforce the laws of the United States seriously.  Started in the late Clinton administration, continued after 9/11, continued after the MEK and others told us of the Iran nuclear program; and that is we have an administration policy that they cannot find gambling at Casablanca.  They are unaware of any oil company anywhere in the world investing more than US$20 million in the Iranian oil sector. 

Now, the Congressional Research Service sitting in the Library of Congress, no CIA, is able to produce a comprehensive chart of all the companies who are making such investments.  But the official position of the Bush administration is, since they have not received a certified letter from Ahmadinejad announcing that there has been such an investment, no such investment is occurring; therefore, no international oil companies even have to be identified and reviewed to determine whether sanctions should be applied, sanctions which could be waived by the President under current law but could not be waived if we were successful in passing the Iran Counter-Proliferation act. 

You know the left is looking everywhere for grounds for impeachment; the one place they have not looked is the Iran Sanctions Act and the refusal of this administration to carry out its duty to enforce the law.  There are several things -- the one other thing that the federal government could do unilaterally, and that is stop Iranian banks from doing business in dollars through the Federal Reserve Board in New York.  We have stopped - too much fanfare - two Iranian banks from doing this; we have not stopped the others.  We forced Ahmadinejad to move some of his accounts across the street from one Iranian bank to another Iranian bank.  That hardly represents all we could do. 

Internationally and diplomatically, there are two things we can do.  One is something I have talked about before and that is the World Bank.  You folks in the press -- big tissy. Wolfowitz’s girlfriend gets maybe an extra hundred grand from the World Bank -- front page news.  Iran is getting $1.3 billion from the World Bank - most news outlets have not even mentioned that.  When we had Secretary Paulson before our Financial Services Committee, he said that in an effort to save Wolfowitz’s job he had carried out an international lobbying effort, talking to other finance ministers around the world trying to save Wolfowitz’s job.  I asked him whether he had done anything to try to get finance ministers to not vote for bank or for disbursements from the World Bank to Iran; his response was, no, he had not done anything like that.  They did vote against it at the World Bank and then went out for tea with all the people that outvoted us, which was everybody, in these loans to Iran. 

So the one thing you can say is that, unlike the Iran Sanctions Act, the Treasury Department did follow the letter of the law; they did, at least, cast the vote but no effort to actually prevail.  So the good news and the bad news are all in one sentence:  We got a lot of tools that we could be using on Iran sitting in the toolbox.  What that means is we have not had the political will to take the tools out of the toolbox.  The good news is we still got a lot of good tools sitting there in the toolbox.  If we made use of all of these, I think we would put substantial pressure on Iran, but there is one more thing we have to do and it is far more complicated and far more controversial - we need to get Russia on our side. 

With Russia on our side we will get U.N. sanctions, serious U.N. sanctions.  With serious U.N. sanctions, Iran will not be able to import refined petroleum products and a host of other things will happen.  How do you get Russia on our side?  You have to go to them and entice them with the possibility of U.S. policy changes in things that are less important to us than they are to them.  We might actually have to change our policy on Apkhazia, but I talked to the State Department of this at the highest levels.  For reasons I cannot understand, we cannot link the Iran issue to Caspian oil pipeline issues with Russia, to Apkhazia or to anything else.  That ensures that we will not get serious sanctions from the U.N.  So we need to act diplomatically and economically. 

We need to use all the tools in the toolbox and we need to realize that it does take courage to send American troops into harm’s way.  And it even takes courage to be able to sign letters to the parents of the bereaved -- the bereaved parents of those who have died.  But it takes, perhaps, more courage to stand up to, and inconvenience, multinational corporations and we need to see that kind of courage in making foreign policy and economic policy here in Washington.  Let’s open it up to questions.

 Danielle Pletka:  What if I moderate for you?

Brad Sherman:  Yes.  I have got about maybe a two-minute conclusion as well.

Danielle Pletka:  Very good.  I am going to open up the floor to questions.  If everybody would just be kind enough to follow our ground rules, which is to raise your hand, I will call on you.  Wait for the microphone, please, and identify yourself, make your statement, your brief statement in the form of one and one question only.  And since I am here with the microphone I would like to ask the Congressman one first question.  And I would also like to take a moment to say four years of the Clinton administration, they did not enforce the Iran Libya sanctions act either; pretty frustrating then.  But what I am wondering about is something that has actually bedeviled us here a little bit at AEI in the work that we have done on our interactive, and that is companies that have made a decision in recent years, particularly American companies, to actually move out of Iran. 

So actually, most major American corporations have decided to pull out of Iran but they have still got existing contracts that they are finishing out.  How do you deal with and how do you recommend that legislatures and others deal with this question of contracting today?  How do we protect companies that are going to get in trouble for pulling out?  How do you address it?  I am very interested in your answer.

Brad Sherman:  First, from the company’s standpoint I think they need to take a serious review:  What happens if we stop performance?  Will Iran be able to sue us?  Will they have jurisdiction?  Will that be in courts where there are already victims of terror that have tens and hundreds of million dollars of claims so that Iran would recover nothing?  So I would like companies, not just to say, “Oh, we got a contract with the devil.  We must face it because we love contracts,” but, rather, what is the practical exposure? 

Second, I would like to see companies not expand -- extend these contracts.  With those things in mind, we did put in the OPEC legislation provisions to deal with this very thing and to allow companies that are not expanding or extending to participate with OPEC with their other projects.  And so we do need a sophisticated approach.  I think, though, that when it comes to divestiture, ultimately the power -- we cannot write something so specific here in Washington to say this is the exact model of divestiture; rather, we should provide as much freedom to investors as possible and then have them make their own decisions on this.

Vladimir Kara-Murza:  Thank you.  I am Vladimir Kara-Murza with RTVI, Russian television.  Can I ask you Congressman to elaborate a little bit on the point you made about changing U.S. policy towards Russia to get U.N. sanctions on Iran?  Do you  advocate [sounds like], for instance, the U.S. ignoring all the democracy promotion things, forgetting about issues such as press freedom, political prisoners and everything just to get Putin’s support in Iran?   Is that what you are suggesting?

Brad Sherman:  I think it is more not doing favors for Putin but to look at our policy toward Russia as a people, as a country, as a state with interests that go beyond any particular administration.  When the vice-president goes to Lithuania and criticizes Russia’s human rights policy without even mentioning that there are some who think that Lithuania could treat its own Russian speaking minority better, that is not a slap at Putin; it is a slap at the average Russian citizen who, of course, when they think of human rights issues being spoken of in Vilnius, would think of how their own co-nationals or Russian people are being treated. 

When it comes to commercial disputes between Ukraine and Russia, we were in the highly unusual position of saying that if a country has provided foreign aid, in this case to the Ukraine through cheap oil, then it has a moral obligation to continue that foreign aid.  That foreign aid is not a privilege; it is a right, and that you cannot discontinue it because you do not -- because there has been a change in either the receiving country or the sending country.  That is a bizarre position for the United States.  We have changed our foreign aid policy either because of changes in the United States or because of this or that action.  And it is bizarre for the United States to say that countries that provide foreign aid are obligated to continue it.  We would never impose that duty on ourselves. 

We then turned to Russia and said, “You have to charge less than fair market value for your product, oil.”  That is a bizarre thing for the evangelic -- the evangels -- I am mispronouncing -- for those who promote capitalism to say to Moscow -- did you ever think Washington would be shouting at Moscow, “How dare you act like capitalists?”  “How dare you charge market prices?”  Then you look at the Caspian oil pipeline situation.  Yes, we all want to see the oil move from the Caspian region to markets.  Okay, we said we do not want those pipelines going through Iran; good idea.  Then we say we do not want those pipelines going through Russia.  Why? 

Well, because, apparently, we put Russia and Iran in the same category.  So then you look at Abkhazia, Transdniester, Moldova, a host of issues where if you -- you could argue issues either way.  You know, I used to be a lawyer; if you hired me as a lawyer I could make the Russian argument about Transdniester; I can make the Moldovan argument about Transdniester.  The only thing I can say with confidence is that if the United States prioritizes everything, then we have prioritized nothing.  And if a Transdniester argument or an Abkhazia argument that could be argued either way -- every time we come down against Russia, okay, if Russia is opposing us on the Iran issue.  But we should open the door to seeing it their way on those issues where it is very easy to see it their way.  If we had a conference on Abkhazia, you have half the room -- well, you will have no one in the room.  But he would be in the room, and I do not know which side of the room he would be sitting on.  So -- what?

Danielle Pletka:  Not your side in a sense.

Brad Sherman:  So we could -- on issues that are state-to- state where Russia has national interests, I think we have come out on the anti-Russia side every time Russia has an interest in its own region.  If that is an effort to punish Russia for opposing us on Iran it is pretty comprehensive, except it leaves out the part about negotiating with Russia.  If you start with the idea that Iran’s -- that Russia’s votes in the Security Council on Iran are no more important to the United States, then the -- whether Caspian oil pipelines go through Russia or whether we note our human rights interest in the Russian speaking minorities abroad, then if you have a thousand equal priorities, you have no priorities at all.  Okay.  I just got myself in trouble with that answer.  Go on.

John Cruz:  John Cruz from the House Armed Services Committee.  Congressman, we see polls that the Iranian people have favorable attitudes toward the United States; that surprised us.  Is there a public diplomacy or strategic communications component to your policy to explain to the Iranian people the reason for any hardships they have to endure because of the divestiture?

Brad Sherman:  Absolutely.  If you poll in Iran, you find three things; first, -- or four things.  First, their government is unpopular probably pretty much for that reason; it is the only place we are popular.  The only thing their government is doing that the people like is developing nuclear weapons, and, you know, nuclear weapons are popular in every -- you know, take a poll in Brazil: “Should we have nuclear weapons?  “Yes.  We are a big important country.”  And without weighing it against and really discussing the issue, if you just ask the question, “Do you want nuclear weapons?”  Lichtenstein would say yes. 

And then, the final thing you see is if we bomb Iran that is the one thing that would make their government popular.  Any sophisticated program involves carrots and sticks, and that is the one thing I left out on my talk -- it was only a 40-minute talk; I needed more time.  But the one thing that was missing is we ought to have carrots, most of which are coming from Europe but even from the United States. 

We ought to have a sophisticated message to the Iranian people and Iranian elites: We are not enemies of the Iranian people.  We want you to be prosperous.  We are not demanding regime change, though if it happens, you can expect us to be upset.  But here are the good things we will do for you if you abandon your nuclear program; here are the things that are being imposed upon you not by the United States but by the peoples of the world, by investors in London and Tokyo, by sanctions at the U.N., by individual decisions of individual investors and by governments around the world.  And that is where the U.N. and World Bank are so important because of that imprimatur.  That whole message has to get across that this is a worldwide effort of carrots and sticks because your government is doing the wrong thing, endangering the world and people around the world understand that.  This is not an effort to punish; this is an effort to get you to change your policy and then reward.  And we look forward to the day when there are no gas lines in Tehran.

Dan Dombey:  Dan Dombey, Financial Times.  Congressman, can I just ask you to, perhaps, narrow down a little bit more what you are seeking to do with your bills?  You were talking primarily about changing the behavior of the European and Asian energy companies but you also gave a nod to pre-existing contracts.  Now, in fact, the Bush administration argues that there has not been a significant new investment, precisely because of its policies.  They point to things like the Japanese [indiscernible] they also say that informal financial sanctions mean that European banks and banks internationally are unwilling to underwrite new investments.  So in that case, what are you trying to do if new investments are not occurring on a large scale and you are concerned about the sanctity of contracts?  What is the behavior from European and energy [indiscernible] companies you are looking for?

Brad Sherman:  We will send you a collection of Financial Times articles in which companies announce their progress and their contracts and they are moving forward with multimillion and multibillion dollar oil investments, and we will also send you the report from the Congressional Research Service.  I do not think there is any one who believes that not a single investment has been made since 1998 in the Iranian oil sector. And you are right to point out the Clinton administration, at least, went through the motions of following the law and issuing the waivers until 1998.  And then they established the dangerous precedent of saying “If you do not like a law, you just ignore it.” 

If you are a police officer and you happen to think that heroin should be legal, well, if somebody is selling heroin in front of you, you just say, “I did not actually see it.  Or maybe I saw it but I was sleeping or sleep walking or something.”  So you are right that this dangerous practice of, “I do not agree with the law; therefore I see no facts,” was established in the Clinton administration.  And that is why I made the point that it did kind of continue after a few things that should have woken up any government.  I would love to take more but I do not know if we have more time.

Danielle Pletka:  I think we are a bit limited.  Perhaps we can take one, if you want -- I think you wanted to say another word or two in conclusion and so we are going to have to choose between a questioner or a word of conclusion.

Brad Sherman:  Well, I just want to commend -- I know Ted Deutch is here from Florida where they have accomplished a lot.  I know Missouri is represented and I am scurrying through my notes to see the -- who is here from the state of Missouri?

Danielle Pletka:  Sarah Steelman, the State Treasurer.

Brad Sherman:  Sarah?

Danielle Pletka:  I am not sure if she is here this morning.  She [cross-talking]

Brad Sherman:  Tell her I went on for 20 minutes praising her efforts in the State of Missouri.  Okay.

Danielle Pletka:  Very good.  Let me praise your efforts.  Thank you so much for joining us here today.  Let me encourage everybody to be in touch with the Congressman if you do have questions.  He is open to answering all of them very fully.  So thank you for being here at AEI.  Let me ask everybody to remain seated; we are going to move directly to our next panel.  And thank you again.

Brad Sherman:  Thank you.  And Don Macdonald will stay here.  He will educate me on the other wisdom that comes from this podium and also if you give him your email address, we will spam you forever.  Thank you.

[Second Panel]

Omeed Jafari:  Ladies and gentleman, if you can take your seats we will begin this morning’s second panel.  I would like to begin with the introductions and segue right into the discussion.  So to your far right is Danielle Pletka; she is AEI’s vice president for Foreign Defense Policy Studies.  To her right, Ken Katzman is a specialist in Middle East Affairs for the Congressional Research Service who provides analysis for members of Congress and their staffs on Persian Gulf political and military and diplomatic affairs, and on U.S. policy in that region.  Dr. Katzman has served in government and in the private sector as an analyst in Persian Gulf affairs with special emphasis on Iran and Iraq.  And to my immediate left is Dr. Patrick Clawson.  He is Deputy Director for Research of the Washington Institute for Near East Policy.  His previous positions include five years as senior research professor at the National Defense University’s Institute for National Strategic Studies and four years as senior economist at the Foreign Policy Research Institute, the World Bank and International Monetary Fund.  Dr. Clawson?

Dr. Patrick Clawson:  In the last five years, Iran’s economic performance has been mediocre; not bad, but mediocre.  The country has had five percent GNP growth each year.  The budget has had some -- government budget has had some small deficits and small surpluses that more or less even out.  The country has very little foreign debt and has now accumulated about US$50 billion in foreign exchange reserves.  Overall, not a bad performance.  However, it is a stunningly poor result, given the extraordinarily favorable circumstances of the last five years.  The other oil-producing countries in the region have been able to do dramatically better -- well, except for Iraq. 

And, actually, Iraq’s economic performance in the last five years has been quite a bit better than that of Iran - higher growth rates, better government budget outturns and the like.  In fact, if we compare how Iran has done to the expectations of its peoples, the results are also disappointing, to put it mildly.  The mood in Tehran, in the newspapers everyday, in the -- much less in discussions is sour.  People feel that the economic performance of the last two governments in Iran has not been particularly good.  Why? 

Well, Iran faces four fundamental economic problems.  First and foremost is cronyism.  The economy is dominated by revolutionary institutions such as the foundations and, increasingly, by firms that are affiliated with the Revolutionary Guard Corps which make extraordinary profits through their political connections.  Economists have the horrible phrase to describe this: rent-seeking.  I was amused to discover just how much that phrase is now even popping up in the Iranian newspapers as [indiscernible] the idea that instead of making money through productive economic activity, that the way to earn income is by diverting income from those productive enterprises into your own pockets, thanks to your favored connections. 

The second fundamental economic problem facing Iran is the poor use of government funds.  The government actually has quite ample resources to meet the country’s needs but, instead, uses the money for such things as subsidies, which now take up, according to the International Monetary Fund’s most recent reports, 23 percent of national income is spent on the government subsidies.  The government is simply not willing to tackle these.  For instance, last month a great show was made of introducing gasoline rationing; it was a sham.  The fact is that the only price at which gasoline is sold is the old subsidized price and Iranians have been given rations but told that, “Oh by the way, you can use your first six months ration as you wish.”  In other words each person was given six months’ rations and unless you are an extraordinary gas guzzler, it is going to take you three months to run through that, and then we will see whether or not the government actually does insist that some gasoline be sold at prices higher than the highly subsidized rates now available. 

The third basic economic problem facing Iran is youth unemployment.  There is a fair amount of outdated information out there about Iran’s population’s structure.  Many people say Iran is a young country; that actually is not true.  In fact, the births in Iran in the last three years have been barely sufficient in order to sustain the current country’s population.  The population is simply not growing at all and may shrink.  But Iran had a great baby boom after the revolution and that is the age group which is now entering college -- the peak of that is entering college and also entering the labor force.  So that generation -- when there were more than two million people a year born in Iran compared to last year when they were less than one million born in Iran -- that generation is now entering the labor market looking for work and not able to find it. 

The IMF report from last year pointed out that even if Iran is able to sustain five percent GDP growth each year for the next five or six years, that unemployment will still continue to rise.  The IMF does not think that Iran will be able to sustain growth that robust. 

Well these three problems - cronyism, the poor use of government funds and youth unemployment - are not really problems that are addressed by the divestment issue.  The fact is that these issues of the cronyism, poor use of government funds and youth unemployment provide us with extraordinary opportunities to press Iran and to offer both carrots and to threaten with sticks.  But those really can be done only most effectively by the federal government that the sticks that we should be using at the federal level should be aimed at this cronyism problem; namely, at finding ways to keep money out of the pockets of Iran’s leaders, similar to what we have done with North Korea. 

And the Revolutionary Guard Corps in Iran has shown itself to be extraordinarily sensitive whenever their personal income stream is threatened.  So there are real opportunities here for those kinds of sticks.  Simultaneously, as Congressman Sherman was describing, we can offer carrots to Iran that would provide for opportunities for job growth, carrots such as membership in the World Trade Organization and, hopefully, these would be a way that we can split the people away from the regime and to say that if it were not for the regime’s bad policies, then you would not be suffering the problem of unemployment.  And we have a real opportunity here because so many people in Iran blame the regime hardliners for the country’s economic problems and for isolation from the West, which is seen as the core of many of the difficulties that Iran is facing economically. 

However, divestment does address a fourth problem, which is a very serious problem that Iran faces and that is the declining oil output.  Iran has been producing oil for almost 90 years; its fields are quite old and output is declining.  It has now been 15 to 20 years that the Iranian oil fields output each year drops by something between 300,000 barrels a day and 400,000 barrels a day; that is the figure that the National Iranian Oil Company’s Managing Director cites regularly.  And it has only been by an impressive program of investment, almost all of which have come form Iranian funds themselves, that the National Iranian Oil Company and National Iranian Gas Company have been able to sustain output.  And they have done pretty decent job at sustaining output, but the problem becomes harder and harder each year. 

They need foreign technologies and they need foreign managerial skills, in particular, to help work with their complicated and the aging fields.  Foreign money is not as important, frankly; it is mostly the technology and the managerial skills.  There have been a lot of announcements out of Iran over the last decade of major new investments in their oil and gas fields, particularly with Asian companies - Japanese, Chinese and Indians.  Very few of those projects have gone anywhere.  The announcements are typically given extensive coverage but very few of those projects actually have moved forward.  The Japanese project has simply been canceled; the Indian project is in terminal condition and the Chinese were offered a field which you would have to be really desperate to want to invest in that field, and not even the Chinese seem to desperate enough to want to do that. 

Most of the actual investment that is taking place has come from North European firms - not from South European firms, but North European firms.  And, indeed, it is a handful of firms that are spending tens of millions of dollars each per annum that are providing most of the action for helping Iran with its investment in its oil and gas industry.  I only know of three such firms; there may be more, but most of the action is coming from a few such companies.  I would suggest that those in the divestment field may wish to consider the advantages and disadvantages of concentrating on just that handful of firms.  At least, so far, that handful of firms has not paid much price for its involvement in Iran, and they are quite openly dismissive of the threats to them from their involvement in Iran.

On the other hand, there are advantages to spreading the net wider because the divestment movement has been successful; it is scaring off a number of other companies from investing in Iran.  And so there are pluses and minuses of having a broader focus or having a more narrow focus.  But that -- let me just end my remarks with that observation.

Omeed Jafari:  Thank you very much.  Just a quick note: If you have a cell phone, would you please either silence it or put it on vibrate?  Dr. Katzman?

Kenneth B. Katzman:  Thank you very much, Omeed.  I confess, I admit it.  I'm the author of the famous CRS Chart that Mr. Sherman referred to in his remarks on the companies that have invested in Iran’s energy sector.  And I can send it to anybody and I hope it is correct.  And if it is not correct, please, I’ll be glad to add to it at any time.  I want to talk today about the -- not the economy per se, because I think Patrick covered it quite well, but the constituencies of Iran’s economy, the politics of the economy, so to speak.  I completely agree with everything Patrick said that the economy is completely mismanaged; its performance is poor.  I'm showing what I have heard from industry sources that they are losing 50,000 barrels a day of production each year.  Patrick cited the higher figures; hard to really know, but they are losing production. 

These investments in this chart have just basically held the line; they have very ambitious goals of increasing production way up to, I think, as much as 10 or 12 million barrels a day and they are nowhere near that, not even approaching it.  So all this investment in that chart has not amounted to much, except it has slowed the rate of deterioration.  But what I see is two sort of theaters in the Iranian economy.  You have, in my view, the pole represented by President Ahmadinejad.  He is what we would call as a state controller; he believes in state control of the economy, government employment, lots of subsidies, state management in his campaign.  And since taking office he has proposed new subsidies, marriage funds, soft loans, debt write-offs to farmers, et cetera.

His constituency is the working class, the lower classes, many of them in the rural areas way outside of Tehran, way outside the reach of many of the journalists who predicted Rafsanjani would be victorious in the last election; he was not victorious.  The center of gravity in Iran, really, I think, is the rural areas who do not meet Westerners, who do not get interviewed by Reuters, et cetera.  And this is why, I think, polling in Iran and opinion research in Iran is very difficult because many of the people who visit do not get out to the rural areas and encounter this center of gravity that really is Ahmadinejad‘s political base.

To that extent, the gas rationing that was instituted in many ways hurts his political base.  I think it has hurt Ahmadinejad deeply to have this gas rationing, although I take Patrick’s point that, perhaps, it is a sham and might evaporate and be undone.  Nonetheless, it is regressive; when you raise the price of gasoline it hurts the poor more.  Many of the poor use their cars as unofficial taxis; they make money off their vehicles.  And when you have gas rationing, you are indeed hurting Ahmadinejad’s political base. 

The other main -- so we have the state controllers and we have Ahmadinejad’s political base.  They do not care about a trade agreement with the West.  Ahmadinejad’s political base could not care less if there is a grand bargain that leads to a lifting of sanctions and trade agreements with the European Union, et cetera.  Ahmadinejad’s political base does not buy French cosmetics; they do not buy automobiles; they do not buy luxury goods.  They are purely subsistence level. 

So Ahmadinejad’s constituency -- there is no pressure from his constituency to cave in to international demands.  The pressure comes from the counterpoint to Ahmadinejad’s political base which is the bazaris, the private free-capitalist; the merchants, essentially. These are the constituents, really, actually, of the supreme leader who through most of his career actually has catered to the bazaris and Mr. Rafsanjani, who has been obviously a political heavy-weight for many years.  These guys pay attention very much to the bazaris. 

Why are the bazaris so important?  Well, they were important in bringing Khomeini to power in 1979, first of all.  Second of all, they are essentially the employment source.  Iran is not an industrial economy.  This is not a world-class economy; this is a very primitive -- basically, a primitive economy.  Iran does not make anything; they do not manufacture anything.  They have a few automobile plants under license from Renault, Peugeot, even some Mercedes, some light aircraft, a little bit of internet software sector. 

But basically, the economy of Iran is the big trading families - the bazaris, the tavacolis, the azari ghomis, et cetera.  They have a paper, the Resala Paper, et cetera.  Since they do not make -- the way they make their money is to import goods, mark it up at a profit and sell it.  They do not make anything.  They need cheap employment, low rents, and free trade, and low regulation.  In a sense, they are really quite free market capitalist.  Maybe they would agree even with -- they would sympathize in many ways with the Republican Party in the United States - very much low regulation, low taxes, and free imports.

The bazaris are very, very scared of what is going on with the United Nations and the international community.  Because if they are economically isolated and they cannot import any goods, they are going to starve; they are going to go out of business.  They do not make anything; they need to import these goods, mark it up in a profit, and sell it.  If you stop that activity, they die.  They are extremely nervous about the international sanctions that are ratcheting up on Iran.  And I believe that this is a key source of vulnerability and pressure that the international community can and is in many ways bringing to bear on Iran right now. 

Now, so far, the two UN resolutions that have passed have not sort of infected or infiltrated into general economic principles.  We have sanctions on basically WMD factories, Iranian officials involved in WMD.  We did get to -- there was a ban on Iranian arms exports directed against their shipments of weapons to Shiite militias in Iraq, Hezbollah, Hamas, et cetera.

But so far, the two UN resolutions that have had teeth that have passed have not gotten into general economics.  Now, there is consideration - and we will see how it plays out in New York at the UN - about getting more into general economic isolation - strangling off credits, financing, maybe even shipments of refined gasoline to Iran.  And that makes the bazaris, Rafsanjani, the supreme leader, extremely nervous.  Ahmadinejad, because his base does not care so much, is less fearful.  He is willing to be more defiant, and this is the clash that is going on in the regime right now among these economic interests.

Just very quickly, Patrick mentioned and I have done in my paper a lot of work obviously on the bonyads.  These are also very well-connected -- these are reasons why Iran’s economy really is so mismanaged.  You have these foundations, the bonyads, that basically took over the Shah’s property.  The Shah’s people fled and many of these bonyads took over the property.  They run conglomerates; they sell actually Coca-Cola, which is licensed by Coca-Cola Company -- sold them the license to produce Coca-Cola.  And they do and they sell it.

And to some extent, they need products because they import goods and give them out to the poor.  So they -- I think the “bonyads”, which is a key constituency also of Ahmadinejad and all the leadership are not, I think, so happy about economic pressure because they do need a certain amount of interaction with the international community.  The constituency that is the least fearful, I think, of international economic sanctions is the Pasdaran, the revolutionary guard.  They actually benefit if Iran is economically isolated because then they will get all the contracts to construct everything.  If you say that international engineering firms cannot come in and build a metro -- a new phase of a metro or an airport extension, who is going to get the contract?  The gorb [sound like], which is the economic conglomerate arm of the revolutionary guards; it is short for Khatam-ul-Anbia, seal of the prophet.  That is the guard’s economic contracting wing.

So they are not scared because if any sanctions that scare off international companies -- they will benefit; they will get all the contracts; they will not have to compete with anybody.  So these are some of the competing factors in Iran’s political economy that I think make the economy and the political structure extremely vulnerable to international pressure from a unified Security Council.  Thank you.

Omeed Jafari:  Dani?

Danielle Pletka:  Thank you very much, Omeed, and thank you, Kenneth and Patrick.  I'm going to try and talk a little bit briefly about something a little different. We named this panel “Divestment and its Policy Implications,” and we have talked a little bit about the implications inside Iran.  We have not talked that much about the policy implications of the divestment movement in the United States and in the countries that are seeking to target Iran’s nuclear weapons program in Europe and in Asia as well.  And I think those are not insignificant, and they need to be paid attention to. 

What do we have before us on the scene?  We have a number of bills.  At the state level, what you see are fairly straight forward divestment bills dealing with pension funds.  Some of them relate to Iran, some of them relate to Sudan; at my last count, there were 15 such measures.  I think two had -- State Senator Ted Deutch corrected me.  I thought there was only one, but there are two that I think have passed so far and a number of additional ones are pending.  Similarly, as Congressman Sherman outlined, there are a number of bills on Capitol Hill, different measures in the Senate and in the House, and there are a variety of overlapping measures as well.  Interestingly, though, in the House measure sponsored by Congressman Lantos that has seemed to move forward the most quickly at this point, what you see is a whole variety of different things.  You see the questions of divestments, safe harbor, various reporting requirements about which corporations may or may not be involved in Iran, which banks may or may not be involved. 

You also see, as he alluded to, amendments to what was once called the Iran-Libya Sanctions Act and what is now called the Iran Sanctions Act, something that as he pointed out has been largely observed in the breach.  And what those amendments would do is take away any discretion on the part of the President - and that would be any President, I should add, and not just President Bush, but whoever follows him in office - to impose sanctions.  It would require the imposition of one sanction and it would allow the President to choose among a small menu of others.  It is not clear which one of these bills is going to become a law or indeed if any of them are going to become law, although I think that given the fairly broad bipartisan consensus, we should expect to see that at least some part of these measures will end up in statute by the end of this year.

But I do think that there is a risk here, and part of that risk is something that you have heard of already this morning.  We run the risk that some of this legislation ends up being more interested in the peccadilloes or perceived peccadilloes and profit-making motives of multi-national corporations and less interested in the proliferation in terrorism activities of the Iranians.  That is a little bit troubling and it is going to hurt us, not from the free market standpoint which I embrace although I think that it will hurt that, but because it is going to cause us problems outside the United States.

It is not hard for us to lean on American companies and, in fact, most major American companies have announced that they are not continuing to do business in Iran, although they are honoring existing contracts.  The same cannot be said for a whole variety of banks and corporations and funds outside the United States, and that is a lot harder for members of Congress to lean on them.  And it is really hard for members of Congress to lean on foreign leaders to lean on them, and that has caused us a lot of trouble in the past and we need to learn a little bit from them.

Now, in parallel to what has been going on at the state and local level, we do see down the multilateral -- we have, as Patrick said, two UN Security Council resolutions.  Ken also talked about the details of them; they do not really bite on the economic level; they are not outside the specific targeted realm and they do not go too far because it was really, really hard to get everybody to agree to go too far.  Now, the real tough nuts were obviously our favorites in the P5 on the Security Council, the Russians and the Chinese.  But in truth it was not that easy to get the British and the French to go along either although I think that they do, at a national level, recognize the gravity of the Iranian nuclear weapons program.

Now we are in the process of negotiating with our friends and allies and with the others on the Security Council about a third resolution.  And in fact, what we have seen in the press is that a lot of the things that were left on the cutting room floor for the first two resolutions are in fact back under discussion.  Whether it is petroleum-related issues or it is travel sanctions or it is further restrictions on the credit to the Iranians, all of these are back on the table and are being looked at in a creative way. 

But I think as we have heard very clearly from the Russians, they are not really interested in having any of it which means that the negotiating process which will begin anew in earnest when everyone comes back from vacation, which it turns out is about six weeks long everywhere, but here are at AEI apparently -- although I'm working on that.  And when they all come back from vacation, the negotiation process will begin in earnest.  Of course, the Iranians, needless to say, are continuing with what they are doing.

Now there has been some progress.  The International Atomic Energy Agency has very excitedly announced that they have made some progress with the Iranians so that the Iranians are going to open and turn over a new leaf and disclosure.  I think this has been, at least from my standpoint, rightly written off by most parties including, by the way, the Russians and the Chinese, to the best of my knowledge, as a negotiating tactic on the part of the Iranians.  They are always interested in turning over a new leaf when they are about to be new sanctions, but it turns out that, in fact, that leaf is not too new and they are going forward as planned with their cascade and their enrichment program.

So we have these parallel tracks, we have our national measures; we have our efforts at divestment, at strengthening sanctions; we have got the multilateral efforts.  And the multilateral efforts have spawned, in turn, pretty tough sanctions at the European Union level that have in fact gone a little bit further than the United Nations mandate and those have been -- I think, there is agreement that they have been pretty seriously implemented.

Finally, of course, there are U.S. unilateral measures.  And I have to say, and having worked in the government when the Iran-Libya Sanctions Act passed, I'm struck that, in fact, we do see the most stringent application of sanctions and the strongest effort to date from this administration on trying to persuade the international community, corporations, foreign banks, and others to go along with us.

I have to give credit to Hank Paulson and Stuart Levey, the Under Secretary of the Treasury for Terrorist Financing and Intelligence, who really have been absolutely tireless in traveling the world and making this argument.  They have, in fact, banned the so-called “U-turn transactions.”  Two Iranian banks have been targeted.  My understanding is that at least one or two more Iranian banks will be targeted in the near future.  This has made a huge difference.  I think that it has created a climate of -- not only inside Iran, as Patrick and Ken described, but a climate outside of real hesitancy.  It has also had undoubted impact on the Iranian economy.  It is not just the incompetence and bad financial management and other problems inside the Iranian economy; in fact, you see that banks are less willing to do business with Iran.  You see that letters of credit are far harder to come by. 

I, at least, understand from those who analyze this that the cost of money to the Iranians has almost doubled.  This makes life very hard for the Iranians, and I do not think that we can pat ourselves on the back [indiscernible] in fact, I think that the Europeans have gone some way.  You have seen the export credits from the German government apparently dropped by 30 percent last year.  They said that they will continue to drop this year.  I have heard and I have not seen reported reliably -- perhaps someone can tell us that a recent trip by our treasury officials has generated a reconsideration of work in Iran by Deutsche Bank, Commerce Bank, and HSBC.  If that is true, that is also very good news.

In other words, things are not at a standstill; things are moving forward.  And I would say this is actually having a very negative effect on the Iranian economy.  So will divestment work?  Well, I think that these divestment measures, as I said, at the outset are about choice.  There should be no doubt in people’s minds that they will continue to chill the climate.  Even companies that ultimately do go in or banks that do extend lines of credit are, in fact, thinking twice, three times, four times, five times.  They recognize there is a new seriousness.  They recognize that billions of dollars are at stake; in Florida, in California, these pension funds are not small amounts of money and they will make a difference; there is no doubt.

But I do think that the effort to tighten up what have popularly been referred to as secondary sanctions that through the Iran Sanctions Act could very well be just what the Iranians are looking for, which is an opportunity to divide the Europeans and the Asians and the United States because in fact this is highly unpopular.  We need to recognize that; we need to recognize that, in fact, when the United States legislates against foreign companies, that it is unpopular with their governments.

I have had a change of opinion on this in 10 years.  And one of the reasons I have had that change of opinion is because for years on end, the Europeans refused to recognize the threat; the Japanese also refused to recognize it.  I think we have seen a sea change.  And if we go forward and we begin to sanction foreign companies through more stringent sanctions in the Iran Sanctions Act, I think there will be serious repercussions for our multilateral effort.  It is something that while we may not ultimately heed the warning, we need to at least understand that there are serious problems out there.  I'm not going to talk any further.  Omeed, thank you.

Omeed Jafari:  Thank you very much, Danielle.  I would like to open up the floor to questions.  Please wait for the microphone to be passed to you and when you receive it, please say your name and your affiliation.  Yes, sir.

James P. Lucier:  I'm Jim Lucier with the Institute on Religion and Public Policy.  And my question is, I think, probably directed towards Patrick or Ken.  It seems to me that there already is an Iranian disinvestment law in effect and that is the one with the statutes to the Iranian petroleum statutes themselves.  As I understand it, the foreign investments are limited to 49 percent and that you will have to sell this investment to the state after -- I think it is 10 years or a certain amount of time.  And in the meantime, you are not sure about repatriating your profits.  So I do not understand why these Northern European companies are investing at all.  I noticed that Total is reconsidering its investment in the South Pars Gas Field.

Patrick L. Clawson:  The conditions being offered by the Iranians are not particularly attractive compared to conditions being offered by other countries; although actually on some of the points you mentioned, the Iranians are not so bad.  But over all, the conditions they offer are not that attractive; however, there have been some companies that have been able to do rather nicely, Total not among them.  But for instance, Statoil of Norway has done quite nicely in Iran and is extremely active in the Iranian market.  But on the whole, the problems the Iranians have had attracting foreign investment into their oil and gas industry had been because of their poor terms and their reputation for corruption, and the interminable negotiations that are required because each Iranian official is scared that he will be criticized at home if he leaves a penny on the table for the foreigner.

The corruption problem has gotten significantly worse recently.  There was a truly bizarre episode when one of the few foreign companies prepared to send an oil rig into Iranian waters to work there was a Romanian company whose oil rig was then boarded and seized by the Revolutionary Guard Corps and which was not exactly a good way to attract additional companies to send in oil rigs which Iran badly needs.

And I would like us -- Europeans -- and Danny is quite right.  The Europeans have been very much more active than they were in the past.  I would like the European governments and the United States to be much more active in figuring out ways in which we can drain the money going to Revolutionary Guard leaders and other corrupt regime figures in the oil and gas business.  Ahmadinejad has been effectively displacing the former corrupt crowd of reformers with his own corrupt crowd and we ought to be targeting them hard.

Omeed Jafari:  Yes, Ken.

Kenneth R. Timmerman:  Good morning.  Ken Timmerman from NewsMax.  My question is for Ken Katzman.  We heard a lot this morning from Brad Sherman and others about tools in the toolbox and certainly, disinvestment is one of them.  And by the way, my own reading of the Iranian domestic situation is that it has gotten the attention of Iranian leaders and I think it is a very important tool to be using at the state level as well as at the federal level.  It works and it gets people’s attention.  The treasury department’s tools have been also extremely effective and have gotten the attention of the Iranian government.

The one tool that has not been mentioned here and is not really being pursued effectively by the U.S. government at any level is the people of Iran, the pro-democracy tool.  There is a program - and this is why I want you to comment on it, Ken - with the State Department to spend this year -- I think it is around $31 million on democracy promotion programs.  But I have learned from the sources who were involved in this that, in fact, it is the State Department bureaucracy which is kicking and screaming and refusing to allocate these funds to effective programs.  And instead they think that instead of democracy promotion, which is the policy of the Bush administration and which, by the way, was also supported by Congress in authorizing and then appropriating this money -- instead, the policy should be to help artists and painters and singers and dancers.

Well, if you could comment on that on the status of the program, that would be helpful.

Kenneth B. Katzman:  Well, not all of that is open.  I mean, I cannot really talk about all of that because they are trying to protect the people that are getting the money so they have not specified who -- but part of -- there is a spigot.  Actually, Congress did earmark some of those categories; a small portion are for cultural exchanges, student exchanges.  So I would not say it is all meridian houses, art show, and all this stuff.  But a lot of it is for Radio Farda; a lot of it is VOA -TV as part of the overall -- but what I would say is the Department view -- I'm not speaking for them; maybe somebody is here.  But their view is this money is not about democracy promotion or regime change; it is about behavior modification.  That is their formal position. 

This money is to assist the U.S. effort to moderate Iran’s behavior to approximate that which was seen under Mohammad Khatami when he was President.  Now, whether one can get to that, whether that is really meaningful to get to that in the first place -- some would dispute that -- that was not some utopia in the first place but that is what they say as far as what the goal is.  As far as specifics of who is getting these funds, I just cannot elaborate on.

Patrick L. Clawson:  Can I make a comment?  Ken, I would not be so negative about cultural exchange.  I mean, I think it is quite useful when the United States government offers substantial funding for artists to come to the United States.  Then they get back to Iran, have their passports confiscated and the regime arrested some of them yesterday.  It sends a message to Iranians on who is the problem here; the problem is not United States government.  Or when the U.S. government volunteers to bring Iranian athletes here to the United States to train for the Olympics and the Iranian government says, “No.”  It is very useful in countering this image which the Iranian government likes to peddle about U.S. hostility towards the Iranian people; it gets the message home to people.  And when the United States government has been advertising about how it is offering scholarships to Iranian students to come to study in the United States, a lot of kids were really pretty excited about that in Iran and then the Iranian government is putting enormous barriers in the way of doing this.  I think it sends a very useful message.

It also sends a useful message to those who claim, especially in Europe, but even some in the United States that the U.S. refuses to talk to Iran, which is generally untrue.  The United States has had a long history of high-level dialogue with the Iranian government; very rarely has it been fruitful.

But we have certainly also had an active program about reaching to the Iranian people, and I think we should be doing more of it.  And in fact, my criticism of the State Department and of the U.S. government is that how poorly managed many of these programs are and in particular how our legitimate security concerns about visitors have led to extraordinary bureaucratic bungling that has allowed the regime to portray the American government as being hostile to the Iranian people.

So when, for instance, the United States decided to cancel the visa of a whole group of Iranians who were coming here for an alumni meeting, nobody told the Iranians before they got in the plane that the visas had been canceled.  So they arrive in airports across the United States, especially in San Francisco, to discover that they were instead going to be handcuffed, taken away to a jail, and then put on the next plane back at their own expense because nobody bothered to tell them the visa was cancelled.  Well, the episode got tremendous play in Iran.

And so I would say that we should be doing more on these exchange programs and not less.

Danielle Pletka:  Ken, you have heard us talk about this before, but I do think that it is important as we talk about the economic measures to actually talk about one aspect where you have an intersection of the kind of activism that we are looking for with Iranian economic interests with opposition to the regime and with the whole effort to isolate the regime economically, and that is through the trade unions.

And what some of us -- and I hate to say it, but probably increasingly few us in this room remember is the good old days of Lane Kirkland and the AFL-CIO and the strong positions that American unions were willing to take - but particularly the AFL-CIO were willing to take - to stand up for groups like Solidarity and for labor union movements in the former Soviet Union and for labor union movements in Asia.  And they were really willing to stand up for people who were being thrown in jail because they were organizers of independent unions because they were people not who were standing up and saying, “Let’s overthrow the regime,” but we are saying, “Hey, I want to organize my workers because we want to get better pay and I do not think that you have the right in the government to put some of your people on my labor union board.”  This is why Mr. Osanlou is in prison in Iran; this has not been made enough of an issue up. 

And I think that if you want to talk about an intersection here of left and right, which is something that we have been talking about, this is an opportunity where we are speaking to Iranian workers -- highly unionized, the national Iranian oil workers union and others, extremely important and profoundly disgruntled.  Even in the highly state-controlled press you can read about how unhappy these people are.

Again, they are not unhappy over nuclear weapons programs and I do not care that they are.  They do not like their government; we do not like their government.  We have shared interests and there is an opportunity that I know has been exploited in there in the end.  The Solidarity Institute, which is one of the core grantees of the National Endowment for Democracy, has done a very good work with it.  They are quiet about it, but the truth is that we can do more and let’s call on everybody else.  Let’s say, the Europeans who care so much about their labor unions, they too could do so much more.  There is an opportunity that is missed.

Omeed Jafari:  Thank you.  Yes?

Daniel Dombey:  Dan Dombey, Financial Times, again.  I was just wondering if at root you think that we [indiscernible] push for sanctions is going [sounds like]to likely to amount to anything more than what Robert Kagan once called “give futility a chance.”  Even if everything works, even if foreign companies change their behavior because of the kind of legislation you are talking about or the kind of threat about legislation; even if the UN actions become more effective and has changed qualitatively, do you really think that in the what even someone like ElBaradei says is five to seven years and others think is much less that remains before Iran can get the bomb that Iran will rethink -- its cadres will rethink the fundamental strategic decision that they made so long ago, that they wanted to have a nuclear option, they wanted to go down a nuclear path and that the Revolutionary Guards [indiscernible] endure the privations of the 1980s would endure this as well?

Patrick L. Clawson:  Well, I’ll first comment about that which is that the sanctions to date, as Ken and Danny have pointed out, that are adapted by the United Nations have been targeted at the WMD programs, the nuclear program in particular.  And they seem to be having some effect.  In November 2004, when the IAEA went to Iran in order to certify Iran’s suspension of its enrichment programs, they said that Iran had 1,241 centrifuge rotors, the key element of a centrifuge.

Well, the most recent IAEA reports said that Iran now had 1,340 centrifuges; there is a similarity in these two numbers.  Well, this suggests that there is a real problem that the Iranians have.  And by the way, I do not think that those 1,340 centrifuges are working very well.  At least from the data that we have available, they seem to be working very badly.  And that is not surprising.  I mean, making centrifuges is tough.  The United States does not have much experience in this area, but Eurenco, the company from which -- the Dutch-based company from which Aqcon stole the plans which then the Iranians got -- Eurenco is building a private centrifuge facility and hubs in Mexico.  Eurenco says that once it completes that facility and installs the centrifuges, it will be three years before they are at full commercial production.  Now that is in New Mexico.

So if we can slow down Iran’s nuclear program, we can, in fact, achieve some of the kinds of success we have over the last 18 years where Iran has been pursuing this nuclear capability for 18 years and has not gotten very far.  I mean, okay, we can say, “Yes.  Look at all the centrifuges they got,” but after 18 years?  Good grief.  And if we can slow them down so that we have not another three years but another nine years, that would be a much more opportunity for us to influence Iranian behavior.

That said, I would agree with the thrust of your question, which is that it is unlikely that economic measures alone will be sufficient.  And I think that we should be pursuing, therefore, political and security measures.  And that on the political front we are doing not badly; we have gotten the Russians and the Chinese to sign on board to the idea of sanctions against Iran; we have gotten unanimous Security Council resolutions.  I think we need to be doing more in the security front.

And in particular, since European countries have made all of these grandiose promises about security guarantees to Gulf countries -- I mean, France has signed the Treaty of Mutual Defense with Qatar, which I find amusing - Qatar defending France.  But it will be useful if European countries were to put some “umph” behind this.  And in the face of repeated Iranian threats to close the Strait of Hormuz, this would be a good time to have an exercise how to defend it.

And at a time when Turkey is involved in accession talks with the EU, it would be useful if NATO were to actually -- the North Atlantic Council NATO were to order the military staff, which is not too busy these days, to prepare plans for how to defend Turkey from an attack from the East.  So I think that we should be doing more on defensive security measures that could impress upon the Iranian leaders that if they go down this route of pursuing a nuclear capability, that is going to make Iran’s security situation worse because Iran’s neighbors are going to take counter measures that will leave Iran worse off.

Kenneth B. Katzman:  I just want to talk a little about where I think Congress is on your question.  I think what I'm hearing in Congress is they are willing to give the Security Council process a chance for a while and to see if the ratcheting up of pressure does, indeed, rattle Ahmadinejad, the regime and cause change.  What I hear from the Europeans and others is the idea that, “Well, we will give it a chance, but if it reaches an impasse, then maybe we have to acquiesce and just accept a nuclear Iran.”  That is not where Congress is in my view.  My view is they will not accept a nuclear Iran and they will push and keep pushing until some measures are taken, whether they are successful or unsuccessful.

Now, obviously, we get into the issue of security measures at some point, and I'm in the camp that -- I'm not in the camp that sees no value or no possibility for security action by the United States.  I'm not convinced about joint action.  I think this action would have to probably be United States -- Central U.S. capabilities.  I am not a believer that these would be doomed -- would have no value.  I am of the view that if well designed and properly designed, they could have the effect of halting Iran’s program.

Female Voice:  And I just want to say one thing.  I think I disagree a little bit with Patrick about whether the Iranians have been most successful in their spinning and centrifuges.  I think they have made some pretty serious progress.  I also think that once they progress, they will have progressed and there will be no going backwards.  So I guess I disagree a little bit about that, but I do not disagree with thrust of what he says.  But, you know, there is a tendency when we have these conversations to talk about Iran and the nuclear problem, and I agree that economic measures alone are not going to cause the Iranians to suddenly rethink the wisdom of a program they have actually been pursuing since well before the revolution. 

But it will slow them down and we also need to remember some other things.  It is not just us or even us Europeans or even Mohamed ElBaradei and Ahmadinejad; it is us - the Europeans, the U.N. Security council and Iran’s neighbors and Hezbollah and Lebanon and Syria and Hamas and the Al-Qaeda people living inside Iran and the support that they are giving to now the Taliban in Afghanistan and the IEDs they are shipping into Iraq and their relationship with Muqtada al-Sadr, and the fact that the Saudis are spending sleepless nights ringing up people who they can find in Washington to say, “When are you bombing Iran?”

These are all important factors, and they will go in a particular direction because they are also pressure points on the Iranian government. So I do think that it is important as we think about this not to look at it too one-dimensional a way.  There are a lot of pressure points -- we may not succeed, but there are a lot of people who are afraid of this and it is not just us Westerners who think the Iranians are bad guys; it is people who have been willing to do business and break bread with the Iranians in the past.

Omeed Jafari:  Yes.

Dmitri Ivanov:  I have a question for every panelist.  I'm Dmitri Ivanov with [indiscernible].  My question is for every panelist.  Do you personally consider any foreign company with investments, say, in Iran’s non-energy sector to be a sponsor of terrorism?

Patrick L. Clawson:  Well, I would say that it is quite amusing to watch how when European governments have considered the question of what kind of sanctions we might apply in Iran as we got tougher, that they came to the same conclusion that the U.S. Congress did long ago which is to say that the energy sector is a key point of vulnerability of Iran and that the income of the energy sector goes to the Iranian government, and that, therefore, we ought to concentrate on sanctions about the oil and gas sector.  I have no objections to investments in fields that are indeed run by private firms.  But the difficulty in the Iranian economy is that so much has been taken over by the Revolutionary Guards and by other corrupt areas.

So for instance when the Clinton administration allowed the sale to the United States of carpets, you would say, “Oh, well.  Great, because carpets are made by ordinary Iranians and sold here.”  As soon as something like that got allowed, suddenly this became an opportunity for a dramatic corruption.  And guess who horned their way into the business and insisted on taking a lot of the money.  And so the real problem that we face with regard to Iran is that wherever a profit-making opportunity arises, very quickly, this gets taken over by those connected with the regime.

Kenneth B. Katzman:  I would just add to what Patrick said that the carpet industry, too -- let’s not have any illusions about who is weaving these carpets.  They are very beautiful carpets, okay?  These carpets are made by young girls, eight, nine, ten years old working in terrible conditions; there is no oversight so -- I mean, they are very beautiful and the product is very nice, but it’s just a little aside [audio glitch]

Omeed Jafari:  Yes, sir?

Ron Dermer:  Ron Dermer from the Embassy of Israel.  It is a question to Dr. Clawson on -- to look ahead at a very interesting point that Mr. Katzman made that where international companies are going to come out, the Revolutionary Guard will step in.  But could it not be the case that by doing so internally within Iran, that could actually cause a huge problem for the regime and that while you may appear to be helping the Revolutionary Guard in the short term, the impact internally on the regime could be very, very problematic?

So how would you see an Iran where international companies are leaving and the Revolutionary Guard is getting much, much stronger?  What would be the political dynamic?

Patrick L. Clawson:  Well, first, Ken is certainly correct that the Revolutionary Guard is going to try to profit from any situation.  And it is going to be very difficult for us to drain their money.  That said, I'm actually more optimistic that we can find ways of doing this.  And I think, for instance, of the tiffs that the British down in Southern Iraq have had with the Revolutionary Guards.  And those of course have been -- both the seizures this year and the seizures a year and a half ago are, of course, entirely unrelated to what you can see if you stand there on the shore in Basra and you see all these little boats smuggling mostly alcohol into Iran and opium into Iraq.  But the Revolutionary Guards are up their eyeballs in that smuggling business.  And there are ways in which we can drain their income, so I think that we should try doing that.

As for the Revolutionary Guards stepping in when foreign companies leave -- look, the Revolutionary Guards do not have the technical capabilities that the international companies are providing.  And so when the Revolutionary Guards have won contracts, their standard procedure is then to go to one of the losing bidders from the international companies and offer to give them the contract to actually do the work after the Revolutionary Guards have skimmed off the corrupt profit margin that they want.  And the Revolutionary Guards simply do not have the capabilities to replace the international firms, in fact, in any of these contracts that we are talking about.  And this process of the Revolutionary Guards then getting the contract, skimming off some money and giving it to the actual work to a foreign company can be well-observed by the Iranian competitors who lost the contract bid, and they are embittered.  And the comments from the Iranian business community about some of these large contracts that the Revolutionary Guards have won have been truly furious.  So yes, the revolutionary guards may make some money out of this process, but at a very high political price.

Omeed Jafari:  Yes, all the way in the back.

Julie Kosterlitz:  Julie Kosterlitz with National Journal.  I may have missed in an earlier session exactly what the scenario is that people would like to see come of this because it seems that both primary and secondary economic sanctions -- it seems like there is talk of behavior modification; there is talk of regime change periodically; there is talk of stopping or slowing a nuclear weapon.  And it is not completely clear to me what the scenario is, whether this involves negotiations, whether it looks like this would just lead to some kind of grand compromise and how this all fits in with the current dialogue that is going vis-à-vis Iraq.  In other words, where negotiations fit into this process.  Thank you.

Danielle Pletka:  I'm not quite sure why -- you certainly did not miss anything earlier about this.  I'm not quite sure why all of those things are mutually exclusive. I think that the aim is to see an end to the Iranian nuclear weapons program and then you have a fairly diverse set of views from then on.  I think a lot of people -- I would hope all of them in that camp would also want to see an end to Iranian sponsorship of terrorism.  I think most of us would like to see them -- and the shipping of IEDs into Iraq and interference in our efforts and the Iraqi government’s efforts there.  I'm betting that the Lebanese would like to see them get the hell out of Bekaa valley and stop supporting Syria, and we could probably go on from there.

But as to how we get from A to B, this is meant to certainly slow them down to make them see either the wisdom of dialogue or to help the Iranian people see the wisdom of a new and different leadership, which after all will certainly benefit them.  It is always interesting to me that those who pride themselves on opposition to what the United States is not doing in Iraq seem to have absolutely no interest in the human rights and well-being of the Iranian people.  Seventy percent of them, regularly polled, suggested they do not really like their government very much.

We have not talked at all about the Iranian-Americans who are being held hostage, but take someone like Haleh Esfandiari from the Wilson Center.  There is a lady who devoted much of her professional life to opening up dialogue and avenues of discussion with the Iranian regime.  She is sitting in Evan Prison in, I imagine, rather unpleasant circumstances right now.  It would be nice to see people like that released from prison, too.  So I think those are all the goals.  And perhaps my colleagues would like to say something.

Patrick L. Clawson:  Yeah.  Look, I have a lot of goals in life and if I can make progress towards one of them, then I’ll take what I can on that front even if I cannot make progress on other ones.  And so I would be -- would regard it as peculiar in advancing U.S. interests if we said that we have to -- we have achieved nothing unless we have achieved everything.  And I’ll be happy to take modest progress in some fronts

And I'm also not a believer in magic bullets, and I do not believe in putting all my eg