```

[Senate Hearing 111-336]
[From the U.S. Government Publishing Office]

                                                        S. Hrg. 111-336

 MINIMIZING POTENTIAL THREATS FROM IRAN: ASSESSING ECONOMIC SANCTIONS 
                     AND OTHER U.S. POLICY OPTIONS

=======================================================================

                                HEARING

                               before the

                              COMMITTEE ON
                   BANKING,HOUSING,AND URBAN AFFAIRS
                          UNITED STATES SENATE

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                                   ON

 EXAMINING HOW THE UNITED STATES CAN USE SANCTIONS AND OTHER FORMS OF 
  ECONOMIC PRESSURE TO PREVENT IRAN FROM ACQUIRING A NUCLEAR WEAPONS 
                               CAPABILITY

                               __________

                             JULY 30, 2009

                               __________

  Printed for the use of the Committee on Banking, Housing, and Urban 
                                Affairs

Available at: http://www.access.gpo.gov/congress/senate/senate05sh.html

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            COMMITTEE ON BANKING, HOUSING, AND URBAN AFFAIRS

               CHRISTOPHER J. DODD, Connecticut, Chairman

TIM JOHNSON, South Dakota            RICHARD C. SHELBY, Alabama
JACK REED, Rhode Island              ROBERT F. BENNETT, Utah
CHARLES E. SCHUMER, New York         JIM BUNNING, Kentucky
EVAN BAYH, Indiana                   MIKE CRAPO, Idaho
ROBERT MENENDEZ, New Jersey          MEL MARTINEZ, Florida
DANIEL K. AKAKA, Hawaii              BOB CORKER, Tennessee
SHERROD BROWN, Ohio                  JIM DeMINT, South Carolina
JON TESTER, Montana                  DAVID VITTER, Louisiana
HERB KOHL, Wisconsin                 MIKE JOHANNS, Nebraska
MARK R. WARNER, Virginia             KAY BAILEY HUTCHISON, Texas
JEFF MERKLEY, Oregon
MICHAEL F. BENNET, Colorado

                    Edward Silverman, Staff Director

        William D. Duhnke, Republican Staff Director and Counsel

               Colin McGinnis, Professional Staff Member

                Neal Orringer, Professional Staff Member

                Misha Mintz-Roth, Legislative Assistant

                Mark Oesterle, Republican Chief Counsel

          John O'Hara, Republican Senior Investigative Counsel

                 Ellen Chube, Professional Staff Member

                       Dawn Ratliff, Chief Clerk

                      Devin Hartley, Hearing Clerk

                      Shelvin Simmons, IT Director

                          Jim Crowell, Editor

                                  (ii)

                            C O N T E N T S

                              ----------                              

                        THURSDAY, JULY 30, 2009

                                                                   Page

Opening statement of Senator Bayh................................     1
Opening statements, comments, or prepared statement of:
    Senator Shelby...............................................     3
        Prepared statement.......................................    45
    Senator Tester...............................................     4
    Senator Corker...............................................     4
    Senator Menendez.............................................     4
    Senator Martinez.............................................     5
    Senator Merkley..............................................     6
    Senator Johanns..............................................     6
        Prepared statement.......................................    45
    Senator Bennet...............................................     7

                               WITNESSES

Joseph I. Lieberman, a United States Senator from the State of 
  Connecticut....................................................     8
    Prepared statement...........................................    46
Nicholas Burns, Professor of the Practice of Diplomacy and 
  International Politics, Harvard University.....................    12
    Prepared statement...........................................    47
    Responses to written questions of:
        Chairman Dodd............................................    63
        Senator Johanns..........................................    64
Dr. Matthew Levitt, Senior Fellow and Director of the Stein 
  Program on Counterterrorism and Intelligence, Washington 
  Institute for Near East Policy.................................    15
    Prepared statement...........................................    50
    Responses to written questions of:
        Chairman Dodd............................................    65
        Senator Johanns..........................................    69
Suzanne Maloney, Senior Fellow, The Saban Center for Middle East 
  Policy, Brookings Institution..................................    17
    Prepared statement...........................................    54
    Responses to written questions of:
        Chairman Dodd............................................    69
        Senator Johanns..........................................    70
Danielle Pletka, Vice President, Foreign and Defense Policy 
  Studies, American Enterprise Institute for Public Policy 
  Research.......................................................    20
    Prepared statement...........................................    59
    Responses to written questions of:
        Senator Johanns..........................................    71

                                 (iii)

 
 MINIMIZING POTENTIAL THREATS FROM IRAN: ASSESSING ECONOMIC SANCTIONS 
                     AND OTHER U.S. POLICY OPTIONS

                              ----------                              

                        THURSDAY, JULY 30, 2009

                                       U.S. Senate,
          Committee on Banking, Housing, and Urban Affairs,
                                                    Washington, DC.
    The Committee met at 10:04 a.m. in room SD-538, Dirksen 
Senate Office Building, Senator Evan Bayh, presiding.

             OPENING STATEMENT OF SENATOR EVAN BAYH

    Senator Bayh. The Committee will please come to order. I am 
pleased to call to order this hearing of the Senate Banking 
Committee which will focus on how the United States can use 
sanctions and other forms of economic pressure----
    Senator Corker. Your microphone.
    Senator Bayh. Ah, great. Thank you. I am grateful that you 
are interested in what I am saying, Bob.
    Senator Lieberman. It is very good to see the spirit of 
bipartisanship at the outset.
    Senator Bayh. Absolutely. No one goes without an adequate 
hearing in the Banking Committee, Joe. Thank you, Senator.
    I am pleased to call to order this hearing of the Senate 
Banking Committee which will focus on how the United States can 
use sanctions and other forms of economic pressure to prevent 
Iran from acquiring a nuclear weapons capability.
    I want to begin by thanking our Chairman, Senator Dodd, for 
his assistance in arranging this hearing and for his support 
and leadership on this important issue and his staff and the 
staff of the Banking Committee as well. We all know that 
Senator Dodd has many other demands on his time, and his 
willingness to schedule this hearing, despite those demands, 
demonstrates his commitment to confronting this serious threat.
    As we gather here today, there is perhaps no challenge more 
pressing or vexing than Iran's pursuit of nuclear weapons. The 
extent of the three is well documented. The Iranian regime has 
refused to cease its illicit nuclear activities in defiance of 
multiple U.N. Security Council resolutions. It is the world's 
foremost state sponsor of terrorism, and it has provided arms 
and training to dangerous terrorists groups in Iraq, 
Afghanistan, Lebanon, and the Palestinian Territories. And as 
we have all observed so vividly in the past few weeks, it is 
engaged in brutal repression of its own citizens.
    If this regime were to acquire nuclear weapons, it could 
spark a dangerous arms race in the Middle East, do irreparable 
damage to the global nonproliferation regime, and pose a 
serious threat to the security of the United States and our 
allies. In confronting a threat of this magnitude, a sense of 
urgency is in order.
    I know that many Senators share my concerns about Iran, as 
is evidenced by the legislation this Committee has considered 
over the past several years. Last year, Chairman Dodd put 
forward a sanctions bill that included some very noteworthy 
measures. More recently, I introduced legislation with Senator 
Kyl and Senator Lieberman called ``The Iran Refined Petroleum 
Sanctions Act.'' This bipartisan bill would give President 
Obama expanded authority to target what has been described as 
Iran's Achilles heel: its dependence on imported refined 
petroleum products.
    Our bill has since won the support of 71 Senators from 
across the ideological spectrum. This hearing, however, will 
not focus exclusively on any particular legislation; rather, we 
will focus more broadly on the relative advantages and 
disadvantages of different forms of economic pressure.
    We are fortunate to have with us today several noted 
experts who have agreed to share their views on how the United 
States can best use economic pressure as a tool to advance our 
interests with respect to Iran. As we consider this question, 
we should keep in mind that when it comes to Iran's nuclear 
program, there are, unfortunately, no easy answers.
    Accordingly, all of the different approaches we will 
explore today are bound to have some drawbacks, and we are 
likely to be faced with a choice among difficult options. I 
firmly believe, however, that using economic pressure is far 
superior to the extreme alternatives of standing idly by as 
Iran goes nuclear or relying solely on a potential military 
strike, which could have grave consequences and should be 
contemplated only as a last resort.
    As we consider our various options, we do so in cooperation 
with President Obama's historic outreach to Iran. This outreach 
has demonstrated to the Iranian people and the international 
community that the United States is prepared to engage in 
direct dialog to resolve our differences between our two 
countries. The President's offer of engagement has also put the 
regime on the defensive and made it more difficult for Iran's 
leaders to blame the West for all of their problems.
    While I have supported the President's outreach, I believe 
that we have been wise to set a deadline for Iran to accept his 
offer. I am also pleased that the Senate last week unanimously 
adopted a resolution that I put forward, once again with my 
friends Senator Lieberman, Senator Kyl, and Senator McCain, 
that reinforced the deadline by making it clear to the Iranians 
that they have until the G-20 summit at the end of September to 
agree to negotiations or else to face sanctions.
    While I sincerely hope that Iran's leaders seize this 
historic opportunity for dialog, I believe that prudence 
demands that Congress begin to lay the groundwork for a 
different approach should Iran continue to reject meaningful 
negotiations. Such preparations will demonstrate to Iran's 
leaders that there will be grave consequences if they do not 
agree to forego their drive for nuclear weapons.
    To put it even more bluntly, if Iranian officials are 
unwilling to sit down at the table and negotiate, then Congress 
is prepared to authorize what Secretary of State Clinton has 
referred to as ``crippling'' economic sanctions.
    With each day that passes, Iran is installing more 
centrifuges and producing more fissile material. According to 
published reports, they have now accumulated enough low 
enriched uranium for a nuclear weapon should the regime decide 
to develop one, and by next February, they will have enough for 
two weapons.
    Conversely, our window of opportunity to stop Iran from 
acquiring nuclear weapons is rapidly closing. The clock is 
ticking, and at some point it will run out. As we have seen 
with India, Pakistan, and North Korea, the clock can often run 
out sooner than we think, with grave consequences for the 
region and the world.
    I hope that today's hearing will help underscore the depth 
of the Senate's concern over Iran's nuclear program and will 
demonstrate to Iran and to the international community that 
Congress is prepared to act.
    As I have previously mentioned, we are fortunate to have 
with us today a distinguished group of panelists, beginning 
with our friend and colleague Senator Lieberman. But before we 
hear from them, I would first like to give my distinguished 
colleagues an opportunity to share their thoughts, and we will 
begin with my friend and colleague, our Ranking Member, Senator 
Shelby.

             STATEMENT OF SENATOR RICHARD C. SHELBY

    Senator Shelby. Thank you, Mr. Chairman.
    Once again, the Committee meets to hear testimony on Iran's 
support for terrorism and its determination to develop nuclear 
capability. This time, however, we meet at a time that is 
marked by weeks of unprecedented social, economic, and 
political upheaval in Iran. While many things remain unclear 
about Iran and its future, two remain very clear: Iran's 
nuclear ambitions and its sponsorship of terrorism.
    Iran continues to make strides in both its nuclear and 
missile programs, and it is still recognized as the so-called 
central bank for terrorist financing. Over the years, various 
administrations have attempted, with little or no success, to 
moderate the regime's nuclear aspirations and to curb its 
support for terror. Certainly time and experience have shown 
that economic sanctions can be a mixed bag as a foreign policy 
instrument. Sanctions and other financial measures, directly or 
indirectly, have restrained some of Iran's activities. But we 
have yet to implement a sanctions regime that produces the 
desired result. It has become clear that we need a fresh 
approach and that stricter controls may be necessary.
    I appreciate our witnesses' willingness to appear before 
the Committee today. I cannot help but note, however, that the 
current administration is not represented at today's hearing. 
The members of this panel will undoubtedly provide valuable 
insight on the previous administration's efforts. Current 
officials, however, would certainly be in a better position to 
provide details or even discuss generally how the President 
intends to engage Iran diplomatically and whether he would 
support further sanctions on the regime. I hope we will get the 
opportunity to have that discussion sometime in the near 
future.
    Thank you, Mr. Chairman.
    Senator Bayh. Thank you, Senator Shelby.
    I will recognize members in the order in which we arrived, 
alternating sides of the aisle. Senator Tester.

                STATEMENT OF SENATOR JON TESTER

    Senator Tester. Thank you, Senator Bayh, and I want to 
thank you and Chairman Dodd and Ranking Member Shelby for 
having this hearing, and I welcome Joe Lieberman. Thank you for 
being here, Senator.
    This is an interesting issue on a couple different fronts 
because I think that any sanctions that we apply, we cannot be 
the only ones on the block doing it, I guess is what I want to 
say. We need to make sure that it is a community effort amongst 
the world, and how we get other folks to step up to the table 
because, quite frankly, Iran's potential nuclear capabilities, 
if they come to pass, will have a destabilizing impact on the 
world. And so how we get other folks to step up and help us 
keep that region stable, basically--that is what we are looking 
for--is important.
    And then as we look and see what has transpired over the 
past while with the recent elections and the unrest that is 
occurring in that country due, I think, to poverty and 
unemployment and a government that is simply not responsive to 
the people, how do we not distinguish that flame that is 
burning? Because, quite frankly, I think that the people have 
figured it out, and we do not want to stop them from 
controlling their own destiny.
    So I look forward to the hearing, look forward to the 
panelists, look forward to hearing what they have to say about 
the region. I by no means am an expert, but I certainly look 
forward to the information.
    Thank you.
    Senator Bayh. Thank you very much, Senator.
    Senator Corker.

                STATEMENT OF SENATOR BOB CORKER

    Senator Corker. Thank you, Mr. Chairman.
    Mr. Chairman, I, as you know, do not ordinarily make 
opening comments. I do want to welcome, though, Senator 
Lieberman. There is a hearing in Foreign Relations on Sudan. I 
just came from there. So I am going to be in and out. I want 
you to know that is no disrespect to one of the most honored 
witnesses we have had in recent times.
    So thank you for having this hearing. It is very important, 
and I look forward to learning from it.
    Senator Bayh. Thank you, Senator.
    Senator Menendez.

              STATEMENT OF SENATOR ROBERT MENENDEZ

    Senator Menendez. Thank you, Mr. Chairman.
    I want to just briefly say that I appreciate this hearing. 
It is timely and important. It is my personal view that Iran is 
not simply an existential threat to our ally in the Middle 
East--Israel--but it is a threat. And when I look at the fact 
that Iran has made dramatic progress in its nuclear program 
over the last 18 months, with the June IAEA report indicating 
that it had increased the number of installed centrifuges by 
1,200 in the preceding 3 months, and that its stockpile of low 
enriched uranium is now at 1,339 kilograms, an increase of 33 
percent since the February report, enough low enriched uranium 
to produce a minimum amount needed to arm a bomb if the 
material were further enriched to weapons grade; and in 
addition to its growing enrichment process, Iran continues to 
test fire ballistic missiles at a rapid pace, missiles that now 
are capable of delivering a payload to Israel or our allies in 
Europe, I am seriously, seriously concerned.
    So I look forward--I believe and respect what the 
administration is doing in terms of seeking to have a 
diplomatic track, but I think the Congress strengthens the hand 
of the President in having an alternative track, a parallel 
track at the same time, and that is why I support your 
legislation, am a cosponsor of it, and looking to hearing the 
witnesses today to determine how do we best ensure that what we 
universally do not want to see happens does not take place.
    Thank you, Mr. Chairman.
    Senator Bayh. Thank you very much, Senator Menendez.
    Senator Martinez.

               STATEMENT OF SENATOR MEL MARTINEZ

    Senator Martinez. Mr. Chairman, thank you very much. A very 
important hearing, of course. We all agree.
    Senator Lieberman, a pleasure to have you, and to the other 
distinguished panelists as well, thank you for being with us 
today.
    No doubt that Iran is on a path to achieving nuclear power, 
a weapon. There is no doubt that that would be an incredibly 
destabilizing event to the region, but it is also equally a 
threat to the very existence of the people of Israel. We cannot 
allow for this to occur. I appreciate the diplomatic track, but 
I believe that all options must be available and on the table. 
And I think the longer we wait, the more danger arises. I think 
the time to act becomes closer and closer at hand.
    I do not think there is any question that Russia does not 
care about this outcome that we so much care about, and so I 
think, so long as they are part of the P5-plus-1 process, that 
nothing significant is going to come out of that.
    Obviously, it is great to look at the diplomacy being a 
part of this, but I have no hope that Iran voluntarily will 
stop the path they are on. Even with the unrest that they have 
had, there is really no indication that a changed government 
would have a different idea on the pursuit of nuclear weapons 
and perhaps even on the issue of the destruction of Israel that 
President Ahmadinejad seems so intent upon.
    So I am concerned and I think the fuse on our timeframe 
grows shorter by the minute, and I would love to hear the 
administration make a clear statement that all options continue 
to be on the table and also that time is of the essence, and 
that simply hoping for a negotiation to begin that is, in my 
view, elusive at best, particularly with a government that 
today you do not even know who you are to negotiate with 
because I am not sure the power structures are intact in Iran 
at the moment. I think that the time for more aggressive action 
draws really, really close.
    So thank you for being here. I look forward to hearing from 
all of you.
    Senator Bayh. Thank you, Senator Martinez.
    Senator Merkley.

               STATEMENT OF SENATOR JEFF MERKLEY

    Senator Merkley. Thank you very much, Mr. Chair, and I 
associate myself with the comments of my colleagues. I am 
hoping that in the testimony today we can really get into the 
details of understanding the potential features of a sanctions 
strategy and why is it the 1996 Iran Sanctions Act did not work 
so well. How do we bring in and strengthen and move from 
unilateral to multilateral sanctions that might be more 
effective? What are the levers with Russia and Europe and Asia?
    And so that we have basically recognized over time that 
sanctions are--there is no magic bullet here, but what can we 
do that would make this tool the most effective one possible to 
try to prevent this unacceptable threat of a nuclear weapon in 
Iranian hands?
    Senator Bayh. Thank you, Senator Merkley.
    Senator Johanns.

               STATEMENT OF SENATOR MIKE JOHANNS

    Senator Johanns. Thank you very much, Mr. Chairman.
    Let me start out today and say it is good to be here, and, 
Senator Lieberman, I have so much respect for your thinking in 
this area, and I wanted you to know that. I really appreciate 
your strong leadership.
    I look back over the events of the last few months with the 
election in Iran, and I must admit that I am deeply worried by 
not only the rhetoric that has come out of that country on 
behalf of and by Ahmadinejad over the past years. But I am 
deeply worried by this situation where I think because of the 
election, because of the just aggressive violence, oppression 
of any voice pushing back on the results of that election, that 
unfair election, that Ahmadinejad has been emboldened by what 
has happened.
    For a long time, I would express the view that I really 
felt that the religious leadership in Iran had complete control 
over Ahmadinejad and where he was at and what he said. And I 
have to tell you, after the election, I certainly appreciate 
the power of the religious leadership there, but I also think 
that they have seen the train leaving the station, if you will, 
and they got on the train. And I worry about whether his power 
has now been solidified and strengthened in a way where as long 
as he pays deference to the leadership there, the religious 
leadership, he can do about what he chooses to do.
    If that is the case--and I would like to hear your thoughts 
on that--then I think the dynamic is changing. And the threats 
that sometimes seem crazy, the references to Israel that 
sometimes seem too bizarre to be real, maybe all of a sudden 
they are not bizarre anymore, and they are more real than 
bizarre.
    Those things, I think, are things we have to be paying 
attention to. If, in fact, that is a new nuance that has 
occurred in this very difficult part of the world, then we 
really have to refocus on what our strategy is going to be, how 
we are going to deal with this, what sanctions can have an 
impact, because it seems to me so far we are not having an 
impact in terms of sanctions.
    So my hope is that in today's hearing we can focus on has 
there been a new nuance added to this situation. Is Ahmadinejad 
in a more powerful position than maybe he has ever been? And 
what would the consequence of that be as we start to think 
about how we work with this situation?
    The final thing I will say--and I did not expect to speak 
this long, but I feel so strongly about this relationship we 
have with Israel and its importance to us. This is a part of 
the world where it is hard to find friends, and this is a deep, 
deep friend. This is a part of the world where it is hard to 
find democracy, and this is a country that was established on 
the basis of democracy and freedom. And I just think in every 
way we can we have to stand by this friend and support them, 
and the stronger we can speak as a Nation in that regard, I 
think the better off we are in terms of our long-term strategy 
for this part of the world.
    With that, I will just wrap up and say again, Senator, I am 
so anxious to hear your thoughts, and I appreciate your 
leadership in this area.
    Senator Lieberman. Thank you.
    Senator Bayh. Thank you, Senator.
    Senator Bennet.

             STATEMENT OF SENATOR MICHAEL F. BENNET

    Senator Bennet. Thank you, Mr. Chairman. I will be very 
brief. I want to first thank you for your leadership in the 
Congress on this incredibly important issue, for calling all of 
our attention to it, and for Senator Lieberman's leadership as 
well, thanks for being here today.
    This is an enormously important topic for us. The threat is 
real, both to the United States and to Israel, and the profound 
instability that could result in the region if Iran were able 
to acquire nuclear weapons should be of concern to every 
American and every citizen on this planet.
    I just appreciate your willingness to hold the hearing and 
am deeply grateful, Senator Lieberman, that you are willing to 
come talk to the Committee.
    Thank you.
    Senator Bayh. Thank you, Senator. I appreciate your kind 
words. As I mentioned in my opening statement, Senator Dodd was 
also instrumental in bringing us here today, so I want to let 
you know that your gratitude should be shared with him as well 
and his staff. So thank you for that, Senator.
    I would like to thank our distinguished witness for his 
patience in listening to all of us, and now the time has come 
for us to benefit from his insights. If there was ever a 
witness who truly needed no introduction to this panel, it is 
our first witness, Senator Lieberman, our distinguished 
colleague from the State of Connecticut. Senator Lieberman.

STATEMENT OF JOSEPH I. LIEBERMAN, A UNITED STATES SENATOR FROM 
                    THE STATE OF CONNECTICUT

    Senator Lieberman. Thanks very much, Senator Bayh, Senator 
Shelby, and members of the Committee. Thank you for giving me 
the honor of speaking before you this morning. Thank you for 
your kind words during the comments you spoke. I am really 
honored to be here.
    I join you in giving credit to my friend and colleague from 
Connecticut, Senator Dodd, for the leadership role he and this 
Committee have played, and to Senator Shelby as a strong, 
principled partner to Senator Dodd on these matters. Last year, 
this Committee reported out critically important sanctions 
legislation and endorsed it overwhelmingly.
    I thank you, Senator Bayh, for your strong and persistent 
leadership on this matter, and I will tell you what an honor it 
was for me to work with you on the amendment that passed in the 
Department of Defense authorization bill last week, and on S. 
908, the Iran Refined Petroleum Sanctions Act, all very 
important, as you said, quite remarkable.
    You all have spoken so eloquently and well that I am going 
to ask that my statement be included in the record because it 
is repetitive, and I will see if I can just put in context, I 
think, what we are all feeling and what this moment of 
challenge is about.
    The Senate is picking up its pace of action here. The 
amendment that was adopted last week unanimously by the Senate 
for the first time puts an explicit time schedule on sanctions 
against Iran, and it adopts the schedule that President Obama 
and President Sarkozy have stated, which is that if there is 
not a reaction by Iran by the G-20 meeting that will be held in 
Pittsburgh in the third week of September, action will have to 
be taken.
    And in our resolution last week, we said that that action 
should begin with sanctions against the Central Bank of Iran. 
Senator Shelby, you used the term that Iran has become ``a 
central bank for terrorism worldwide.'' The Central Bank of 
Iran is the central bank of support for terrorism and 
sustaining the economy of Iran and, may I say, end-running some 
of the other sanctions that a very creative, aggressive 
Treasury Department under the Bush Administration, continuing 
now under President Obama, have imposed on Iran.
    So

        Do this, Mr. President

is what we said last week

        at the G-20 or right after it, if there has been no response 
        from Iran or if within 60 days of that summit they do not stop 
        their production of enrichment on fissionable material.

    S. 908, as you said, has 71 Senate sponsors, broadly 
bipartisan. I would say, if you look at the list, it includes 
some of the most liberal and some of the most conservative 
members of the Senate. And there is power in this because it 
sends a very clear message to Iran and the rest of the world 
that no matter what may divide us on other issues, we are very 
united in our concern and our anger about the Iranian program 
of nuclear weapons development and our commitment to urge and 
push and pressure and legislate our Government to be very 
strong in doing everything we can to stop that development.
    Now, why does it worry us? Iran is a great country with 
great people. The whole history of Persia is of an 
extraordinarily bright, well-educated, highly developed 
culture. In 1979, the government was taken over--a complicated 
situation, I understand, but the reality--taken over by a 
fanatical Islamist regime. And it has grown more fanatical over 
the years, both with regard to its neighbors and the rest of 
the world, and with regard to its people. And too often in our 
discussion of Iran here, we, quite understandably, talk about 
the threat it represents to Israel, the threat it represents to 
the United States, the threat it represents to stability in the 
Middle East. But it has represented a daily threat, and not 
just a threat, but the reality of suppression and the denial of 
freedom and the brutal treatment of dissenters, to its people 
ever since this revolution took place.
    This is a fanatical regime that is also an expansionist 
regime, and it has chosen to work through proxies, terrorist 
proxies--Hezbollah, Hamas, the Shia extremists in Iraq--who 
have on their hands the blood of hundreds of American soldiers 
who would not have been killed there were it not for the 
support that the Iranian Revolutionary Guard Corps was giving 
to those extremists in Iraq.
    Now we have a situation where, as a result of the public 
uproar over the blatantly unfair elections, two things have 
happened. One, the world now sees what we cannot see every day 
because it is a closed society: the terrible repression that 
the Iranian people live under. And I always remember--I think 
it was Sakharov who said during the dark days of Soviet 
communist oppression that how can the world rely on the word of 
a nation that lies consistently to its own people and 
suppresses their freedom?
    But here is what I worry about, and, Senator Johanns, I 
think you have asked a very interesting question. I worry--and 
history gives us, I think, a basis for this worry--that 
nations, particularly dictatorial nations, when they are in 
domestic difficulty--and this regime is in trouble right now in 
Tehran--very often look to generate an international crisis, 
and through that crisis try to unite the people behind them 
again. So I think we are in perilous times.
    As you have all said, every day that goes by, more of those 
centrifuges are spinning, more fissionable material is being 
created. They have enough for one bomb now. They are soon going 
to have more than that.
    What happens when they achieve that capability? Well, of 
course, for Israel, listening to the words of Ahmadinejad and 
all the others, including some who today are described as 
moderates who say ``Death to Israel''--it represents an 
existential threat.
    But we also have to remember the cheers of ``Death to 
America,'' too. And, you know, we do not have to go back too 
far--only, unfortunately, to Osama bin Laden--to know that at 
our peril do we not listen to threats against us that seem so 
fantastic that they are unbelievable. But it is a real threat.
    Also, if you have been to the Middle East, as many of you 
have been, what has been striking to me is that the anxiety 
level about Iran and the Iranian nuclear weapons program is as 
high and intense at the leadership of the Arab countries as it 
is in Israel. The threats are not made to the Arab countries, 
but they feel the danger. And what they feel is if Iran gets a 
nuclear weapon, the balance of power switches in the Middle 
East.
    For us, this is very significant because over decades we 
have been committed to that stability, worked hard, spent a lot 
of money, lost a lot of lives to preserve that stability. That 
will be greatly disrupted if the Iranians get a nuclear weapon. 
There will be a powerful motivation in some of the larger Arab 
countries to develop their own nuclear capability. It will be, 
I think, the end of the international nonproliferation regime. 
And it will strengthen the terrorist proxies of Iran, because 
behind terrorist action then will be nuclear blackmail.
    I think this is about the most unsettling thing--in a world 
that seems very unsettled--that could happen. The greatest 
threat to peace is for Iran to get a nuclear weapons 
capability.
    So, for all those reasons and because time is not on our 
side, we have very few options to peacefully draw this to a 
close in a positive way.
    It is why I support President Obama's initiative to engage 
with Iran. We have got to test that, but we have got to test 
it, as you have said, on a time-limited basis. They can't drag 
this out as the Iranians did with the Europeans.
    I think what is becoming increasingly clear because of this 
initiative and the deadly silence of the Iranians in response 
to it--not only publicly, but from everything I can determine, 
privately--that the world has to recognize that the problem 
between Iran and the United States is not in Washington. It is 
in Tehran.
    And I think it will become increasingly clear that only 
through what Secretary Clinton described earlier this year as 
crippling sanctions do we have a chance to convince the 
Iranians to stop this nuclear weapons program and to save 
ourselves from exactly the choice that Senator Bayh described, 
the most difficult choice between doing nothing in regard to a 
nuclear Iran and taking military action, because that is the 
choice we will be faced with. To me, in that moment, I think 
there is only one choice, but we don't have to make it now and 
it is why these sanctions proposals are so important.
    I think we are at this point. I think, as someone else said 
to me, the only thing that the fanatical regime in Tehran cares 
more about today than the development of nuclear weapons is the 
survival of their regime. And I think with the instability in 
Tehran today politically, crippling economic sanctions may 
reasonably lead the regime to wonder whether it can survive and 
to lead it to do what it ought to do to become part of the 
family of nations.
    So I think that S. 908 is the next significant step. They 
depend on refined petroleum products. This bill will basically 
say to companies worldwide who are selling gasoline to Iran, 
who are shipping it to Iran, or who are ensuring or financing 
those shipments, you have got a choice to make. You can 
continue what you are doing with Iran or you can do business in 
the United States of America. You cannot do both.
    I think time is of the essence. I appreciate greatly that 
you are holding the hearing this morning. I hope that the 
Committee will consider marking up this bill and reporting it 
out in September. Remember, it is not mandatory. It gives the 
President the authority to impose these sanctions, and I think 
only if the Iranians see that these sanctions are coming do we 
have any hope of avoiding the stark choice that you, Mr. 
Chairman, have laid out.
    When you depart from your prepared text, you speak longer 
than you otherwise would. But your opening statements really 
inspired me to do that. I thank the Members of the Committee 
and I have great confidence in your judgment on this matter and 
so many others that come before you, as well.
    Senator Bayh. Thank you, Senator Lieberman.
    First, without objection, I will order the entry of your 
full statement into the record. So ordered.
    Thank you for your very insightful and sobering comments 
today. You have been a longtime leader in this area, and I know 
I speak for the entire Committee when I say how grateful we are 
for your leadership and your testimony today.
    Senator Lieberman. Thank you very much, Senator Bayh. Good 
morning.
    Senator Bayh. Good morning.
    I would like to ask the next panel of witnesses to please 
join us.
    While they are taking their seats, I would like to ask my 
colleagues, we are fortunate to have four very distinguished 
individuals with us today. That means the list of their 
accomplishments is rather lengthy. I ask my friend and 
colleague Senator Shelby, if it is all right with him and the 
rest of the Committee, I would like to have ordered the entire 
list of their credentials into the record, but in the interest 
of saving time, I will just cite their current place of 
employment.
    Senator Shelby. That is fine.
    Senator Bayh. With no objection, we will proceed that way 
and I will order their entire resumes entered into the record.
    Senator Bayh. I would like to thank our witnesses for 
joining us today. I am well aware that they have busy schedules 
and so I speak for the entire Committee when I say how grateful 
we are for your time and for the benefits of your thinking on 
this important area.
    As I mentioned, I am simply going to list your current 
place of employment and enter into the record your entire list 
of credentials. Because you are all so accomplished, it would 
take us quite some time to go through the entire list of 
academic accomplishments, employment history, and that sort of 
thing.
    We are first joined by Ambassador Nicholas Burns, who is 
with us today. He is a Professor of the Practice of Diplomacy 
and International Politics at the John F. Kennedy School for 
Government at Harvard University.
    Next, we have Dr. Matthew Levitt, Director of the Stein 
Center on Counterterrorism and Intelligence at the Washington 
Institute for Near East Policy. Thank you, Dr. Levitt.
    Next, we have Dr. Suzanne Maloney. I guess I am skipping 
over one in the order of the table here, but that is the way it 
has been given to me. I will come back to you, trust me, 
Danielle. She is Senior Fellow at the Saban Center for Middle 
East Policy at the Brookings Institution.
    And we also have Ms. Danielle Pletka, Vice President of 
Foreign and Defense Policy Studies at the American Enterprise 
Institute for Public Policy Research.
    I would like to thank you all for joining us today, and 
Ambassador, we will begin with you and then go in order down 
the table. Ambassador Burns?

   STATEMENT OF NICHOLAS BURNS, PROFESSOR OF THE PRACTICE OF 
    DIPLOMACY AND INTERNATIONAL POLITICS, HARVARD UNIVERSITY

    Mr. Burns. Senator Bayh, thank you very much. Senator 
Shelby and Members of the Committee, it is a pleasure to be 
here. I have testified before this Committee as a government 
official during the Bush Administration in the past. This is my 
first time testifying as a private citizen, so obviously the 
views I am about to express to you are entirely my own. But it 
is a pleasure to be here.
    I will not read my statement. I will take mercy on the 
Committee. I submit it for the record, obviously. But I would 
just like to say that----
    Senator Bayh. We will have to call you more often to 
testify, Ambassador Burns.
    [Laughter.]
    Mr. Burns. I will just make a couple of points that are at 
the heart of my statement.
    First, let me just say that I agree very much with the 
sentiment that I think every Member of the Committee made in 
the opening remarks as did Senator Lieberman. I can think of no 
foreign policy challenge to our country that is more serious 
and perhaps more pressing than the challenge of a nuclear-armed 
Iran.
    There are three challenges to our national security posed 
by Iran. First is a nuclear weapons future that would 
destabilize the balance of power. It would confront Israel with 
a terrible strategic situation and confront our Arab friends 
with the same situation.
    Second, as Senator Shelby has pointed out many times, Iran 
is the major funder of most of the Middle East terrorist groups 
that are a problem for us, a problem for the Israelis, a 
problem for the Iraqis, and in other parts of South Asia.
    And third, Iran is highly significant and highly 
influential in Afghanistan and in Iraq, so we have a real 
challenge here. We Americans should seek to maintain our 
position as the dominant power in the Middle East because our 
influence is positive in that region and Iran's is not. But 
that is a strategic challenge that is posed for the United 
States by the rise of power of the Ahmadinejad government over 
the past 4 years.
    I would defer to other panelists, especially Suzanne 
Maloney, who is a great expert on the internal politics of 
Iran. But, as many of you have said, I think the events of the 
last several months--from the lead-up to the elections, to the 
June 12 elections, to the extraordinary aftermath and the 
opposition that we saw in the streets of Iran of all classes, 
all ages, all ethnic groups--pose a real challenge now to the 
Iranian government. I believe the Iranian government has been 
weakened by this whole episode and we should seek to diminish 
its strength further.
    I think we do have the upper hand as a country, we and the 
coalition of countries with which we are working, and we should 
seek to diminish Iran's strength in the wake of this political 
crisis.
    Now, I know that many people think we should at this time 
not deal with the Iranian government at all because, of course, 
people say, well, if you deal with a government, you might 
legitimize it and it might be an affront to the demonstrators. 
I have some sympathy with that because I think most Americans 
looking at these events immediately sympathized with the people 
in the streets who wanted liberty and wanted a better 
government and wanted a better future. That is obvious.
    I think the problem with isolating them now and not talking 
to the government at all is that it probably weakens our 
ability to be effective in opposing them and in providing for a 
more difficult and energetic sanctions regime to pressure them.
    So my view is that--and I am a former official of the Bush 
Administration--is that I think that President Bush's strategy 
of two paths, because that is how he and Secretary of State 
Condoleezza Rice articulated it, is the correct one, and I 
think that President Obama is essentially following that same 
basic strategy, and so I support what President Obama is trying 
to do.
    Here are the two paths. We, the international community, 
would say to the Iranians, we are willing to negotiate in a 
very short window, as many Members of the Committee have said. 
Given the fact that they have stonewalled negotiations, the 
Iranians, they have prevented them for 3 years now. We are 
willing to negotiate and sit down with you. The object of those 
negotiations, I believe, should be--I think it is the Obama 
Administration's idea, as well--to seek an end to the nuclear 
weapons project of Iran. If it is not possible to negotiate 
successfully that objective in a very short period of time, 
then I think we will have much greater credibility to say to 
the Russians and the Chinese, the Europeans and others, you now 
need to join us in draconian sanctions against the Iranian 
regime.
    I think that if we refuse to negotiate at all, we diminish 
our ability to be successful in arguing for subsequent 
sanctions.
    I would just make one further point on this. I think it is 
likely, if the parties even get to the negotiating table, that 
the negotiations will likely not succeed, because I think the 
Iranian government under Ahmadinejad is so determined to create 
a nuclear weapons future for its country, it is not likely to 
agree to the object of these negotiations that I just cited, an 
end to that program.
    Therefore, that sets up this important question of 
sanctions, which is at the heart of the bill that you have put 
forward, Senator, and that so many Senators have cosponsored. 
What type of sanctions and what type of flexibility should the 
President and the executive branch have? I would just say that 
you are right to consider sanctions of every kind, strong 
financial sanctions, economic sanctions, and energy sanctions, 
because those have not been tried in the past, the energy 
sanctions, and that is Iran's Achilles heel.
    I would just say two things. I think it is important that 
the President maintain his flexibility to conduct foreign 
policy because this is a shifting situation. It is a situation 
that is highly complex and I wouldn't favor any legislation, or 
I wouldn't suggest any legislation that would tie his hands, 
that would mandate deadlines for him. But if he is given 
sufficient waiver authority, then I think these types of 
sanctions are likely to have the greatest potential impact on 
the Iranian government and they may be the only thing that will 
convince Iran to think twice about going forward with a nuclear 
weapons project in the face of concerted international 
opposition.
    The second point I would make on sanctions, Senator, would 
be I think it would behoove the United States, both the 
administration and the Congress, to try to convince other 
countries of the world to make these sanctions multilateral and 
not unilateral. Because despite the best intentions of the 
Congress or our government or any one of us on this panel, if 
Americans are the only ones sanctioning, those sanctions will 
not succeed. We need to convince the Russians and the Chinese, 
the Europeans, the South Koreans, the Japanese, the Arab 
countries that are trading partners of Iran to join us in these 
sanctions. So if there are going to be financial sanctions, 
then they have to be universally applied, and the same is true 
of energy sanctions.
    The last point I would say is this, and I will finish on 
this point, and forgive the length of these extemporaneous 
remarks. I think that we would be well served if we didn't 
allow our national debate to come down to, well, either it is 
negotiations with Iran or it is war. I think that we can have a 
more complex strategy of negotiations combined with sanctions, 
of negotiations combined, as I think Senator Shelby said, with 
the threat of the use of force. We must keep all options on the 
table, in my judgment. I think we have to say that all options 
are on the table. The Iranians will understand that. They may 
be more impressed with that than anything else.
    And I think it is very important that diplomacy and the 
threat of force be combined here so that we bring the national 
power of the United States to greatest effect to try to 
convince the Iranians, as well as to try to impress our 
negotiating partners on our side of the table that we are not 
going to live with a nuclear armed Iran.
    And I would just end by saying that I don't think it is 
inevitable that we are going to have a war with Iran. I still 
maintain some hope that a combination of skillful diplomacy 
with the threat of force, with the threat of very tough 
sanctions, might succeed in convincing the Iranians to back 
down. Should that not happen, then, of course, the President 
and the Congress will be faced with a truly excruciating 
decision, the use of force or the construction of a containment 
regime in order to limit Iranian power against Israel, against 
the Arab world, and against the United States. That is down the 
road. I don't think you face that now, but that ultimately is 
what the stakes are, I think, in this very difficult problem.
    Thank you.
    Senator Bayh. Thank you, Ambassador, very much. I look 
forward to having an opportunity to explore your thoughts in 
further depth during the round of questioning.
    Dr. Levitt?

STATEMENT OF DR. MATTHEW LEVITT, SENIOR FELLOW AND DIRECTOR OF 
    THE STEIN PROGRAM ON COUNTERTERRORISM AND INTELLIGENCE, 
           WASHINGTON INSTITUTE FOR NEAR EAST POLICY

    Mr. Levitt. Thank you, Senator Bayh, Senator Shelby, 
Members of the Committee. It is an honor to be here. It is an 
honor to be on a panel with such distinguished experts.
    Allow me to maybe start off where Ambassador Burns finished 
in explaining a little bit about the sanctions strategy, as 
someone who was at Treasury when we first started implementing 
it, because a lot of people ask me, well, if this hasn't ended 
Iran's pursuit of nuclear weapons, if it hasn't changed their 
calculus, if it hasn't prevented them from doing what they 
wanted to do, then really how effective are these tools anyway?
    The answer is that targeted financial sanctions were never 
intended to solve your problem. This is not a silver bullet. It 
is not a panacea. On their own, financial tools can only do so 
much and they were always planned that way. But coupled with 
other tools, as Ambassador Burns said, especially robust 
diplomacy and a credible military presence in the region, 
financial measures, I believe, can effectively create leverage 
for diplomacy in particular. That diplomacy should focus on 
Iran, but also on Russia, on China, and on our European and 
Asian allies and the Gulf States, among others.
    There are three critical things that sanctions can 
accomplish. The first is to disrupt Iran's illicit activities, 
make it more difficult for them to do what they want to do, 
constrict their operating environment, and even if it doesn't 
completely stop the program, they are still effective.
    The second is to deter third parties from knowingly or 
unintentionally facilitating Iran's illicit activities.
    And the third and the most difficult is impacting Iran's 
decisionmaking process so that the continued pursuit of these 
illicit activities themselves are reconsidered.
    Some question the wisdom of employing sanctions when the 
administration is seeking to pursue engagement. Others question 
the wisdom of employing sanctions that might give the regime, 
in the wake of the June 12 elections and protests that 
followed, a straw man and a scapegoat to blame for all their 
ills, though now Great Britain has taken the number one slot 
and we are down to number two.
    My own conclusion is just the opposite. This is exactly the 
time to use financial tools to build leverage for diplomacy. 
With a hard-line regime so significantly delegitimized at home 
to the point that both moderates and hard-liners alike have 
overtly questioned the decisions of the Supreme Leader, the 
regime's ability to easily deflect criticism over the state of 
Iran's economy, as a result of sanctions imposed over the 
nuclear program, I think, is significantly undermined. The 
regime faces far greater legitimacy crisis over its handling of 
the sham elections, the IRGC-related Basij militia crackdown on 
Iranian citizens protesting the election, the demonization of 
those protestors by senior leaders, and the incarceration of 
protesters.
    Given that Iran's nuclear program continues to progress, 
one thing is clear, as you have all said and we have heard here 
already: we do not have the luxury of time. Therefore, the only 
question is not whether or not to use sanctions, but what 
sanctions, targeting which entities, under which tools and 
authorities, and in what order. And so here are a few ideas.
    First, I think we should seek international consensus and 
multilateral sanctions, including, as Ambassador Burns said, 
multilateralizing our efforts focused on the energy sector. I 
think that the deadline of the G-20 here is critical, and among 
the targets that we should be focusing on first, at the U.N., 
are those that the U.N. has already made a shot over the bow.
    For example, UNSCR 1803 explicitly called on member states 
to exercise vigilance over the activities of financial 
institutions in their territories with all banks domiciled in 
Iran and their branches and subsidiaries abroad. There are 
several banks that we in the United States have sanctioned that 
have not been sanctioned by the United Nations yet. We should 
take those actions. We should target Bank Mellat. We should 
target Bank Melli. We should certainly consider targeting Bank 
Merkazi, the Central Bank of Iran, as you have heard.
    I also think we need to focus on the IRGC elements that are 
involved in the missile and nuclear weapons programs, and also 
in terms of the more recent Basij crackdown on peaceful 
protestors. Khatam al-Anbia, the IRGC-affiliated engineering 
conglomerate, is very involved in the oil sector. We have 
already designated it unilaterally. It would make a very good 
target for multilateral designation. In fact, it has already 
been listed by the European Union. And IRISL, the Iranian 
shipping line, which has also been called out by the U.N. 
Security Council as a company that has engaged in proliferation 
shipments and which we have already designated, a designation 
that would have, I think, significant impact.
    Multilateral action, however, is very difficult. Russia is 
not on board yet. China is not on board yet. And so if we are 
to do something around the time of the G-20, we may have to 
take some other unilateral actions, bilateral actions with 
other countries, with other regional bodies, as well, and we 
should not shy away from doing that.
    Nor should we shy away from actively supporting the efforts 
of multilateral technocratic bodies like the FATF. The FATF's 
multiple warnings on Iran have had a very significant impact on 
Iran's ability to do business. FATF's letters calling for 
enhanced due diligence, highlighting the shortcomings of their 
anti-money laundering system, and most recently, instructing 
countries to begin developing countermeasures, as they 
described them, to deal with Iran's illicit financial 
activities have been very effective.
    I do think, however, that it might be time to engage in 
less targeted financial measures. The targeted financial 
measures campaign focusing on Iran's illicit conduct has been 
very successful in getting people on board. But I agree, as we 
have all said today, that the true Achilles heel of the regime 
is the energy sector. And even though the regime has great 
expertise in the formation of front companies and sanctions 
busting, if we were to have a robust program in place, 
especially if we weren't the only ones doing it, they would not 
be able to make up for that 40 percent of reimported refined 
petroleum. It would have a tremendous impact, I believe.
    There are other things that need to be done, especially 
focusing on Iran's continued ability to transfer arms and 
technology, and I will just cite one thing in that regard. For 
example, I think we should encourage implementation of the 
World Customs Organization's Draft Framework on Standards to 
Secure and Facilitate Global Trade. This is something DHS has 
thought a lot about and I think it is something that would make 
a big difference. We all saw earlier this year when the 
Monchegorsk, the Cypress-bound Iranian chartered ship which was 
carrying weapons, we believe for Syria, perhaps further on, 
that clearly, we have holes in our current program.
    So to conclude, it seems clear to me that today, Iran is 
politically and economically exposed. Even as it continues to 
pursue a nuclear program and other illicit activities, these 
sanctions are no panacea. The fact is, if properly leveraged, 
in tandem with other elements of national power--this tool will 
not solve anything by itself--the pinch of targeted financial 
measures could ultimately have a much bigger punch.
    Thank you very much.
    Senator Bayh. Thank you, Dr. Levitt.
    Ms. Pletka? Or we can skip over to Dr. Maloney. Dr. 
Maloney, by the way, did I have the benefit of hearing you at 
an Aspen Institute conference once on the Middle East?
    Ms. Maloney. You did.
    Senator Bayh. Yes. You were very impressive then, and I am 
sure you will be, as well, today.

 STATEMENT OF SUZANNE MALONEY, SENIOR FELLOW, THE SABAN CENTER 
         FOR MIDDLE EAST POLICY, BROOKINGS INSTITUTION

    Ms. Maloney. Well, thank you. Thank you very much, Senator 
Bayh, Senator Shelby, Members of the Committee. I am very 
grateful for this opportunity to be here and very honored to be 
part of this panel.
    The Islamic Republic today is contending with an almost 
unprecedented array of internal challenges. The persistence of 
street skirmishes and passive resistance to the regime, the 
increasingly uneasy straddling of a broad array of conservative 
politicians, the mutiny against the Supreme Leader's unfettered 
authority by a quartet of veteran revolutionary leaders, as 
well as senior clerics, all this clearly marks the opening 
salvo of a new phase of existential competition for power 
within Iran.
    At this stage, it is impossible to predict precisely where, 
when, and how Iran's current power struggle will end. In the 
near term, the Islamic Republic will likely survive this 
crisis, thanks to the same tactics that have preserved it for 
the past 30 years, behind-the-scenes deals and mass repression. 
But we don't know where Iran is going from here and I think 
that is an important point to make at the outset of our 
discussion of U.S. policy tools.
    I was asked to say a few words about the Iranian economy. 
Let me tell you that Iran is an economy that has recorded 
respectable growth rates in recent years. It is a wealthy 
country, but it has serious economic problems: Double-digit 
inflation, power shortages, a tumbling stock market, stubbornly 
high unemployment rates, particularly among its large young 
population, increasing dependence on volatile resource 
revenues, and perhaps most ominously for the Iranian 
leadership, a rising tide of popular indignation about economic 
frustrations.
    Ahmadinejad was elected on the basis of economic 
grievances, but he governed in an ideological fashion and, for 
his part, bears a lot of responsibility for the continuing 
economic problems of the country. What has really galled 
Iranians is the opportunity that has been squandered over the 
past 4 years. Iran's oil revenues during Ahmadinejad's first 
term exceeded 8 years of revenues under either of its previous 
presidents. Forty percent of all of Iran's oil revenues in the 
past 30 years have come in under Ahmadinejad's watch, and 
really, very few people know where that money has been spent.
    The unrest of the past 6 weeks is likely to exacerbate 
Iran's economic problems and put solutions to its long-term 
structural distortions that much further out of reach. And 
should the political situations degenerate, opposition economic 
actions may well further paralyze the Iranian economy.
    And let me speak for a moment about U.S. policy options. 
The events since the June 12 elections have changed Iran in 
profound fashion and it would be counterproductive to suggest 
that this were not the case. The United States must adjust our 
assumptions about Iran and our approach to dealing with our 
concerns about Iranian policy.
    But the turmoil within Iran haven't altered our core 
interest vis-a-vis Iran, nor has the turmoil effectively 
strengthened the case for alternatives to the stated policy of 
the Obama Administration to engage with the Iranian regime. 
Engagement will require talking to some particularly unpleasant 
people, but the administration's interest in diplomacy was 
never predicated on the palatability of the Iranian regime but 
on the urgency of our concerns.
    Like Ambassador Burns, I am sympathetic to the concern that 
bilateral negotiations would somehow legitimize the regime. But 
diplomacy does not confer a seal of American approval on its 
interlocutors. To the contrary, the Iranian regime, in fact, 
derives whatever remaining legitimacy it has from its 
revolutionary ideology that is steeped in anti-Americanism. If 
we can successfully draw them to the bargaining table on our 
urgent concerns, negotiations would only undercut their 
attempts to stoke revolutionary passions at home and rejection 
of sentiments across the region. And negotiations, even if they 
don't succeed, would help exacerbate divisions within the 
regime.
    Negotiations are unlikely to succeed in the short term. 
There is a precedent I would cite, and that is the successful 
negotiations over the hostage crisis in the late 1979 to 1981 
period. They were difficult. We were not dealing with 
moderates. Our Iranian interlocutors were people whose 
authority, credibility, and interest in resolving the crisis 
was very much in doubt.
    What made those negotiations eventually successful and 
produced what has been a durable agreement in the Algiers 
Accords were a variety of tools, including secret talks and the 
involvement of a third-party mediator, but also the presence of 
a fact that clarified the minds of our Iranian interlocutors, 
the Iraqi invasion of Iran.
    In a similar respect, any U.S. effort to negotiate with 
Iran right now would benefit from the identification of 
incentives and counterincentives that will focus the minds of 
the Iranian leadership. In this respect, there is a direct and 
mutually reinforcing relationship between engagement and the 
identification of sanctions if Iran chooses to proceed with 
non-cooperation. The threat of sanctions may be the only 
effective means of persuading Iran's increasingly hard-line 
leadership that their interests lie in constraining their own 
nuclear ambition.
    In addition, the offer of dialog with Iran represents the 
most important factor for creating a framework for long-term 
economic pressures. We know from the experience of the Bush 
Administration that Russia, China, and in particular also the 
Gulf States have proven averse to the steps that would really 
constrain their economic relations or their strategic 
relationships with Tehran. The minimum price for achieving 
their support for and participation in significantly 
intensified economic pressure will entail a serious American 
endeavor at direct diplomacy with the Islamic Republic.
    As a result, we should be coordinating our next step as 
closely as possible with all of these states. In particular, we 
should be stepping up our dialog with Beijing, whose interests 
with respect to Iran diverged substantially with those of the 
Russians and whose investments in Iran reflect a long-run 
effort to secure prospective opportunities rather than a short-
term calculus, and I think we can leverage that long-term 
interest.
    I understand now the buzzword in Washington is ``crippling 
sanctions,'' but the simple reality is that we alone in the 
United States don't have the capacity to cripple the Iranian 
economy with our sanctions, which means that multilateral steps 
represent the only real alternative to a negotiated solution. 
While Iran is certainly capable of change, we have to recognize 
that economic pressures alone in the past have not generated 
substantial modifications to Iranian policy. Where they have 
worked, it has been where they have particularly played into 
the perceptions and utility of swaying critical constituencies 
within Iran.
    Let me just finish by suggesting that the choice posed in 
one of the previous panel member's discussions between doing 
nothing and military action, I think is really a fallacy. We 
are the United States. We are a superpower. We deterred the 
Soviet Union and a Chinese regime that was responsible for the 
murder of 30 million of its own citizens. We can deter and 
contain Iran. Economic pressures will be part of that.
    Thank you.
    Senator Bayh. Thank you, Dr. Maloney.
    Ms. Pletka.

   STATEMENT OF DANIELLE PLETKA, VICE PRESIDENT, FOREIGN AND 
   DEFENSE POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE FOR 
                     PUBLIC POLICY RESEARCH

    Ms. Pletka. Thank you very much, Senator Bayh, Senator 
Shelby, for all of your leadership on this issue and for 
inviting me to testify here today. It is a pleasure to be on 
such a distinguished panel.
    For the first 7 months of this year, the Congress has been 
extraordinarily--unusually, I would say--deferential to the 
President and careful to do nothing that might undercut the 
prospects for success in direct diplomacy with Iran.
    While the U.S. Congress and the United Nations have stood 
down, however, change has been in the air in Iran. I think my 
colleagues have talked a lot about the circumstances on the 
ground.
    What we have seen on the nuclear front is that Iran has 
continued its enrichment activities and claims to have now 
7,000 centrifuges spinning at Natanz, an operational uranium 
conversion plant at Isfahan, and continuing operations at the 
heavy water facility at Arak.
    As Dr. Maloney detailed, on the economic front there is 
very little good news, despite some years of extraordinarily 
high oil prices, very, very high unemployment, inflation at 
over 22 percent, the central bank announced this week.
    And on the military and paramilitary fronts, Iran has 
continued to refine its delivery systems. In May they tested a 
solid-fuel ballistic missile with a range of 2,000 to 2,500 
kilometers, and they continue to deliver weaponry to Hezbollah 
in Lebanon.
    Finally, on the political front, we are well aware of the 
aftermath of the elections, the fraud, the outpouring by the 
Iranian people, and the brutal repression and murder of 
protesters and opposition members.
    I think even the closest of Iran watchers are unsure of 
what is next in Iran. But I think that many have failed to take 
into account the radical transformation of the country and the 
fact that the Iranian Revolutionary Guard Corps has quietly and 
very systematically taken over the reins of power inside the 
country.
    They have really come to dominate all sectors of Iranian 
life, including the economy, the military, and as we saw in the 
last month, domestic politics.
    On the economic side, most interestingly, what that means 
for countries and for companies that are doing business in 
Iran, it means that if you are doing business there, you are 
probably doing business with the IRGC.
    It is always possible that the regime does have a surprise 
in store. The Iranian Foreign Ministry has promised us a 
package aimed at assuaging--this was a great phrase--the 
``economic, cultural and moral crises'' of the world. I know we 
are all looking forward to seeing that. And some have persuaded 
themselves that only hardliners in Iran can successfully 
deliver a credible deal to the Europeans and the Americans. But 
I think that that optimism flies in the face of every statement 
that we have seen from every member of the government, 
including so-called reformers.
    Meanwhile, however, Iran has chosen not to accept the 
outreached hand of the Obama Administration and others and 
rebuffed an invitation from Secretary Clinton to attend the G-8 
meeting. Indeed, the regime explicitly attempted to embarrass 
the President by leaking a letter, a private and personal 
letter, that President Obama had sent to the Supreme Leader, 
leaking it to an American newspaper--something I do not think 
that they have done in the past.
    I believe that the time has come to reassess the value of 
our current policy. I think that those who suggest that we are, 
in fact, proceeding on two tracks are wrong. I think we have 
been proceeding on one track. That need not be a repudiation of 
engagement, but it should be an acceptance of the reality that 
the free pass engagement on offer by the administration has 
bought little more than time for Iran to install more 
centrifuges.
    In part because of our silence, the decline in trade 
between Iran and certain countries of the European Union--now 
Iran's second largest trading partner after China--has begun to 
reverse itself.
    More troubling, the increases in trade with Europe have 
been dwarfed by the explosion in Iran-China trade. More than 
100 Chinese state companies operate in Iran, with bilateral 
trade reaching over $27 billion in 2008--by the way, a 35-
percent increase over 2007.
    Despite the growing movement for divestment from state 
sponsors of terrorism, there have been scores of major 
transactions in Iran in the last couple of years, most in the 
oil and gas and construction sector, with values in the 
hundreds of millions of dollars, including companies ranging 
from France's Renault and Peugeot to Germany's Krupp, Siemens, 
Toyota, Royal Dutch Shell, Gazprom, Hyundai, Spain's Repsol, 
and many others.
    Perhaps more important than the moral and financial suasion 
of divestment, however, is the tool that has yet to be used by 
the international community to persuade Tehran of the wisdom of 
coming to the table, and those are restrictions that you 
yourselves have been talking about here today--restrictions on 
the export to Iran of refined petroleum products and equipment 
to enhance Iran's own refinery capacity. I think that S. 908 
really does afford the President the opportunity to address 
that.
    Iran is heavily dependent--we know that, we have talked 
about it--on imported refined petroleum. They are trying to 
address that problem at home, though. Using this pressure point 
quickly and decisively will do more to convince the Tehran 
government of the world's seriousness than any number of 
videograms and letters and goodwill visits.
    Iranian refining capacity, imports, and shipping are 
concentrated in fairly few hands. News reports indicate that 
supplies come largely from two Swiss firms--Vitol and 
Trafigura. And then there are the insurers without which these 
shipments would halt, reportedly including Lloyd's of London, 
Munich Re of Germany, Steamship Mutual Underwriting 
Association, and others of the U.K.
    Companies helping Iran gain refining independence--which 
could be subject to sanction under S. 908--include British 
Universal Oil Products, which is a subsidiary of the U.S.-based 
Honeywell; Axens and Technip of France; Sinopec; Hyundai of 
South Korea, and others.
    Mr. Chairman, even proponents recognize that sanctions are 
a blunt tool. They are, as we have all said, not a silver 
bullet, and they may not--in fact, they will certainly not 
deliver an end to the Iranian nuclear program. But they will 
help force a decision inside the Tehran regime about the value 
of the nuclear program and the wisdom of remaining isolated 
from the world in order to further that program.
    In truth, I think that the choice is really not between 
engagement and sanctions. Rather, it is only by applying the 
toughest possible sanctions that we stand any chance of 
persuading Iran's leaders to consider serious negotiations with 
the international community. And it is time to give the 
President the additional tools he needs to do just that.
    Thank you very much.
    Senator Bayh. Thank you, Ms. Pletka. I appreciate your very 
good testimony here, and I particularly appreciate your joining 
us, even though you apparently may be under the weather a 
little bit. So thank you.
    Ms. Pletka. No. It is so cold in here.
    Senator Bayh. You feel cold in here? In spite of all the 
hot air emanating from this institution?
    [Laughter.]
    Senator Bayh. Well, we will now begin the round of 
questioning, and I thought this was an excellent panel, and we 
will have 5 minutes per member and then a second round if there 
are sufficient questions thereafter.
    Let me begin, and I think--this is just for the record. I 
think, Dr. Maloney, you touched upon this, although at least 
indirectly everybody else did as well. Following the invasions 
of Afghanistan but particularly the invasion of Iraq, there was 
a brief window there where, through back channels, the Iranians 
were reaching out to us looking for ways to cooperate, even 
suggesting perhaps some accommodations could be made here. They 
were just tentative feelers, that sort of thing.
    My takeaway from that was that they were very impressed by 
action and material consequences. They were worried. The regime 
on their east had been changed. The regime on their west had 
been changed. They were beginning to think--as some of you 
suggested, they care most about regime preservation. They were 
beginning to think about their own situation, and so they began 
to moderate their behavior a little bit.
    What insight does that offer us into how we can actually 
change their behavior with regard to their quest for nuclear 
weapons? Doesn't it suggest that, you know, at least the 
potential threat of or the thoughtful application of sanctions 
with material consequences is our best hope to change their 
behavior? Is there any useful insight to be gained from their 
outreach following Afghanistan and Iraq, at least for a brief 
window that then closed after they began to realize that Iraq 
was really a place we were going to get bogged down and might 
help them in the long run?
    Ms. Maloney. I think what that episode shows us most 
clearly is that Iran, the leadership as a whole, is capable of 
making a rational cost/benefit assessment of its own interests, 
and at that time they saw the potential costs and the potential 
threat to their own survival as severe enough to generate 
perhaps some kind of unprecedented outreach to the United 
States.
    It is not clear, I would say, that Mr. Ahmadinejad is 
capable of that same sort of assessment, but, clearly, the 
overtures that were made in 2003 could not have come without 
the approval of the Supreme Leader. He was influenced, no 
doubt, by people around him who were perhaps more moderate than 
those who are surrounding him today. But that is, of course, 
what also makes the emergence and the potential empowerment of 
what we are calling an opposition but really is not an 
opposition in the sense of an opposition trying to oust the 
regime.
    The reemergence of former President Rafsanjani in 
particular, former President Khatami, Mr. Mir Hussein Moussavi, 
and Mehdi Karrubi, these are all people who appreciate that the 
nuclear program is not worth the potential cost to Iran, and I 
think we have got to be watching their position very closely in 
hopes that some sort of--that that kind of pressure can be 
reapplied, that that kind of calculation can once again be part 
of the Iranian leadership's decisionmaking.
    Senator Bayh. Ambassador, I would appreciate your thoughts 
on that. It seems there is consensus among the testimony 
today--and I suspect on the Committee--that dialog and 
negotiations is appropriate, but they are most likely to be 
effective, indeed, will only be effective if there is some 
meaningful consequences for a failure to negotiate in good 
faith or a failure to negotiate at all. So I am interested in 
your assessment. Dr. Maloney mentioned that the hostage crisis 
was only resolved when they began to worry about their own 
situation. They reached out to us, at least temporarily and 
tentatively following the invasion of Iraq because they were 
worried.
    What does that suggest about the importance of meaningful 
sanctions and to have any hope of changing Iranians' behavior 
with regard to their nuclear program?
    Mr. Burns. Well, I agree with Dr. Maloney that the Iranian 
Government is more likely to respect strength than anything 
else, and I think, Senator, you are right to conclude that is 
one of the lessons, perhaps of how they acted in 2001 after our 
invasion of Afghanistan and in 2003 after our invasion of Iraq.
    For the record, I will say the Iranians had a golden 
opportunity to negotiate with the Bush Administration in May-
June of 2006 when the administration offered negotiations. The 
Iranians then turned those down over the next 2 years. So the 
onus is really on Iran to show that they are interested.
    Senator Bayh. Perhaps their assessment of their own 
situation had changed by 2006.
    Mr. Burns. Well, that gets to my second point. I think that 
strength of the United States is not enough. We have to have 
international strength, and we have to have a diplomacy that 
brings Russia and China in particular--Russia sells arms to 
Iran; China is their leading trade partner--with us. And that 
is why I think that President Obama has done--I have been 
impressed by his diplomacy toward Iran. I think setting up this 
construct of being willing to engage, willing to talk, seeming 
to go the extra mile, with the likelihood that those 
negotiations either will not take or will fail, that allows the 
United States to have a stronger hand in arguing for the type 
of sanctions that the Committee is considering and the Senate 
will consider. And it gives us more options, I think, for the 
future than fewer.
    Senator Bayh. My time is about up on the first round, but I 
guess my point is--and I gather it is the consensus of the 
panel--that none of us wants to impose sanctions on Iran if we 
do not have to. But our assessment is that at least the 
credible presence of material consequences through sanctions 
gives the engagement the maximum chance of working and is our 
only hope of changing behavior if the negotiations do not work. 
Is that sort of the bottom line you would agree with, too?
    Mr. Burns. It is, and I would say there is an additional 
benefit to tough-minded sanctions. It puts off a decision to 
use force, and that would be a fateful decision for the United 
States. We should keep that option on the table, but I still 
think there is room and time for a combined strategy of 
negotiations and sanctions to try to see if it is possible to 
lever, influence the Iranians to change their program.
    Senator Bayh. They demonstrate strength, and the stronger 
we are, the more likelihood that we will resolve this in an 
acceptable way.
    Senator Shelby.
    Senator Shelby. Thank you, Mr. Chairman.
    Mr. Burns, how do you believe we should measure progress 
under the administration's engagement strategy? And, second, 
what do you believe that Iran wants to achieve from discussions 
with us? And is there anything that we should be prepared to 
give to Iran?
    Mr. Burns. Senator Shelby, I think that President Obama has 
done a very good job of regaining the initiative and putting 
Iran on the defensive. And I think taking the high road, the 
Cairo speech, the videotaped message to the Iranian people, he 
said that he would continue the Bush Administration's policy of 
being with the P5 in negotiations. All of that has been very, I 
think, effective.
    The Iranians are going to be extraordinarily difficult, I 
believe, at the negotiating table, and they will want to divide 
the parties sitting at the table alongside of us. And they have 
effectively done that the last couple of years.
    So I think the challenge for the United States now is to 
unite those parties against the Iranians, and that is why I 
think that giving the President not only waiver authority but 
some flexibility in sanctions is really important for him and 
for the effectiveness of our policy.
    Senator Shelby. Mr. Burns, you alluded to this a minute 
ago. A key reason, I believe, that the U.N. sanctions on Iran 
are so weak is that Russia and China do not share our goal of 
preventing Iran from developing nuclear weapons. Can our 
sanctions regime, as it is now, or under the various proposals 
we have heard here, that you are aware of work to encourage 
Iran to abandon their quest for nuclear weapons without 
bringing China and Russia to the table? I think they are very 
important to be at the table with us.
    Mr. Burns. I agree with you, Senator. I was the negotiator 
for the United States on the first three U.N. sanctions 
resolutions, and they were well intentioned and they were a 
good start, but they were insufficient, and we knew that. We 
knew that we needed to get to stronger sanctions. The time is 
coming for those stronger sanctions.
    What would make the Russians and Chinese now decide to work 
with us? I think, number one, they need to know this is a vital 
concern of the United States. It is the top of our agenda, not 
at the middle or the bottom of our agenda.
    Number two, they need to know that the United States is 
willing to keep all options on the table and willing to take 
any action necessary to deny Iran a future nuclear weapons 
capability.
    If both of those are in place, then I think that they might 
be more inclined then to work with us. You know, look at the 
Russians only. They live closer to Iran than any of the other 
countries negotiating. It cannot be in their interests to see 
Iran have a nuclear weapons capability. So the negotiations 
with Moscow and Beijing I think are the most important right 
now.
    As I said in my testimony, if President Obama has said he 
is willing to negotiate, then I think the Russians and Chinese 
should be willing to promise the United States up front, if 
negotiations fail, we, Russia and China, will agree to 
sanctions. They did not do that in 2006 and 2007 and 2008. They 
need to do it now.
    Senator Shelby. Mr. Levitt, in her testimony, Ms. Pletka--I 
am using all of your testimony--made reference to the notion 
that if one is doing business in Iran today, they are probably 
doing business with the Islamic Revolutionary Guard. In October 
of 2007, the Office of Foreign Assets Control listed the 
leading Iranian financial institutions as well as the IRGC, 
among others, as ``specially designated global terrorist 
organizations.''
    Are you aware of anyone who has mapped out a complete 
picture of who is trading with Iran? And, Ms. Pletka, I will 
address this question to you. Do you believe having a full 
understanding of all of Iran's trading partners would help us 
develop a better, more complete sanctions regime? I will start 
with Mr. Levitt.
    Mr. Levitt. Well, as usual, Danielle was right. If you are 
doing business with Iran, you are doing business with the 
regime's illicit--OK. As usual, you were right again.
    Ms. Pletka. I am glad to hear that.
    Mr. Levitt. If you are doing business with Iran, there is 
no way to know that you are not doing business with illicit 
elements of the regime, in particular the IRGC. I do not know 
anybody who has successfully, certainly in the open source, 
done a full mapping, even a partial mapping, of who is trading 
with Iran. I do think it would be useful, but it would be 
limited. And I think Dr. Maloney has talked about this before, 
and she is right as well, of course. Iran is extremely adept at 
sanctions busting. They are better than anyone else at 
operating front companies, et cetera. 
    One of the biggest problems we have had, one of the things 
that we have been able to leverage most effectively with our 
allies to get banks designated, for example, is their use of 
deceptive financial practices. So simply getting a list of who 
is trading with Iran is like to be only the very tip of the 
iceberg and not necessarily address the most illicit activity.
    Senator Shelby. Ms. Pletka, do you have any comment?
    Ms. Pletka. I think that Dr. Levitt is right. It is an 
enormous challenge. But, of course, the truth is that even what 
we can find out from open press sources--and AEI has a project 
on our Iran tracker website that actually keeps track of all of 
the open press reporting on such transactions.
    I have got here a six-point list of all of these companies 
that are doing business or reporting, and we have done a pretty 
solid job about trying to verify most of them. You have got 
hundreds and millions and billions of dollars worth of projects 
that are not merely selling pencils and desks, but are also in 
the Iranian oil sector and the construction sector. And I think 
that naming and shaming is worthwhile.
    The truth is that the Chinese Government and the Russian 
Government do not really care. But I think that the German 
Government cares a little bit more. The Italian Government 
cares a little bit more. And the taxpayers in those countries 
that are often subsidizing these transactions through state-
guaranteed insurance also care. So I think it is very 
worthwhile.
    Senator Shelby. Thank you.
    Thank you, Mr. Chairman
    Senator Bayh. Thank you, Senator Shelby.
    Senator Corker.
    Senator Corker. Thank you, Mr. Chairman.
    I missed your oral testimony. I heard it was outstanding. 
We were in another hearing, but thank you for being here today.
    Are there sanctions today that we have in place that you 
would herald as having modest success? Is there anything you 
would point to under our present sanctioning process that is 
having modest success? Any of you.
    Mr. Levitt. Sure. But I will caveat that it is an almost 
impossible question to answer--I will answer it anyway--because 
there are so many things that we have now targeting Iran. 
People say, well, you know, what percentage impact has this one 
had or that one, and it is really impossible to know 
specifically how much of an impact has anyone had.
    But I would argue that there are a whole bunch of sanctions 
targeting Khatam al-Anbia, IRGC-related entities, most recently 
IRISL, the shipping lines, and certainly the banks, that have 
had an impact on, A, disrupting Iran's ability to easily 
conduct its illicit business; and, B, there is plenty of 
evidence, even long before the June 12th election, these 
actions were have a domestic political impact and people were 
resigning and people were getting fired and people were 
pointing fingers at Ahmadinejad for his poor economic policies.
    I think there is no real argument that these have had no 
success, that they have not had some significant success. But I 
think there is also unanimity that they have not been fully 
successful in the sense of undermining the regime's nuclear 
program or making it possible for them to achieve that program. 
But, honestly, that was not the strategy's goal. We never 
thought that it would be able to accomplish that.
    Ms. Pletka. I think what is important to understand is not 
just what Dr. Levitt underscored, but the fact that so much of 
the sanctions activity, particularly, I think, the really 
ground-breaking work that the Treasury Department did in the 
Bush Administration and is continuing today, has raised the 
cost of business to Iran significantly so that Iran finds it 
very difficult, for example, right now to get letters of 
credit, to bring in exports. They are finding it difficult to 
get trading partners.
    Yes, it is true there are still hundreds of millions' worth 
of business out there, but that is hundreds of millions' worth 
of business that may have cost a lot less in earlier days and 
probably was better quality. Iran is much more isolated. But 
these are our only tools, and that is the problem. None of 
these individuals sanctions is going to cause the regime to 
turn around and say, ``You know what? Forget it. Nuclear 
weapons really were not a good choice for us.''
    But the more targeted they are, the more that they 
discredit the regime in the eyes of the public, and I think 
that they have done that, to great effect. The more that they 
do that, particularly building on the opportunities after the 
election, the more likely we are to get the Iranians to the 
table to make agreements toward concessions.
    Senator Corker. I am going to move on to another question. 
I appreciate the two responses.
    The Chairman has discussed earlier and I think introduced 
legislation dealing with the refined product issue. I just came 
from a hearing on Sudan, and, you know, our foreign policy is 
replete with unintended consequences. I mean, that is the way 
life is. It is not a criticism, but it is.
    So we have this movement inside of Iran right now where, 
you know, obviously, many of the people who live there are very 
pro-Western. They actually respect our country. They respect 
democracy. We have a regime that certainly is the antithesis of 
that. And so we have talked about this whole issue of basically 
keeping refined product outside of the country, keeping it from 
coming back in.
    We have had some people say that, in essence, the 
unintended consequence of that could be that the people inside 
the country that are pro-Western may, in fact, very quickly 
become not that. We have also had people say that, you know, 
they could quickly, 6 months, 8 months afterwards, figure out 
other ways of getting refined product in the country. Maybe 
that is not true, but I would like to hear from each of you--I 
know my time is up--what your thoughts are about whether we 
absolutely should create this sanction where refined product 
cannot make its way into Iran, and then what the consequences 
of that might be with a population that, generally speaking, 
seems to have quite a movement underway, if you will, as it 
relates to countering the regime right now.
    Mr. Burns. Senator, thank you. I think that one of the 
reasons why we ought to be focused on a diplomacy, engagement, 
and sanctions path rather than a war path is that if we 
resorted to military force, that would unite the country more 
than anything else. We ought to try to play on the divisions 
within Iran that were so apparent after the June 12th 
elections.
    On the sanctions, I keep coming back to a basic problem, 
and that is that if the U.S. Congress or the executive branch 
asserts unilateral sanctions, they may make us feel good--and I 
support stronger sanctions--but they will not be effective 
unless they are multilateral. And that is why I very much 
believe that the President needs the flexibility to work with 
the allies to make those sanctions, if he can do it, 
multilateral. Striking out on our own, I think, will not have 
the intended effect that we want, and we would not want a 
situation to develop where we create divisions between, say, 
Europe and the United States at a time when we ought to be 
united and focused on Iran itself.
    So I see this as a highly complex maneuver here, and that 
is why the waiver authority, I think, in the legislation is so 
important for the President to have. I hope President Obama 
will have the political strength with the Russians and Chinese, 
in particular, to convince them that they have got to get on 
board these sanctions. And that is the test of our diplomacy in 
September and October of this year.
    Mr. Levitt. I would give one caveat maybe to Ambassador 
Burns' point. I completely agree that multilateral sanctions 
are far more effective, and for the petroleum concept to be 
effective, it will have to be multilateral. But I do not think 
that unilateral sanctions are ineffective, and, in fact, you 
know, when I was at Treasury we used to see all the time that 
international financial institutions, for example, used to 
incorporate our unilateral sanctions in their due diligence 
data bases, though they had no legal requirement to do so. And 
we have many, many examples on Iran, on Hamas, on other cases, 
where unilateral designations have had an impact, although I do 
not think we disagree. In essence, the multilateral route is 
the only one that is going to have sufficient power to get us 
where we want to be.
    I would also point, however, to some precedent. Consider, 
for example, the dramatic failure of the regime's gas ration 
card program in the summer of 2007. The cards were loaded with 
6 months' worth of ration. Iranians reportedly used the entire 
ration within weeks. It was a huge fiasco. As cold winters 
come, Iran worries about the possibility of heating fuel 
shortages.
    Neither of these, when I look back at them, at least in the 
open source, demonstrates a huge Iranian, really any 
significant Iranian reaction against the United States. They 
have been reactions against the economic policies of 
Ahmadinejad's regime.
    Ms. Pletka. I know that time is up. I think that it is 
always ironic when people suggest that the sanctions that we 
are going to impose in an effort to get Iran to the table to 
talk about their nuclear weapons program could hurt the Iranian 
people, and yet we are willing to stand idly by while the 
Iranian people are crushed beneath the jack-booted heel of the 
IRGC on a daily basis.
    There is some risk that if we end up needing to impose 
draconian sanctions, whether unilaterally or multilaterally, 
that the Iranian people will, yes, blame their government--
because they almost always blame their government for 
everything because it is so inept--but also may blame us.
    But at the end of the day, we are really not in this to 
talk about the tools that are available to us. We are in this 
because we want to stop the Iranian Government from acquiring a 
nuclear weapon. And that seems to be a fairly urgent 
requirement. We actually have not talked that much about what 
it would mean for Iran to have a nuclear weapon and how Iran 
would come to the negotiating table or whether they would with 
nuclear weapons and how the regime would feel empowered vis-a-
vis its own people, not to speak of its neighbors, if they had 
a nuclear weapon, and the threat that they pose, of course, to 
us in our homeland.
    So when we talk about these things, we do need to recognize 
that weighed very heavily on one side is this rather terrifying 
prospect that Senator Lieberman outlined at the outset that all 
of you have talked about, and on the other side these tools 
that are available to us, which tend to take on the aspect of a 
discussion at a tea party when we talk about whether this would 
work and whether that would work and how we could all sit down 
around the nice table at Foggy Bottom or at Turtle Bay.
    We need to be serious, and we need to recognize that there 
is some real urgency to achieving these goals.
    Senator Corker. Thank you.
    Ms. Maloney. In terms of Iranian public opinion, I can 
speak to my time there, although I have not been now in a few 
years. And I would say Iranians generally are not fans of 
American sanctions on their economy. However, at this stage I 
think it is also quite clear that they look at the disastrous 
policies of Ahmadinejad and at this stage certainly look more 
toward the government for the economic problems than they do 
toward U.S. sanctions. And I think that would be the case.
    It is not to say the regime would not be able to leverage 
the blame issue, and it is already beginning to do so. I see a 
lot of talk about the difficulties of getting spare parts for 
airlines and some of their recent aircraft disasters. And I 
think that is taking a page from the Saddam playbook in terms 
of trying to mobilize international and public opinion around 
the unfairness issue or the public safety issue with respect to 
sanctions.
    But let me just say that I think it is also important to 
recognize that a ban on refined products is not going to be a 
silver bullet. It may not be the Achilles heel of the Iranian 
economy, if only because Iranians are well aware of this 
vulnerability. They have been investing very heavily in new 
refineries and expect to be self-sufficient by 2012. One of the 
countries that we are speaking with about major new investments 
is China, and I think that is going to be something we are 
going to have to consider, the extraterritorial dimensions of 
these potential sanctions, if we are looking to build our case 
for multilateral sanctions, particularly including the Chinese.
    Senator Corker. Thank you for the excellent testimony, and 
thank you, Mr. Chairman.
    Senator Bayh. Thank you, Senator, for your excellent 
questions.
    Senator Martinez?
    Senator Martinez. Thank you, sir.
    One thing that seems to me to be important that we have not 
talked a lot about is the question of regime change. This used 
to be a word that got thrown around this town a lot a few years 
ago. It isn't talked about too much these days. But what a 
better world it would be if there was a completely different 
regime in Iran. The people of Iran have been in the streets 
trying to advocate for change.
    My question to perhaps all of you would be, what is the 
likelihood of a regime to be changed in Iran by the Iranian 
people, and is there a likelihood that a different leadership--
and we have mentioned Rafsanjani and some of the other leaders 
who now appear to be very much on the side of regime change, as 
well--whether they would present any significant change in 
terms of the problem we are dealing with, which is nuclear 
arms, or whether we would see more of the same as it relates to 
that issue. While it might be more to the liking of the Iranian 
people, it wouldn't really be any different in terms of its 
international attitudes toward Iran--I am sorry, toward Israel 
or whether or not the pursuit of a nuclear weapon would 
continue.
    Mr. Burns. Senator, I think that, obviously, looking at the 
actions of the Iranian government in the wake of the June 12 
elections, all of us would wish to see that regime disappear 
and would wish to see a democratic regime take its place. 
Unfortunately, that is not likely to happen in the short term 
over the next couple of years. And so I don't think regime 
change by itself can be a policy for the U.S. Government and I 
do think it is important that we understand that even 
Rafsanjani or Mohammed Khatami, two prior presidents to 
Ahmadinejad, well, they built the nuclear program. They 
sustained the support for Hezbollah and for Hamas and for 
Palestinian Islamic jihad, so these are not Jeffersonian 
Democrats who might be the people who take over if Ahmadinejad 
should fall from power.
    I think a far more realistic policy, frankly, is the one 
that President Bush had in his second term and certainly that 
President Obama has now. We have to deal with this government 
in Iran. We don't like it, but we have to deal with it. We 
dealt with Stalin's Soviet Union. We dealt with Mao's China, 
and successfully through containment.
    And so I think we ought to practically focus on the issue 
of how do we coerce that government internationally to back 
down from its nuclear program, and if it doesn't, how do we 
sanction it effectively, hopefully in a way that prevents us 
from getting into a third war in the Middle East. I think that 
is the strategic challenge and President Obama deserves some 
time to see this strategy of engagement plus sanctions, which I 
understand is his policy, play out. I think he has done very 
well in his first 7 months to set this up. But the crucial time 
will come in September and October. I think he set his own 
deadline, as I understand it--the G-20 summit in Pittsburgh.
    Senator Martinez. Unless someone has a different view, we 
can move to something else. Is there----
    Ms. Maloney. I don't think anyone would make the assumption 
that a Rafsanjani or Khatami or Moussavi presidency would have 
abandoned the nuclear program. Their track records are very 
clear.
    Senator Martinez. Right.
    Ms. Maloney. However, they did speak in the campaign about 
a different kind of attitude toward negotiations, and I think 
if we were to see some sort of change in the leadership, as 
unexpected as that is at this stage, it would create more room 
for a serious negotiation and potentially more room for 
concessions. It was under the Khatami presidency, of course, 
that the Iranians did agree to suspend uranium enrichment for 
several years.
    Senator Martinez. Now, moving on to the current track and 
with the critical diplomacy in the months ahead, there seems to 
be a fairly strong consensus that in order for sanctions to 
really function, we are going to have to get the Chinese, the 
Russians, and to some extent, as well, the Europeans on board. 
What is it going to take to get Russian cooperation? Even the 
Chinese might be easier. But what is the likelihood of Russian 
cooperation when they are an arms seller as well as an 
important trade partner?
    Mr. Burns. Senator, I guess I wouldn't want to twin the 
Russians and Chinese here in terms of analysis. I think the 
Chinese, unfortunately, have shown themselves to be devoted to 
mercantilism, to trade above all else. When the Europeans 
pulled back in part from the Iranian market in 2005 and 2006, 
the Chinese rushed in and filled all those contracts. The 
Russians seem to have a more strategic view based on their 
history with the Iranians.
    So I think that we have to let the Russians know this is a 
vital concern to the United States and that we have options and 
that we are willing to exercise those options to deny Iran a 
nuclear weapons capability unless Russia can join us in an 
engagement and sanctions regime. That is the test for the 
Russians. But the Russians have been cynical, as well.
    Senator Martinez. Ms. Pletka?
    Ms. Pletka. I agree with Ambassador Burns that I don't 
think we can see the Russians and the Chinese the same way. And 
although the Chinese are very mercantilist, I think that they 
have interests in North Korea and elsewhere that we can use to 
discuss our interest here, and frankly, there is some prospect 
of them being made perhaps a little bit more cooperative than I 
think that the Russians have been. I defer to those who have 
sat with the Russians on these negotiations, but certainly the 
evidence is that they have been very, very difficult.
    And I think that the truth is that they need to be 
persuaded that we, in fact, have some credible other option, 
and the assumptions in each one of these capitals, whether it 
is the European capitals or it is in Beijing or in Moscow is 
that the United States is not going to use force under any 
circumstance. And if you are persuaded of that, then you are 
probably not going to be persuaded of the wisdom of moving 
toward any sanctions with any alacrity.
    That was the advantage that the Bush Administration, for 
all that it has been vilified, had. There was some prospect 
that they were going to do that, although I think it was 
exaggerated. I think people believe, again perhaps falsely, 
that the Obama Administration holds out no prospect for the use 
of force.
    Senator Martinez. On that vein, if I may just extend for a 
second, you touched on something that I think is very 
important, which is what would it mean for Iran to have a 
nuclear weapon. Dr. Maloney also mentioned the prospects of 
containment and our success in the cold war on containment. I 
think the Iranian leadership is a little different and their 
motivation may be a little different than what we were dealing 
with in the cold war. How do we deal with a nuclear Iran and 
what are the prospects for containment as well as what 
alternative there would be beyond that, which I guess would be 
military action?
    Ms. Pletka. Thank you for giving me the hardest question of 
the day.
    [Laughter.]
    Ms. Pletka. I do think that the analogy between the Soviet 
Union and the containment of the Soviet Union during the cold 
war and that of Iran is a false analogy. I think the Iranian 
leadership is a far more apocalyptic one. I think that the 
threats that they have articulated, frankly, are much stronger 
and much more consistent than the ones that were certainly in 
latter years articulated by the Soviet--pardon me, maybe I am 
sick----
    [Laughter.]
    Ms. Pletka.----by the Soviet leadership, and we have to ask 
ourselves, I think, whether this is a risk worth taking.
    Some have said that the Iranians--in fact, I think 
Secretary Clinton said this during the campaign--that the 
Iranians must know that if they used a nuclear weapon that they 
could be annihilated. And all I would say to that is, first of 
all, that is not terribly credible. And second of all, I think 
it was President Ahmadinejad who said that it would be worth 
losing half of Iran in order to destroy the state of Israel, 
and we should take people like that seriously. Senator 
Lieberman said that at the outset. We need to listen to 
people----
    Senator Martinez. Take them at their word.
    Ms. Pletka.----talk about the use of weapons. Exactly.
    Senator Martinez. Yes, sir?
    Mr. Levitt. I would just add that containing, deterring a 
nuclear Iran from using a nuclear weapon is only one part of 
the equation. As several of us have already said, there is the 
whole second part of it, of how it would empower and muscle up 
Iran in terms of its regional intentions. And here, when I 
travel in the region, it is not the Israelis who are the most 
vocal on this issue. It is the Emirates and others in the Gulf 
practically taking me by the lapel, saying, ``Matt, you don't 
understand,'' after I have given them my spiel on Iran, ``No, 
you don't understand exactly how''--hegemonic is the word they 
use--their intent would become, or they would act on that 
existing intent, as they put it.
    And the reason I think there would be a cascade of 
instability, other regions starting up nuclear programs, and 
just by virtue of having that power, it is kind of a, ``So I 
support Hezbollah. What are you going to do about it? I am a 
nuclear power.'' That is a whole second side of it, that 
attitude that we would have to contend with, that is not 
necessarily containable.
    Senator Martinez. And it is not limited to the Middle East 
because that includes the Western Hemisphere, as well.
    Yes, I am sorry. I am way over my time, but----
    Ms. Maloney. I realize we are over our time----
    Senator Martinez. That is all right.
    Ms. Maloney.----but let me just make a couple of points.
    Senator Martinez. Thank you.
    Ms. Maloney. I recognize that the Gulf states spend a lot 
of time talking about the Iranian threat, but they don't spend 
a lot of time doing anything about it.
    Senator Bayh. When you are contemplating an apocalypse, 
Senator, it is worth taking some time.
    Senator Martinez. I appreciate that.
    [Laughter.]
    Ms. Maloney. They don't spend a lot of time doing anything 
about it, and they may be grabbing that by the lapels, but they 
have been very averse to doing anything that would curtail 
their business relationships with Iran and their political 
relationships, both of which are quite substantial. So I will 
take that rhetoric much more seriously when I see them behaving 
in a way that suggests that they believe that that threat is as 
real as they say.
    In terms of the threat of force and the inability to 
contain the Iranians or deter them, I think that that puts a 
very problematic sort of choice for American foreign policy. 
The inability to talk about deterring Iran in this Capitol is 
stunning to me. We have to recognize that we cannot necessarily 
control the outcome in Iran and we have to be able to develop 
policies that are intended to deal with whatever we may face in 
the future. And so we have to have a serious discussion about 
how we would handle a nuclear Iran, because that eventuality 
could be upon us much more quickly than we suspect.
    And for those who suggest that Iran is somehow much greater 
and much more severe of a threat than either Maoist China or 
Soviet Russia, I would say that your memories are probably very 
short.
    Senator Bayh. Ambassador, I think we would like to hear 
from you on this question, but then out of courtesy to Senator 
Johanns, we will need to turn to him.
    Mr. Burns. I will be very brief, Senator. I did want to 
join this discussion. I think it would be unwise to limit the 
President's options should negotiations and sanctions fail, and 
I would bet that they probably would. To be left with only one 
option, military force, when that option is fraught with 
difficulties for us--a third war in the Middle East and South 
Asia in a decade--I think would be very unwise of us as a 
country, and therefore, we need to look at containment.
    The Soviet Union and Communist China were far superior to 
Iran, present-day Iran, in their military strength and their 
threat to the United States. We have the means and we have the 
partners in Israel and the Arab states to contain the Iranians. 
It ought to be an option alongside the use of force that we 
ought to be looking at very carefully, and the President ought 
to decide what is best for our country if that time should 
come. It may come in the future.
    Senator Bayh. Thank you, Ambassador.
    Senator Martinez. Thank you. I appreciate the indulgence.
    Senator Bayh. Senator Johanns, I apologize. In my intent 
focus on our witnesses' testimony, I did not notice that 
Senator Menendez reentered and he is ahead of you on the queue, 
so I apologize for that.
    Senator Menendez?
    Senator Menendez. Thank you, Mr. Chairman. That is the 
first time someone has not been able to notice me, so I like 
that, actually. It means I have withered away a little bit in 
the process.
    Senator Bayh. Hardly.
    [Laughter.]
    Senator Menendez. Let me thank you all for your testimony. 
I know that the G-8 has set the September meeting of the G-20 
as supposedly a deadline for Iran to accept negotiations or 
face stronger sanctions. My question is, and I saw Secretary 
Clinton's speech discussing in the Council of Foreign Relations 
engagement, but at the same time saying that the opportunity 
doesn't remain open indefinitely. So how can the G-8 prevent 
Iran from stalling and what is, in your view, what would occur 
if Iran has refused to accept the invitation to engage? What 
should be done then?
    Mr. Levitt. I think what should be done is an immediate 
movement to try and pick off the low-hanging fruit for 
multilateral designations at the United Nations, and by low-
hanging fruit, I mean those entities that we know designating 
them would have an impact and that have already been called out 
at the U.N.--banks and the IRISL, the shipping line, in 
particular. That should be done both because it would have an 
impact and it should be something we could do quickly because 
the U.N. has already called them out.
    But we need to do much more than that, and as we all have 
said, if we really want sanctions to be able to have a 
significant bite, they are going to have to be multilateral. We 
can't go this on our own. Unilateral sanctions on the margins 
can be effective, as well, and that might be a useful means of 
filling in the blank some of the time as we are trying to 
negotiate multilateral sanctions.
    To me, the critical thing is that we do something and we do 
something quickly if Iran doesn't respond to our offer by the 
deadline that the administration has set. I have often said 
that I think what made the first U.N. Security Council 
resolution on Iran most effective was not--of the several we 
have had--is not just that it had the sharpest teeth, though 
its teeth were not all that sharp, either, but that it was 
unanimous. And the fact that subsequent resolutions were not is 
something that the Iranians paid a lot of attention to.
    So we should be working now--I hope we are working now 
very, very hard diplomatically with our allies to secure 
agreement so that if the G-20 comes and goes, we don't then 
have a whole bunch of other deadlines by which a few more weeks 
and a few more weeks and the UNGA and something after that, 
because what everyone is clear on is that we don't have time 
and that the Iranian strategy will be to buy time.
    Senator Menendez. Yes?
    Ms. Pletka. I just want to make a point of clarification. I 
think that, as several members have alluded to, that the G-20 
deadline, and I know the Congress passed a Sense of the Senate 
on it, it is not a deadline as it has been described. You were 
about to say the same thing. It has been described as a time to 
reassess.
    And so for those who are conceiving of this as a moment, a 
launching point for decisive action, whether that action is 
multilateral sanctions or United Nations resolutions or 
whatever it might be, I think that that is not correct. The 
President himself in his discussions with Benjamin Netanyahu 
gave the Iranians, in fact, until the end of the year. But even 
there, I don't think that we can think of that as a hard 
deadline. So----
    Senator Menendez. Well, that raises the question. So let us 
accept--I accept that it is a time to reassess. We can keep 
reassessing this ad infinitum. The question is----
    Ms. Pletka. We have been.
    Senator Menendez. We have been, which is what worries me. 
The question is whether it is a determination that you can't, 
as Dr. Maloney said, you are not going to affect the outcome, 
and if you come to that conclusion, then you have to look to 
your next step, or the question is can you affect the outcome 
in some way, and if so, then what is that. It just seems to me 
that when we create the impression that we are reassessing 
without action, then I think if I was the Iranians and my goal 
was theirs, that I would love all these reassessments. So what 
is our action?
    When I hear you, Dr. Levitt, talk about multilateral 
actions, I agree. So how do you get the Chinese and the 
Russians to join you? What is your leverage there? Ballistic 
missile issues? Anti-defense missiles? How do you get them, 
engage them on this critical issue?
    Mr. Burns. Senator, I just would make two points in 
response to your question. First of all, the Iranians have had 
an awfully long time to consider this offer. It was first made 
by the P-5--most of those countries are in the G-8--in June of 
2006. This is not a new offer. I think they are unlikely to 
accept the offer.
    But let me speak up for reassessment. I think this is such 
a highly complex environment following the elections, where we 
are going to want to try to capitalize in divisions in Iran, 
that President Obama is right not to say right now, here is 
what I am going to do. He ought to wait and see if the Iranians 
accept this offer. If they don't, then he has a much--he is 
greatly strengthened to turn to the other members of the G-8 
and G-20 and say, we tried to negotiate. We had a good faith 
offer on the table. Now you need to join us, Russia and China, 
in sanctions, because this has gone on long enough.
    I think the President is actually in a very strong position 
internationally, stronger than, let us say, President Bush was 
a couple of years ago, and I worked for President Bush and, of 
course, wanted that policy to succeed.
    So this is set up not so badly for us, and reassessment 
doesn't mean inaction. It means actually that we might be able 
to get to a period of action with greater international and 
multilateral strength. That will be the test sometime this 
autumn.
    And I wouldn't want, just as a former diplomat, I certainly 
wouldn't want to impose on President Obama an outsider's view 
of what his deadline is. I think he will be in the best 
position, given his talks with Hu Jintao and President Medvedev 
and others, of when the time has come to move toward that 
tougher sanctions regime.
    Senator Menendez. Yes, sure.
    Ms. Maloney. I would just say the Iranians never actually 
turn down an offer. They always propose their own offer, which 
tends to be something that is completely unreasonable by most 
external standards. And I think what we have to be prepared for 
is not an Iran that is simply unwilling to speak on any basis, 
but an Iran that comes back to us with something way out there 
but which then is kind of grabbed by the Chinese and Russians 
and others, and potentially they will do this in advance of 
September, as a rationale for refusing any further action. And 
I think that is where our efforts have to be focused on how do 
we make the case that an Iran that is not capable of putting 
forward a serious offer is an Iran that needs to be the subject 
of serious multilateral sanctions.
    Senator Menendez. And, Mr. Chairman, if I may, just one 
last question. How do you get the Russians, for example, to 
cease its arms sales, specifically sophisticated anti-aircraft 
systems, to Iran? How do you incentivize them here to move in 
the direction that we want to see and that is in our mutual 
interest? Any thoughts on that?
    Ms. Maloney. Well, I mean, I will say that I think what the 
administration has tried to do is, as they say, reset the 
relationship and develop a level of trust and understanding in 
our mutual interest and goals that the Russians will be willing 
to put some of their own economic interests on the back burner 
in order to continue and potentially advance this bilateral 
relationship.
    The difficulty with that kind of a strategy is it is a 
long-term strategy. It is not a short-term strategy. And I 
don't think we are in a position yet where the Russians are 
likely to do that.
    I also don't think the threat of force terribly worries the 
Russians. They probably can see an upside to that, which is 
that oil prices would go up and they would be the primary 
beneficiary and supplier of choice under a set of circumstances 
where the Gulf were in flames.
    I think where we do have some leverage is with the Chinese, 
because they have a long-term view. They are trying to sew up 
some opportunities in Iran, but they are also looking to all 
their relationships with the other Gulf oil producers because 
of the significance of energy for their economy, and I think 
that is where we may be able to create some new leverage. By 
moving the Chinese, we may therefore help move the Russians.
    Senator Menendez. Thank you, Mr. Chairman.
    Senator Bayh. Thank you, Senator. Very interesting 
questions and excellent responses.
    Thank you for your patience. I just have a few more 
questions and then we will wrap the hearing up.
    Dr. Levitt, you testified, and I think accurately, and 
several of the other panelists referenced the financial 
sanctions that have been put into place which have raised the 
cost of doing business on Iran, but not modified their 
behavior. But there is something to be said for gaining some 
leverage. They are increasing the cost of them doing business.
    I would be interested in your assessment or other panelists 
assessments, if we could get some sanctions on the import of 
refined petroleum products. Now, they are moving, as Dr. 
Maloney suggested. They are aware of their vulnerability. They 
are moving to increase their refining capacity. But we do have 
a window here where they are not there yet. If we could get 
some sanctions on the importation of refined petroleum products 
into Iran that were reasonably successful--not perfect, but 
reasonably successful--how much would that increase the cost of 
doing business for Iran?
    Mr. Levitt. Significantly, but I can't measure it for you. 
In other words, 40 percent is a lot of oil, domestically 
consumed oil. The big shift here would be moving from a 
targeted financial measure, which is trying to target illicit 
actors engaged in illicit activity and not the people of Iran, 
moving toward one that begins to target the people of Iran in a 
way to put pressure on the regime since the fact is that regime 
stability is the only thing, as you have heard, that they care 
more about than the nuclear program.
    I think that the idea of giving the administration this 
tool is a wise one, but we also need to think creatively. There 
are lots of ways to skin this cat. For example, we have talked 
a lot about the formal sanctions. Many would argue that at 
least as effective have been the informal sanctions, the 
leveraging of market forces, going out and meeting not only 
with governments, but also with the private banks, the Treasury 
dog-and-pony show which State was actively engaged in, as well. 
This was----
    Senator Bayh. Your testimony is that the combination of 
either formal or informal would increase the cost of doing 
business potentially a lot----
    Mr. Levitt. Correct, and especially--I am sorry.
    Senator Bayh. I was going to be interested, then, and the 
next question would be, enough that it might actually get them 
to think seriously about moderating their behavior or not?
    Mr. Levitt. On their own?
    Senator Bayh. It has gone up the scale, but is it enough?
    Mr. Levitt. I don't think it is going to be enough. I don't 
think it is going to be there yet, especially if it is--unless 
it is a truly multilateral international effort focused on 
petroleum.
    Senator Bayh. I think there was an agreement between you 
and Mr. Burns. I think you both agreed that, ideally, 
multilateral approach would be much more efficacious, but with 
your caveat that there was some utility in a unilateral 
approach if you just had no recourse other than that. But you 
would agree that if we could get cooperation, as difficult as 
it might be, that a multilateral approach would be the ideal 
path.
    Mr. Levitt. Yes, and there is a third option, and that is 
taking the informal sanction approach and moving beyond the 
financial sector, and moving beyond State and Treasury to other 
agencies, Commerce in particular, and moving beyond to the 
insurance industries, the petrochemical industries, and having 
this conversation. They, too, have shareholders. They, too, are 
concerned about reputational risk and due diligence and 
fiduciary obligations to shareholders. There are other levers 
that we can press here that can also be things we shouldn't be 
doing. None of this is an either/or.
    Senator Bayh. Thank you, Doctor.
    Ambassador, you might have some thoughts on that. Again, my 
question is, this continues to--getting back to my original 
question, they respect strength and material consequences to 
them focus the mind, give us the best chance of moderating 
their behavior, leading to successful negotiations. The 
importation would ratchet up the pressure, but is it enough for 
them to begin to focus, wait a minute, this is something we 
just can't ignore anymore. Perhaps we need to start thinking 
about some sort of negotiated settlement here.
    Mr. Burns. Thank you, Senator. I think that the Congress 
would be right to give the President greater authority to 
impose sanctions in the future. I know that your bill intends 
to do that----
    Senator Bayh. It does, with the waiver provision that you 
have noted.
    Mr. Burns. Exactly. Forgive me for sounding like a broken 
record here, but I do think that it is not enough to inflict 
economic pain on the Iranian government at a time when they 
are, if you look at the IAEA reports, proceeding vigorously on 
their nuclear research. And so I think we have to have a 
decisive impact, and that would be an agreement that would 
encompass the Russians, the Chinese, the Europeans, and 
Americans on truly decisive sanctions.
    I do think the only way to get there is through an 
engagement strategy showing the willingness to negotiate, which 
then enhances the power of the United States to say to the 
others when those negotiations haven't worked out, you have to 
try it our way.
    Senator Bayh. What is your response to Dr. Maloney's 
testimony that, well, the Iranians will probably at some point 
after delay agree to negotiate and then put out incredibly 
unreasonable counterproposals that will be seized upon by some 
of the countries you have cited whose cooperation we need as a 
reason to do nothing. What do you think about that?
    Mr. Burns. That is exactly--she is exactly right, as 
usual----
    Senator Bayh. So how do we deal with that?
    Mr. Burns. That is what happened over the last several 
years. How we deal with that, I think, is having prior 
agreements with all the governments that Iran will not have the 
capability of dividing and conquering, that we are going to 
stand together. If a certain amount of measurable progress is 
not made in a very short time in negotiations, all of those 
parties would turn to sanctions. I don't think that is too much 
for the United States to ask of these other negotiating 
partners, like the Russians and Chinese.
    Senator Bayh. Do you think that is a reasonable prospect, 
even given the Chinese commercial interest and the Russians' 
commercial interest?
    Mr. Burns. I think it is a difficult prospect. I am not 
sure this strategy will succeed, but it is worth trying because 
the only other alternatives, I think, would be worse, such as 
the resort to military force at this time. That would be worse 
for the United States, in my judgment.
    Senator Bayh. So your testimony is clearly that a 
unilateral approach gives us the best prospect of success, so 
we need to focus on what it takes to get the other countries, 
including India, I think, who is doing a fair amount of 
business there, to participate in this. And it would, according 
to Dr. Levitt, substantially increase the cost of doing 
business, perhaps so much if we can take a unilateral approach, 
Ambassador, that it would get them to contemplate modifying 
their behavior?
    Mr. Burns. Well, my belief is that we cannot have a solely 
unilateral approach, that some of these steps might be helpful 
in constructing a larger strategy, but in essence, we have to 
lead a coalition. We have to start a coalition here, lead it, 
and keep it unified. That is going to be very difficult to do, 
but it is worth trying and there is time to do it.
    Senator Bayh. Ms. Pletka or Dr. Maloney, do you have any 
response to what your two co-panelists have said?
    Ms. Maloney. Getting back to your original point about the 
impact of a ban on refined products, I think, depending on the 
environment in Iran, it could play into some change in the 
regime's calculus. I play out what this would look like on the 
ground, and potentially with smuggling, with disrespect of the 
provisions of the act, Iran might be down, say, to 20 percent 
of its refined products actually coming into the country, so 
they have got a deficit potentially of 20 percent.
    What happens on the streets? You have got people waiting in 
long lines. You have got a lot of frustration. Now, the regime 
has been successful in cutting demand for refined products. It 
has imposed both a rationing program and also tried to gear up 
CMG vehicles around the country for public transportation. So 
it could cope for some period of time, but----
    Senator Bayh. Could I interject for just a moment? You 
previously had testified that with the controversy surrounding 
the election, the protests in the street, perhaps they are a 
little bit more worried about the stability of the regime, 
although they are going to retain control in the longer term. 
Might it not be true that if you added this additional economic 
element to what is already now a changed political situation 
that perhaps that increases their anxiety level a bit about 
their own situation?
    Ms. Maloney. I think it absolutely----
    Senator Bayh. Because I was very impressed by your original 
statements to my first question about what could we learn from 
their behavior post-Afghanistan and Iran and you said they do a 
cost-benefit analysis. Might this not increase the cost to get 
them to change that calculus a bit?
    Ms. Maloney. Absolutely. I think that it plays into a very 
different environment in Iran, and one in which the population 
would be far more willing to blame their own regime rather than 
outside forces for this action. But I also would note the 
caveat that the Iranians are not terribly good at capitulation. 
This is a regime that tends to believe the best defense is a 
good offense, and so I think we also have to be prepared that 
Iran, under pressure from within, under pressure from greater 
sanctions from without, would, at least in the immediate term, 
probably prove more difficult to deal with.
    It doesn't mean that it wouldn't change their calculations. 
But to the extent that we have got a timing issue here, and the 
ticking clocks metaphor gets used a lot, we have to try to 
think about exactly how we get them to the table if they feel 
entirely cornered. So I think----
    Senator Bayh. Well----
    Ms. Maloney. I think there is a cost-benefit to it from our 
side, and I think, like Ambassador Burns, the waiver is key 
because to the extent that the Chinese see their economic 
interests threatened, they won't play ball.
    Senator Bayh. Having them at the table feeling cornered 
seems to me to be a better set of circumstances than the ones 
we are looking at today, because then at least if we can come 
up with a face-saving way out of it for them if they agree to 
modify their behavior, I mean, then you have made some 
progress. Right now, it seems that they just feel they can kind 
of continue their current course without much--at least without 
consequences they are perfectly willing to bear, but thank you.
    Ms. Pletka, anything?
    Ms. Pletka. The only thing I would say is to underscore and 
agree with what you just said. The wisdom of having an 
engagement policy is giving them a way out when they are backed 
up into a corner. It is allowing them the graceful exit. The 
problem is, if you have an open door on one side and absolutely 
nothing pushing them toward it on the other side, or nothing 
credible pushing them toward it on the other side, then the 
engagement policy becomes nothing other than an open hand.
    We can stand waiting for an awfully long time, and this is 
what we have heard over the course of many, many years. Don't 
do that because around the corner is the persuasive moment when 
everybody will join with us. No, no, no, don't do that because 
it will really take away from our credibility and our bona 
fides.
    But what the Iranians have seen over the same course of 
time is that we have changed our red line every single time and 
we have always been willing to do it. First, we didn't want 
them to get uranium conversion. Then we didn't want them to do 
enrichment. Then we wanted them only to suspend enrichment. Now 
we want them to suspend enrichment, but maybe we could even 
have an enrichment facility in Iran. Goodness me, what a great 
idea.
    So I think the Iranians look at that, and just as we make 
assessments about them, and we have all talked about them, they 
look at us. And what they see is a United States that isn't 
terribly decisive. They see an international community that 
isn't going to come together. And they see the likelihood that 
they are going to continue. When people talk about the 
possibility of containment, the way they see that, the way they 
reacted to Secretary Clinton's statement last week in Thailand 
was that the United States will accept a nuclear Iran. They 
will all talk about deterring us and containing us, but at the 
end of the day, they will accept a nuclear Iran.
    And I think at the end of the day, the truth is, but a lot 
of people aren't willing to say it, that they are willing to 
accept a nuclear Iran. A lot of people in this town.
    Senator Bayh. Well, the hope here is that we are taking a 
calibrated approach and the hope is that we can empower the 
President, working in a multilateral context, to change the 
cost-benefit analysis in Tehran by--in a different political 
environment now, somewhat more unstable, to add some economic 
and financial difficulties on top of that that might get them 
to feel cornered, Dr. Maloney, but not without a way out. And 
that is what we are--if they agree to moderate their behavior, 
then there is a way out, and in the fullness of time, God 
willing, the regime will change. But at least in the near term, 
in their own minds, they will have relieved the pressure and 
perhaps they will be internally in a better situation from 
their own point of view.
    I don't know, you look like you seem a bit skeptical, you 
are thinking a bit skeptically. It is incredibly difficult, but 
that is the challenge here.
    I had one final question and this might be a question--
well, there are so many ways we can go, but you have been most 
patient. Two final questions, actually.
    I was in Moscow--it has been some time. The world has 
changed a lot in the last year and a half. But I met with the 
energy minister there whose portfolio is to deal with some of 
these questions with Iran and he used a word that caught my 
attention. He said that the Iranians were terrified--that is 
the word he used, terrified--at the prospect of perhaps some 
restriction, not on their import of refined petroleum products. 
That is the next step. We began with the financial issues Mr. 
Levitt worked on. We are now contemplating refined petroleum 
importation. He said they were terrified at the potential for 
any restrictions on their export of petroleum because they rely 
so heavily upon that.
    Now, that would have all sorts of consequences for the 
global oil market, and at this moment in the global economy, it 
is unlikely we would go there. I think maybe Dr. Maloney, one 
of you pointed out the Russians actually think about that in 
terms of their own self-interest.
    But I would be interested in any of your thoughts, and how 
we can work with the Saudis and some others in a multilateral 
way to deal with some of the consequences of something like 
that. Is that--if the Iranians are terrified about that, isn't 
it at least worth us thinking about?
    Not doing today, but at least ultimately as an end-game 
strategy and perhaps doing some things to mitigate the economic 
consequences to us and the rest of the world of such a 
scenario.
    Mr. Burns. I believe it makes sense for the United States 
to consider sanctions on energy because that is the source of 
Iran's national power and its economic power. The question is: 
Will the Arab governments agree with that? Will the Russians 
and Chinese agree with that? It has not been tested. We have 
not put that on the table before. Giving the President that 
kind of authority, therefore, expands his options and I think 
enhances, strengthens his diplomatic portfolio. It is a good 
thing to give him that authority.
    I want to just say, however, I do not think we should 
consider the Iranians as 10 feet tall here. The Iranian threat 
to the United States, to Israel, to the Arab countries is not 
in any way comparable to what we faced in the middle part of 
the 20th century through the early 1990s with the two great 
communist powers. That threat was far greater.
    Therefore, we ought to have a little bit of self-confidence 
that with a skillful diplomatic approach that combines these 
various elements that we have been talking about, Senator, and 
that are in your bill--engagement and sanctions and keeping the 
threat of force on the table--that is the proper way for the 
United States to proceed. And I very much disagree with the 
criticism that somehow President Obama has been soft or weak or 
indecisive or he is not keeping to deadlines. Frankly, I see 
President Obama continuing a lot of the strength that was in 
President Bush's policy, and I think what he has been able to 
do is to put Iran on the defensive internationally. And, 
frankly, Iran is weakened now as a result of the political 
crisis over the past summer.
    So I do not assume that somehow this is a strategy that is 
bound to fail. It may not succeed, but it is worth trying for 
the United States, and we ought to have the self-confidence 
that our President has put in place a lot of different 
initiatives now that might come together, hopefully will come 
together, for a successful policy.
    Senator Bayh. Well, the hope is to move progressively, with 
timelines and real consequences for failing to meet them, to 
ratchet up the consequences, to change the cost/benefit 
analysis in Tehran, and then, God willing, avoid very difficult 
decisions, you know, at the end of the day if all that does not 
work. That is why I asked about the exportation, because if 
they are truly terrified about it, at least having some 
prospect of that out there might get them to focus on their 
cost/benefit analysis. But I am well aware that there are 
some--that would be very difficult on us economically, 
potentially, if we do not move to mitigate some of that.
    Perhaps I will end up with--both you and Dr. Maloney have 
suggested--you, Dr. Maloney, spoke about deterrence. You have 
talked about the Iranians not being, you know, 10 feet tall and 
that sort of thing. When you sit in these chairs and the chairs 
that some of you have served in previously, at the end of this 
road lies an assessment of their intentions and their 
psychology.
    You are correct, the military capabilities of the former 
Soviet Union and some of our previous adversaries make what 
Iran can do pale by comparison. But as best we can tell, they 
were never suicidal. The Iranians may very well not be 
suicidal. At the end of the day, Dr. Maloney--and here is my 
question to all of you at the end of this. At the end of the 
day they may be irrational, cost/benefit analysis--who was 
that? Jeremy Bentham? They may view the world in those sorts of 
terms. But they do have some leaders that make apocalyptic 
statements. They do have some religious fanatics amongst their 
midst. And if the consequences of error are the launching of a 
nuclear weapon, how great a risk do we run that our assessment 
of their psychology is wrong? Even if there is a relatively 
small possibility that they might engage in such behavior, the 
consequences of that are so great--granted, the consequences of 
acting to try and prevent them from doing that, if all these 
steps we have outlined here today are unsuccessful, is 
certainly no walk in the park and should sober all those who 
advocate such a step.
    But that is ultimately the decision that we may very well 
be confronted with and why this hearing and these steps to try 
and change the analysis are so important, because the answer to 
that question may in large part be unknowable with consequences 
either way that could be potentially very adverse.
    Ms. Maloney. Well, I mean, deterrence is effectively about 
risk and about the psychology of your adversary, and I think 
you are right to raise the extent to which we have not always 
forecast Iranian behavior accurately and the extent to which 
certainly the leadership at this stage is prepared to use 
violence to advance its aims and essentially secure its power.
    At the same time, I think you could have made equally, 
perhaps even more compelling arguments about the psychology of 
communist Russia, about the psychology of Maoist China and 
their willingness to use violence, their ability to be deterred 
by the threat of violence, and their interests in protecting or 
preserving their own citizens, and it worked. And I think that 
the same laws of deterrence applied to Iran will work. They 
have worked. We have deterred Iran from engaging in some of the 
worst behavior that certainly some within the regime would have 
engaged in without any sorts of curbs on their activities. And 
I think we can certainly deter and contain a nuclear Iran.
    Let me just say, in answer to your previous question--and I 
realize that I am indulging here, but I think that the export 
question is certainly far more of an existential threat to the 
Iranian regime, but it is one that they recognize that also has 
some costs to the international community, particularly in the 
wake of this global economic crisis. At this stage, there is 
sufficient spare capacity for the world to live without Iranian 
exports, but it will have an impact on the price.
    I think the easier way to get at this, because you will 
never get--if you cannot get multilateral agreement to the sort 
of very modest measures that Dr. Levitt suggested, you will 
never get multilateral agreement on a ban on Iranian oil 
exports short of them testing a nuclear weapon. I think the 
easier step would be just begin talking about targeting 
investment in their energy sector, writ large, because the 
Iranians know better than anyone that they have a production 
decline, that they have technological and now, given the 
financial crisis, some financial, some issues of capital that 
they need international involvement in their sector in order to 
avert potentially becoming an importer of oil rather than an 
exporter.
    Senator Bayh. So you would agree with the sentiments of the 
Russian energy minister I spoke with? He used the words 
``existential threat,'' that they would be very concerned about 
even beginning to discuss something along those lines.
    Ms. Maloney. I think even those discussions, the suggestion 
that the Chinese and others would be willing to go along with 
anything that involves energy investments would be very 
powerful.
    Ms. Pletka. Senator?
    Senator Bayh. Yes.
    Ms. Pletka. May I just address an issue that has not 
arisen? We have gotten drawn into the question of parallels and 
similes with the Soviet Union and Maoist China, and I think 
that Ambassador Burns is absolutely right. There is no 
comparison in terms of the might, the power, or the threat that 
they represent to the United States. Neither the Soviet Union 
nor Maoist China were especially interested in annihilating the 
state of Israel. Each of the members, I noticed up here, 
regardless of party, happened to mention our alliance with the 
state of Israel, and I think that we are interested in the 
security of the state of Israel as well as the security of our 
own homeland and other allies. And, in fact, Iran does have an 
ability to do significant damage----
    Senator Bayh. Well, and if I could interject, the Israelis 
obviously have an interest in their own security, and we are 
not the only actors on this stage.
    Ms. Pletka. That is exactly right.
    Senator Bayh. And if some others feel sufficiently 
threatened, they could engage in behavior that would then 
implicate us and a whole chain of events could take place.
    Ms. Pletka. Exactly, that would be enormously destabilizing 
in the region. We have not talked about that, but obviously the 
implications are very serious for us and for our allies. And, 
of course, you know, for us to stand by as the Jewish people 
twice in the space of 60 or 70 years face the prospect of 
genuine annihilation is something that is a fairly daunting 
prospect and not something I think that this Congress or most 
of us are willing to indulge in.
    Senator Bayh. Well, I think we would all agree that we have 
a strong interest in avoiding that.
    Anything else? You have been very patient, and I want to 
thank you. This has been a very good hearing, and your 
testimony has been very thoughtful. And I want to thank you for 
that. Anything else, Ambassador, anything you would like to 
add, anything that we did not touch upon?
    Mr. Burns. I just want to thank you for the opportunity to 
testify, and I want to agree with you that the prospect of a 
nuclear-armed Iran is unthinkable for our interests and for 
Israel's interests. But I am convinced that the best way to 
protect Israel's interests--and everyone wants to do that--as 
well as ours is not to leap to the solution of military force 
at this point. It is to engage in the more complex diplomatic 
move that I think President Obama is currently engaging in.
    Senator Bayh. Well, as Senator Lieberman indicated in his 
testimony and I tried to indicate in my opening remarks, the 
purpose for this hearing and for some of our initiatives is to 
try and make negotiations--maximize the chances that we do not 
reach that point, to try and buttress the negotiations with 
real consequences from a position--to change the cost/benefit 
analysis so that, God willing, we do not have to have a second 
panel here at some future date discussing what to do next.
    Thank you all very much. The hearing is adjourned.
    [Whereupon, at 12:19 p.m., the hearing was adjourned.]
    [Prepared statements and responses to written questions 
follow:]
            PREPARED STATEMENT OF SENATOR RICHARD C. SHELBY
    Thank you Mr. Chairman.
    Once again, the Committee meets to hear testimony on Iran's support 
for terrorism and its determination to develop a nuclear capability. 
This time, however, we meet at a time that is marked by weeks of 
unprecedented social, economic, and political upheaval in Iran.
    While many things remain unclear about Iran and its future, two 
remain very clear--Iran's nuclear ambitions and its sponsorship of 
terrorism.
    Iran continues to make strides in both its nuclear and missile 
programs, and it is still recognized as the ``Central Bank'' for 
terrorist financing.
    Over the years, various Administrations have attempted, with little 
or no success, to moderate the regime's nuclear aspirations and to curb 
its support for terror.
    Certainly, time and experience have shown that economic sanctions 
can be a mixed bag as a foreign policy instrument. Sanctions and other 
financial measures, directly or indirectly, have restrained some of 
Iran's activities. But, we have yet to implement a sanctions regime 
that produces the desired result.
    It has become clear that we need a fresh approach and that stricter 
controls may be necessary.
    I appreciate our witnesses willingness to appear before the 
Committee. I can't help but note, however, that the current 
Administration is not represented at today's hearing.
    The members of this panel will undoubtedly provide valuable insight 
on the previous administration's efforts.
    Current officials, however, would certainly be in a better position 
to provide details, or even discuss generally how the President intends 
to engage Iran diplomatically
    I hope we will get the opportunity to have that discussion sometime 
in the near future.
    Thank you, Mr. Chairman.
                                 ______
                                 
               PREPARED STATEMENT OF SENATOR MIKE JOHANNS
    Thank you, Mr. Chairman. And I'd also like to thank the witnesses 
testifying before us today, about an issue that has been in the news 
quite a bit these past few weeks. I recognize this hearing is not 
primarily about Iran's Presidential elections in June. But those 
elections have affected both the regime's willingness to negotiate and 
raised the cost of reaching out too far to this Iranian government. The 
Obama Administration came into office promising to extend its hand to 
nations that it felt had been unnecessarily threatened and bullied 
under the previous administration. In March, the President made a 
direct address to the Iranian nation, in which he sought to offer the 
Iranian government legitimacy as an equal partner in constructive 
negotiations over its nuclear program.
    His intention was commendable. I too am extremely hopeful that the 
current diplomatic process can produce a solution. I am thus proud to 
be an original cosponsor of S. 908, the Iran Refined Petroleum 
Sanctions Act. I understand that the President needs a great deal of 
flexibility to manage these highly delicate negotiations. I absolutely 
do not want to have the United States face yet another crisis in the 
Middle East. But at the end of the day, we in the United States do not 
dictate the pace of events. Nor, I believe, do our allies and partners 
in the ``P five plus one'' group negotiating with Iran.
    For years, successive Administrations have requested just what you 
have recommended in your testimony, Dr. Burns; that we allow the 
executive branch the greatest possible flexibility in instituting 
sanctions. I think Congress has indeed been flexible. Since the Iran-
Libya Sanctions Act was passed in 1996, no foreign firm has been 
penalized for investing in Iran's energy sector. That omission became 
even more glaring after the 2002 revelation of Iran's hidden nuclear 
facilities, and the subsequent beginning of negotiations over Iran's 
nuclear program. Initially, the Europeans took the lead in these 
efforts. The United States has been repeatedly assured that our 
European partners are equally concerned with Iran as we are, and 
equally committed to finding a diplomatic solution.
    But then why does German and French and Italian trade with Iran 
continue? Why is it rising? Why does the German government, itself part 
of the ``P five plus one'' negotiating group, continue to offer its 
companies export credits for their sales to Iran? I cannot understand 
how long our partners need before they get serious. The latest deadline 
I have heard--a soft deadline--is this fall, before Iran needs to reply 
to our latest offer. If it has not reciprocated by then, the United 
States and its partners will reportedly impose--in the words of the 
French President, among others--``crippling sanctions.'' But these 
sanctions almost certainly will require a strong U.N. Security Council 
resolution to be truly effective. And I don't see how we get from here 
to U.N. Security Council unanimity by waiting for 6 months, or a year, 
or whatever.
    I am unclear on why Russia and China would support a massively 
ramped-up U.N. sanctions regime when they never have in the past. Is 
there reason to think that they were waiting for direct, unconditional 
U.S. engagement with Iran before they were convinced of our sincerity? 
I find that unlikely. I do not think the Administration's engagement 
effort will change anything fundamental in Russia or China's strategic 
view of this situation. China, in particular, is aggressively deepening 
its business relationship with Iran. Is that partnership likely to be 
outweighed by the strategic value of another hand reached out to Iran's 
fist? I doubt it. If Iran responds to the U.S. offer by this fall--and 
I imagine its leadership, as masters of the delaying tactic, may well 
do so, to prolong the process--negotiations will stretch on. And a 
strong U.N. resolution will still be opposed by Russia and China.
    I find this a highly realistic scenario. And what worries me is 
that while our Administration and our partners continue to call for 
more time, and more negotiations, and flexibility, our best window for 
sanctions is slipping away from us. I believe a comprehensive 
application of economic sanctions on Iran is necessary and could be 
effective, given the state of its economy and the regime's actions in 
the recent Presidential election. But these measures are critical now, 
not in a year or so.
    I do not mean to sound too gloomy. But I--and I think others in 
this room--have a terrible feeling that this situation is close to 
slipping beyond our ability to influence it. Thank you, Mr. Chairman.
                                 ______
                                 
           PREPARED STATEMENT OF SENATOR JOSEPH I. LIEBERMAN
    Thank you, Senator Bayh and Senator Shelby. I greatly appreciate 
the opportunity to appear before you and your distinguished Committee 
this morning as you take up what Defense Secretary Gates recently 
characterized as the greatest threat to global security today: the 
pursuit of a nuclear weapons capability by the Islamic Republic of 
Iran.
    I am deeply grateful to the Chairman of the Banking Committee, my 
good friend and colleague Chris Dodd, for calling today's hearing. 
Under Chairman Dodd's leadership, the Banking Committee has played a 
critically important role in the response to Iran's nuclear ambitions--
most notably, in the sanctions bill your Committee overwhelmingly 
endorsed 1 year ago.
    I also would like to applaud you, Senator Bayh, for chairing this 
hearing, and for your distinguished and strong leadership on this 
issue. It has been my privilege to work closely with Senator Bayh this 
year as we, together with Senator Jon Kyl, put forward S. 908, the Iran 
Refined Petroleum Sanctions Act.
    As of this morning, no less than 71 members of the Senate have 
joined together as cosponsors of S. 908. This includes both some of our 
most liberal and some of our most conservative colleagues--Senators who 
do not see eye-to-eye on many issues. And that is precisely the point.
    In uniting behind S. 908, our bipartisan coalition sends an 
unambiguous message of unity, strength, and resolve to Iran and the 
rest of the world, that, whatever other differences may divide us, they 
are not as important as what unites us--our shared determination as 
Americans to do whatever is necessary to prevent Iran from getting 
nuclear weapons.
    Today's hearing could not take place at a more critical moment. 
Last week, the Senate unanimously adopted an amendment to the NDAA that 
Senator Bayh and I put forward, together with Senator Kyl and Senator 
McCain, and thereby for the first time endorsed an explicit timetable 
for imposing sanctions against Iran.
    Specifically, our amendment urges President Obama to adopt tough 
new sanctions against the Central Bank of Iran in the event that the 
Iranians fail to respond to his historic outreach by the time of the G-
20 summit in Pittsburgh on September 24, 2009, or if they fail to 
suspend all enrichment and reprocessing activities within 60 days of 
that summit.
    I have been a supporter of the President's effort to engage the 
Iranians in direct diplomacy over the past 6 months. Thanks to this 
outreach, it should now be clear to the world that the obstacle to the 
peaceful resolution of Iran's nuclear program is not in Washington, but 
in Tehran.
    Unfortunately, however, it has also become increasingly clear that 
Iran's current leaders are unlikely to engage in a serious negotiation 
with the international community over their nuclear program until they 
are under existential pressure to do so. In this way, crippling 
sanctions are not only consistent with diplomacy; they are critical to 
any hope of its success. It is precisely by putting in place the 
toughest possible sanctions, as quickly as possible, that we stand the 
best chance of persuading Iran's leaders to make the compromises and 
concessions that the peaceful resolution of this crisis will require.
    In fact, this is exactly the formula that President Obama himself 
endorsed a year ago when he argued that the key to preventing Iran's 
nuclear breakout is, and I quote, ``aggressive diplomacy combined with 
tough sanctions.''
    Given the September deadline endorsed by the Senate last week, I 
respectfully hope that your Committee will act expeditiously to provide 
the President with every authority he needs to impose crippling 
sanctions this fall--starting with S. 908.
    The logic of S. 908 is simple. During last year's Presidential 
campaign, President Obama repeatedly pointed to Iran's reliance on 
imports of refined petroleum products as a point of leverage in our 
nuclear diplomacy. As Senator Bayh and I subsequently discovered, 
however, the President's authority to target the handful of companies 
involved in this trade is at best ambiguous. The Congress can end this 
ambiguity by passing S. 908. Doing so will not tie the President's 
hands; rather, it will hand him a new and powerful weapon in our 
diplomacy toward Iran.
    The coming months will be critical in determining whether we stop 
Iran from acquiring nuclear weapons. As I know all of the members of 
this Committee are aware, time is not on our side. Whatever else we may 
debate or discuss about Iran, there is one reality we cannot afford to 
lose sight of: every minute of every day, right now as we speak, 
thousands of centrifuges in Iran are continuing to spin. Hundreds more 
are being installed every month. More and more fissile material is 
being stockpiled. Already, Iran has enough low enriched uranium to form 
the core of one nuclear weapon. Soon, it will have much more.
    Simply put, every day that we wait, the Iranian regime is advancing 
closer to its goal--and the odds that we can persuade them to turn back 
from the brink, through peaceful means, diminish.
    I thank the Committee for its time and consideration, and again 
express my gratitude for your strong leadership on this critical issue.
                                 ______
                                 
             PREPARED STATEMENT STATEMENT OF NICHOLAS BURNS
  Professor of the Practice of Diplomacy and International Politics, 
                           Harvard University
                             July 30, 2009
    Chairman Dodd, Senator Shelby and Members of the Committee, thank 
you for the invitation to testify today on United States policy toward 
Iran.
    I have had the pleasure of testifying to this Committee in the past 
as a government official. This is my first appearance as a private 
citizen. The views that follow are entirely my own.
    One of the most important diplomatic challenges facing the United 
States is what we should do about an aggressive, reactionary and 
truculent government in Iran.
    After 4 years in power, it is clear that the Ahmadinejad government 
is seeking a dominant role in the Middle East. It is pursuing with 
great energy a future nuclear weapons capability that would threaten 
Israel and our Arab partners. It continues to support the most 
destructive and vile terrorist groups in the region. It plays an 
influential role in both Iraq and Afghanistan, often in direct 
opposition to the United States.
    Given Iran's confrontational policies on issues that are vital for 
American interests, we are, in many ways, on a collision course with 
its government.
    In the short-term, we must assume that relations between our two 
governments will remain poor. We have had no sustained and meaningful 
diplomatic contacts in thirty years since the Iranian revolution.
    Given the lethal nature of Iran's challenge to the United States, 
our government must respond to it with toughness and strength but also 
with ingenuity. One of our highest priorities should be to maintain 
America's leadership role in the Middle East and to deflect 
Ahmadinejad's own quest for regional supremacy.
    But, we must also recognize that the near total absence of 
communication between our two governments is no longer to our 
advantage. We know very little about a government that exerts such a 
negative influence in the Middle East. President Obama has gone further 
than any of his predecessors in offering negotiations with the Iranian 
regime. I believe his instincts have been right in positioning the 
United States to regain the upper hand with Iran in the international 
arena. President Obama's outreach to Moslems worldwide in his Cairo 
speech, his video message to the Iranian people and his pledge that the 
United States would participate in the Perm-Five Group nuclear talks 
with Iran have put us on the diplomatic offensive.
    The result has been telling. The Iranian government has had no 
effective or coherent response to these overtures. It is now Iran, 
rather than the United States, that is considered internationally to be 
the party preventing the resolution of the nuclear issue.
    This is not an insignificant accomplishment. Unfortunately, many in 
the Moslem world saw the United States, incorrectly, as the aggressor 
in the conflict with Iran in past years. President Obama has managed to 
shift global opinion. The United States is now in a stronger position 
to argue convincingly for a more tough-minded international approach to 
the Iran nuclear issue.
    Given these developments, I believe that the best course for the 
United States is to continue to offer two paths to the Iranian 
authorities.
    The first is the possibility of international negotiations over the 
nuclear issue. The United States and the other countries have declared 
their readiness to talk. The aim of these talks should be to convince 
Iran to cease its illegal nuclear research efforts. Should Iran not 
respond seriously and convincingly to this international offer by the 
autumn, the United States should turn to the second path by moving 
quickly and decisively with its key international partners to place 
very tough economic and financial sanctions on the Iranian government.
    U.S. policy, in short, should be to increase pressure on the 
Iranian government at a time when it finds itself an international 
pariah with vastly reduced credibility around the world.
    In many ways, Iran is now far weaker than it was before its June 12 
elections and the subsequent revolt on the streets of Tehran and other 
major cities.
    It is highly probable that the government's cynical and corrupt 
handling of the elections is a fundamental turning point in the history 
of the country. The demonstrations that followed the government's 
transparent intervention in the ballot counting represented the most 
critical assault on the credibility of the Supreme Leader and the 
government in the thirty-year history of the Islamic Republic. The 
reform movement that surged onto the streets was the strongest such 
protest movement in this entire period, representative of all age and 
ethnic groups and classes. And, while the government's brutal and anti-
democratic actions on the streets appear to have been effective in 
quelling the demonstrations in the short-term, the reformers are 
unlikely to go away. It is more likely that the deep divisions created 
by the stolen election will be a major force in Iranian politics and 
society for some time to come.
    Despite the relative quiet on the streets of Iran today, tensions 
and fundamental disagreements about the future of the government are 
simmering just below the surface. The situation in Iran will remain for 
some time to come highly volatile and unpredictable. Some experts on 
Iran believe the regime has retaken control of the streets for good and 
will continue to rule essentially unchallenged. But, many others 
believe that there is an equally good chance that the country will 
remain roiled by instability and division for months to come.
    What is the proper way for the United States to respond to this 
potentially explosive situation?
    First, I continue to believe that President Obama was correct to 
not inject the United States into the middle of the Iranian domestic 
crisis right after the elections. Had he done otherwise, it would have 
given the most reactionary Iranian leaders, such as Ahmadinejad, the 
excuse to charge that the United States was intervening unjustly in the 
domestic affairs of a proud country. By tempering U.S. statements and 
actions in the days following the election, I believe President Obama 
succeeded in keeping the international spotlight on Ahmadinejad rather 
than the U.S. Government.
    Second, the United States and other governments around the world 
now face a highly difficult and complex situation in Iran. Inaction or 
choosing to ignore or isolate the Iranian government would allow 
Ahmadinejad to continue unfettered the nuclear research that the 
International Atomic Energy Agency believes continues unabated. 
Allowing the Iranian government to continue to build a nuclear 
capability with no effective international opposition is definitely not 
in the U.S. interest. Refusing to negotiate would weaken the potential 
for effective international action to pressure the regime.
    The right policy for the United States, in my judgment, is thus to 
stand by the invitation for international discussions between the 
Permanent Five countries (the United States, France, the United 
Kingdom, Russia, China and also Germany) and Iran on the nuclear issue 
and to combine it with the threat of strong and immediate sanctions 
should Tehran refuse to negotiate seriously.
    But, the offer for such discussions should not be open-ended. The 
offer to negotiate has been on the table for months. It would thus be 
reasonable to give Iran a deadline of this autumn to reply. If no 
serious response is forthcoming by then, the United States and the 
other countries would have every right to turn to draconian economic 
and financial sanctions.
    Some will argue that any willingness by the Obama Administration to 
talk to Iran would legitimize the Iranian government and would be an 
affront to the courageous Iranians who took to the streets in 
opposition. They say we should either do nothing or move directly to 
sanctions.
     I think the issues at the core of this dilemma are much more 
complex. The entire democratic world was outraged by the brutal actions 
of the Iranian government in the wake of the failed elections. The 
Iranian regime was seen for what it really is--a ruthless group of 
leaders who have used the power of the military and security services 
to terrorize their own population. The Iranian government deserves the 
most severe criticism for its mistreatment of the Iranian people.
    While it may serve our collective sense of outrage and frustration 
to stonewall the Tehran government, that kind of policy is not likely 
to serve our core American interest--finding a way to prevent Iran from 
becoming a nuclear weapons power.
    By supporting the international offer for negotiations, the Obama 
Administration is building credibility with countries important for any 
future negotiation or sanctions effort--Russia, China, the Gulf states, 
Japan, South Korea, Germany and other European countries.
    If the United States refused to negotiate, we would likely have 
little subsequent international credibility to argue for tough 
sanctions. But, if we offer to negotiate and the talks fail, we will be 
in a much better position to assemble a stronger international effort 
to apply tough sanctions on Iran.
    My best judgment is that, even if negotiations are held this 
autumn, they will fail due to the predictably unreasonable and 
inflexible attitudes of Ahmadinejad and his colleagues. It is highly 
likely, for example, that the Iranian government will not agree at the 
negotiating table to cease its enrichment of uranium as the United 
Nations Security Council has demanded in successive sanctions 
resolutions passed during the last 3 years.
    The most important decision facing the United States and other 
countries is thus to decide what kind of sanctions would have the most 
significant impact on the Iranian authorities. In other words, our 
primary goal must be to find the most effective strategy toward Iran 
that will resolve the crisis on our terms and peacefully.
    There are proposals for sanctions resolutions being debated in the 
Congress and wider public. I agree that the time has come for the 
United States and others to threaten much tougher sanctions on the 
Iranian regime.
    My main recommendation for this Committee and the Congress, 
however, is to permit the President maximum flexibility and 
maneuverability as he deals with an extraordinarily difficult and 
complex situation in Iran and in discussions with the international 
group of countries considering sanctions. It would be unwise to tie the 
President's hands in legislation when it is impossible to know how the 
situation will develop in the coming months.
    The most effective sanctions against Iran, in my view, would be 
those that are multilateral and not unilateral and those that the 
President could decide to either implement or waive, depending on 
events during the coming months. The most powerful signal to 
Ahmadinejad would be for Moscow and Beijing to stand alongside the 
United States in imposing collective sanctions rather than have the 
United States adopt its own way forward, absent consultation and 
agreement with our international partners.
    It makes sense that the search for an effective sanctions regime 
should include initiatives (such as energy imports by Iran) that will 
strike at the heart of the Iranian government's strength. Senator Bayh 
and others have produced creative ideas for more forceful sanctions 
against Iran. It stands to reason that a much more aggressive sanctions 
regime would likely have a more powerful impact on the thinking of the 
government in Iran in the months ahead.
    Still, my strong advice is to give the President the independence 
and flexibility he will surely need to negotiate successfully the 
twists and turns of this volatile issue.
    As many Congressional leaders have stated, we must negotiate with 
Iran from a position of strength. The President would be wise to set a 
limited timetable for any discussions with Iran. He should be ready to 
walk away if progress is not visible in a reasonable period of time. He 
should also agree on the automaticity of sanctions with Russia and 
China, in particular, before any talks begin. In other words, Moscow 
and Beijing should assure the United States that they will sanction if 
the talks fail. China and Russia have acted unhelpfully by continuing 
to trade and sell arms to Tehran as it thumbed its nose at the 
international community. If President Obama is to offer talks to 
Tehran, it is only reasonable for China and Russia to pledge to join us 
in draconian sanctions on Iran should the talks break down.
    In this charged and unpredictable environment, with the stakes so 
high for American interests, it will be very important for the United 
States to keep all options on the table--meaning the United States 
should reserve the right to employ every option, including the use of 
force, to prevent Iran from becoming a nuclear weapons power. This 
marriage of diplomacy with the threat of force is essential to send a 
convincing signal to Iran that it must choose to negotiate soon.
    While there is no guarantee that negotiations will work, the Obama 
Administration's diplomatic approach has several real advantages for 
the United States.
    First, it may be the only way we will ever know if there is a 
reasonable chance for a peaceful outcome to the crisis with Iran. 
Second, a negotiation may be effective in slowing down Iran's nuclear 
research as a pause or freeze in uranium enrichment would be a logical 
demand of the United States and its partners if the talks continued for 
any length of time. Third, negotiations would serve to isolate and 
pressure the Iranian regime in the international arena. Finally, we 
will be no worse off if we try diplomacy and fail. In fact, we will be 
stronger. We will be far more likely to convince China and Russia to 
join us in sanctions.
    I have one final thought to offer to the Committee today. We will 
not be well served if we allow the debate in our own country to be 
reduced to ``negotiation or war'' with Iran.
    Should negotiations fail, stronger sanctions, not war, are the next 
logical step. And should sanctions fail, President Obama would face a 
difficult choice between using force or seeking to build a containment 
regime against Iran. While the stakes are high, there is nothing 
inevitable about war between the United States and Iran.
    This is an extraordinary time in the history of the Iran nuclear 
issue. The Iranian government has been weakened by the national and 
international furor over its dishonest handling of the elections and 
the protests that followed. We should seek to weaken it further by the 
threat of unprecedented sanctions. Those sanctions are most likely to 
be agreed by the leading nations of the world if we try diplomacy and 
negotiations first.
    What we learned from watching the people of Iran demand more 
liberty and a better government when they took to the streets is that 
Iran is not a monolithic country. Instead, it is a remarkably diverse 
nation in ethnic, religious, regional and ideological terms.
    Now that it is apparent to the whole world that Iran is a society 
in crisis and a country fundamentally divided, we should look at our 
own long-term options in a new light.
    We should reflect on the complex set of choices available to us as 
we seek to prevent a nuclear Iran in the short term and build, at some 
point in the future, a better and more peaceful relationship with the 
Iranian people.
    Now is therefore not the time, in my judgment, for the United 
States to consider a military approach to this dilemma. Our interests 
will be far better served if the United States uses its diplomatic 
skill and dexterity to lead an international coalition to make an 
ultimatum to a weakened and despotic regime--agree to negotiations 
quickly or face a renewed international sanctions effort that will 
weaken the regime further.
    We have the upper hand with Iran for the time being. We should seek 
to keep it. And, we should still believe that diplomacy might yet 
produce an ultimately peaceful resolution of this dispute without 
recourse to war.
                                 ______
                                 
                PREPARED STATEMENT OF DR. MATTHEW LEVITT
  Senior Fellow and Director of the Stein Program on Counterterrorism 
      and Intelligence, Washington Institute for Near East Policy
                             July 30, 2009
     Chairman Dodd, Ranking Member Shelby, Committee members, thank you 
for the opportunity to appear before you today to discuss the utility 
and applicability of targeted financial measures as part of a strategic 
policy, leveraging all elements of national power to deal with the 
threats presented by Iran's nuclear program.
    As a former Deputy Assistant Secretary of the Treasury who 
participated in the department's outreach to the private sector as 
early as 2006, I am often asked why I support the use of targeted 
financial measures--both formal sanctions and informal outreach to the 
private sector--if the use of these tools has not stopped Iran from 
pursuing a nuclear weapon. If these efforts have neither altered the 
decisionmaking of Iranian leaders nor disrupted Iran's ability to 
continue developing its nuclear program, then are they really 
effective?
    The answer is that targeted financial sanctions were never intended 
to solve the problem of Iran's pursuit of nuclear weapons. Sanctions 
are no silver bullet. On their own, these financial tools can only do 
so much. But coupled with other tools--especially robust diplomacy but 
also a credible military presence in the region--financial measures can 
effectively create leverage for diplomacy. That diplomacy should focus 
not only on Iran, but on Russia, China, our European and Asian allies, 
the Gulf States, and others.
    What can sanctions accomplish? They are intended to advance any of 
the following three goals: (1) disrupt Iran's illicit activities; (2) 
deter third parties from knowingly or unintentionally facilitating 
Iran's illicit activities; and (3) impacting Iran's decisionmaking 
process so that continued pursuit of illicit activities is 
reconsidered.
    Note, for example, that despite the many problems with the 
declassified key judgments of the November 2007 National Intelligence 
Estimate (NIE) on Iran's nuclear intentions and capabilities, the 
report accurately noted that the tools most likely to alter Iran's 
nuclear calculus--if any--are targeted political and economic pressure, 
not military action. According to the NIE, Iran's decision to halt its 
nuclear weapons program in 2003 was ``in response to increasing 
international scrutiny and pressure resulting from exposure of Iran's 
previously undeclared nuclear work.'' The key judgments conclude that 
the intelligence community's ``assessment that the [nuclear weapons] 
program probably was halted primarily in response to international 
pressure suggests Iran may be more vulnerable to influence on the issue 
that we judged previously.''
    Iran may or may not have actually halted its weapons program. Even 
if it did, this may actually mean far less than the NIE suggested if 
what was suspended was a piece of the program that could be quickly 
resumed at any time, but the potential of such tools to impact the 
decisionmaking process of key Iranian leaders is worth noting.
    That said, recent events suggest that Iran's current hard line 
leadership sees the pursuit of a nuclear program and ongoing tension 
with the West as positive things that support their primary objective: 
regime survival. But even if the goal of altering the Iranian regime's 
nuclear calculus is not so likely under current circumstances, the 
other two goals of financial sanctions--(1) constricting the operating 
environment and making it more difficult for Iran to engage in illicit 
activities by disrupting their finance, banking, insurance, shipping 
and business dealings; and (2) deterring others from partnering with 
Iran--remain important objectives that can be furthered by employing 
financial tools.
    While some question the wisdom of employing sanctions when the 
administration is actively seeking to pursue engagement with Iran, and 
others question the wisdom of employing sanctions that might give the 
regime a straw man and scapegoat to blame for all of Iran's ills, my 
own conclusion is just the opposite; this is exactly the time to use 
financial tools to build leverage for diplomacy.
    With the hard-line regime so significantly delegitimized--to the 
point that both moderates and hardliners have overtly questioned 
decisions of Supreme Leader Ayatollah Ali Khamenei--the regime's 
ability to easily deflect criticism over the state of the Iranian 
economy or sanctions imposed over Iran's nuclear program has been 
significantly undermined. Indeed, the regime faces a far greater 
legitimacy crisis over its handling of the sham election, the Basij 
crackdown targeting Iranian citizens, the demonization of protestors by 
senior leaders, and the incarceration of protestors.
    Given that Iran's nuclear program continues to progress, the one 
thing that is clear is that we do not have the luxury of time. The 
question is not whether or not to use sanctions, but what sanctions, 
targeting which entities, using which tools and authorities, and in 
what order?
    To be sure, diplomatic engagement, directly with Iran or with 
others focused on Iran, whether broad or limited, is severely 
undermined when Iran is able to pursue its nuclear ambitions, support 
terrorist groups, and erode security in Iraq and Afghanistan without 
consequence. As Washington Post columnist David Ignatius put it, 
``[T]hese new, targeted financial measures are to traditional sanctions 
what Super Glue is to Elmer's Glue-All.'' Periodically reassessing and 
adjusting the package of targeted financial measures is the tool most 
likely to create enough diplomatic leverage to avoid a military 
confrontation. Short of creating such leverage, negotiation and 
diplomacy alone will not convince Iran to abandon its nuclear program.
What sanctions should be employed?
    First, we should actively seek international consensus on 
multilateral sanctions through the United Nations that would be ready 
to be implemented in the early fall should Iran fail to respond to the 
administration's offer of engagement by the deadline of the G-8 summit 
and the U.N. General Assembly that follows shortly thereafter. As 
important as the entities to be listed will be the unanimity of the 
decision to impose sanctions, so it is critical that the administration 
engage in robust diplomatic engagement with China and Russia now.
    New multilateral designations should focus on entities engaged in 
illicit conduct in support of Iran's proliferation program, in 
particular those already designated unilaterally by the United States. 
For example:

    Bank Mellat. Bank Mellat was designated by the United 
        States in October 2007 for providing banking services in 
        support of U.N.-designated Iranian nuclear entities, namely the 
        Atomic Energy Organization of Iran (AEOI) and Novin Energy 
        Company. A multilateral designation would go far in 
        constricting the activities of the banks foreign regional 
        offices in South Korea, Armenia, and Turkey.

    Bank Melli. As FINCEN noted in a March 2008 advisory to the 
        financial sector, ``UNSCR 1803 calls on member states to 
        exercise vigilance over the activities of financial 
        institutions in their territories with all banks domiciled in 
        Iran, and their branches and subsidiaries abroad. While Bank 
        Melli and Bank Saderat were specifically noted, the United 
        States urges all financial institutions to take into account 
        the risk arising from the deficiencies in Iran's AML/CFT 
        regime.'' Iran's largest bank, Bank Melli was also designated 
        by the Treasury in October 2007 for providing banking services 
        to entities involved in Iran's nuclear and ballistic missile 
        programs, including entities listed by the U.N. for their 
        involvement in those programs. Following up on the warning 
        included in UNSCR 1803 with outright designations of these 
        banks would send a strong message.

    Khatam al-Anbya. The U.N. should also follow up on the U.S. 
        and E.U. designations of the Khatam al-Anbya construction 
        company (also called Ghorb), which is one of the most 
        significant of the multiple entities owned or operated by the 
        IRGC that have been designated by the United States. With the 
        increased militarization of the Iranian regime, and the blatant 
        abuses of the IRGC-affiliated Basij militia, now is the time to 
        target IRGC affiliated entities.

    IRISL. The U.S. designation of Iran's national maritime 
        carrier, the Islamic Republic of Iran Shipping Lines (IRISL), 
        in September 2008, was another key unilateral action that 
        should be made multilateral. IRISL was designated for 
        facilitating the transport of cargo for U.N. designated 
        proliferators and for falsifying documents and using deceptive 
        schemes to shroud its involvement in illicit commerce. And as 
        the State Department noted at the time of the designation, 
        IRISL had already been ``called out by the U.N. Security 
        Council as a company that has engaged in proliferation 
        shipments.''

    Multilateral action, however, is not only difficult to achieve but 
can often lead to lowest common denominator decisionmaking. While 
international consensus is built for robust action at the United 
Nations, the United States should pursue both unilateral and bilateral 
financial measures (together with other States or regional bodies like 
the E.U.) focused on IRGC-affiliated and other individuals and 
institutions facilitating Iran's illicit conduct.
    The United States should also actively support the efforts of 
multilateral technocratic bodies such as the Financial Action Task 
Force (FATF), which has issued a series of increasingly blunt warnings 
about doing business with Iran. The FATF is a 34 member technocratic 
body based in Paris which seeks to set global standards on combating 
money laundering and terrorism financing. The FATF has put out multiple 
warnings on Iran--the first in October 2007 and the most recent in 
February 2009. In these warnings, FATF instructed its members to urge 
their financial institutions to use ``enhanced due diligence'' when 
dealing with Iran. In the second warning, the FATF president also urged 
Iran to address the ``shortcomings'' in its anti-money laundering and 
terrorist financing regimes immediately. The most recent warning 
instructed countries to begin developing ``countermeasures'' to deal 
with Iran's illicit financial activities--an indication of how 
concerned the international body was with Iran's behavior in this 
arena. After one such warning, Iran sent a delegation to lobby FATF (of 
which it is not a member) but FATF dismissed the Iranian delegation's 
claims that legislative changes fixed the regime's shortcomings, 
calling the changes ``skimpy'' and noting their ``big deficiencies.''
    Informal sanctions, what I describe as leveraging market forces, 
should be continued and expanded. As my colleague Michael Jacobson has 
also argued, the direct outreach that Treasury has pursued with the 
international financial sector should be broadened to include other 
U.S. agencies and departments, notably the Commerce Department, 
engaging with a wider array of private sector actors in the insurance, 
shipping, and other industries. We should continue to think creatively 
about how to leverage our existing influence to achieve our goals. For 
example, coupled with additional action targeting IRISL, an effort to 
convince countries concerned about Iran's illicit and deceptive conduct 
to deny landing rights to Iran Air would further constrict Iran's 
ability to move funds and material for illicit purposes and isolate the 
regime internationally. Even in today's economy, and to a certain 
extent because of it, the private sector is very sensitive to 
reputational risk and is acutely aware of its due diligence and 
fiduciary obligations to its shareholders.
Less Targeted Financial Measures
    Targeted financial measures have proven impressively effective at 
disrupting Iran's illicit conduct, but given the short timeframe and 
the rapid progress Iran is making on its nuclear program it may be time 
to consider more drastic and less targeted measures. Secretary Clinton 
has spoken about the possibility of inflicting ``crippling sanctions'' 
on Iran, and one particularly promising avenue to pursue would be to 
exploit Iran's continued reliance on foreign refined petroleum to meet 
its domestic consumption needs at home. Due to insufficient refining 
capacity at home, Iran must still re-import the 40 percent of its 
domestically consumed petroleum from refineries abroad. The prospect of 
targeting Iran's continued ability to re-import this refined petroleum 
back into the country could be a powerful tool targeting a regime soft 
spot. Consider as precedent the dramatic failure of the Iranian 
regime's gas ration card program in June 2007. The cards were loaded 
with a 6-months ration, but many Iranians reportedly used their entire 
ration within weeks. Indeed, Iran worries each winter about a possible 
heating fuel shortage and the consequence of not being able to provide 
the public with sufficient fuel subsidies.
Technology Arms Transfers
    We should also focus our attention on developing a more systematic 
approach for dealing with Tehran's efforts to transfer technology and 
arms to radical allies in the Middle East and elsewhere, even as 
Washington seeks to engage Iran. Earlier this year, Cyprus impounded 
the Iranian-chartered freighter Monchegorsk, a vessel laden with war 
materiel bound for Syria (and perhaps beyond). The episode highlighted 
the shortcomings of current U.N. and European Union sanctions on Iran, 
and underscores the need to fill the gaps in the available policy tools 
to deal with Iranian arms transfers to its allies and surrogates. To 
close these gaps, the United States should work with its allies and the 
international community on a number of fronts:

    encourage the U.N. sanctions committee to issue a Security 
        Council communique to the U.N. General Assembly, emphasizing 
        the obligation of all member states, including Iran and Syria, 
        to fully abide by the U.N. ban on arms transfers;

    work with the EU to expand its current policy banning the 
        sale or transfer to Iran of ``all arms and related material, as 
        well as the provision of related assistance, investment and 
        services'' to include a ban on the purchase or transfer from 
        Iran of the same;

    work with U.N. and EU member states to adopt legislation 
        pertaining to Iranian arms and technology transfers, to enable 
        them to fulfill their U.N. and EU obligations. Encourage 
        regional organizations in South America and South and East Asia 
        to adopt similar resolutions;

    work with the EU and Turkey (the de facto eastern gateway 
        to Europe) to develop an enhanced customs and border security 
        regime to prevent Iranian arms and technology transfers through 
        Turkey;

    engage the private sector to draw attention to the risk of 
        doing business with IRISL, its subsidiaries, and other banned 
        entities. Given Iran's history of deceptive financial and trade 
        activity, extra scrutiny should be given to any ship that has 
        recently paid a call to an Iranian port;

    encourage countries to require ports and/or authorities to 
        collect detailed, accurate, and complete data regarding all 
        cargo being shipped to or through their countries (especially 
        from risk-prone jurisdictions like Iran), to conduct rigorous 
        risk assessments, and to proceed with actual inspections as 
        necessary;

    encourage implementation of the World Customs 
        Organization's (WCO) draft Framework of Standards to Secure and 
        Facilitate Global Trade. The WCO represents 174 Customs 
        administrations across the globe (including Iran) that 
        collectively process approximately 98 percent of world trade. 
        Under the proposed framework, a risk management approach would 
        be implemented for all cargo to identify high-risk shipments at 
        the earliest possible time. Participating members would benefit 
        from enhanced security and efficiency, and could benefit from 
        lower insurance premiums.

    There are signs of success, and with continuing signs of domestic 
discontent in Iran, targeted financial measures can increase the 
political pressure on the regime. Indeed, long before the June 12 
elections, the U.S.-led campaign had played a role in causing domestic 
political problems for Iranian hard-liners as well. In September 2007, 
former president Ahkbar Hasehemi Rafsanjani, a moderate opposed to the 
regime's confrontational approach, was elected as the speaker of the 
Experts Assembly--the body which chooses and has the power to remove 
Iran's Supreme Leader. Several days earlier, the Supreme Leader 
dismissed Yahya Rahim Safavi, the IRGC's commander since 1997, who was 
blacklisted by the U.N. in March 2007. Safavi's replacement, Muhammad 
Ali Jafari, confirmed that Safavi was removed primarily ``due to the 
U.S. threats.'' Finally, Motjtaba Hashemi Samarah, one of Ahmadinejad's 
close allies, was removed from his position as the deputy interior 
minister. Iran's former chief nuclear negotiator, Hasan Rowhani, 
disparaged the country's growing international isolation and stated 
that economic sanctions were definitely impacting Iran. Despite high 
oil prices, he noted, ``[W]e don't see a healthy and dynamic economy.''
    While there are a number of factors contributing to Iran's economic 
difficulties, including declining oil prices and President 
Ahmadinejad's mismanagement of economy policy, the response of 
international financial institutions to the Treasury Department's 
outreach has been a key reason as well. Many of the major global 
financial institutions--particularly those based in Europe--have either 
terminated or reduced their business with Iran. More surprisingly, it 
appears that banks in the United Arab Emirates and China are also 
beginning to exercise greater caution in their business dealings with 
Iran as well.
Conclusion
    Even as it continues to pursue a nuclear program and other illicit 
activities, Iran today is financially and politically exposed. While 
sanctions are no panacea, if properly leveraged in tandem with other 
elements of national power, the pinch of targeted financial measures 
could potentially have a very significant impact.
                                 ______
                                 
                 PREPARED STATEMENT OF SUZANNE MALONEY
        Senior Fellow, The Saban Center for Middle East Policy, 
                         Brookings Institution
                             July 30, 2009
    Mr. Chairman and members of the Committee, I'm very grateful for 
the opportunity to discuss recent developments in Iran and the policy 
tools available to the United States for tempering Tehran's nuclear and 
regional ambitions.
    With turmoil on the streets and in the corridors of power, Iran's 
perennially unpredictable politics have moved into uncharted territory 
in the wake of the shameless manipulation of last month's Presidential 
elections. Unrest within Iran is hardly unprecedented; Iran has 
experienced ethnic rebellions, labor actions, student protests, 
economic riots, and a range of other political agitation with a 
surprising regularity over the past 30 years.
    However, the current turbulence stands apart from any past 
instability within Iran in the scope of popular engagement and the 
severity of divisions among the political elite. As a result, the 
Islamic Republic today is now forced to contend with an almost 
unprecedented array of internal challenges, including the emergence of 
an embryonic opposition movement and profound fissures within the inner 
circles of power. The persistence of street skirmishes and passive 
resistance on the streets, the increasingly uneasy straddling of the 
broader array of conservative politicians, the mutiny against the 
supreme leader's unfettered authority by a quartet of veteran 
revolutionary leaders as well as senior clerics--all this clearly marks 
the opening salvos of a new phase of existential competition for power 
in Iran.
    At this stage, it is beyond the capabilities of any external 
observer to predict precisely where, when and how Iran's current power 
struggle will end. In the immediate term, the Islamic Republic will 
likely survive this crisis with its governing system and leadership 
largely intact, thanks to the same tactics that have preserved it for 
the past 30 years: behind-the-scenes deals and mass repression. 
However, the regime's internal challenges have already intensified 
beyond what most analysts anticipated a mere 6 weeks ago, and at some 
point the discord may begin to transcend Tehran's capacity to navigate.
Iran's Economy
    Among the most important factors shaping both Iran's future 
trajectory and the tools available to the international community for 
influencing that course are those related to the Iranian economy. As 
even the most cursory review of the press coverage of Iran would 
suggest, its economy has experienced perennial problems of 
mismanagement that have been exacerbated by the ideological and 
interventionist approach of President Ahmadinejad. In the past 4 years, 
every meaningful economic indicator has suggested serious trouble for 
Iran--alarms that were sounded well before the global economic crisis. 
Iranians must contend with double-digit inflation, power shortages, a 
tumbling stock market, stubbornly high unemployment rates particularly 
among young people, increasing dependence on volatile resource 
revenues, and perhaps most ominously for Iran's leaders a rising tide 
of popular indignation spawned by individual hardship and the broader 
national predicament.
    Ironically, Ahmadinejad owes his unlikely ascent from 
administrative obscurity to the pinnacle of power in Iran in part to 
his successful exploitation of Iranians' frustration with their living 
standards and economic opportunities. While Ahmadinejad's original 2005 
election surely benefited from no small amount of electoral 
manipulation, his election was accepted as a credible outcome by many 
if not most Iranians because he waged an unexpectedly effective 
campaign. His messages emphasized the economic hardships and inequities 
that afflict the average Iranian, and he spoke bitterly about the 
indignities of Iran's grinding poverty and pointedly contrasted his 
lifestyle with that of his chief rival, the profiteering former 
president Akbar Hashemi Rafsanjani. Ultimately, Ahmadinejad's initial 
election reflected the frustrations of an electorate more concerned 
with jobs and the cost of living than with slick campaigns or 
implausible pledges of political change.
    Despite this apparent mandate, however, Ahmadinejad governed on the 
basis of ideology rather than performance. As a result, the president 
himself bears much direct responsibility for the current state of 
Iran's economic affairs; his heavy-handed interference with monetary 
policy and freewheeling spending contributed the spiraling inflation 
rates, and his provocative foreign policy and reprehensible rhetoric 
has done more to dissuade prospective investors than any U.S. or U.N. 
actions. His personal disdain for the technocracy and quixotic economic 
notions has undermined much of the progress that has been made in 
recent years to liberalize the Iranian economy and address its 
underlying distortions. The president has boasted of his instinctive 
grasp of economic policy, reveled in the reverberations of the global 
economic meltdown, and scoffed that his government could withstand even 
a drop in oil prices to a mere $5 per barrel. And he spent--taking full 
advantage of an epic oil boom that reaped more than $250 billion in his 
first three and a half years as president. Ahmadinejad traversed the 
country with his full cabinet in tow, and taking evident enjoyment from 
a paternalistic process of doling out funds large and small for 
picayune provincial projects and even individual appeals.
    The senselessness of his policies has provoked an intensifying 
firestorm of criticism from across the political spectrum. At first the 
critiques were light-hearted. When he once boasted about the bargain 
price of tomatoes in his low-rent Tehran neighborhood, the president 
sparked a flurry of popular jokes at his expense and grumbling among 
the political elite. However, as the ripple effects of the global 
economic slowdown began to impact Iran and the price of oil crashed to 
less than one-third of its stratospheric 2008 high, the mood soured 
both among the regime's veteran personalities and its population at 
large. In three successive letters, panoply of the country's most 
respected economists detailed the dangers of the president's policies. 
Notably, the critiques were not limited to the president's factional 
adversaries; much of the disquiet voiced in recent years over the state 
of the economy emerged from sources ideologically inclined to support 
Ahmadinejad and his patron the supreme leader, including traditional 
conservatives with longstanding links to the powerful bazaar and the 
centers of clerical learning.
    Thanks to his assiduous deployment of economic grievances during 
his original campaign and his copious and public spending throughout 
his first term, Ahmadinejad made himself particularly vulnerable to the 
regime's stumbling in this arena. What particularly galled so many 
Iranian political figures was the opportunity sacrificed by the 
malfeasance of the past few years. Iran's oil revenues under 
Ahmadinejad's first term exceeded 8 years' of income during both the 
Khatami and Rafsanjani presidencies; indeed of the more than $700 
billion that Iran has earned through oil exports in the past thirty 
years, nearly 40 percent came in during the past 4 years. Adding fuel 
to the fire was the lack of transparency over its allocation; having 
decimated the economic planning bureaucracy and attempted to classify 
the details of the nation's oil reserve fund, Ahmadinejad left vast 
ambiguity as to the destination of tens of billions of dollars of his 
government's spending. The presumption is much of it has financed 
record consumption, with a disturbingly high import quotient, rather 
than creating jobs, attracting investors, or taking advantage of Iran's 
large, well-educated baby boom as it comes of age.
    During the Presidential campaign, this particular issue and the 
state of the economy more broadly were hot-button issues for 
Ahmadinejad's opponents. Musavi, who had pressed for statist policies 
through his tenure as prime minister during the 1980s, embraced a 
relentlessly technocratic message centered on the incumbent's failure 
to manage the economy effectively. Musavi and his rivals pitched the 
economy as the primary issue in their attempt to connect with voters, 
equating economic grievances with threats to the country's security. As 
is his wont, Ahmadinejad was not cowed, and brandished shocking 
allegations of corruption and patronage as well as misleading 
statistics in the riveting televised campaign debates with each of his 
rivals.
    The unrest of the past 6 weeks will only aggravate Iran's economic 
dilemmas and put durable solutions to the perpetual problems of 
uncontrollable subsidies, unaccountable spending that much further out 
of reach. The crisis will likely persuade more Iranians who have the 
means and/or ability to leave the country to do so, exacerbating the 
persistent problem of the brain drain and related capital flight. Even 
in advance of any multilateral action on sanctions, the political risks 
and generally unpalatable nature of the new power structure will 
dissuade some investors and reduce the competitiveness of Iran's 
external links. Should the political situation degenerate further, 
economic actions by the opposition such as strikes and mass boycotts 
could further paralyze the Iranian economy as a means of applying 
pressure to current decisionmakers.
    However, one caveat regarding assumptions on the state of the 
Iranian economy: Particularly over the past 4 years, the media as well 
as policymakers have routinely speculated on the prospect for economic 
grievances to spark turmoil that might threaten the Islamic Republic. 
The longstanding distortions that plagued the Iranian economy have been 
greatly exacerbated by Ahmadinejad's spendthrift, interventionist 
policies, and in recent years Iranians have had to contend with double-
digit inflation and unemployment rates. Analysts often pointed to 
small-scale labor actions as well as the short-lived protests against 
the gasoline rationing program, launched in 2007, and other poorly 
designed efforts to revamp the government's vast subsidies as the 
harbingers of mass unrest. They were repeatedly wrong on this count; 
Iranians grumbled and routinely vented their outrage over the economic 
conditions, but largely resigned themselves to making do.
    Instead, what drove the Iranian people into the streets in record 
numbers and established the nascent stirrings of a popular opposition 
to the creeping totalitarianism of the Islamic Republic was a purely 
political issue--the brazen abrogation of their limited democratic 
rights. This should not imply that Iranians view their economic 
interests as somehow secondary to their political aspirations, but 
rather that three decades of Islamic rule have generated the conviction 
that Iran's representative institutions and its citizens' limited 
democratic rights represent the most effective tools for advancing 
their overall quality of life. With the brazen manipulation of the 
election, Iranians saw not simply the abrogation of their voice but the 
continuing hijacking of their nation's potential wealth and their 
individual opportunities for a better quality of life.
    This reflects a remarkable transformation in the way that Iranians 
view their leadership; although Ahmadinejad, like Ayatollah Khomeini 
before him, prefers to emphasize the regime's ideological mandate, the 
population as well as much of the political elite have come to identify 
the responsibilities of their leaders as primarily oriented toward the 
provision of opportunities and a conducive environment for the nation's 
growth and development. Neither Ahmadinejad nor Khamenei can meet this 
test; their functioning frame of reference remains the fierce passions 
of religion and nationalism.
U.S. Policy
    The events since the June 12th elections have changed Iran in 
profound and irreversible fashion, and it would be fruitless and even 
counterproductive to proceed as though this were not the case. The 
United States must adjust both its assumptions about Iran and its 
approach to dealing with our concerns about Iranian policies to address 
the hardening of its leadership, the narrowing of the regime's base of 
support, the broadening of popular alienation from the state, and the 
inevitability that further change will come to Iran, most likely in 
erratic and capricious fashion.
    But the turmoil within Iran has not altered America's core 
interests vis-a-vis Iran, nor has it manifestly strengthened the case 
for alternatives to the Obama Administration's stated policy of 
diplomacy. The worst of these prospective alternatives, military 
action, remains fraught with negative consequences for all of our 
interests across the region, including the revitalization of the peace 
process and the establishment of secure, independent states in Iraq and 
Afghanistan. Even as an option of last resort, military action would 
leave us and our allies in the Middle East markedly less secure and 
would likely strengthen rather than derail Iran's nuclear ambitions.
    There may be some who see the past 6 weeks as a vindication for the 
prospects of regime change in Iran. This is precisely the wrong lesson 
to take from the recent unrest. Every element of the past 6 weeks of 
drama in Iran has been wholly internally generated, and even the whiff 
of any external orchestration or support would have doomed its 
prospects. Even today, with a burgeoning opposition movement, America's 
instruments and influence for effecting regime change are almost 
nonexistent.
    As a result, I remain support the Obama Administration's continuing 
interest in utilizing direct diplomacy with Tehran to address the 
nuclear program and the broader array of concerns about Iranian 
policies. As profound as recent events have been in splintering the 
Iranian leadership and creating the seeds of an opposition movement, 
engagement remains the only path forward for Washington. Engagement 
will require an effort to negotiate with a particularly unpleasant and 
paranoid array of Iranian leaders. Still, the Administration's interest 
in diplomacy was never predicated on the palatability of the Iranian 
leadership--indeed, until very recently the conventional American 
wisdom tended to presume a second Ahmadinejad term--but on the urgency 
of the world's concerns and the even less promising prospects for the 
array of alternative U.S. policy options.
    The upheaval in Iran does not inherently alter that calculus, but 
it does seem likely to exacerbate the potential pitfalls of 
implementing engagement. One of the lines floated by the 
administration--that the consolidation of power under Iranian hard-
liners will create incentives for a quick resolution of the nuclear 
standoff--is certainly conceivable, but given Tehran's uncompromising 
rhetoric and resort to violence, it sound suspiciously like wishful 
thinking. More probable is the opposing scenario--that the United 
States is going to have to deal with an increasingly hard-line, 
suspicious Iranian regime, one that is preoccupied by a low-level 
popular insurgency and a schism among its longstanding power brokers.
    Among American policymakers and citizens, sincere trepidations have 
emerged about the impact that any direct bilateral negotiations might 
have on the seemingly precarious stability of the Islamic regime and on 
the prospects and mood of the opposition. However, conducting the 
business of diplomacy does not confer an official American seal of 
approval on our interlocutors, as evidenced by our ongoing capability 
to maintain a formal dialog with a wide range of authoritarian leaders 
across the world.
    To the contrary, the Iranian regime in fact derives its scant 
remaining legitimacy from its revolutionary ideology that remains 
steeped in anti-Americanism. If we can successfully draw Iran's current 
leadership into serious discussion about the urgent concerns for our 
own security interests, negotiations with Washington would only 
undercut Tehran's attempts to stoke revolutionary passions at home and 
rejectionist sentiment across the region. Negotiations could also play 
a powerful role in exacerbating the divisions within the regime and 
clarifying the prospective path forward available to Iranian leaders 
who are capable of compromise.
    How can Washington draw an even more thuggish theocracy to the 
bargaining table? What incentives might possibly persuade a leadership 
that distrusts its own population to make meaningful concessions to its 
historical adversary? How can the international community structure an 
agreement so that the commitments of a regime that would invalidate its 
own institutions are in fact credible and durable? Finally, what 
mechanisms can be put in place to hedge against shifts in the Iranian 
power structure, an outcome that seems almost inevitable given the 
current volatility of the situation?
    These hurdles are not insurmountable; the context for the 
successful 1980-81 diplomacy that led to the release of the American 
hostage was at least as challenging as that of today. Most of the 
tentative American relationships with the revolutionary regime had 
evaporated with the demise of Iran's Provisional Government, and 
instead U.S. negotiators faced an implacably anti-American array of 
Iranian interlocutors, whose authority, credibility, and interest in 
resolving the crisis remained an open question throughout the dialog. 
Moreover, Tehran's ultimate goals seemed unclear, possibly even unknown 
to its leadership, who often employed the negotiating process as a 
means of prolonging the crisis rather than resolving it.
    A successful agreement to end the hostage crisis entailed months of 
intense work and many false starts, but a variety of tools--including 
secret negotiations and the involvement of a third-party mediator and 
guarantor for the eventual agreement--helped facilitate an outcome that 
both sides abided by. There are no guarantees that the hard-won success 
of the negotiations that ended the hostage crisis can be replicated 
today; if anything, the stakes are higher and the Iranian political 
dynamics are less promising at least in the very short term.
    Perhaps the critical factor in the success of the 1981 conclusion 
to hostage negotiations was the Iraqi invasion and Iran's desperate 
need for economic and diplomatic options to sustain the defense of the 
country. In a similar respect, any U.S. effort to negotiate with Tehran 
would benefit from the identification of incentives and 
counterincentives that can similarly focus the minds of leaders and 
expedite the path for negotiators.
    In this respect, there is a direct and mutually reinforcing 
relationship between the act of engagement and the identification of 
potential sanctions to be applied by the international community if 
Iran chooses to persist with noncooperation. The threat of sanctions 
may be the only effective means of persuading Iran's increasingly hard-
line leadership that their interests lie in restraining their nuclear 
ambitions and cooperating with their old adversary in Washington.
    In addition, the offer and the act of dialog with Tehran represent 
the most important factors for creating a framework for long-term 
economic pressure if negotiations fail. The historical experience of 
prior U.S. administrations makes clear that international willingness 
to apply rigorous sanctions is inherently limited. The critical 
actors--Russia and China, as well as the Gulf states--have generally 
proven averse to steps that would severely constrain their economic 
interests and/or strategic relationships with Tehran. The minimum price 
for achieving their support for and participation in significantly 
intensified economic pressure will entail a serious American endeavor 
at direct diplomacy with the Islamic Republic.
    Recognizing the currently hostile context for diplomacy, we should 
be coordinating our next steps as closely as possible with those states 
that can still bring greater political and economic pressure to bear on 
Tehran. In particular, we need to step up our dialog with Beijing, 
whose interests with respect to Iran diverge substantially from those 
of the Russians and whose investments in Iran reflect a long-run effort 
to secure prospective opportunities rather than a short-term calculus 
of maximizing profit.
    Still, we should be careful to presume too much with respect to the 
efficacy of sanctions. The conventional wisdom in Washington appears to 
be shifting toward the need to identify ``crippling'' sanctions that 
can force Tehran to capitulate on enrichment. Unfortunately, this 
policy pronouncement overlooks the reality that Iran's multifaceted 
economy and, in particular, its petroleum exports offer a significant 
degree of insulation from sanctions. History has demonstrated that 
there simply are no silver bullets with respect to Iran.
    While Tehran is certainly capable of change, economic pressures 
alone have only rarely generated substantive modifications to Iranian 
policy, particularly on issues that the leadership perceives as central 
to the security of the state and the perpetuation of the regime. In 
general, external pressure tends to encourage the coalescence of the 
regime and even consolidation of its public support, and past episodes 
of economic constraint have generated enhanced cooperation among Iran's 
bickering factions and greater preparedness to absorb the costs of 
perpetuating problematic policies.
    Specifically, the debate within the Iranian leadership at the 
height of the war with Iraq during the mid-1980s offers an illuminating 
case in point. Tehran was confronted with mounting frustration with the 
increasing human, political, and financial toll of the war as well as a 
collapse in the oil markets which cut prices by half. Iran's prime 
minister at the time, Mir Husayn Musavi, had the thorny task of 
persuading its feuding parliament to pass an austerity budget, which 
entailed persuading traditionalists with ties to Iran's bazaar merchant 
community to accept new taxes and left-wing radicals to endorse cuts in 
state spending, particularly on social welfare. Musavi succeeded by 
presenting both factions with a choice--either accept the harsh budget 
measures or end the war. The regime's ideological commitment to the 
`sacred defense' and the conviction, even among growing misgivings 
about war strategy, that this was an existential struggle meant that 
this was no choice at all; Iranian leaders undertook the painful 
political and economic steps that Musavi proposed.
    Much has changed in Iran over the past two decades. The diminution 
of revolutionary fervor and the arguably less compelling public 
interest in the nuclear program would surely complicate any effort to 
persuade Iranians that economic deprivation is an acceptable price to 
pay for defending what the leadership has portrayed as its national 
right to technology. However, the global context differs as well; Iran 
today is not nearly as isolated as it was in the 1980s, the 
considerable economic opportunities offered by Europe and conceivably 
by the United States are no longer irreplaceable.
    As a result, sanctions, while nominally successful in raising the 
costs to Tehran of its provocative policies, could fail in their 
ultimate goal of gaining Tehran's adherence to international 
nonproliferation norms and agreements. Equally importantly, the time 
horizon for sanctions to revise the calculus of the Iranian elite may 
be more protracted than the world is prepared to wait.
    In retrospect, the rare cases where economic pressures have 
produced changes to Iranian security policies relate less to the actual 
financial cost to the Iranian leadership, which have ultimately proven 
manageable even during periods of low oil prices, than to the 
perceptions, timing, and utility in swaying critical constituencies 
within the Iranian political elite. Efforts to deter the import of 
refined gasoline are unlikely to have such an impact; they will be 
mitigated by Iran's porous borders, long history of smuggling petroleum 
products, and ongoing efforts to upgrade its refining capabilities. And 
to the extent that sanctions aimed at refined products penalize third-
country governments and entities, trying to exploit Iran's gasoline 
vulnerability may cost more in terms of international influence than it 
is worth.
    Finally and perhaps most importantly, any forward-looking U.S. 
policy needs sufficient dexterity to adjust to the inevitable changes 
that will buffet Iran over the forthcoming months. Iran is in a period 
of great flux, and there simply can be no certainty about the final 
outcome of the current dynamics. As events inside Iran shift toward 
either compromise or confrontation, Washington must be ready to respond 
accordingly.
                                 ______
                                 
                 PREPARED STATEMENT OF DANIELLE PLETKA
          Vice President, Foreign and Defense Policy Studies, 
        American Enterprise Institute for Public Policy Research
                             July 30, 2009
    Mr. Chairman, Members of the Committee, thank you for the 
opportunity to testify before you this morning on recent developments 
in Iran and future policy options for the United States. I am 
especially pleased to have the opportunity to comment on S. 908, the 
Iran Refined Petroleum Sanctions Act, and to commend Senators Bayh, Kyl 
and Lieberman (not to speak of the 66 other members) who have signed on 
in support of this important initiative.
    During the course of last year's Presidential campaigns, the 
American public was treated to a singularly pointless debate about how 
to handle Iran's quest for nuclear weapons--a debate that centered on 
whether and under what conditions the United States should be ``sitting 
down'' with the regime in Tehran, as if somehow ``sitting down'' 
constituted a policy. In any case, the election was won by a candidate 
who embraced a markedly different approach to Iran than that of the 
outgoing Administration. And in our democratic system, the elected 
President can be expected to pursue the policies on which he 
campaigned.
    For the first 7 months of this year, the Congress has been 
extraordinarily deferential to President Obama, and has been careful to 
do nothing that might undercut the prospects for success in the direct 
diplomacy with Iran that he has promised, such as mandating the 
imposition of new sanctions. And despite Iran's continued defiance of 
the United Nations Security Council's demand that it suspend its 
enrichment and other proliferation related activities, the U.N. has 
been equally reticent.
    While the U.S. Congress and the diplomats in Turtle Bay have stood 
down, however, change has been in the air in Iran. And in keeping with 
the trends since the revolution in 1979, most of that change has been 
detrimental not only to American and allied interests, but also to the 
interests of the Iranian people.
    On the nuclear front, Iran has continued its enrichment activities 
and now claims to have 7,000 centrifuges spinning at Natanz, an 
operational uranium conversion plant at Isfahan, and continuing 
operations at the heavy water facility at Arak. The IAEA reports that 
Iran remains uncooperative.
    On the economic front, the Iranian Central Bank disclosed this week 
that inflation is at 22.5 percent. Unemployment, reported at 11.1 
percent, is likely close to three times that amount. Gasoline shortages 
are common, as are electrical outages. Meanwhile, domestic production 
of basic goods continues to decline, and the Iranian press reports that 
meat prices go up on an hourly basis and that rice imports--a vital 
staple--have skyrocketed by 219 percent since March.
    The silver lining in economic news for Iran is that trade--and with 
Europe in particular--which had suffered in earlier years, appears to 
be rebounding somewhat. But allow me to return to this topic a little 
bit later.
    On the military and paramilitary fronts, Iran continues to refine 
its delivery systems, and in May tested a ballistic missile, the so-
called Sajjil, a solid fuel rocket with a range of 2,000-2,500 
kilometers. Iran continues to arms enemies of the United States inside 
Iraq, and has continued apace with its financial and military support 
for terrorist groups like Hezbollah and Hamas.
    And finally, on the political front inside Iran, we are all well 
aware of the aftermath of the Iranian elections, the electoral fraud, 
the subsequent outpouring from the Iranian people and the brutal 
repression and murder of demonstrators by agents of the regime. Events 
still continue to play out inside Iran. Opponents and suspected 
opponents of the regime are still being arrested on a daily basis, 
though the Supreme Leader this week ordered the closure of a 
particularly infamous illegal detention facility in response to a 
public outcry.
    Even the closest of Iran watchers are unsure of what's next inside 
Iran. Some have suggested that once out of the bottle, the genie of 
public unrest cannot be stuffed back in again. While that may be true 
in some cases, history suggests that after historic revolutionary 
events like the Hungarian uprising, the Prague Spring, and the 
Tiananmen uprising, it is actually possible to strangle the genie. In 
addition, many have failed to take into account the dramatic 
transformation of the Iranian political scene--a transformation that 
diminishes the odds of any successful reformist movement and carries 
critical consequences for our own nuclear diplomacy.
    For some years now, the Iranian Revolutionary Guard Corps has 
quietly and systematically taken over the reins of power inside Iran. 
There have been creeping signs of this transformation for several 
years--the takeover of the Tehran airport by the IRGC in 2004, followed 
by their takeover of the country's mobile phone operations. But 
increasingly, with the full backing of the Ahmadinejad government--and 
apparently of the Supreme Leader--the IRGC has come to dominate all 
sectors of Iranian life, including the economy, the military and 
domestic politics. On the economic side, what that ultimately means for 
countries and companies is that if you are doing business in Iran, you 
are probably doing business with the IRGC.
    More importantly, however, the IRGC today is not just the exporter 
of the Revolution and the protector of the regime. The IRGC has become 
the regime. The clerics so hated by the Iranian public--for their 
repression, their corruption, and their incompetence--are all but gone 
from the Iranian political scene. Ahmadinejad purged the last cleric 
from his cabinet this weekend, Intelligence Minister Hojjat al-Eslam 
Gholam-Hossein Ezheh-I.
    What does this mean for the Iranian nuclear weapons program, for 
the Obama administration's hopes of engagement, and for the Iranian 
people themselves? It's hard to find any good news. Engagement with the 
new breed of Iranian leader will likely resemble engagement with the 
previous breed of Iranian leader, but without the trappings or finesse. 
IRGC veterans have little appreciation for the diplomatic minuets so 
enjoyed by previous presidents Rafsanjani and Khatami. Indeed, these 
veterans of the Iran-Iraq war, many younger and brought up entirely 
under the Islamic Republic, publicly scorn the value of trade, free 
markets, or relations with Europe and the United States.
    It is always possible that the regime has a surprise in store for 
us--and the Iranian Foreign Ministry reports they soon will offer a 
package aimed at assuaging the ``economic, cultural and moral crises'' 
of the world. Some optimists here in the United States and in Berlin, 
Paris and London have persuaded themselves that it is only the 
hardliners in Iran that can successfully deliver a credible deal to the 
Europeans and the Americans--something on the Nixon-China, Sharon-Gaza 
scenario. This optimism ignores every statement made by the 
government's own ministers, spokesmen and supporters, but time will 
tell.
    Meanwhile, however, the regime continues to progress toward a 
nuclear weapons capability. The unclenched fist offered by the Obama 
administration has been rebuffed, and no serious response has been 
proffered to repeated invitations. Iran chose not to join the G8 
meeting despite an offer from Secretary of State Clinton. Indeed, the 
regime explicitly attempted to embarrass Obama by leaking the 
President's personal and private letter to Supreme Leader Khamenei to 
an American newspaper.
    The time has come to reassess the value of the current U.S. 
policies. But let's be clear--this should not be a repudiation of 
engagement (though I myself doubt its merits), but an acceptance of the 
reality that the free pass engagement on offer by the Obama 
administration has bought little more than time for Iran to install 
more centrifuges. Speaking softly in the absence of a big stick--our 
approach for the past 6 months--will not bring the current Iranian 
leadership into serious negotiations, nor will it stop them from their 
pursuit of nuclear weapons.
    In part because of our silence, the decline in trade between Iran 
and certain countries of the European Union--now Iran's second largest 
trading partner after China--has begun to reverse itself. Germany and 
Italy are among the worst offenders, though Germany deserves particular 
censure because of its place at the table in the all-important EU-3+3 
talks with Iran. The Wall Street Journal reported last October that the 
``German-Iranian Chamber of Industry and Trade counts about 2,000 
members, including such big names as Siemens and BASF [about which more 
later]. In the first 7 months of [2008], Germany's Federal Office of 
Economics and Export Control approved 1,926 business deals with Iran--
an increase of 63 percent over last year. During that same period, 
German exports to Iran rose 14.1 percent. For the record, French 
exports went up 21 percent during the first 6 months of [2008], but 
they are still worth less than half of Germany's =2.2 billion of 
exports. Britain's exports to Tehran, only a fraction of Germany's 
trade with Iran, fell 20 percent.''
    More troublingly, the increases in trade with Europe have been 
dwarfed by the explosion in Iran-China trade. There are deep and wide 
economic ties between the two, and AEI's Iran Tracker project 
(IranTracker.org) reports that more than 100 Chinese state companies 
operate in Iran, with bilateral trade reaching over $27 billion in 
2008, a 35 percent increase over 2007. Our report goes on to detail, 
among other transactions:

    A 2008 China National Petroleum Corporation (CNPC)--
        National Iranian Oil Company (NIOC) $1.76 billion deal to 
        develop Iran's North Azadegan oil field.

    In March 2009, a $3.2 billion gas deal, in which China's 
        LNG and a Chinese-led consortium will build a line to transport 
        liquid Iranian gas from the South Pars Gas Field.

    In June 2009, a $5 billion Iran-Chinese National Petroleum 
        Corporation gas deal to develop Iran's South Pars Gas field.

     Despite the growing movement for divestment from state sponsors of 
terrorism, including Iran, global business transactions with Iran 
continue to flourish. Our Iran Interactive data base, which should be 
back online at IranTracker.org shortly, details 75 major transactions 
in the last 2 years, most in the oil and gas or construction and 
engineering sector, with value in the hundreds of millions, including 
companies ranging from France's Renault and Peugeot to Germany's Krupp 
and Siemens, Toyota, Royal Dutch Shell, Gazprom, Hyundai, Spain's 
Repsol and many more.
    Among the more appalling stories, however, is German-Finnish 
telecom giant Nokia-Siemens delivery of surveillance equipment to 
Irantelecom--surveillance equipment surely used to suppress and arrest 
opponents of the regime. Nokia and Siemens both do business with the 
U.S. Government, and Siemens was the leading contender to receive a 
contract with possible value in the hundreds of millions to replace 
rail cars in Los Angeles, a contract that is rightly now at risk.
    Perhaps more important than the moral and financial suasion of 
divestment, however, is the tool that has yet to be used by the 
international community to persuade Tehran of the wisdom of coming to 
the table: restrictions on the export to Iran of refined petroleum 
products and equipment to enhance Iran's own refinery capacity. S. 908 
affords the President that opportunity; it doesn't force it on him, 
which may be an option another Congress will feel compelled to 
consider. But as a supermajority of the Senate and many in the House of 
Representatives (who support Congressman Berman's companion bill) have 
made clear, only the ``sword of Damocles'' (to use Chairman Berman's 
phrase) of punitive sanctions will impel the Iranian regime to take 
seriously the many, many deadlines and redlines announced by the 
international community.
    Iran, as many can detail more persuasively than I, is heavily 
dependent on imported refined petroleum. Domestic capacity is limited, 
and while the Ahmadinejad government has identified that weakness and 
is working to remedy it, it remains a significant regime weakness 
nonetheless. Using this pressure point quickly and decisively will do 
more to convince the Tehran government of the world's seriousness than 
any number of videograms, letters, Hallmark cards or goodwill visits. 
This is the language they speak, and we must begin to grasp that fact.
    Iranian refining capacity, imports and shipping are concentrated in 
fairly few hands. News reports indicate that supplies come largely from 
two Swiss firms, Vitol and Trafigura with others from India's Reliance 
(which has announced it is suspending such shipments--a claim thus far 
unconfirmed), Shell, BP, France's Total and Swiss trader Glencore.
    Then there are the insurers without which these shipments would 
halt, reportedly including Lloyd's of London, Munich Re of Germany, 
Steamship Mutual Underwriting Association and the North of England P & 
I Association of the United Kingdom. Indeed, insurers should already be 
on the highest alert in light of the January interception of the 
Islamic Republic of Iran Shipping Lines (IRISL) chartered Monchegorsk, 
stopped at Cyprus carrying weaponry destined for Syria--and most likely 
to Hezbollah. (IRISL and its affiliates are already under U.S. 
sanction, and will likely also be sanctioned by the U.N. Security 
Council this year.)
    Companies helping Iran gain refining independence (which could be 
subject to sanction under S. 908) include the British Universal Oil 
Products (a subsidiary of U.S.-based Honeywell), Axens and Technip of 
France, Sinopec of China, Hyundai of South Korea and Aker Kvaerner 
Powergas of Norway.
    Mr. Chairman, even proponents of sanctions recognize they are a 
blunt tool. Too often, sanctions impact those least likely to be able 
to change policies. They are not a silver bullet, and they may not 
deliver an end to the Iranian nuclear program. But we are on a tight 
timeline. Iran will soon have a weapon that will doubtless preclude any 
desire on their part to negotiate.
    Some, including some at this table and their allies inside the 
Administration, will argue that sanctions will have the opposite effect 
. . . that Iran will not respond well to any pressure, and will be 
driven away from negotiations. Others will argue that only by slow-
rolling our sanctions effort will we be able to persuade the world of 
our bona fides and bring them along in the most effective form of 
persuasion--multilateral sanctions.
    These arguments have little basis in history, and even less 
likelihood of getting us to a successful outcome with Iran. Who here 
believes that the reason that China and Russia have been reluctant to 
support tougher sanctions is because they doubt America's good faith?
    This week, Secretary Gates suggested that ``if the engagement 
process is not successful, the United States is prepared to press for 
significant additional sanctions that would be non-incremental.'' The 
Secretary is absolutely right that the drip drip of incremental 
sanctions will not answer the mail. But he posits a false choice for 
the administration and our allies. In truth, the choice is not between 
engagement and sanctions. Rather, it is only by applying the toughest 
possible sanctions that we stand any chance of persuading Iran's 
leaders to consider serious negotiations with the international 
community.
    It's time to give the President the tools he needs to do what is 
necessary to force a choice inside the halls of power in Tehran. Right 
now there is no choice to be made; the status quo with the rest of the 
world is working out nicely for the regime.
    I would like to say that we can rely on the Iranian people to 
deliver a better government, and one that serves their needs as much as 
the needs of the international community. But I don't think such a 
change is on the cards in the timeframe we need. That should be the 
topic of another hearing, and other legislative efforts. The courageous 
people of Iran deserve our support. In the meantime, however, the 
United States needs to do more to defend its own national security and 
that of our allies. I believe this Committee can provide much needed 
help, and that S. 908 is an important and useful way to move forward.
    Thank you.

 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM NICHOLAS 
                             BURNS

Q.1. You describe ``military containment'' as an option the 
Obama Administration should consider once diplomacy and 
additional sanctions have run their course. Would you please 
elaborate on what you envision containment to mean? How is such 
a posture different from current conditions?

A.1. If negotiations and sanctions do not succeed in convincing 
Iran to cease its nuclear research efforts, the United States 
will most likely be left with the choice of either accepting, 
in effect, Iran's nuclear capability or trying to stop it 
through the use of military force. The United States cannot be 
passive and do nothing given the grave threat a nuclear-armed 
Iran would pose for the United States, Israel and our Arab 
partners. But, I also believe that the early use of force by 
the United States or others against Iran in the next year would 
also be unwise. I believe the United States should consider 
instead a series of security and economic measures to contain 
Iranian power in the Middle East, including a stronger U.S. 
military presence in the Gulf and security guarantees for 
Israel and some Arab partners in case Iran should threaten them 
with force. In addition, the United States and others could 
threaten much tougher sanctions, including on Iran's energy 
sector. Such an effort to contain the Iranian government would, 
by definition, include stronger efforts than are currently in 
place. The United States and its allies contained the Soviet 
and Chinese threats during the cold war. We should look at a 
similar containment regime against Iran as an alternative to 
war.

Q.2. You have noted that Iran's foes lie not only in the East 
but also along its borders. Indeed, many Arab countries remain 
concerned about Iran's intentions and destabilizing ambitions. 
How can the United States and its European allies enlist Arab 
countries more effectively in their fight to isolate Iran 
economically and diplomatically? How can the United States 
embolden Arab states in the region to apply more local pressure 
and deflect criticism that this is merely ``Western 
Aggression''?

A.2. Most of the Arab governments are deeply suspicious of the 
Ahmadinejad government in Iran. The United States can do more 
to help augment their defenses against future Iranian 
aggression and to enhance U.S. military cooperation in the Gulf 
region. Such a step would be a fundamental building block in 
any future containment regime. Many of the Arab governments, 
however, have been insufficiently active in the sanctions 
against Iran. They should make a much greater effort to join in 
the international pressure on Iran to give up its nuclear 
ambitions.

Q.3. What role should China and Russia play in fashioning our 
multilateral Iran policies?

A.3. Russia and China are partners with the United States in 
the international effort to convince Iran to join negotiations 
over its nuclear weapons future. Frankly, neither of them have 
been consistently strong supporters of that strategy. Despite 
the fact that they voted for the three United Nations sanctions 
resolutions from 2006-2008, they have both acted to decrease, 
rather than increase, international pressure on Iran. Russia 
continues to sell arms to Iran. China has become the leading 
trade partner of Iran. If the United States makes a good faith 
effort to negotiate with Iran and those talks fail, then China 
and Russia should commit to stronger sanctions.
                                ------                                

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS FROM NICHOLAS 
                             BURNS

Q.1. Why will the Administration's current policy of direct 
engagement with Iran change Russia and China's judgment that 
their national interest lies in opposing strong U.N. Security 
Council economic sanctions resolutions?

A.1. I do not know whether China and Russia will contribute 
effectively to the international effort to pressure Iran. Their 
immediate past record in this respect is weak. The 
Administration's plan to negotiate with Iran makes sense, in my 
judgment, because it will strengthen U.S. credibility 
internationally to argue for tougher sanctions should 
negotiations fail. Should Russia and China balk at stronger 
sanctions, it would give the United States greater standing to 
consider even tougher measures, such as containment or the use 
of force.

Q.2. Do China and Russia fundamentally want to resolve the 
Iranian nuclear issue in such a way that Iran does not control 
a close nuclear fuel cycle?

A.2. China and Russia both state that they do not wish Iran to 
possess a nuclear weapons capability. But, neither of them have 
worked to pressure Iran sufficiently to give up its nuclear 
ambitions.

Q.3. What should a realistic ``red line'' be for the United 
States? And, do you think our red line is the same as that of 
the Europeans or the Israelis? If not, what should theirs be?

A.3. I believe both President Bush and President Obama have 
been correct to assert that the United States will not tolerate 
Iran as a nuclear weapons power. Both have tried to marshal 
U.S. and international pressure against Iran.

Q.4. You have spent a great deal of time at very high levels in 
the U.S. Government working on this very issue. If you were in 
a similar position in the Israeli government, what policy 
recommendations would you be giving to the Israeli leadership?

A.4. I believe Israel faces a clear threat from a nuclear-armed 
Iran. That is why, in my opinion, the United States should 
continue to extend substantial military support to Israel. But, 
I also believe it would be a mistake for Israel to use military 
force against Iran. Such a step would likely prove ineffective 
and unleash counter attacks on Israel with the possibility of a 
wider war in the region. I think it is more effective now for 
Israel to support President Obama's strategy of engagement 
backed up by sanctions.
                                ------                                

 RESPONSES TO WRITTEN QUESTIONS OF CHAIRMAN DODD FROM MATTHEW 
                             LEVITT

Q.1. The Government Accountability Office previously found that 
enterprising Iranians may circumvent our current trade embargo 
by acquiring U.S. technology re-exported through various other 
countries. And renowned scientists such as Institute for 
Science and International Studies President David Albright have 
indicated that in fact black-market proliferation networks are 
thriving, using such methods.
    Please discuss your understanding of this situation.
    Are there any particular countries that the United States 
should engage to improve cooperation in countering such 
``diversion?''

A.1. Earlier this year, Cyprus impounded the Iranian-chartered 
freighter Monchegorsk, a vessel laden with war materiel bound 
for Syria (and perhaps beyond). This episode highlights the 
shortcomings of current U.N. and European Union sanctions on 
Iran, and underscores the need for a more systematic approach 
for dealing with Tehran's efforts to transfer technology and 
arms to radical allies in the Middle East and elsewhere, even 
as Washington seeks to engage Iran.
The Monchegorsk and its Cargo
    In January, the U.S. Navy stopped Monchegorsk while it was 
transiting the Red Sea en route to Syria, on the basis of 
intelligence that the freighter was carrying Iranian arms 
exports in violation of U.N. Security Council Resolution 1747. 
According to U.N. documents, the Monchegorsk, a Russian-owned, 
Cypriot-flagged vessel, was chartered by Islamic Republic of 
Iran Shipping Lines (IRISL). In September 2008, the Treasury 
Department designated IRISL for its proliferation activities, 
stating that ``Not only does IRISL facilitate the transport of 
cargo for U.N. designated proliferators, it also falsifies 
documents and uses deceptive schemes to shroud its involvement 
in illicit commerce.''
    A U.S. Navy boarding party confirmed the arms embargo 
suspicions and ordered the ship to Cyprus. There, according to 
the Wall Street Journal, the Cypriot authorities found 
components for mortars and thousands of cases of powder, 
propellant, and shell casings for 125mm and 130mm guns. The 
cargo was then unloaded and impounded by Cypriot authorities.
    U.S. and Cypriot authorities acted upon the legal 
guidelines set forth by a series of EU and U.N. resolutions 
pertaining to Iran. In February and April 2007, the EU imposed 
a number of sanctions on Iran in order to implement U.N. 
Security Council decisions, including a ban on Iranian 
transfers of military materiel, arms, and missile technology. 
Similarly, Resolution 1747, adopted in March 2007, prohibited 
the transfer of ``any arms or related materiel'' by Iran, and 
urged U.N. member states not to facilitate such efforts. In 
addition, Resolution 1803, passed in March 2008, calls upon all 
states, ``in accordance with their national legal authorities 
and legislation and consistent with international law,'' to 
inspect IRISL cargoes to and from Iran transiting their 
airports and seaports, ``provided there are reasonable grounds 
to believe that the aircraft or vessel is transporting 
[prohibited] goods.''
Not a New Problem
    Problems relating to interdicting destabilizing technology 
and arms transfers on the high seas, or those proscribed by 
U.N. resolutions, are not new. In October 1991, the North 
Korean freighter Mupo, carrying Scud missiles and related 
equipment to Syria, returned to North Korea after Egypt denied 
it transit through the Suez Canal amid concerns that Israel 
might try to interdict the shipment. The cargo was subsequently 
delivered to Iran in March 1992 by North Korean freighters Dae 
Hung Ho and Dae Hung Dan, which were shadowed by U.S. Navy 
vessels during the transit. (The navy was unable to stop the 
transfers because they were not illegal under international 
law.) The shipments are believed to have subsequently been 
flown to Syria.
    In August 1993, the Chinese freighter Yinhe, which was 
believed to be carrying chemical warfare agent precursors bound 
for Iran, was forced to dock in Saudi Arabia, but was found not 
to be carrying any banned items. And in December 2002, a North 
Korean freighter carrying Scud missiles believed to be for Iraq 
was stopped and inspected by Spanish warships, but was set free 
when it turned out that the Scuds were intended for Yemen.
    These episodes demonstrate the need to ensure that efforts 
to interdict destabilizing or proscribed shipments are backed 
up by reliable intelligence and appropriate legal authorities, 
and highlight the risks of acting without one or the other.
Iran Arming U.S. Foes
    A number of similar incidents in recent years have involved 
Iranian efforts to transport military materiel and arms by sea, 
land, and air to allies and surrogates. During the second 
Palestinian intifada, Iran helped facilitate arms shipments to 
Gaza through Hizballah and the Popular Front for the Liberation 
of Palestine to Gaza (by means of floating waterproof 
containers) by using two civilian vessels, the Santorini, 
seized by Israel in May 2001, and the Calypso 2. In December 
2001, Iran attempted to deliver fifty tons of weapons to the 
Palestinian Authority aboard the Karine A, whose shipment was 
seized by the Israeli Navy in the Red Sea.
    During the 2006 Hizballah-Israel war, Israeli intelligence 
claimed that Iran was resupplying the Shiite movement via 
Turkey. Such claims gained credibility in May 2007, when a 
train derailed by PKK terrorists in southeastern Turkey was 
found to be carrying undeclared Iranian rockets and small arms 
destined for Syria--probably for transshipment to Hizballah.
    More recently, Iran has emerged as a major arms supplier 
for Hamas in Gaza, as well as for anti-American governments in 
South America. In January and February 2009, the Israeli Air 
Force bombed two vehicle convoys reportedly carrying Iranian 
arms destined for Hamas fighters in Gaza. (There are also 
reports that the Israeli Navy sunk an Iranian ship carrying 
arms for Hamas off the coast of Sudan at this time.) Also in 
January 2009, Turkish customs officials in the port of Mersin 
discovered a shipment with equipment capable of producing 
explosives. The shipment, which originated in Iran, had entered 
Turkey by truck and was destined for Venezuela.
    These recent episodes underscore Iran's growing emergence 
as a supplier of military materiel, equipment, and arms for 
radical Islamist and anti-American allies and surrogates in the 
Middle East and beyond. For that reason, it is increasingly 
important to establish a comprehensive regime to constrain 
Iran's ability to transfer military materiel and arms to its 
allies and surrogates by sea, land, and air, especially if Iran 
were to market its nuclear technology abroad.
Enhancing Leverage over Tehran
    These past incidents indicate that intelligence must be 
timely and reliable to avoid embarrassing incidents that 
undermine U.S. credibility. They also highlight the gaps in the 
available policy tools to deal with Iranian arms transfers to 
its allies and surrogates. To close these gaps, the United 
States should work with its allies and the international 
community to:

   Lencourage the U.N. sanctions committee to issue a 
        Security Council communique to the U.N. General 
        Assembly, emphasizing the obligation of all member 
        states, including Iran and Syria, to fully abide by the 
        U.N. ban on arms transfers;

   Lwork with the EU to expand its current policy 
        banning the sale or transfer to Iran of ``all arms and 
        related material, as well as the provision of related 
        assistance, investment and services'' to include a ban 
        on the purchase or transfer from Iran of the same;

   Lwork with U.N. and EU member states to adopt 
        legislation pertaining to Iranian arms and technology 
        transfers, to enable them to fulfill their U.N. and EU 
        obligations. Encourage regional organizations in South 
        America and South and East Asia to adopt similar 
        resolutions;

   Lwork with the EU and Turkey (the de facto eastern 
        gateway to Europe) to develop an enhanced customs and 
        border security regime to prevent Iranian arms and 
        technology transfers through Turkey;

   Lengage the private sector to draw attention to the 
        risk of doing business with IRISL, its subsidiaries, 
        and other banned entities. As the U.S. Treasury noted 
        when it designated IRISL: ``Countries and firms, 
        including customers, business partners, and maritime 
        insurers doing business with IRISL, may be unwittingly 
        helping the shipping line facilitate Iran's 
        proliferation activities.'' Indeed, given Iran's 
        history of deceptive financial and trade activity, 
        extra scrutiny should be given to any ship that has 
        recently paid a call to an Iranian port;

   Lencourage countries to require ports and/or 
        authorities to collect detailed, accurate, and complete 
        data regarding all cargo being shipped to or through 
        their countries (especially from risk-prone 
        jurisdictions like Iran), to conduct rigorous risk 
        assessments, and to proceed with actual inspections as 
        necessary;

   Lencourage implementation of the World Customs 
        Organization's (WCO) draft Framework of Standards to 
        Secure and Facilitate Global Trade. The WCO represents 
        174 Customs administrations across the globe (including 
        Iran) that collectively process approximately 98 
        percent of world trade. Under the proposed framework, a 
        risk management approach would be implemented for all 
        cargo to identify high-risk shipments at the earliest 
        possible time. Participating members would benefit from 
        enhanced security and efficiency, and could benefit 
        from lower insurance premiums.
Export Control: Areas for Improvement
    As my colleague Michael Jacobson has noted, Iran has been 
able to circumvent the various U.S. sanctions regimes by using 
third-party countries as reexport hubs. Since the UAE has 
started to crack down on this type of trade, new countries have 
emerged as safe havens, with Malaysia at the top of the list. 
Malaysia and Iran have taken steps recently to build closer 
ties on many fronts including trade, and in December 2008, 
Malaysian prime minister Abdullah Ahmad Badawi traveled to 
Tehran, culminating in agreements to further cooperation in 
technology and automotive manufacturing. While in Iran, Badawi 
called on the Malaysia-Iran Joint Trade Committee to bolster 
both the volume and breadth of trade between the two countries.
    Hong Kong is also becoming more of a problem in this area, 
with Iranian front companies and procurement agents setting up 
shop there. Hong Kong is an attractive reexport location for 
Iran in part because of the 1992 U.S.-Hong Kong Policy Act, 
which dictates that Hong Kong be treated differently than the 
rest of China when it comes to export control issues. As a 
result, most items that can be shipped to the United Kingdom 
can also be sent to Hong Kong, despite the fact that many of 
these goods could not be shipped to mainland China. The Chinese 
government has also been stepping in to protect Iranians 
targeted by U.S. enforcement efforts. Hong Kong, for example, 
arrested Iranian procurement agent Yousef Boushvark in 2007 at 
America's request for attempting to acquire F-14 fighter plane 
parts, but Chinese authorities denied a subsequent U.S. 
extradition request, and Boushvark was then released from 
custody.
    Although the main challenge for U.S. export control efforts 
is on the international front, problems closer to home exist as 
well:

   LDespite the presence of a national export control 
        coordinator, no agency is officially in charge of U.S. 
        Government export control efforts, with responsibility 
        spread between State, Justice, Treasury, Commerce, and 
        DHS;

   LThe main statute governing this issue--the Export 
        Administration Act (EAA)--has expired, forcing the 
        United States to temporarily operate under the 
        International Emergency Economic Powers Act, which does 
        not allow for the full set of tools that the EAA 
        provided;

   LSentences in export control cases are often light, 
        in part because judges do not always view them as 
        serious national security issues. Adding to this 
        prevalent perception is the fact that export control 
        offenses are not in Title 18 of the U.S. Code, where 
        the vast majority of crimes are found.
                                ------                                

 RESPONSE TO WRITTEN QUESTION OF SENATOR JOHANNS FROM MATTHEW 
                             LEVITT

Q.1. What should a realistic ``red-line'' for the United States 
be? And do you think our red-line is the same as those of the 
Europeans or the Israelis? If not, what should theirs be?

A.1. As a blue ribbon Washington Institute task force argued in 
its report, ``Preventing A Cascade of Instability,'' now is the 
time for the United States to promote a policy of ``resist and 
deter'' rather than ``acquiesce and deter'' within the 
international community. Assertive action now to build U.S. 
leverage is more likely to prevent Iran's emergence as a 
military nuclear power. But time is short if diplomatic 
engagement is to have a chance of success and military 
confrontation avoided. Iran continues to produce enriched 
uranium, of which it already has a sufficient amount--if 
processed further--for a bomb.
    The Middle East is looking for strong U.S. leadership and 
reenergized relationships. Vigorous steps to bolster regional 
defense cooperation could enhance stability and serve to check 
regional perceptions that U.S. influence is weakening. As part 
of the solution to the impasse, Washington could propose 
measures that would also serve to shore up the global 
nonproliferation system.
                                ------                                

  RESPONSE TO WRITTEN QUESTION OF CHAIRMAN DODD FROM SUZANNE 
                            MALONEY

Q.1. Dr. Maloney, what is the current state of Iran's civil 
society, and what role is the Opposition currently playing in 
the wake of the crackdown? Do you consider opposition to the 
current Iranian regime to be broad-based? What potential does 
the Iranian middle class have to empower such opposition, and 
in what ways do you think it might do this going forward? What 
are the key indicators of the status of Opposition forces or 
that you think policymakers ought to be looking for in the 
coming months?

A.1. Despite the repression of the current regime, Iran has 
always boasted a relatively vibrant civil society. 
Associational life was and largely remains in some way 
interconnected with the state, but until recently much of this 
sector of society operated with a considerable degree of 
autonomy from the government. Over the past 30 years, Iranians 
have developed a wide range of institutions and mechanisms for 
insulating civil society from the intrusions of the regime. 
Although student organizations, cultural groups, and other 
institutions of Iran's civil society have undoubtedly borne the 
brunt of the post-election crackdown, I would venture that the 
resilience of the Iranian people and Iranian society generally 
will prevail even during this difficult period.
    As to the scope of the opposition to the regime, it is 
difficult to say with any degree of certainty. For many years, 
anecdotal evidence has suggested widespread dissatisfaction 
with the government's performance on quality of life issues 
and, at a more profound level, with the system of government 
that endows absolute authority in an unaccountable, unelected 
leader. And it is clear that Iranians from a very wide range of 
socioeconomic, geographic, and ethnic identifications 
participated in the demonstrations to protest the manipulation 
of the June Presidential elections. So there is a deep well of 
popular frustration with the government which, for the first 
time since the revolution, was mobilized in public on a mass 
scale in opposition to the regime's policies. What remains 
unknown and perhaps unknowable to those of us outside Iran is 
how many of the participants in the June demonstrations are 
ready and willing to actively confront the system as a whole. 
Certainly the recent recurrence of opposition protests suggests 
that deep resentment remains among many Iranians that will 
continue to undermine the government's attempts to impose its 
will on society.
    As one of my colleagues at the Brookings Institution, 
Djavad Salehi-Isfahani, has written, Iran today has a large and 
growing middle class. Ironically this is one of the factors 
that has helped stabilize Iran over many years; the expansion 
of infrastructure and education since the revolution combined 
with the influx of epic oil revenues over much of the past 
decade helped to create a broad sense of investment in the 
future among many Iranians. However, this same middle class is 
interested in greater economic opportunities, more interaction 
with the world, and a stronger voice in the nation's future 
course. The rigging of the June election likely deepened their 
alienation from Ahmadinejad and from the Islamic Republic 
overall.
    In terms of how Iran and the opposition will evolve, key 
indicators include the following: the size, scope and frequency 
of anti-government demonstrations; the politics within the 
ranks of the senior clerical establishment; the level of rancor 
within the conservative establishment, many of whom are almost 
as alienated from President Ahmadinejad as reformists; the 
posture of influential second-generation political actors, many 
of whom have remained loyal to the system even as they endeavor 
to court the frustrated masses; the level of capital flight, 
inflation, job creation and the government's willingness and 
ability to undertake significant economic reforms as currently 
considered; any shifts in the apparent cohesion of the security 
forces; and the relationship between the executive branch and 
other state institutions, including the Supreme National 
Security Council.
                                ------                                

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS FROM SUZANNE 
                            MALONEY

Q.1. Why will the Administration's current policy of direct 
engagement with Iran change Russia and China's judgment that 
their national interest lies in opposing strong U.N. Security 
Council economic sanctions resolutions?

Q.2. Do China and Russia fundamentally want to resolve the 
Iranian nuclear issue in such a way that Iran does not control 
a closed nuclear fuel cycle?

Q.3. What should a realistic ``red-line'' for the United States 
be? And do you think our red-line is the same as those of the 
Europeans or the Israelis? If not, what should theirs be?

A.1.-A.3. The decision by the Obama Administration to engage 
directly with Iran will not, on its own, decisively alter the 
reluctance of China and Russia to embrace robust sanctions 
against Iran. The Chinese and Russian leaderships have made 
clear that they do not want to see Iran cross the nuclear 
threshold, but their distaste for tough economic pressure 
reflects both their continuing interest in preserving a 
mutually beneficial economic relationship with Tehran and the 
less urgent sense of threat they appear to perceive from Iran's 
continuing defiance of United Nations Security Council 
resolutions. Nor has the Obama Administration embraced 
diplomacy for the sole or primary purpose of persuading 
international fence-sitters; based on the president's clear and 
consistent rhetoric, the Administration made the calculation 
that diplomacy represented the best possible policy, among an 
array of unappealing alternatives, for influencing Iran's 
nuclear calculus.
    However, American engagement in the diplomatic process is a 
necessary condition for beginning to alter the Chinese and 
Russian reluctance on sanctions, and for building a credible 
case that other means of persuading Tehran have not worked.
    I cannot speak for any other government, but our own 
priority should be developing a robust set of safeguards that 
can provide the international community with maximum confidence 
that Iran's program will not be utilized for military purposes.
                                ------                                

RESPONSES TO WRITTEN QUESTIONS OF SENATOR JOHANNS FROM DANIELLE 
                             PLETKA

Q.1. Do China and Russia fundamentally want to resolve the 
Iranian nuclear issue in such a way that Iran does not control 
a closed nuclear fuel cycle?

Q.2. What should a realistic ``red-line'' for the United States 
be? And do you think our red-line is the same as those of the 
Europeans or the Israelis? If not, what should theirs be?

A.1.-A.2. While it would be nice to ``know'' with certainty 
what Russia and China's true intentions are vis a vis Iran, we 
can only interpret each's statements and actions to make 
informed inferences. And while both Moscow and Beijing have 
criticized Iran's lack of cooperation with the IAEA and made 
occasional statements suggesting sanctions could be inevitable, 
neither Russia nor China has indicated support for new 
sanctions despite the fact that Tehran has missed repeated 
deadlines to accept an offer to enrich uranium outside Iran.
    So many red lines have passed already, for both Israel and 
the United States, that etching new lines in the sand seems 
futile. Iran has progressed to the point that it is mere months 
away from a nuclear weapons capability. Technical glitches are 
just that, glitches. The Europeans and Israelis are now in the 
position of having a more robust Iran policy than the United 
States. The point is not for all of us to embrace exactly the 
same policies, but for us all to ensure that Iran is unable to 
divide us and play one off against the other.

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