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S. HRG. 110–1029

IRAN COUNTER-PROLIFERATION ACT OF 2007

HEARING

BEFORE THE

COMMITTEE ON FINANCE

UNITED STATES SENATE

ONE HUNDRED TENTH CONGRESS

SECOND SESSION

ON

S. 970

APRIL 8, 2008

(

Printed for the use of the Committee on Finance
COMMITTEE ON FINANCE

MAX BAUCUS, Montana, Chairman

JOHN D. ROCKEFELLER IV, West Virginia

KENT CONRAD, North Dakota

JEFF BINGAMAN, New Mexico

JOHN F. KERRY, Massachusetts

BLANCHE L. LINCOLN, Arkansas

RON WYDEN, Oregon

CHARLES E. SCHUMER, New York

DEBBIE STABENOW, Michigan

MARIA CANTWELL, Washington

KEN SALAZAR, Colorado

CHUCK GRASSLEY, Iowa

ORRIN G. HATCH, Utah

OLYMPIA J. SNOWE, Maine

JON KYL, Arizona

GORDON SMITH, Oregon

JIM BUNNING, Kentucky

MIKE CRAPO, Idaho

PAT ROBERTS, Kansas

JOHN ENSIGN, Nevada

JOHN E. SUNUNU, New Hampshire

RUSSELL SULLIVAN, Staff Director

KOLAN DAVIS, Republican Staff Director and Chief Counsel

(II)
C O N T E N T S

OPENING STATEMENTS

Page

Baucus, Hon. Max, a U.S. Senator from Montana, chairman, Committee

on Finance ............................................................................................................ 1

Grassley, Hon. Chuck, a U.S. Senator from Iowa ................................................. 2

Salazar, Hon. Ken, a U.S. Senator from Colorado ................................................ 15

WITNESSES

Gordon, Philip, senior fellow for U.S. foreign policy, The Brookings Institution, Washington, DC ........................................................................................... 3

Kittrie, Orde, visiting associate professor, University of Maryland School of

Law, Baltimore, MD; and professor of law, The Sandra Day O’Connor

College of Law, Arizona State University, Tempe, AZ ...................................... 5

Reinsch, William A., president, National Foreign Trade Council, Washington,

DC .......................................................................................................................... 8

Pletka, Danielle, vice president, foreign and defense policy studies, American

Enterprise Institute, Washington, DC ............................................................... 10

ALPHABETICAL LISTING AND APPENDIX MATERIAL

Baucus, Hon. Max:

Opening statement ........................................................................................... 1

Gordon, Philip:

Testimony .......................................................................................................... 3

Prepared statement .......................................................................................... 27

Responses to questions from committee members ......................................... 33

Grassley, Hon. Chuck:

Opening statement ........................................................................................... 2

Kittrie, Orde:

Testimony .......................................................................................................... 5

Prepared statement .......................................................................................... 36

Responses to questions from committee members ......................................... 50

Kyl, Hon. Jon:

Prepared statement .......................................................................................... 55

Pletka, Danielle:

Testimony .......................................................................................................... 10

Prepared statement .......................................................................................... 58

Responses to questions from committee members ......................................... 64

Reinsch, William A.:

Testimony .......................................................................................................... 8

Prepared statement .......................................................................................... 68

Responses to questions from committee members ......................................... 74

Salazar, Hon. Ken:

Opening statement ........................................................................................... 15

Prepared statement .......................................................................................... 80

(III)

(1)

IRAN COUNTER-PROLIFERATION ACT OF 2007

TUESDAY, APRIL 8, 2008

U.S. SENATE, COMMITTEE ON FINANCE, Washington, DC.

The hearing was convened, pursuant to notice, at 10:05 a.m., in

room SD–215, Dirksen Senate Office Building, Hon. Max Baucus

(chairman of the committee) presiding.

Present: Senators Lincoln, Salazar, Grassley, Snowe, Kyl, and

Smith.

OPENING STATEMENT OF HON. MAX BAUCUS, A U.S. SENATOR

FROM MONTANA, CHAIRMAN, COMMITTEE ON FINANCE

The CHAIRMAN. The hearing will come to order.

The Earl of Mountbatten said, ‘‘If a third world war is fought

with nuclear weapons, the fourth will be fought with bows and arrows.’’ Few goals can be as momentous as preventing that third

world war, and central to that end is containing the proliferation

of nuclear weapons to unstable or provocative regimes in strategic

regions. Just such a regime is that of the Islamic Republic of Iran.

Today we will address S. 970, the Iran Counter-Proliferation Act

of 2007. This bill takes action to achieve the worthy end of a

nuclear-free Iran. S. 970 seeks this end by tightening and expanding economic sanctions against Iran, and it seeks to deter foreign

countries from cooperating with Iran.

But S. 970 has its critics. Some argue that the bill will not

achieve its goal. Some believe that the potential negative consequences of the bill outweigh its benefits. Others argue that America should not impose unilateral sanctions on any country. Still

others have expressed concerns about the potential humanitarian

effects of the bill, and others, including this Senator, hope to address some WTO questions that the bill raises.

These are valid concerns, but we cannot fail to act because we

have concerns. Rather, we must address and resolve the concerns.

Today we will hear from both supporters and critics of the bill. We

will seek to have a frank discussion about the effect of the bill on

promoting a nuclear-free Iran. We will closely examine the trade

and economic effects of this bill, including its WTO implications,

and we will analyze the bill’s effect on American businesses to be

sure that we are not punishing ourselves in our efforts to deter

Iran.

We will also look at the role that this bill plays in a broader multilateral sanctions regime. America is a leader in the international

community. As such, we are often called upon to take tough actions
2

to ensure the safety and security of ourselves and our allies. But

time and experience have shown that multilateral sanctions are

more effective. We should ensure that any actions that we take can

be used as building blocks for broader international action to deter

Iran from its nuclear ambitions.

Finally, we will examine the humanitarian effects of this bill. We

must make sure that this bill does not undermine our humanitarian goals. We seek to heighten pressure on the Iranian government, but not lower the living standards of the Iranian people.

I thank today’s witnesses for helping us to consider the implications of the bill. I hope that they will give us their ideas about the

benefits and the consequences of this bill, the role of this bill in a

broader multilateral sanctions regime, and the humanitarian effects of the bill.

So let us learn about S. 970, what it can do to help to prevent

the proliferation of nuclear weapons. Let us learn what this bill

means for America, our allies, and the people of Iran, and let us

work to find the most effective means to lessen the threat of a

nuclear-armed Iran.

Senator Grassley?

OPENING STATEMENT OF HON. CHUCK GRASSLEY,

A U.S. SENATOR FROM IOWA

Senator GRASSLEY. Thank you, Mr. Chairman.

This is a very important hearing because of the threat that Iran

poses to the rest of the world. Particularly, being armed with nuclear weapons, this is a reason for us to address this issue. Iran

also is the leading state sponsor of terrorism, supporting groups

like Hezbollah and Hamas.

The president of Iran has vowed to destroy Israel. Iran is working to enrich uranium for purposes of developing nuclear weapons.

It continues to pursue missile arsenals to deliver weapons. Iran

should not be allowed to develop and possess nuclear weapons. The

international community has been clear in opposing Iran’s efforts.

This is a multilateral approach to Iran, not just the United States’

approach to Iran.

The United Nations Security Council has passed three separate

resolutions demanding that Iran suspend all uranium enrichment,

yet Iran continues to defy the international community. A nuclear

Iran poses a serious threat to peace to our allies in the region and,

if not right today, eventually our own national security. The Iran

Counter-Proliferation Act of 2007 is another important tool then for

the United States to use to put even more pressure on the Iranian

regime to abandon its quest for nuclear weapons.

The bill has strong bipartisan support. I am glad that we’re taking a serious look at this legislation. While I agree with most of the

bill—maybe I had better say the overwhelming part of it—I do not

yet support all the trade provisions as they are currently drafted,

but we are working to see what we can do to change those.

For instance, I am not comfortable with the way that the bill

links sanctions to the extension of preferential trade treatment in

the process of accession to the WTO. I want to ensure that we end

up with a strong, targeted bill that is fully consistent with general
3

policy interests in promoting and enforcing the rule of law in international trade.

So we are engaging, through my staff and Senator Smith’s staff,

on these issues. I want to thank Senator Smith for his willingness

to address some of our concerns—that is, assuming we can get together. I look forward to continuing to work with him then. I hope

that the Iranian regime and the Iranian people will see that their

interests are not served by the pursuit of nuclear weapons.

I look forward to working with my colleagues on efforts to continue to apply political and economic pressure on the Iranian regime. Its leaders must understand that their quest for nuclear

weapons will not be tolerated, and a measure like the Iran

Counter-Proliferation Act is a strong signal for our position on that

issue.

Thank you, then, Mr. Chairman.

The CHAIRMAN. Thank you, Senator, very much. I appreciate

that.

Today’s panel begins with Philip Gordon, who is a senior fellow

for foreign policy at the Brookings Institution. Mr. Gordon formerly

served on the staff of the National Security Council.

Following Mr. Gordon is Professor Orde Kittrie, a visiting associate professor of law at the University of Maryland, and professor

of law at Arizona State University.

Our third witness is William Reinsch, president of the National

Foreign Trade Council. Mr. Reinsch previously served as Under

Secretary for Export Administration in the Department of Commerce.

Our final witness, who is on her way, is Danielle Pletka, the vice

president of foreign and defense policy studies at the American Enterprise Institute. Ms. Pletka formerly served on the staff of the

Senate Foreign Relations Committee.

Mr. Gordon, why don’t you begin? As you all know, our usual

rule is that witnesses speak 5 minutes, and prepared statements

will automatically be in the record.

STATEMENT OF PHILIP GORDON, SENIOR FELLOW FOR U.S.

FOREIGN POLICY, THE BROOKINGS INSTITUTION, WASHINGTON, DC

Mr. GORDON. Thank you, Mr. Chairman. It is an honor to be

here. I appreciate the opportunity to testify on this issue.

As I noted in my written testimony, I have some concerns about

certain aspects of S. 970, but I would like to begin my summary

by saying that I applaud Congress’s involvement in this issue, and

I think that the basic approach in the bill, designed to increase the

price Iran pays for its pursuit of a nuclear weapon, is the right one.

I want to begin by saying why.

There is little doubt to me that Iran is actively working towards

a nuclear weapons capability, even if its final decisions on whether

to build an actual nuclear weapon may not have been made. In

that sense, the conclusion of the December 2007 National Intelligence Estimate that Iran had ‘‘halted its nuclear weapons program,’’ I think, was misleading.

By defining a nuclear weapons program only in terms of weapons

design and covert enrichment programs, the NIE gave the impres-
4

sion that Iran had ceased to move towards a nuclear weapons capability when in reality our concern, and the international community’s concern, has always been the declared enrichment capability.

Even using the NIE’s narrow definition, it reported that until

just a few years ago Iran was secretly working on military aspects

of a nuclear weapons program, in violation of the Nuclear NonProliferation Treaty (NPT), and that it could accumulate enough

enriched uranium for a nuclear weapon within a few years.

Despite the U.N. Security Council resolutions that you referred

to, Mr. Chairman, demanding that Iran suspend its enrichment

program because it had hidden aspects of that program for nearly

2 decades, Iran continues to enrich. It is operating 3,000 P–1 centrifuges at Natanz that, if operated efficiently, could generate

enough highly enriched uranium for a nuclear weapon in about a

year.

Recent reports from the International Atomic Energy Agency

suggest that Iran has now started operating 300 much more efficient centrifuges, and Iranian President Mahmoud Ahmadinejad

announced yesterday that they are installing 6,000 more, possibly

of an advanced type.

Iran also has plans to build an industrial-scale enrichment facility of 54,000 centrifuges which, when completed, would be able to

produce enough highly enriched uranium for several nuclear weapons within weeks.

The lack of transparency, the scale of these projects, the absence

of a large-scale nuclear energy program, and the willingness to absorb all the international costs of isolation suggest that the Iranian

enrichment program is not designed for civil purposes, but rather

to give Tehran a real nuclear weapons option.

In the context of S. 970, therefore, it seems to me that the logic

of the bill is right, because the best option to deal with this challenge is, indeed, to increase international pressure on Iran. If we,

on one hand, acquiesce to Iran’s nuclear weapons development, we

would tilt their cost/benefit analysis in the direction of doing so

and basically imply that U.N. Security Council resolutions, even

binding ones under chapter VII, have no meaning.

The policy option at the other end of the spectrum, using military

force, however, is equally unpalatable. I believe that targeted air

strikes could no doubt set the Iranian program back for a number

of years, but our intelligence is far from perfect. It would have

major consequences, and Iran would no doubt respond, including

asymmetrically against our interests in Iraq and Afghanistan.

Because those options are so bad, I think the option, the philosophy behind S. 970 is the right one, using all possible political, diplomatic, and economic leverage to convince the Iranian leadership

that the costs of defying the international community are greater

than the benefits. That, it seems to me, is the merit of this bill.

I support many of the measures in this bill, but let me conclude

my summary, rather, by talking about, very briefly, what I think

the principles should be as we consider these different measures.

That is my greatest concern with the bill.

What we need to keep in mind is that any step in this bill that

would lead to legal challenges from allies at the WTO or elsewhere,

I think, could be counterproductive. We have discovered in the
5

past, with various challenges to the Iran Sanctions Act, that most

countries, even among our closest allies, reject the extra-territorial

application of U.S. sanctions, and they are willing to act to defend

that principle, the principle that countries should not impose their

foreign policy priorities on others.

So it seems to me any measure in S. 970 deemed to provide for

mandatory secondary sanctions, especially if they limited the President’s ability to waive those sanctions, could be counterproductive.

The principle is that sanctions, as Deputy Treasury Secretary

Kimmitt has said, have their most comprehensive impact when applied cooperatively and collectively.

This, I think, is particularly true at a time when the international community is actually moving forward to increase pressure on Iran. I have detailed that in my written testimony. You are

all familiar with the four U.N. Security Council resolutions. But

there is also the reality that, I think, increasingly international

companies and banks are refusing to work with Iran, and that is

major progress.

Finally, let me just say that I think that these positive trends in

the international community would be reinforced by U.S. diplomatic pressure on these countries. Reporting requirements that

name and shame the countries and companies that are contributing to Iran’s proliferation activities and efforts to promote U.S.

divestment from Iran and the companies that invest in Iran—and

all of that is, I think, quite usefully in this bill.

Lastly, let me say that I think the bill could be strengthened

with elements to make clear not only that Iran must pay a price

for its refusal to cooperate, but that more flexibility on its part

would be rewarded. So just as the bill proposes to increase IAEA

funding for the creation of a nuclear fuel bank, I think it would do

well to reiterate the offer that the United States and others made

to Iran in 2006 to ensure its access to peaceful use of nuclear energy.

My last point is that pressure from Congress can play a useful

and constructive role in making sure that foreign governments and

companies uphold their responsibility to contain the nuclear risk

from Iran. I believe that S. 970 adds to that pressure in some useful ways, but also that we must take great care not to provoke divisions in the international coalition that has been forming to contain Iran, and I hope Congress will keep that principle in mind as

it moves forward.

Thank you very much, Mr. Chairman.

The CHAIRMAN. Thank you, Mr. Gordon.

[The prepared statement of Mr. Gordon appears in the appendix.]

The CHAIRMAN. Mr. Kittrie?

STATEMENT OF ORDE KITTRIE, VISITING ASSOCIATE PROFESSOR, UNIVERSITY OF MARYLAND SCHOOL OF LAW, BALTIMORE, MD; AND PROFESSOR OF LAW, THE SANDRA DAY

O’CONNOR COLLEGE OF LAW, ARIZONA STATE UNIVERSITY,

TEMPE, AZ

Mr. KITTRIE. Chairman Baucus, Ranking Member Grassley, distinguished members of the committee, thank you for the opportunity to speak with you about S. 970.
6

Today, April 8th, is a date Iran has marked as its National Day

of Nuclear Achievement. This date commemorates the April 2006

day on which Iran, for the first time, produced enriched uranium.

Last year, 2007, Iran celebrated this National Day of Nuclear

Achievement with an announcement by President Mahmoud

Ahmadinejad, in a ceremony accompanied by chants of ‘‘Death to

America,’’ that Iran had begun to enrich uranium on an industrial

scale.

This year, today, Iran is celebrating its National Day of Nuclear

Achievement by announcing it has started to install 6,000 advanced enrichment centrifuges at its Natanz uranium enrichment

facility. Under international law, any uranium enrichment by Iran

is flatly prohibited by three legally binding resolutions of the U.N.

Security Council, so Iran is, today, explicitly celebrating nuclear

progress explicitly prohibited to it by international law. It is anyone’s guess how Iran will celebrate its National Day of Nuclear

Achievement next year. In 2010, at the current rate of development, Iran just might celebrate it by detonating a nuclear bomb.

The sanctions imposed on Iran thus far, including by the Security Council, the EU, and the U.S. have obviously failed to dissuade

Iran from continuing to pursue its nuclear program. It could be

tempting to conclude from this experience that sanctions can,

under no circumstances, succeed in stopping Iran’s nuclear weapons program. Such a conclusion would be both unfortunate and incorrect.

The international community has learned in recent years that

strong sanctions can stop illicit nuclear weapons programs. For example, it was discovered in the wake of the U.S. occupation of Iraq

that strong U.N. Security Council sanctions had destroyed Iraq’s

nuclear weapons program and succeeded in preventing Saddam

from restarting it between the Gulf War in 1991 and the coalition

occupation of Iraq in 2003.

Strong U.N. Security Council sanctions also induced Libya’s government to both forsake terrorism and completely and verifiably relinquish its nuclear, chemical, and biological weapons programs.

Unfortunately, the sanctions imposed on Iran by the international

community thus far are much weaker than the sanctions which

stopped the Iraqi and Libyan nuclear weapons programs.

The Security Council’s resolutions imposed on Iran thus far are

too weak to coerce Iran into compliance, to contain Iran’s ability to

advance its nuclear weapons program, or to deter other states from

following Iran’s lead in developing their own nuclear weapons program. This is unfortunate because Iran’s heavy dependence on foreign trade leaves it potentially highly vulnerable to strong economic sanctions.

Why are the Security Council sanctions on Iran so weak? In considerable part, because Russia and China are prioritizing the shortterm profits to be gained from business as usual over the long-term

security to be gained by forcing Iran to stop before it develops nuclear weapons.

The EU has played a more constructive role, but could do much

more. If the EU, which supplies one-third of Iran’s imports, including a high proportion of Iran’s sophisticated machinery needs, were

to follow the U.S. lead and impose a nearly comprehensive embargo
7

on Iran, it might quickly succeed in coercing Iran to cease its nuclear weapons program.

Diplomatic tools traditionally include incentives as well as sanctions, but Iran has already been offered generous incentives and

consistently rejected any suggestion that it halt or limit its nuclear

work in exchange for any incentives.

S. 970 could contribute to convincing Iran’s regime that the price

for its nuclear program has become too high, that the risk from

sanctions to the regime’s survival has become so great that the regime is better served by halting its nuclear program rather than

further risking its grip over the Iranian people.

Some will argue that S. 970 is wrong because it is unilateral, or

because it runs afoul of our international trade commitments, or

because it will have an inappropriate humanitarian impact. None

of these is correct. The U.S.’s recent success with unilateral banking sanctions, about which the committee heard just last week,

demonstrate that unilateral sanctions can be very effective in both

directly impacting Iran and persuading third countries to lessen

their ties to Iran. S. 970 would help build on those successes.

In addition, S. 970 would not run afoul of our international trade

commitments. Rather, it falls well within the security exceptions

provided by article 21 of the GATT. With respect to the concern

that S. 970 might harm humanitarian interests, I would stress that

S. 970 would deprive Iran of neither food nor medicine. Indeed,

S. 970 explicitly exempts exports to Iran of food and medicine.

If the people of Iran are not as prosperous today as they would

like to be, it is because their government has grossly mismanaged

the Iranian economy and chosen to isolate itself from the international community by persisting in its nuclear program in explicit

defiance of international law.

Whatever inconvenience the Iranian people might incur from a

tightening of sanctions attributable to S. 970 would pale in comparison to the humanitarian cost to the U.S. and its allies of an

Iranian nuclear arsenal, including the greatly increased risk of

stepped-up terrorism under an Iranian nuclear umbrella, a likely

spread of nuclear proliferation to Iran’s neighbors, and the greatly

increased risk of a nuclear 9/11. By impeding an Iranian nuclear

arsenal, S. 970 would therefore advance, rather than hinder, humanitarian interests.

In conclusion, stronger U.S. sanctions on Iran would impose costs

on U.S. business. Yes, they would. Stronger multilateral sanctions

would impose costs in Russia, China, Europe, and other sanctioning countries. But as my written statement discusses, sanctions

are investments in protecting against the far higher price of an Iranian arsenal.

In light of Iran’s advancing nuclear program, a failure by the

West to quickly improve its peaceful leverage over Iran will inevitably leave us with a terrible choice: taking military action to stop

Iran’s nuclear weapons program or allowing Iran to obtain a nuclear arsenal. I urge you to pass S. 970. Thank you.

The CHAIRMAN. Thank you, Professor Kittrie.

[The prepared statement of Mr. Kittrie appears in the appendix.]

The CHAIRMAN. Mr. Reinsch?
8

STATEMENT OF WILLIAM A. REINSCH, PRESIDENT,

NATIONAL FOREIGN TRADE COUNCIL, WASHINGTON, DC

Mr. REINSCH. Thank you, Mr. Chairman. It is a pleasure to be

back with you, although I think I am in the rather lonely position

of having to tell you why it would be a mistake to pass this bill

and to express the serious concerns my organization, the National

Foreign Trade Council, and also the USA Engage Coalition, have

with it.

There is no question that Iran’s behavior poses grave concerns

for the United States and for our allies. Iran’s pursuit of a nuclear

program is deeply troubling, and its documented support for terrorist organizations is unacceptable.

It is important, however, to consider what approach is most likely to change the behavior that we all want to see changed. By picking fights with our allies and limiting the ability of this and future

presidents to negotiate directly with Iran, legislation like S. 970

would make it more difficult for the United States to address the

threats that the other witnesses and I have described.

Members of this committee, as well as members of the Banking

and Foreign Relations Committees, who have also been working on

this problem, must balance the need to stand strong against Iran’s

unacceptable behavior, against the risk of doing something counterproductive in an effort to address it. We believe that passing S. 970

would come at a heavy price.

As a general matter, unilateral sanctions rarely achieve U.S. foreign policy goals. The Peterson Institute for International Economics has concluded that unilateral U.S. sanctions in place from 1970

through 2000 were effective only 19 percent of the time, and most

successes came where a modest policy change, like release of a political prisoner, were sought.

Moreover, sanctions may make the problems they are intended

to address worse by providing an excuse for the targeted government to blame its failures on outside pressures and to rally support

for its regime. In the case of Iran, our ability to change behavior

through future sanctions is further limited because the United

States already maintains comprehensive restrictions.

More pressure by the United States alone is very unlikely to convince Iran to change its behavior. Instead, the best hope of altering

Iran’s behavior is through vigorous and unified multilateral pressure in concert with our allies and Security Council partners, combined with direct diplomacy with Iran.

Unfortunately, S. 970 would make it more difficult to unify our

partners behind further multilateral measures and would also impede efforts by this and future presidents to conduct direct diplomacy. Section 8 of S. 970 would expand current unilateral U.S.

sanctions to foreign companies by making a parent company liable

for the actions of its foreign subsidiaries. This bill would draw

international attention away from the core problem of Iran’s

threatening behavior and instead effectively penalize entities and

individuals in the very countries whose cooperation we need to

counteract Iran’s behavior.

These other governments could draw on already existing blocking

statutes or implement new measures to counteract the threat of

U.S. penalties. If enacted, this provision would override and pre-
9

empt provisions of the 17 executive orders issued over a 28-year period that provide legal authority for the current sanctions. This is

a dramatic departure from current policy. The last time the United

States attempted to sanction foreign companies in this way it

caused a major rift with our allies and ultimately forced the President—in that case President Reagan—to back down.

The fact is that extraterritorial sanctions, as these are, are more

likely to cause a trade war than they are to change Iran’s behavior.

Moreover, it is important to remember that adequate authority exists in current U.S. law for the U.S. Government to target sham

corporations that exist to circumvent domestic sanctions. Simply

put, if a subsidiary is independent and legitimate it should not, and

cannot, be held to U.S. law for conduct outside the United States.

If it is not independent and legitimate, then the U.S. Government

already has adequate enforcement authority.

Mr. Chairman, the Senate has considered and rejected this particular provision three times in the last 4 years, and I recommend

that you continue that record.

S. 970 would also limit the ability of the President to conduct diplomacy. Codifying existing prohibitions would remove the ability

of a U.S. President to offer incentives or to respond to positive developments in Iran. For example, in the 1990s the United States

allowed imports of caviar and rugs in response to what was perceived then as a political opening in Tehran. It is essential that future Presidents have the same tools available to them, even if there

are no present plans right now to employ them.

Equally important, under the current wording, this provision

would seem to prohibit the export of medical devices to Iran and

could hinder the ability of NGOs or news organizations to work on

humanitarian activities in Iran. Banning the export of medical devices to Iran could compromise basic medical treatment of Iranian

citizens, while prohibiting the export of civil aviation parts, which

this legislation also does, could compromise air safety not only for

Iranian passengers, but for European and other passengers on Iranian airlines.

Further, this provision could inhibit the ability of NGOs, international organizations such as the U.N., news bureaus, and other

organizations from working on humanitarian activities. Sanctions

often end up hurting ordinary people, while having little impact on

the government leaders we are trying to influence.

In the case of Sudan, for example, poorly drafted State laws have

discouraged American business activity in southern Sudan at the

same time the Federal Government is trying to encourage it. These

are just some of the problems with S. 970. USA Engage has compiled a list of concerns with the legislation which are attached to

my testimony, which I hope will be placed in the record.

Finally, Mr. Chairman, we believe that the best way to change

Iran’s unacceptable behavior is through multilateral pressure and

direct talks with Iran. The United States should continue to work

with the Security Council on ways to pressure Iran on its nuclear

program and with our allies around the world to confront its support for terrorist activities. The Congress should also consider endorsing and funding a high-level special envoy for Iran with the au-
10

thority to engage in direct bilateral talks in partnership with the

international community.

The United States has made some progress negotiating an end

to North Korea’s nuclear weapons program through direct diplomatic engagement. When it comes to Iran, there is already a

framework for cooperation—security talks in Baghdad—and precedent—the United States and Iran cooperated in the past to support

democratic governance in Afghanistan. In addition, the Treasury

Department has also been successful in convincing European banks

to curb their dealings with Iran. This kind of back-channel economic diplomacy with our allies is a much more effective way to

influence the behavior of foreign companies than the sledgehammer

approach of S. 970.

Finally, let me just say, Mr. Chairman, based on my experience

dealing with these programs when I was in the government, I can

guarantee you that if this bill is passed it will have serious unintended and unforeseen consequences which will be manifested rather quickly and which would make our efforts to change Iran’s behavior significantly more difficult. I strongly urge the committee to

reject this approach and instead to endorse diplomatic efforts with

our allies and with Iran that are much more likely to result in a

positive outcome.

Thank you.

The CHAIRMAN. Thank you, Mr. Reinsch. The materials you referred to will be included in the record.

[The prepared statement of Mr. Reinsch appears in the appendix.]

The CHAIRMAN. Ms. Pletka, welcome to the committee. We were

anticipating your arrival.

STATEMENT OF DANIELLE PLETKA, VICE PRESIDENT, FOREIGN AND DEFENSE POLICY STUDIES, AMERICAN ENTERPRISE INSTITUTE, WASHINGTON, DC

Ms. PLETKA. Thank you, Mr. Chairman and members of the committee. Thank you for the invitation, and thank you for your forbearance with my late arrival. I left a panel on nonproliferation in

the middle of their talk, walked out and left. So, forgive me for my

bad organization.

The CHAIRMAN. No, no, no. Fine. We are glad you are able to participate in both forums.

Ms. PLETKA. It is a pleasure for me.

I ask that you accept my full statement for the record, and I will

briefly summarize my remarks as well.

The CHAIRMAN. Without objection.

[The prepared statement of Ms. Pletka appears in the appendix.]

Ms. PLETKA. While there are some who have suggested that

Iran’s intentions regarding its nuclear program are in question,

that is not the view of any of the professionals worldwide with

whom I have consulted. Iran’s record of concealment, pattern of

procurement, and unwillingness to agree to even de minimis concessions should inform our opinion about their intentions.

The real question before us is not, what is Iran up to, but how

should we react to Iran’s weapons programs? Should we rely solely

on multilateral sanctions as the only credible, if so far ineffectual,
11

means of talking Iran off the ledge? Should we weigh options to

sharpen our own sanctions, making them more biting and—we

hope—more persuasive to those in the Iranian leadership not committed to this nuclear weapons folly? Should we do so notwithstanding the inconvenience to certain ardent trade groups?

Or should we throw these coercive measures out and offer ourselves up to the Iranians for unconditional dialogue, despite the

fact that successive administrations have refused unconditional

dialogue, despite the fact that our European allies have demanded

the same conditions as we for moving forward in discussions with

Iran, despite the fact that the Iranian regime clearly believes that

an agreement to dialogue without preconditions represents a major

concession from the United States?

We can debate these various options and our different philosophies of approaching rogue states, but a few things should be clear.

The first is that dialogue too often means negotiation. If we are to

negotiate, I ask proponents of negotiation: exactly what do you propose to give away in exchange for Iranian concessions on their illegal nuclear program, and do you propose that, once those concessions that presumably secure a verifiable dismantlement of the Iranian nuclear weapons program are delivered, that we accept Iranian sponsorship of terrorism, or sponsorship of death squads in

Iraq, or domination of its region?

Second, we should have no doubt that sanctions do have an impact. Whether they have the desired impact in the desired time

frame is another question entirely. But both unilateral and multilateral sanctions imposed by the United States and the international community have bitten hard into the Iranian economy,

and into the ease of doing business, into Iranian credit, and into

the bank accounts of Iran’s corrupt leadership.

Raising the cost of defying the international community is what

sanctions are all about, and I think there is clear evidence that we

have done so. Interest rates are high for Iran. Despite high oil

prices, the economy is in a shambles. Investment in Iran’s oil and

gas sector has declined. Iran’s exports of oil have declined over the

last years. In other words, there is a cost to Iran, and that is all

to the good.

Finally, there is the question of loopholes in American law. It is

hard to argue persuasively that the U.S. is committed to stopping

Iran while we subsidize Iran’s nuclear trading partners—I mean

Russia—and Iran’s aide donors—I mean the World Bank. It is hard

to argue to foreign companies that we wish them to cease and desist their business with the mullahs when American companies are

permitted to use foreign subsidiaries to do that same business.

Some skeptics have argued that sanctions will not achieve their

desired effect. I think there is ample evidence to indicate that engagement has also failed abjectly. And while both sanctions and engagement may ultimately fail to bear fruit, American leadership

and American conscience dictate that we do our best to achieve our

goals without getting into bed with the Tehran regime.

Fewer and fewer companies and banks are willing to do business

with the Islamic republic. We are gaining ground. For those who

believe we should cede that ground, I remind you—and I had to include this quote because it is so apropos—of Thomas Jefferson’s
12

wonderful letter of 1808 discussing an earlier challenge to American national security. He said, ‘‘Three alternatives alone are to be

chosen from: one, embargo; two, war; three, submission and tribute. And wonderful to tell, the last will not want advocates.’’

If economic pressure fails to persuade Iran to change course, we

will be left with few options. One is to accept a nuclear-armed Islamic republic, and the other is war. I suggest that an enhanced

commitment to persuasive economic measures remains the best option for the moment. This bill is an important step in that direction, and I commend its sponsors and this committee’s leadership.

Thank you.

The CHAIRMAN. Thanks, Ms. Pletka.

Frankly, I think everyone in this room agrees that the United

States can do more, and should do more to stop Iran’s nuclear proliferation. I do not think there is much doubt about that. The real

question is what works, what is effective, and what is not effective.

I do think probably some unilateral actions are effective. Some may

not be effective and have unintended consequences.

I have concerns, frankly, about the provisions in the bill that basically ban products that are substantially transformed in third

countries, which I think is WTO-inconsistent. Now, Mr. Kittrie, you

alluded that the security exception in the GATT may make this

provision consistent with WTO rules. But I am asking a broader

question, and that is, what provisions in this bill need to be modified because they otherwise have unintended consequences that are

adverse?

I was struck by Mr. Reinsch’s point that some of these provisions

may have the unintended effect of causing an international debate

among allies, among friends. We are getting off the track here, trying to sanction Iran effectively. Anyone who wants to, just pipe up

here and tell me what needs to be changed in this bill and how do

you change it to minimize unintended adverse consequences that

may otherwise be caused by this bill?

Mr. Reinsch, I think you have something in mind, so I will call

on you first.

Mr. REINSCH. We have a long list, Mr. Chairman, and it was appended to my testimony. I commented on some of the things. I

think that clearly section 6, which relates to Russia’s nuclear cooperation, would have a significant adverse impact on our bilateral

relationship with Russia.

Let me go back one step. I do not think anybody on the panel

disagrees with the seriousness of the problem or the nature of the

problem. You are quite right in your comment about that. We certainly do not oppose multilateral sanctions. I think multilateral

sanctions, multilateral pressure is the way to get there.

What the debate over this bill is about is the best way to get to

a multilateral approach. Our problem with this bill is that it attempts to bring basically the Russians, the Chinese, and the Japanese, and some of the Europeans, the countries that we are talking

about here, attempts to bring them along by beating their companies over the head. We do not think that that is a useful way to

get their governments to cooperate. Telling Russia that we are

blocking Russian accession to the WTO, which is what this provi-
13

sion would effectively do, unless it stops its nuclear cooperation

with Iran, is not an effective way to obtain Russian cooperation.

The CHAIRMAN. Just to give a little discussion on that one point,

let me ask Mr. Gordon, as well as Professor Kittrie and Ms. Pletka,

to respond to that point about the provision relating to Russia’s accession to the WTO.

Mr. GORDON. I think that the administration should take into account what Russia is doing on the Iran issue as it considers whether it would support Russian accession to the WTO. The problem I

would have in making this a law and taking away any flexibility

from the administration is that there are circumstances in which

I could imagine Russia having some nuclear cooperation with Iran,

notably on the Bushehr nuclear reactor, that we would want to

allow to continue. If Russia was cooperating more broadly on Iran,

that should not stop us from having a 123 agreement with Russia

or from allowing it into the WTO. The Bushehr reactor we have opposed for a number of years. Russia has gone ahead anyway.

In an ideal world, Russia would not have anything to do with

any nuclear reactor in Iran. It does, and even the Bush administration, in the context of the recent Russian agreement to start delivering fuel to Bushehr, noted that this could be a positive tool in our

arsenal because it shows Iran that it is possible to have peaceful

use of nuclear energy while relying on foreign fuel supplies.

So, if the bill makes it impossible for Russia to continue with

that arrangement, it is hard for us to go to Iran and say, you can

rely on others for nuclear fuel, you can, as is made clear by the

NPT, make peaceful use of nuclear energy, but, by the way, we are

going to confirm to you that we are prepared to take it away by

denying Russia the ability to provide that fuel. So I think that

more flexibility than is in this bill is required on the issue of how

to leverage Russian nuclear cooperation with Iran.

The CHAIRMAN. Ms. Pletka?

Ms. PLETKA. I agree with Phil to a certain extent; flexibility is

the clarion call of the executive branch no matter who is in power,

and we all know that all too well.

I would caution against viewing the idea of a 123 agreement, an

agreement for nuclear cooperation with Russia, as somehow an entitlement for the Russians. To the contrary, it has been the policy

of every administration, including the Bush administration in an

earlier incarnation, that Russian cooperation with the Iranian nuclear program was incompatible with the idea of Russian nuclear

cooperation with the United States. And people should understand

what the implications of that cooperation are.

It is not just a nice piece of paper that is signed, it is a potential

for the export of spent fuel, for example, to Russia which will be

a source of enormous—and when I say ‘‘enormous’’ I mean even in

the current Russian context—amounts of profit for, likely, the Russian government. So again, we need to think this through very

carefully. I think the argument is a little bit more easy to make

on the question of trade, and there one wants to argue in favor of

flexibility. On the other hand, we have to say that, having given

Russia a significant number of incentives, including initialing that

self-same 123 agreement last summer and beginning discussions on
14

WTO, they have proven themselves nothing if not more intransigent in the Security Council.

The CHAIRMAN. I appreciate that. My time has expired.

Senator Grassley?

Senator GRASSLEY. Yes, Mr. Chairman. Before my 5 minutes

starts, I was going to give Senator Kyl some of my time, but then

he got a call. He had to go to meet with other people. So, he will

not be here. He wanted me to apologize to the panel, and he is

going to submit some questions for answer in writing. He is our Republican leader, so he has a bigger agenda.

The CHAIRMAN. One of them. One of the leaders.

Senator GRASSLEY. That is right. Our assistant leader.

[The questions appear in the appendix.]

Senator GRASSLEY. I am going to start with Mr. Gordon in a little bit different approach than the discussion we just had on Russia, but somewhat close to it, Mr. Gordon.

You testified that we should avoid provoking division in the

international community through unilateral sanctions. On the

other hand, Russia and China appear to be opposed to applying significant pressure on Iran. If we are forced to choose, which is more

important, effective sanctions or keeping Russia and China on

board?

Mr. GORDON. Thank you, Senator. I guess I would say I do not

think that is the choice. I think we can do two things at the same

time. We can, and do, impose a whole range of unilateral sanctions

on Iran. We have not traded with Iran for almost 30 years. We do

not talk to Iran, we do not invest in Iran. We have frozen the assets of Iranian banks and individuals, and we can continue to do

all of those things, and in many cases we should. We would like

more Russian and Chinese cooperation, no doubt.

The choice can come in the context of secondary sanctions when

we make relations with those countries conditional on what they do

towards Iran. That is the context in which I think it can be problematic when we do things that will cost us their cooperation.

The basic principle, again, is, if we are honest with ourselves, our

own unilateral sanctions have a very limited impact. I mean, the

reality of the modern world is, there are a lot of other countries out

there with money, banks, and who buy oil. That is why it is so important, as much as possible, to get countries like Russia and

China on board, to the extent our sanctions are designed to limit

funds to Iran in order to put pressure on Iran. We cannot buy oil

from Iran. We do not. We cannot invest in Iranian energy development. We do not. But especially given the current price of oil,

around $100 per barrel, Iran is making more than $70 billion more

per year from oil exports than it was 8 years ago.

So, we need to understand that what we can do alone as a country is going to have a very limited impact, and in that sense it is

in many cases more important to have broad and weak sanctions

than very narrow and strong sanctions. That is why I think it is

important, as much as possible, to get Russia and China on board.

I think it has helped having U.N. Security Council resolutions. It

is useful not only in sort of putting the diplomatic squeeze on Iran,

but with other countries. It is a lot easier to persuade the Europeans, the Japanese, and the Indians that they should not deal
15

with Iranian banks when Russia and China have agreed at the Security Council that no one should deal with Iranian banks.

Senator GRASSLEY. All right.

Ms. Pletka, you testified that the sanctions in effect today have

done a better job than previous regimes in targeting leadership elements and sources of income without imposing a heavy burden on

the Iranian people. Others have asserted that the sanctions have

led the Iranian public to question whether nuclear ambitions of the

regime are worth the economic cost.

Question: do any of the sanction provisions in our bill run the

risk of hurting the Iranian public and thereby causing nationalist

backlash?

Ms. PLETKA. It is a difficult question to answer, Senator, for the

simple reason that Iran has become, under President Mahmoud

Ahmadinejad, so much more of a statist and state-run economy,

where there were businesses in private hands under previous governments. Things have been drastically centralized. So on the one

hand you can say that sanctions have an impact on the government

because so much is, in fact, controlled by the government. The

other side of that argument is, because so much is controlled by the

government, it has a significant impact on the Iranian people.

I think that there is no doubt that all sanctions have an impact

on a population. If I had to look at where sanctions had an impact

right now, I would say in terms of their ability to procure consumer

goods from Europe, luxury exports. Those kinds of things in Iran

have gone up in price, but there should be no doubt that, when you

weigh the cost of sanctions on the Iranian people versus the cost

of immense economic mismanagement on the part of the regime,

that certainly has a heavier burden.

The only comment I would make about the specific provisions of

the bill in terms of the Iranian people is the note that Bill Reinsch

made, which is that if in fact—and I did not pick up the provision

that he mentioned—there is a question on medical devices, then

clearly the United States is not interested up to a reasonable point,

understanding that lots of medical devices are, in fact, dual use

and, if the Iranians are seeking to exploit that loophole in order to

get technology for the nuclear program or their missile program,

we do need to be particularly vigilant.

Senator GRASSLEY. Mr. Chairman, I am going to submit the rest

of my questions for answer in writing because I cannot stay for a

second round.

The CHAIRMAN. All right. Thank you very much, Senator, for

your comments here, and your questions.

[The questions appear in the appendix.]

The CHAIRMAN. Senator Salazar, you are next.

OPENING STATEMENT OF HON. KEN SALAZAR,

A U.S. SENATOR FROM COLORADO

Senator SALAZAR. Thank you very much, Chairman Baucus and

Senator Grassley, for this morning’s hearing. Thank you to all the

witnesses for your testimony this morning.

I am a co-sponsor of S. 970, along with, I think, 69 or 70 of my

other Senate colleagues. I share the concern of those 70 Senators

that Iran’s continuing violation of its obligations under the Nuclear
16

Non-Proliferation Treaty is a concern not only to America, but to

the world. When you take Iran’s nuclear activities, together with

Iranian President Mahmoud Ahmadinejad’s inflammatory statements concerning the elimination of Israel and his statements

against the west, it is clear to me that we need to keep our focus

on Iran and try to do everything that we can to make sure that

they do not move forward with nuclear armaments.

A nuclear-armed Iran would be a threat to the United States and

our allies around the world and would likely function to destabilize

the already fragile—very fragile—political situation in the Middle

East. I think most of us view that situation as unacceptable.

Let me be clear, however. The U.S. should make every attempt

to resolve the Iranian challenge through diplomatic and economic

challenges. This includes working with our Security Council partners in the United Nations to ensure Iran cooperates with nuclear

weapons inspectors from the International Atomic Energy Agency

and, pertinent to this hearing, expanding upon the economic sanctions against the Iranian regime that are already in place.

I believe S. 970 will work effectively to intensify the economic

pressure on Iran, as well as any country that assists the Iranians

in developing their nuclear sector. The bill provides for new sanctions and expands upon sanctions already in place under the Iran

Sanctions Act. It significantly curbs exceptions to current importexport bans, and also provides financial support for the peaceful

production of nuclear energy. With the passage of this bill, in my

view, the United States would send a clear message to Iran that

its pursuit of nuclear weapons will come at a significant cost that

they cannot afford.

As we examine issues related to this legislation, I have been very

interested in hearing your views on how effective or ineffective our

past efforts have been with respect to the Iran nuclear program. I

have a longer statement for the record, Mr. Chairman, and I will

submit that for the record.

[The prepared statement of Senator Salazar appears in the appendix.]

Senator SALAZAR. But let me ask a couple of questions to our witnesses. When we try to see what is happening in Iran, there have

been many of us who have been focused on what is happening with

the nuclear program for many years. It seems that we are not

being very effective in terms of getting them to cut back on what

they are doing. They are moving full speed ahead.

Part of it, I think, has to do, Mr. Gordon, with what you stated, which is that they are making $70 billion more a year now than

they were 5 years ago because of $105-a-barrel oil. When we look

at where the money is coming from, that is, financing the Iranian

nuclear enrichment program today, you speak about Russia, you

speak about China, you speak about foreign subsidiaries. Do you—

any of you—have a breakdown of the quantum for that foreign assistance that is coming to Iran to move forward with its nuclear enrichment program? We will start with you, Mr. Gordon.

Mr. GORDON. Senator, the vast proportion of Iran’s revenues are

from oil sales, oil and gas sales. More than 85 percent of Iran’s government revenues comes from selling oil and gas. That is, again,

why our leverage here is so limited, because, for all of the sanctions
17

we have imposed and for all of the sanctions the international community has imposed, there is not an oil embargo on Iran. It is selling oil. It is fungible. We do not buy Iranian oil, of course, but that

does not matter, because they can sell it to someone else. And oil

being fungible, as long as there are one or two countries that are

willing to buy it, they can sell it and the oil price is the oil price.

Senator SALAZAR. Do we know which of those two countries or

three countries—who is buying that $70 billion of oil from Iran

today?

Mr. GORDON. I do not have the list. I think the point I would

make is, it does not really matter because very few countries do not

buy any Iranian oil at all. But because most do—China, India, and

other Gulf States that do not have oil—the oil price is the oil price

and Iran gets this tremendous revenue.

Senator SALAZAR. Should we then, as we deal with this issue in

this committee and in this Senate, focus in only on the oil issue?

Or, when we start bringing in the foreign subsidiary support for

the nuclear enrichment program, are we bringing in the wrong target?

Mr. GORDON. Well, the oil issue—in an ideal world we would,

and we could, because if you really wanted to pressure Iran economically you would go after their oil exports. That is the only

thing, frankly, that would really have a major impact on Iran. The

reality is, I think no other country in the world would go along

with us in having a total ban on Iranian oil, especially with oil at

$100 a barrel. Iran exports 2.5 million barrels per day. If we were

to take that off, oil would go up to, I do not know what, $10, $20,

$30 more per barrel.

Senator SALAZAR. Thank you, Mr. Gordon.

Ms. Pletka, I would like to hear from you. I know my time is

about up.

Ms. PLETKA. First of all, when we talk about foreign subsidiaries

or foreign companies, we are not talking about their support for the

specific weapons programs, we are talking about their general support for the economy. I think that Phil is right. Clearly, if there is

a silver bullet out there, it is a total embargo of Iranian oil exports.

But there are, I think, other important points of weakness. I am

speaking quickly because I know your time is limited, as is mine.

Iran imports 40 percent of its gas. It actually imports it because

its refining capacity is so low. That is a real point of vulnerability

for Iran.

Going after that, working with our allies, working with Iran’s

neighbors that are exporting to it is, in fact, very useful. But also,

Iran is inter-linked into the world economy. We have, at AEI, a

compilation of all the companies that do business in Iran, including

companies that do business with the Iranian government, and specifically with the Revolutionary Guards. There are hundreds of

companies, and they do make it possible for Iran to be part of the

global economy. That is a point of isolation.

Senator SALAZAR. Ms. Pletka, I would appreciate it if you would

get a copy of that list to us, and I will have my staff in contact with

you.

My time is up. Thank you. Thank you, Mr. Chairman.

The CHAIRMAN. Thank you very much, Senator.
18

Senator Smith?

Senator SMITH. Thank you, Mr. Chairman.

To our witnesses, thank you all for being here. I think your presence here is motivated by the same factors that caused Senator

Durbin and I to introduce this bill back over a year ago, now. Obviously we see a sham democracy there, the outrageous antiSemitism that is expressed in the highest councils of Iranian leadership and their continued flouting of international law in this

reckless pursuit of a closed nuclear cycle so that they can

weaponize the rockets that have already been sold to them. I think

that leads us all here to look for what to do and to get beyond, or

at least to a conclusion, as Mr. Jefferson put it. As Ms. Pletka so

eloquently stated, the option is embargo, the option is war, or the

option is paying tribute. The focus of this is an embargo that is actually meaningful so we can avoid those other two most unacceptable options.

Shortly after I introduced this bill and we began signing up colleague after colleague—16 members of the Finance Committee are

co-sponsors of this, 70 members of the U.S. Senate, veto-proof majorities in both bodies—fortunately the administration then reached

out to me and said, what does it take to slow this down? I said,

implement it. They have substantially implemented many of the

features of the bill, and yet we continue to see this onward rush

towards a train wreck that is certainly millennialistic, at least as

I can imagine it.

But shortly after I introduced it I had a visit from a major European country and its ambassador to the United States who had an

earlier posting in Tehran. I posed to him this question. I said,

based on your experience among the Persian people, what is this

all about? Is this about the Jews in Israel or is this about the

Arabs in Arabia? He said, oh, it is no question, it is about the

Arabs in Arabia. That is their greater hatred, that is their greater

competition. Israel is more the excuse.

I wonder if you have any comment about his conclusion and, if

that is true, does this, the weaponizing of these rockets that Iran

has, not lead us to a nuclear arms race in the Middle East that we

have never contemplated before?

Ms. PLETKA. Senator, I think you are right in appreciating Iran’s

thinking about these issues, which is not, frankly, restricted to the

current leadership but was very much part of the Shah’s thinking

about his region. We just finished a study just observing what

Iran’s activities are in its own region, in Syria, in Lebanon, in Afghanistan, and Iraq. What you can see is that Iran is reaching its

tentacles throughout the Middle East, throughout its neighborhood,

throughout Afghanistan, linking countries into their electrical grid,

creating aide dependencies. It is the biggest exporter of electricity

in the area. Is that not a little bit strange?

Senator SMITH. Very.

Ms. PLETKA. Again, Iran has very broad ambitions. That is one

of the reasons why the Saudis in particular, but other Iranian

neighbors, view the program with such trepidation. It is another

reason why, as we think about the threat, we should not just think

about the bilateral threat but should think about what kind of a

nuclear arms race this will trigger. Saudi Arabia’s government has
19

made manifestly clear not just to the United States but to many

European leaders as well that if Iran succeeds in developing a nuclear weapon it will procure for itself nuclear weapons.

Senator SMITH. They will just buy it. They have the ability to

buy it.

Ms. PLETKA. They will buy it off the shelf. And then who is next?

Senator SMITH. And Egypt is clearly next. Is that your understanding?

Ms. PLETKA. I know that Egypt has expressed interest in it, but

we should also worry, frankly, about Syria and other countries as

well.

Senator SMITH. I wonder if any of you can speak to this. I mean,

obviously what we see is that moderates in Iran are not even allowed to run for public office. The mullahs set the ballot and the

Iranian people choose between radicals. How is this debate penetrating on the streets of Tehran? I mean, do the Iranian people understand the cost that they are paying and the cost they may yet

pay if they continue this? Do any of you have any sense of Iranian

public opinion on that?

Mr. GORDON. Senator, it is hard to get accurate public opinion

data in Iran. I think it is probably fair to say that if you had a referendum on the nuclear program in Iran you would have strong

support for having a nuclear program. The Iranian people do not

understand why other countries are allowed to enrich uranium and

they are not.

Actually weaponizing, going to a nuclear weapon, might be a different story. Of course, the government officially says they are not

pursuing a nuclear weapon anyway. But just the question of national pride, looking around the world at countries that have considerable use of nuclear energy, and frankly countries that have

nuclear weapons.

I think you mentioned this point of pride and nationalism. Iran

is a great and longstanding civilization. They look around not only

at the five recognized nuclear powers, but Pakistan, India, Israel,

and they say, why should we not as well? So I think, unfortunately

for us who are trying to persuade them not to, it is a popular thing

among the Iranian people.

What may be possible is to get to a point where they are satisfied

that they have expressed their right to the peaceful uses of nuclear

energy and master the technology of enrichment, but do not move

towards a nuclear weapons capability. That, taking it back to your

original point, is our job, to convince them that the cost of doing

that, as much as they might like to, would outweigh the benefits

that they perceive.

Senator SMITH. Mr. Chairman, I notice my time is up. I just

want to note as well that Russia, which holds itself out as a leading nation in the civilized world, is not being sufficiently helpful on

this issue. They could do a lot. They are not. As long as they are

not, they should not be in the WTO, or any other international institutions which assume a certain level of responsibility that they

are not demonstrating as it relates to Iran and this cataclysmic

event that they are helping to aid and abet.

Thank you.

The CHAIRMAN. Thank you, Senator.
20

Senator Lincoln?

Senator LINCOLN. Thank you, Mr. Chairman. Thanks for holding

the hearing. We appreciate the panel and your wisdom, joining us

and trying to come to some conclusion, or at least some action that

will work.

I, like my other colleagues here, have come to express the serious

challenges to the United States and to our allies that the Iranians

pose. Certainly their efforts in seeking to exert greater influence in

the Middle East through the funding of extremist groups, supplying weapons to extremists in Iraq, and certainly the continued

enrichment of uranium in the face of three U.N. resolutions requiring them to cease doing so, create concern for all of us. That is the

reason I, along with many of the others, am a co-sponsor of S. 970,

because I believe more has to be done.

We in the Congress and the administration, we have to do more

in terms of the pressure on Iran to abandon its pursuit of the highly enriched uranium. More punitive trade sanctions, in my opinion,

are an appropriate strategy, but I am not sure it is one that is

going to completely work, and you all have expressed that as well,

I think.

I also believe in some of what you have expressed, and that is

that economic pressures have to be coupled with strategy to work

through the kind of diplomatic channels that are necessary in the

international community to bring Iran into some compliance with

the U.N. resolutions. So I am sure today will not be the last conversation that we have on this, and I hope that you all will continue to offer your insight and opinions as we move forward on

what the positive benefits and what the drawbacks of S. 970 would

be.

I know that some of the members here on the panel have serious

concerns about the implications of passing the legislation. I guess

my question to you all would be, what, if any, or what else might

the members of the Senate Finance Committee and members of the

Congress do in particular to work to change Iran’s behavior in pursuit of the highly enriched uranium, recognizing that time is of the

essence?

Also, what impacts do you think there will be in terms of the deteriorating relations between the U.S. and Russia? What effects

will S. 970 have on that, which targets Russia for its cooperation

with Iran? What effect does that have on our U.S.-Russia relations?

I do not know if you all have answered that before I got here, and

I apologize if I am being redundant.

If we do, as a Congress, pass harsher unilateral sanctions on

Iran, does it give the administration, or even the next administration that comes along, greater leverage to influence Iran to cease

that nuclear enrichment? I do not see that necessarily as happening. But, anyway, your insight, particularly in terms of our relationship with Russia would be good, and any suggestions you

have to us as members of the Finance Committee.

Mr. REINSCH. May I?

Senator LINCOLN. Please.

Mr. REINSCH. This may not be a welcome response, but I have

to say, from my point of view—and I do not say this very often

about this administration, frankly—this is one area where the
21

President is doing the right thing, and the best thing the Congress

can do is to let him do it. He has perceived in this circumstance

that the best approach, because of the peculiar difficulties of the

Iranians, which have been very clearly explained by Ms. Pletka

and by Mr. Gordon, is multilateral.

How do we get the Russians and the Chinese in particular, and

the Japanese who are the ones who are engaging in a lot of economic activity in Iran, along with a number of European countries,

to all move in the same direction? The President has concluded

that we need to do that, and I think his strategy has been working

with not yet 100-percent effectiveness, but clearly making progress

in bringing them along. It is a fair point that maybe it is two steps

forward, one step backwards, and maybe some months it is the reverse, one step forward and two steps backward. But we are making progress.

We have a number of Security Council resolutions, and the Russians and the Chinese, as Mr. Gordon had pointed out, have begun

to evolve in the direction that we want. I think that is the way to

get there. One of the things that is required is some degree of patience in allowing the administration to continue to do what it has

been doing, because it has been having perhaps not the success you

want at this point, but it is making progress.

One of the biggest problems with this bill is that you put into

statute things that would remove the President’s flexibility and

would make it harder for him to do that. The President should be

able to, if he sees an opening down the road, engage in some kind

of direct contact with Iran, and he should be able to, I think, provide some kind of an olive branch or make some gestures should

circumstances warrant.

This bill would effectively preclude that and would lock the

President into a framework in which essentially only Congress

could remove the sanctions that have been imposed. I think what

you need now is flexibility and nuance and not a black-and-white

situation. The problem with this bill is that it provides the latter

and takes away the former.

Senator LINCOLN. Well, do you think that this President would

engage in that?

Mr. REINSCH. Pardon me?

Senator LINCOLN. Do you think that this President would engage

in that outreach or contact or negotiation?

Mr. REINSCH. Not now. He may run out of time, under the circumstances. But you are not legislating for this President; you are

legislating for the long term.

Senator LINCOLN. No, you are right. So you think it is equally

as important to have that flexibility for future administrations as

well?

Mr. REINSCH. Yes, ma’am, I do.

Senator LINCOLN. Yes. Anybody else?

Mr. KITTRIE. Yes. I think S. 970 would, on the whole, have a

positive impact with respect to Russia. I think it would send Russia

a strong message that it cannot both shield Iran and conduct business as usual with the United States. However, it could probably

use—and this goes back to a question earlier, I think, from Senator

Baucus, to tweak the bill. The formulation of all nuclear assistance
22

to Iran would appear to cover both the Russian-built Bushehr reactor and also Russian activity under the proposed deal by which

Iran would cease its enrichment activity in exchange for Russian

enrichment at Angarsk.

As currently written, this provision would mean that, even if

Russia voted in the Security Council for much stronger sanctions

on Iran and limited its nuclear cooperation with Iran to the current

Bushehr arrangement, the U.S. could not enter into a 123 agreement with Russia absent congressional amendment of the provision. So I would say that, in light of developments regarding

Bushehr, I would say that S. 970 should be revised to reflect that

the foremost Russian obstacle to stopping Iran’s nuclear program

is Moscow’s blocking of strong sanctions in the Security Council.

Revision of the provisions, a slight tweak there, would enable the

administration to more usefully deploy it as leverage in achieving

U.S. goals for Iran-related diplomatic negotiations with Russia.

Mr. GORDON. May I just add, Senator, I did not jump in because

I agreed with everything Mr. Reinsch said. But if I might just add

a word, I have great sympathy with Congress’s desire to do more,

which is what you expressed. You are all right to want to do more.

Congress has already done a lot. Congress has put great pressure

on the administration and on allies. They know how Congress feels.

The risk is overreaching and doing things that would turn what

is right now general momentum towards the international isolation

of Iran at the Security Council and with our allies in Europe and

elsewhere into a spat among allies rather than putting the pressure on Iran. We have been there before. We were there in the late

1990s, we were there in the early 2000s. I think we are in a better

place now. You asked, and I agree. I think, to the credit of the

Bush administration over the last few years, it has started to implement this approach, and it has had some positive effect.

Since finally agreeing to support the European Union diplomacy

with Iran in 2005, they have taken steps to show Iran that there

could also be incentives for cooperating on the nuclear dossier, and

they have made clear—no, I do not think either that this administration will be ready to talk to Iran, but they have taken a step

towards talking with Iran about Iraq. They have said if Iran suspended enrichment they would talk to Iran about the nuclear issue.

I would actually suggest going one step further and talking to Iran

even without suspension of uranium enrichment.

Last point. I am somewhat more hopeful, even though I agree

with the general sentiment that neither engagement nor containment is working particularly well. Iran is not Saddam Hussein’s

Iraq, and it is not Kim Jong-il’s North Korea. It is a much more

diverse and vibrant society, with a lot of business people and young

people and bloggers and anti-clerical activists. There is a chance

that over time, if we do show that this country, under the right circumstances, can be integrated into the international community, I

think we have a chance of persuading them that it is in their interests not to cross that threshold and become a nuclear weapons

state.

Senator LINCOLN. Can I just follow up on that? You mentioned

the middle class and the working class there as really the democracy movement in Iran. How do the sanctions affect them? I mean,
23

what I am hearing from you from my first question was, just have

patience. When I say what can we on this committee do, you are

saying, be patient, let things work as they are going. But if this

were to become law, what do those sanctions do to pro-democracy?

The CHAIRMAN. Briefly, please. Very briefly.

Mr. GORDON. Very briefly. It cuts both ways. I think there is an

advantage of the sanctions because they do frustrate Iranians and

they are a signal that the international community is unhappy

with their regime, as they should be.

The CHAIRMAN. Thank you.

I would like to focus a little more on the concern that many have,

that a provision in the bill expands the import ban to include goods

that are substantially transformed in third countries in a manner

that may violate the World Trade Organization’s rules. In fact, on

the surface I think it is pretty clear that it does.

The next question is what to do about that. So my question really

is, how can that provision be modified? I think we do not want a

big spat among various countries claiming that this is WTO-inconsistent. How can this be modified and still be WTO-consistent?

Anybody who wants to respond. Ms. Pletka, I will ask you that

question.

Ms. PLETKA. I could see you looking at me, and I was hoping you

were not going to call on me. I am not a trade lawyer, and I am

not even going to pretend to provide a good answer for you on that.

The CHAIRMAN. All right. Let me turn to anybody else who might

want to respond. Mr. Gordon?

Mr. GORDON. I am not a trade lawyer either, but I have an opinion anyway.

The CHAIRMAN. Well, go ahead.

Mr. GORDON. Which is, take it out. I mean, as we have discussed,

Iran is making $100 billion a year in oil revenues. The idea that

some marginal tweak that could lead to a huge trade spat with allies in a WTO suit is worth doing in order to cut down by a tiny

fraction their revenues, I think that would be out of balance.

The CHAIRMAN. Professor Kittrie, your view on that point?

Mr. KITTRIE. Yes. I would say that, from what I can tell, that

particular provision could use a little bit of tweaking. The language

there could perhaps be correlated with the language that we use

in our Customs law having to do with articles of Iranian origin. I

also would note that that provision may go a little bit too far. As

Mr. Reinsch mentioned, if in fact the reference there to medicine

does not include medical devices, I would support including medical

devices which are not dual-use. I also compared that provision last

night with the provisions of IEEPA, the International Emergency

Economic Powers Act, that I used to implement when I was a lawyer at the State Department.

That comparison reminded me of a few more items that may

need to be exempted from section 7 when you mark it up, which

include postal letters, informational materials such as publications

and films, and, so long as we are going to permit travel between

the U.S. and Iran, the importation of accompanied baggage for personal use and such.

So long as such changes are made to the import and export provisions of section 7, it seems to me that it would have a positive
24

effect in closing off the 200 or so million dollars a year in trade

that we currently have with Iran, it would send a message to our

allies that we are not being hypocrites here, and also would ensure

that S. 970 would not harm humanitarian interests, which was a

concern expressed earlier.

Mr. REINSCH. May I comment as well?

The CHAIRMAN. Absolutely.

Mr. REINSCH. Two points. On the last point that Mr. Kittrie

made, I want to second that, that this bill stomps all over the Berman amendment, which is the provision in IEEPA that permits the

flow of information and books and things like that, and this bill

would seriously interfere with that, which would make it harder for

us to communicate our message directly to the Iranians.

On the question you asked specifically though, looking at the language—it took me a few minutes to find it—certainly I would prefer Mr. Gordon’s solution, which is to take it out. That is the simplest thing. I think the narrower way to address the WTO program

that you described is to simply remove the word ‘‘indirectly’’ and

limit the prohibition of imports to direct imports.

The CHAIRMAN. But is that not somewhat of a restatement of

current law?

Mr. REINSCH. Well, it is a restatement of current executive order.

The CHAIRMAN. All right.

Mr. REINSCH. And that is the significant difference I was commenting on earlier. I would not be a fan of codifying these things.

One of the advantages of being old like me is you remember past

cases. I remember when the Congress, in its wisdom, banned the

import of coffee from Uganda because of Idi Amin, which seemed

at the time like a perfectly sensible thing to do. The only problem

was, because it was codified, it took Congress 2 years after Amin

had left to repeal the ban.

So at the very time that you wanted to help the Ugandan economy you had locked into place statutory prohibitions, instead of

giving the President the flexibility to deal with changing circumstances. That is one of the problems here. But the WTO problem that you have described, I think, would be addressed simply

by removing the word ‘‘indirectly.’’ That does not address the other

problems.

The CHAIRMAN. Correct.

Before we adjourn, does anybody want to say something that

needs to be said? That is, has anybody said something so outrageous it deserves a response, or something that was left unattended to but is very important?

Ms. PLETKA. I do not want to use the time to snipe at my colleagues. I do want to say something that is not said often enough,

and it is actually in sympathy to Bill Reinsch who is sitting here

by himself ideologically, a little bit. There is a tendency in these

sanctions legislations to go after low-hanging fruit. It is always

easier to sanction our friends and it is always easier to sanction

countries which have transparent systems.

In other words, we know Deutsche Bank is doing business in

Iran. We know Commerzbank is doing business. We know USB. Actually, these banks have all since pulled out. We are really not sure

about Chinese companies doing business in Iran, and ditto for Rus-
25

sian companies, ditto for a whole variety of other states where

there is much, much less transparency. And because of that lack

of transparency, we tend to pay less attention to their transgressions, and that is not right.

So all I would encourage—and I have made this point in the

newspapers as well—is that as we move forward in—rightly, I believe—tightening sanctions, in closing the loopholes in our own law

about American subsidiaries, is that we pay close attention not just

to the easy ones, the Europeans who are selling tankers, or even

the South Koreans who are selling tankers, but that we also pay

attention to countries like the United Arab Emirates, where most

of the money that has been squeezed out of Iran has now gone, and

other countries where there is far less transparency. I think that

is a very important test, and it is a hard one.

The CHAIRMAN. Good point.

Anyone else? Mr. Kittrie?

Mr. KITTRIE. Yes. I would say, just to add to what Ms. Pletka

said, we do know what Chinese companies are doing, and Chinese

companies are not being helpful at all. During the week prior to

the passage of the first resolution, Resolution 1737, in December of

2006, China’s national offshore oil corporation signed a $16-billion

agreement to develop Iran’s North Pars Oilfield.

We need to think about the fact that those deals fall smack within the Iran Sanctions Act criteria for sanctioning investments. One

disincentive we might use to help influence China’s approach would

be for the executive branch to consider going ahead and imposing

Iran Sanctions Act sanctions on these Chinese companies.

With respect to the bill before us, unilateral sanctions are indeed,

as has been mentioned, almost inevitably less effective than multilateral sanctions. We do need to be pushing multilateral sanctions

forward at the same time we push forward unilateral sanctions.

However, contrary to what Mr. Gordon said, it seems to me that

the weak multilateral sanctions imposed thus far in Iran by the Security Council are simply not up to the task of slowing Iran’s nuclear program.

The calculus is not going to change unless we make it change,

unless we make it clear to foreign countries and companies that

the profits to be made in Iran from continuing to do business with

Iran will be dwarfed by the profits they will lose in the United

States from continuing to do business with Iran. We cannot allow

our National security to be held hostage to the lowest common denominator of the U.N. Security Council. S. 970 would help return

our fate to our own hands.

The CHAIRMAN. Generally, a response prompts a counter response. I see you raising your hand, Mr. Reinsch.

Mr. REINSCH. Well, I was not going to say anything, but I cannot

let one comment that was made pass. I think Ms. Pletka’s point

about low-hanging fruit and lack of transparency is a good one, and

it is an important one. I just urge the committee as it moves forward on this to also remember that, even when things appear to

be transparent, they are not always.

Much of what we know about foreign investment in Iran is the

product of very visible press conferences in which the deals like the

one that Mr. Kittrie just referred to are announced with consider-
26

able fanfare. If you talk to people at the State Department, as I

have, about this, there is a big difference between the announcement of a signing and the announcement of a deal and the actual

transfer of any money.

First of all, a number of these deals are announced three or four

times for a variety of purposes, even though it is the same deal.

A number of them end up not being consummated and end up not

having the transaction actually occur. One of the problems that you

get into—and Mr. Kittrie, in his original testimony, alluded to

naming and shaming—is we end up naming and shaming a lot of

people who actually have not done anything because we do not

have sophisticated enough techniques to figure out what is actually

happening.

So I would urge the committee as it moves forward, to operate

on the basis of very clear factual information about what is going

on, and I encourage you to work with the State Department in that

regard, because they have a lot of information. They may not want

to share it with you, but they have a lot of information, and I

would encourage you to try to extract it from them.

The CHAIRMAN. I thank you all very much. This bill clearly addresses one of the most important issues of our time, that is, nuclear proliferation in the world, especially in this case, Iran. You

all are very thoughtful in your comments and your observations.

Again, thank you for taking the time.

The hearing is adjourned.

[Whereupon, at 11:25 a.m., the hearing was concluded.]
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