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U.S. Urges Financial Sanctions On Iran

The potential side effects have led European officials to turn the pressure back on Washington to hold direct talks with Iran.

"The sanctions could make Iran miserable, and Iran can respond by making everyone miserable back," said one senior Western official, who consulted on the issue recently with Rice. "In the end, the whole world is miserable and Iran gets to keep its nuclear program."

Although sanctions would not be directed "at the country or people of Iran," the measures "can be expected to bear second-order consequences for the people of Iran," according to a footnote on a Treasury Department task force memo sent to Rice last month.

The task force, made up of financial investigators, analysts and intelligence officers, is part of a growing government effort -- at the White House, the State Department, the CIA and the Pentagon -- focused on Iran. While some parts of the administration are studying prospects for negotiations with Iran -- an ally turned enemy nearly 30 years ago -- others are preparing for increased isolation and the possibility of a military strike against nuclear installations.

For four years, President Bush has sought to isolate Iran and roll back its nuclear energy program, which could provide the Islamic republic with a pathway to a nuclear bomb. Over that time, Iran's capabilities and nuclear expertise have only advanced, while soaring crude prices have brought the oil-rich nation additional hard currency.

The situation has emboldened the Iranians and left the White House searching for leverage. Bush administration officials believe that one approach may be to prevent Tehran from spending money on the open market.

European governments have spent months considering travel bans and arms embargoes on Iran, both of which would be largely symbolic. U.S. officials now hope the Europeans will impose sharper sanctions on Iran, at some cost to themselves, as diplomacy fails to yield results.

In interviews, U.S. officials described the plan as a new approach to international sanctions and said they believe it could succeed if implemented correctly.

"I would argue that targeted sanctions are designed to have minimal effects on people," Levey said, "and more designed to have effect . . . on the government and the people in the government. We are trying to design things that are not intended to inflict harm on the people." Undersecretary of State R. Nicholas Burns and Levey first briefed their Western counterparts on aspects of the proposal at a meeting last month in Moscow.

But the impact on U.S. allies could be steep as well. A Treasury Department memo recently predicted that Britain, which does not import Iranian oil, faces a low level of financial risk if it agrees to implement the sanctions plan. Germany, which imports 1 percent of its oil from Iran, and France, which gets 6 percent, are deemed at medium financial risk, whereas Italy and Japan would be taking the largest risks. The assessment is considered internally "an initial -- first blush -- estimate based on each country's overall volume of exports to Iran, dependence on Iranian oil and degree of investment in Iran oil projects," according to the Treasury memo.

Japan exports nearly $1.3 billion worth of goods to Iran, has nearly $2 billion worth of oil projects there and gets about 12 percent of its oil from the country, which is approximately equivalent to what the United States buys from Saudi Arabia. Italy buys 9 percent of its oil from Iran, and has $3.2 billion in oil investments in the country and $2.7 billion worth of exports to Iran.

Originally, U.S. policymakers discussed plans for sanctions through the U.N. Security Council, but that has proved more difficult than convincing a handful of allies.

The new plan would operate outside the council's authority and would "not depend on recalcitrant countries," identified in one government document as China and Russia, which have resisted the idea of U.N. sanctions. But if they did not participate, Beijing and Moscow would also be spared any financial burden and be free to pick up lost European business with Iran.

In the hopes of encouraging other governments to act, the Treasury Department has pursued a secondary path, approaching private-sector banks in Europe and Japan, one by one, in the hopes that they will reject Iranian business on their own.

A similar strategy was successfully employed with a bank in Macau, off mainland China, that was doing business with North Korea.

So far, four financial institutions have signed on to the U.S. effort. "These institutions are looking at which way this is headed and are asking themselves if they want to get in front of this wave," Levey said.

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