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U.S. Urges Financial Sanctions On Iran
White House Tries to Enlist Europe, Japan

By Dafna Linzer
Washington Post Staff Writer
Monday, May 29, 2006

The Bush administration is pressing Europe and Japan to impose wide-ranging sanctions designed to stifle the Iranian leadership financially if diplomatic efforts fail to resolve an impasse over the country's nuclear program, according to internal government memos and interviews with three U.S. officials involved.

Developed by a Treasury Department task force that reports directly to Secretary of State Condoleezza Rice, the economic measures go far beyond the diplomatic pressure exerted by the Bush administration to date, both in scope of action and in objective.

The plan is designed to curtail the financial freedom of every Iranian official, individual and entity the Bush administration considers connected not only to nuclear enrichment efforts but to terrorism, government corruption, suppression of religious or democratic freedom, and violence in Iraq, Lebanon, Israel and the Palestinian territories. It would restrict the Tehran government's access to foreign currency and global markets, shut its overseas accounts and freeze assets held in Europe and Asia.

The United States, which has imposed unilateral sanctions on Iran for nearly three decades, would shoulder few of the costs of its ambitious new proposal. But internal U.S. assessments suggest that the sanctions could not hurt Tehran without causing significant economic pain for Washington's friends. That calculation has made the plan a difficult sell, especially in capitals such as Rome and Tokyo, which import significant quantities of Iranian oil.

"I have been very open with people about the costs that could fall on them," said Stuart Levey, Treasury undersecretary for terrorism and financial intelligence, in a recent interview.

U.S. intelligence agencies have spent months trolling through the personal accounts of Iranian leaders in foreign banks, analyzing Iranian financial systems and transactions and assessing how the government does its banking. They have calculated the amount of foreign investment at stake and even which charities have connections to the Tehran government.

Decades of stand-alone U.S. sanctions on Iran, North Korea and Cuba have failed to bring down those countries' leaders or modify their behavior. But U.S. officials believe that if other Western allies join in a sanctions pact, it could magnify pressure on Iran in much the same way that some Bush administration officials believe U.N. sanctions helped persuade Libya to give up its nuclear weapons program in 2003.

With Britain, France, Germany, Italy and Japan on board, collective sanctions would "isolate the Iranian regime" and see it "shunned by the international financial community," according to one internal Bush administration memo.

Under the plan, the major allies involved would freeze Iranian government accounts and financial assets in their countries, much as the United States did after Iranian students took over the U.S. Embassy in Tehran in 1979. Iranian officials who appear on lists being drawn up by U.S. officials would be prevented from opening accounts, trading on foreign markets or obtaining credit.

U.S. officials said in interviews that it is their hope the allies will carry out the punitive measures if Iran refuses a package of incentives the Europeans are preparing to offer in coming weeks.

So far, potential partners have not jumped at the plan, raised again last week in London by senior diplomats from Washington and European capitals. European officials who spoke on the condition of anonymity attributed their reluctance to a reliance on Iranian oil, domestic legal constraints and the fear of being dragged toward another conflict in the Middle East.

In an effort to minimize financial risks, the plan does not include oil or trade embargoes. But, according to a Treasury Department assessment, it could jolt world oil prices nonetheless if Iran responds by limiting exports. The internal assessment also predicts additional economic repercussions for Western allies, such as trade loss, and adverse effects for the Iranian people as their government is squeezed out of global markets and foreign banks stop taking their business.

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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