By Danielle Pletka, Omeed Jafari
Posted: Monday, May 21, 2007
Publication Date: May 19, 2007
As Iran's violations of its nuclear nonproliferation obligations have been revealed, U.N. sanctions have been imposed and economic pressures have been multilateralized. Since none of this has stopped Iran's seemingly inexorable progress toward nuclear weapons, many have concluded that there are only two realistic options: war or engagement.
In fact, it is too early to give up on multilateral economic pressure. There is significant unexploited potential for leverage against the Islamic Republic, because Iran is tightly bound to the world in a vast web of trade and financial relationships. Limited U.N. sanctions have yet to compel the rest of the world to exercise this leverage, and even America's closest allies have so far avoided jeopardizing lucrative trade and investment relationships with Iran. So before we despair about sanctions, we should redouble our efforts to persuade other countries to join us in applying meaningful economic pressure.
Dozens of nations pour billions worth of financial support into Iran. World-wide since 2000, we were able to document reporting on more than $152 billion worth of major contracts or agreements, and both private and government lines of credit--altogether 328 separate transactions--with Iranian entities public and private. The details compiled in our database (www.aei.org/IranInteractive) are not to be found anywhere, including the U.S. Treasury Department.
In a study of open source reporting since 2000, we found indications that 12 countries have used public export credit agencies--funded by taxpayers--to underwrite at least $6.48 billion worth of business with Iran. In addition, private banks have individually or through consortia funded at least $20 billion worth of multiyear foreign direct investment. And while the petroleum sector is clearly a magnet for investors lured by Iran's immense oil and gas reserves, the transportation, construction, power and telecom sectors were also attractive to outsiders.
Since 2000, French companies and financial institutions, working individually or through international consortia, have signaled their intent to ink deals worth more than $30 billion with Iran. China, Germany and Italy followed closely. These figures represent only published reports.
Most nations have imposed few restrictions on trade or investment with Iran; Washington's draconian bilateral trading sanctions (with carve-outs only for food and medicine) are the exception. Even U.S. sanctions are not airtight, permitting American firms such as Coca Cola, Pepsi and Halliburton to lawfully trade. (Halliburton has announced that it will pull out.) As a result, and despite a finding of non-compliance with its safeguards obligations under the Nuclear Non-Proliferation Treaty in 2004 and subsequent condemnations by the International Atomic Energy Agency, Iran continued to attract eager investors and, more importantly, generous financing.
In 2006, the U.N. Security Council, frustrated with Iranian intransigence over its nuclear program, adopted UNSCR 1737, banning the supply of nuclear-related technology and materials to Tehran and freezing the assets of key individuals and companies related to the enrichment program. UNSCR 1747, adopted in March of 2007, expanded the freeze, imposed an embargo on Iranian arms exports, and imposed additional visa restrictions. It stops short of a ban on financing, merely calling upon "States and international financial institutions not to enter into new commitments for grants, financial assistance, and concessional loans, to the government of the Islamic Republic of Iran, except for humanitarian and developmental purposes."
Notwithstanding IAEA condemnations and U.N. Security Council resolutions, between 2003 and 2005, Iran secured more than a billion dollars in World Bank financing for a public works projects. A variety of national export credit agencies were just as generous. In 2003, Sace (Italy's taxpayer-funded export credit bank) reportedly underwrote a $1.23 billion loan for power plant conversions throughout Iran. The next year brought $204 million more in financing for road construction.
Between 2000 and 2004, Germany's export credit bank Hermes underwrote nine projects in Iran (four in 2003 and 2004 after Iran's illegal nuclear program was revealed) covering everything from a billion-dollar French Credit Agricole loan to a thousand-megawatt power plant in Tarehsar. France's Coface was equally active, with five loans between 2000 and now worth nearly $2 billion. Other export credit agencies, in particular Japan's Bank for International Cooperation, were also active in funneling taxpayer financing to various projects, often with Iranian state-owned enterprises.
The value of this credit is difficult to pin down, as most such banks do not make public their records. However, reporting to the Berne Union, the International Union of Credit and Investment Insurers for the period through 2005, clocks Italy at $6.2 billion in total commitments for Iran-directed business, Germany at $5.4 billion, Korea at $1.7 billion, France at $1.4 billion and Spain and Austria close behind. Experts believe these numbers significantly under-represent Japan's export credits.
Lately, in response to U.S. pressure, European and Asian governments have begun to ratchet back export credits for business in Iran. U.S. Treasury Department officials report that two Swiss banks, UBS and Credit Suisse and Holland's ABN Amro, have pulled back, as has U.K.-based HSBC. Energy companies such as Baker Hughes, ConocoPhillips, and BP PLC have cooled on Tehran. Across the board, fewer investors are plunging into Iranian waters.
But overall business remains brisk and the value of new transactions has skyrocketed. In 2006, the value of publicly reported foreign investment in Iran, including multiyear investments, was slightly under $5 billion. For 2007, it is $45 billion because of several high-value projects. From Tehran's point of view, offering multiyear contracts and guaranteeing long-term cooperation with its foreign partners can mitigate the negative effects the overall decline in foreign investment has on its economy.
Since January 2007, the Netherlands' Shell, Spain's Repsol, Austria's OMV, China's Sinopec and Malaysia's SKS have each signed tentative agreements to develop Iran's gas infrastructure and exporting capabilities. The smallest of these contracts is an estimated $10 billion--and Tehran has secured for itself a long-term commitment from European and Asian companies to explore, extract and develop its energy resources. Additionally, Iran's foreign partners help guarantee that Iran will break into established European and Asian markets. For instance, last month Austrian state-controlled energy giant, OMV AG, signed an $18 billion energy contract with Iran. In turn, the Austrian government has agreed to import two billion tons of gas from Iran over the next 25 years.
For Iran, entirely dependent on the outside world for its economy, the news remains mostly good. American pressure on investors has had some impact, but where some have withdrawn, others have taken their place. Japan, Iran's prime trading partner until 2004, dropped to number nine in 2005. But China stepped in and is now Iran's main partner. Many export credit agencies and companies also avoid the kind of public scrutiny that might force a reassessment by withholding information.
But things can change. There is a growing divestment movement, modeled on the campaign against South Africa's apartheid regime. Florida recently passed legislation requiring the state pension fund to screen approximately $1 billion for holdings in companies doing business with or investing in Iran's oil sector. California and other states are headed in the same direction. Shareholders and taxpayers in Europe have been slow to awaken to the risks of business with Iran, let alone the risks of its nuclear weapons program. But awareness is growing.
Will a squeeze on Iran's pocketbook force a fundamental reassessment in Tehran? Even limited U.N. sanctions have prompted squabbling among factions in the regime. Iran is, after all, very dependent on the outside world for cash. Ratcheting up the pressure significantly may not dissuade the Supreme Leader of the wisdom of a nuclear weapons arsenal, but it could well slow the program down and enable the international community and Iran's own population the time to cobble together a more effective strategy to end the program or force the mullahs from power.
At the very minimum, understanding just who is underwriting Iran will provide accountability and increased leverage against one of the world's most dangerous regimes.
Danielle Pletka is the vice president for foreign and defense policy studies at AEI. Omeed Jafari is a research associate at AEI.