Battle Rial

To end Iran's nuclear program, it's time for America to step up its economic warfare.

Sanctions are convulsing Iran. In the past seven months, the Western turn from targeted sanctions to broader economic warfare has presented the Iranian regime with perhaps its greatest economic challenge since the Iran-Iraq War.

A looming European Union oil embargo, which goes into effect on July 1, along with additional U.S. pressure on Iran's customers to reduce their oil purchases, will make matters worse for Iran's leaders. The situation is already dire: Iran suffers from hyperinflation, stagnant growth, and a crumbling currency. And oil revenues, which constitute 80 percent of Iran's export earnings and half its government budget, have already dropped almost 40 percent, year over year.

Yet, sanctions have so far failed to achieve their intended objective of forcing Iranian Supreme Leader Ali Khamenei and his Islamic Revolutionary Guard Corps (IRGC) to agree to halt their nuclear weapons program. U.S. President Barack Obama and his European counterparts built the sanctions regime to increase their leverage at the negotiating table and cause financial desperation on a scale to match the determination and duplicity of the men who have spent three decades and billions of dollars to develop every component of an Iranian nuclear-tipped missile.

But the painful truth is that Western sanctions have been underwhelming. Three rounds of failed talks in Istanbul, Baghdad, and Moscow have shown that the United States and its allies do not yet have the kind of leverage that could make Khamenei yield and agree to meet Iran's obligations under international law. In spite of cyberattacks and sabotage, the supreme leader has reason to believe that Iranian physicists can construct a nuclear bomb faster than Western countries can undermine his economy.

For sanctions to work, Khamenei must be forced to make a fundamental decision between his nukes and his regime. While Obama and his allies in Europe have made no effort to overturn Khamenei's regime -- notably doing nothing to support the Green Movement in the summer of 2009 -- they have wanted him to think they will.

The best evidence that Khamenei fears what a massive U.S.-led economic offensive could do against his country is the quiet in the streets of Iran. A leader confident that his citizens would rally around the flag against Western sanctions would be busing in hundreds of thousands of Iranians from the towns and villages, where the regime's faithful live, to burn Obama in effigy. Khamenei hasn't done this. Since the summer of 2009, the regime has lived in fear of massive street demonstrations that could easily turn against him and the regime.

There is no denying that sanctions have had a devastating effect on Iran's economy. Iranian oil is now a distressed asset -- to sell oil, the National Iranian Oil Co. has been forced to provide Chinese traders discounts of $20 per barrel or give them extended payment terms. And according to the International Energy Agency, 67 million barrels of Iranian crude -- more than a month of normal Iranian oil exports -- are currently sitting in storage, looking for a home. All told, Iran is losing an estimated $4.5 billion per month in oil revenues, losses that will only increase if global oil prices continue to fall and the European embargo and U.S. oil sanctions take their toll.

But it's still not enough to make the mullahs abandon their nuclear program. Even a staggering 39 percent drop in oil revenues compared with 2011 would still net Iran $44 billion this year, according to Reuters's estimates. With between $60 billion and $105 billion in foreign currency reserves, Khamenei's economic expiration date -- when his cash hoard falls low enough to set off a massive economic panic -- may still be far off.

If Obama wants to bring that date closer, he should make it clear to the supreme leader that he will do everything in his power to destroy Iran's energy wealth. Obama and his allies should adopt an idea contained in legislation introduced by Rep. Ted Deutch (D-Fla.), Rep. Robert Dold (R-Ill.), and Sen. Mark Kirk (R-Ill.) that would blacklist the entire Iranian energy sector as a "zone of primary proliferation concern," preventing international companies that do business in the United States or the European Union from doing business with it. The Obama administration should also designate the Central Bank of Iran as an "entity of primary proliferation concern," barring firms from transacting with it as well.

There is precedent for such a decision: U.N. Security Council Resolution 1929, passed in 2010 with the support of Russia and China, explicitly notes a "potential connection" between Iranian oil and gas revenues and "the funding of Iran's proliferation-sensitive nuclear activities." In 2011, the Obama administration declared Iran's entire financial sector a money-laundering threat because of its role in supporting proliferation and terrorism, laying the groundwork for the limited sanctions against Iran's Central Bank that passed in December 2011.

Sweeping action along these lines is the only way to counter aggressive Iranian attempts to subvert international sanctions. For the past seven years, the U.S. Treasury Department has sanctioned hundreds of financial and commercial entities controlled by the IRGC, but Iran can spin off new front companies faster than Treasury officials can target them, conjuring up "clean" entities with which international companies can maintain their business relationships.

Blacklisting Iran's entire energy sector would solve that problem, prohibiting business dealings with every entity involved in it, both inside and outside the country. This would include the National Iranian Oil Co. and its many subsidiaries, the former National Iranian Tanker Co. (now known as NITC), and hundreds of other entities and front companies. Foreign companies that continued to do business with Iran's energy sector would face U.S. sanctions that could cut them off from access to the much larger American market.

Central Bank sanctions should also be extended beyond formal financial institutions, targeting foreign exchange houses in the Persian Gulf that assist Iran in accessing hard currency, gold suppliers that allow countries like China to pay for Iranian oil in gold in lieu of hard currency, companies that provide services to the Central Bank of Iran for the printing of the Iranian currency, and alternative payment and settlement mechanisms, like the Swiss-based Iranian company Naftiran Intertrade Co., which Iran is using to funnel funds to its Central Bank.

This step would also eliminate any ambiguity about what energy transactions are permissible with Iran. For example, it would target the Swiss company EGL's $22.5 billion, 25-year purchase contract for Iranian natural gas, which may still be permitted under current U.S. law as long as it doesn't route funding through the Central Bank of Iran or a designated Iranian financial institution.

Washington and its European allies should make some allowances for oil sales to enable Iran's current oil buyers to find alternatives. Current U.S. sanctions laws give the president the authority to provide exemptions to countries buying Iranian crude if they can demonstrate that they "significantly reduced the volume of crude oil purchases from Iran."

But too much Iranian oil is finding a home, and the United States should raise the threshold for these exemptions dramatically. So far, the Obama administration has granted exemptions to 18 countries for reductions in oil purchases that reportedly range from 11 to 22 percent.

These exemptions now appear much more generous than they need to be. Oil prices are dropping as new Saudi, Iraqi, and Libyan oil production has increased world capacity, the European debt crisis and a slowdown in Chinese economic growth rates have put a dent in world oil demand, and the United States has witnessed a much larger than expected decrease in oil consumption and larger than expected increase in domestic oil production. This means that oil markets could absorb a more significant reduction in Iranian oil sales without increasing pressure on global oil prices. It also gives the Obama administration more flexibility to insist that Iran's oil buyers reduce their purchases at a much more rapid pace in order to qualify for the next round of exemptions, which need to be determined between September and December.

A comprehensive ban on the Iranian energy sector, with a much higher threshold for permissible oil purchases, would discourage most foreign companies from investing in Iranian energy or doing any other business. It would also put the remaining companies operating in Iran in a position to extract major price concessions from the Islamic Republic. Finally, it would cut Iran's overall oil and petrochemical exports and prevent Iran's enormous natural gas reserves from being developed at a time when its leaders can ill afford any more bad economic news.

Economic warfare should not be limited to the energy sector. The United States and its allies should also target other areas of the Iranian economy, including the automotive sector, which is the largest part of Iran's economy outside the energy industry. Aggressive action against sectors controlled by the IRGC, the tip of the spear in Iran's efforts to expand its influence throughout the Middle East, should be a no-brainer -- that means blacklisting the IRGC-controlled construction and engineering sector and declaring the IRGC-controlled Iranian telecommunications and technology sector as a "zone of electronic repression." The Obama administration also should impose an insurance embargo on the underwriting of any Iranian business activity that would otherwise be sanctionable under U.S. law.

The European oil embargo signals a new stage in the pressure campaign against Iran. The White House must build on this momentum, intensifying economic warfare in an effort to shake the Islamic Republic to its core. And, if that's insufficient to get Khamenei to strike a deal -- and there is unfortunately no evidence so far that it will -- the president needs to unite the country in moving beyond sanctions and preparing for U.S. military strikes against Iran's nuclear weapons program.



Putin's Got America Right Where He Wants It

And that's bad news for Obama.

Last week's G-20 summit was the first time U.S. President Barack Obama had seen his Russian counterpart, Vladimir Putin, since 2009. An account of their long, loveless meeting on the sidelines of the conference, along with photographs of their unhappy tête-a-tête, was splashed on the front page of the New York Times. The real story belonged in the obituary section: The "reset," Obama's attempt to mend relations with Putin's Russia, is dead. Syrian President Bashar al-Assad killed it.

But the two countries' fundamental disagreement about what to do about Assad, the dictator whose bloody attempts to suppress a popular revolt has resulted in the deaths of 14,000 Syrians, was only the last straw for a policy that has been on life support since its inception. On a vast array of issues -- ranging from human rights to Iran to the territorial integrity of the post-Soviet states -- Russian behavior has consistently been a thorn in the side of the United States and its allies. The reset only provided Obama with a justification to cover his retreat in the face of Russia's advance.

Let's start with Syria, where Moscow has vetoed two attempts to pass a U.N. Security Council resolution condemning the Assad regime. In the case of the May 25 Houla massacre, where over 100 civilians were murdered in cold blood, Russian Foreign Minister Sergei Lavrov claimed that "both sides evidently had a hand in the deaths of innocent people." This injected moral equivalence where none existed, since U.N. peacekeeping chief Herve Ladsous said that pro-regime shabbiha militias were likely responsible.

And yet, the Obama administration continues to try to woo the Kremlin. The White House's latest dead-letter hope is that a "Yemen model" of political transition in Syria, referring to the negotiated departure of former Yemeni dictator Ali Abdullah Saleh, might find favor in the Kremlin. It will not. The Kremlin is joined at the hip with the Assad regime: Lavrov, for instance, told Ekho Moskvy radio last week that asking Assad to step down is "infeasible" because the latter simply will not do so.

Perversely, while Putin blames foreign actors for undermining special envoy Kofi Annan's peace plan by facilitating the Syrian opposition, his state-owned arms dealer Rosoboronexport has continued to run weaponry to Assad. Most recently, it attempted to ship MiG-25 attack helicopters to Syria -- the transport vessel was turned around in the North Sea only after London, acting at Washington's request, got the vessel's British insurer to revoke its insurance. Instead of expressing embarrassment, Lavrov blamed the "unreliability of the British insurance system." Meanwhile, the Moscow-based think tank CAST anticipates that, in addition to those repaired copters, Russia will also eventually deliver MiG-29 fighter jets and even more advanced air-defense systems to Syria.

The hard truth is that the reset was doomed from the beginning by Russia's increasingly autocratic political system. The White House's outreach was founded on two phantom premises -- first, that former President Dmitry Medvedev was actually running the country rather than keeping the seat warm for Putin; and second, that Medvedev was the liberal modernizer that he claimed to be.

The men and women who have paid the price for Obama's gullibility on these points are the beaten-down Russian dissidents, whose fate used to matter to the United States. Even as they have begun the hard work of constructing a domestic opposition movement, they have been denied even token support by the White House. "I can't name any real changes in [U.S.] policy that were good for democracy and human rights in Russia over the past several years," Oleg Kozlovsky, a veteran activist with the anti-Kremlin Solidarity movement, told me.

"We have been hit heavily in the last couple of months with brutal detentions during protests, arrests, and searches and would have liked a firm reaction from the U.S.," said anti-corruption activist Natalia Pelevine. "We have not seen it. This is especially humorous in view of the much-promoted idea in Russia that the opposition is paid by the U.S. State Department."

Even the architect of the reset policy has learned the hard way how the Kremlin deals with the mildest criticism. U.S. Ambassador to Russia Michael McFaul, in a recent interview with Foreign Policy, expressed shock at how badly he's been harangued since his arrival in Moscow. "What I did not anticipate, honestly was the ... relentless anti-Americanism that we're seeing right now," he said.

McFaul seemed confused by the personal attacks: State television labeled him an agent provocateur set on fomenting a revolution in Russia, while a pro-Kremlin youth group compared him to a convicted child molester. He shouldn't have been. His predecessor, John Beyrle, vividly documented the scale and the intensity of state-directed anti-Americanism that he experienced as America's man in Moscow in a WikiLeaked cable written in November 2009, only a few months after the reset took hold. Although bilateral relations had improved, Beyrle wrote, a "cold war mentality" persisted in the minds of Russia's siloviki, the heads of the elite security and intelligence establishments. They are "ideologically and materially" threatened by the reset and have convinced themselves that the West is guilty of fomenting democratic regime change in Russia's neighbors.

In this atmosphere, is it really possible to pursue a genuine rapprochement? Beyrle warned of what McFaul now professes to find so remarkable: The FSB, the successor agency to the KGB, harasses U.S. Embassy personnel, the ex-ambassador wrote, slanders them in state-controlled media outlets and -- more insidiously -- traumatizes their spouses by suggesting that they have met with accidental deaths. U.S. government employees' homes were also routinely invaded and searched.

It might have been possible to justify a Faustian deal with Putin if the Russian leader had delivered on one of the most important international efforts of the day -- orchestrating international pressure on Iran to convince the mullahs to abandon their nuclear weapons program. In fact, Russia used its American-dealt hand on this issue to play a clever game of offering minimal concessions in exchange for maximum benefit.

Although Putin has helped build Iran's nuclear reactor at Bushehr and offered repeatedly to enrich its uranium in Russia, reset champions will say that securing his backing of U.N. Security Council Resolution 1929, which imposed new sanctions on the Islamic Republic and banned the sale of certain weaponry to it, was an indicator of his sincere commitment to ensure that the mullahs never get the bomb.

Yet the price of getting Russia and China on board meant that the resolution was watered down and never included a full arms embargo. The expert panel set up to keep track of the sanctions, moreover, is not allowed to publish its reports, a precondition Moscow negotiated that effectively hobbles the U.N. enforcement mechanism.

Russian obstructionism should come as little surprise, as the status quo of minimal sanctions and persistent international tensions over the Iranian nuclear problem keeps oil prices high  -- an economic boon for Moscow. And as European banks end their dealings with Tehran, little-known institutions such as the First Czech-Russian Bank have done a brisk trade, charging more than six percent per transaction.

Moscow has also served as Iran's arms dealer -- selling more than $5 billion in military equipment to Tehran in the past decade. Reset advocates declared victory in 2010 when the Kremlin cancelled its sale of S-300 anti-aircraft system to Tehran, which could be used to shoot down American or Israeli jets. By why would Putin ever would agree to sell such sophisticated missiles to the world's leading state sponsor of terrorism in the first place? Because his preferred style is to create a minor problem, then solve it and take a disproportionately long bow.

This is even true when it comes to the Northern Distribution Network (NDN) in Afghanistan. Since September 2009, NATO has been able to transport non-lethal supplies and equipment to Afghanistan through Russia. And since November 2011, when Pakistan closed the supply routes that ran through its territory -- payback for a U.S. drone strike that killed 24 Pakistani soldiers that year -- the NDN has grown even more crucial to the international war effort in Afghanistan.

But even Russia's professed support for the NATO mission -- a product of the Kremlin's own self-interest -- hasn't stopped it from making life difficult for the United States. Key Central Asian states' commitment to allowing the traffic to continue is in doubt -- largely because of Russian pressure. One cause for the latest bout of Russian attacks on McFaul is that the put-upon ambassador made the mistake of telling the truth during a recent lecture: Russia, he said, had "bribed" the Kyrgyz government in an attempt to close the U.S. military base at Manas, through which critical materiel is flown into Afghanistan. Kyrgyzstan's pro-Russian president has furthermore demanded that the United States leave Manas when its lease expires in 2014.

If the Kremlin's policies toward Syria, Iran, and Afghanistan suggest that it hasn't abandoned its Cold War aspirations of competing for global influence with the West, its attempts to exert influence in what it considers its "near abroad" should shatter any doubts. Russia has treated with contempt its 2008 ceasefire agreement with Georgia, which was meant to conclude the summer war between the two countries. Despite a clear demand that Russian forces withdraw from Georgian territory, Russia has actually upped its military presence in the breakaway territories of South Ossetia and Abkhazia. Nevertheless, the United States pressured Tiblisi not to block Russia's accession to the World Trade Organization.

Such accommodation hasn't helped rid Putin of the idea that Georgia belongs within Russia's imperial demesne. As the Economist's Edward Lucas notes in his new book Deception: The Untold Story of East-West Espionage Today, the GRU, Russian military intelligence, is tasked with waging destabilization operations in South Ossetia, Abkhazia and the rest of Georgia -- not the SVR, Russia's foreign intelligence service. For Putin, this is a domestic dispute, and the objectives are to weaken Georgia's defenses, keep it out of NATO, counteract its pro-European tilt, and establish a Russian "fifth column" inside the country. According to Lucas, the GRU has been credibly linked by U.S. and Georgian intelligence to at least a dozen successful or abortive terrorist attacks in Georgia, including one near the U.S. Embassy and NATO liaison office in Tiblisi.

Even though Georgia's accession to NATO is a remote prospect, that hasn't stopped Russian officials from suggesting it would be willing to spark a global war to prevent such an eventuality. Just last month, Gen. Nikolai Makarov, Russia's military chief of staff, said that Moscow might well resort to launching a "pre-emptive strike" on any NATO installation at Russia's doorstep. Talk like that hasn't been heard since before glasnost.

The Obama administration's response to these provocations has been rank appeasement, framed as adherence to the reset. The White House's campaign against the Sergei Magnitsky Rule of Law Accountability Act is the best-documented example of its ham-handed attempts at realpolitik. The act is named for a Russian attorney who was framed, arrested, and tortured to death -- during the reset -- for uncovering a $230 million tax fraud perpetrated by officials with ties to the Kremlin.

This legislation would not only impose travel bans and asset freezes against the 60 Russian officials implicated in Magnitsky case, but carries a universal clause that applies to gross human rights violators in any foreign country. This is why an ever-growing number of Russians supports the bill and Putin wholeheartedly opposes it. Remarkably, the White House sided with Putin.

The real letdown for Russians is that the attempt to quash the Magnitsky Act has revealed the true motivation of the reset. It wasn't about improving bilateral relations -- it was about flattering a mafia state into some measure of compromise, then kidding ourselves into thinking that the mafia state had changed its ways.

"The biggest problem of this administration's policy was their attempt to separate different issues," Kozlovsky, the opposition activist, put it to me. "They said that you could cooperate on, say, nonproliferation and disagree on human rights, and it's OK. It didn't work because Moscow doesn't think or act this way -- and also because all these things are connected."

But perhaps this assessment of the reset is too harsh. It has, after all, resulted in one undisputed achievement -- the disillusionment of the liberal intelligentsia, the one Russian group traditionally a stalwart American ally. Lilia Shevtsova, a senior fellow at the Carnegie Moscow Center argued in a recent essay in the American Interest that today's equivalent of the Soviet dissident isn't looking to Washington for moral or intellectual support anymore. Shevtsova expanded on her thesis to me via email. The new orientation, she wrote, "is not anti-Americanism in its traditional form. This is criticism of connivance regarding the Kremlin and rejection of the normative dimension in dealing with Putin. This attitude is becoming very popular among the liberals."

In other words, the reset has achieved the worst of all possible outcomes: It has made a renewed enemy of Putin, and it's alienated the best and brightest of our would-be allies too.