Swiss Cheese

The EU's "strong" sanctions on Iran are full of holes, but might they be enough to prevent the U.S. going to war?

BERLIN — It's been a big week for the EU. The union won the Nobel Peace Prize on Friday, Oct. 12, and if all 27 of its foreign ministers accept, it'll mark the first time its recipients won't fit on a dais. To cap it off, the Europeans finally united in their opposition to Iran's illicit nuclear activities, enacting a new round of sanctions for which Washington has long waited.

On Monday, Oct. 15, European diplomats passed a new round of economic sanctions on Iran that may bolster President Barack Obama's street cred on foreign policy as he heads into a dog-eat-dog battle for reelection -- and a key debate on international affairs with Mitt Romney early next week -- amid charges that his administration provided inadequate security for U.S. diplomats in Libya, where U.S. Ambassador Chris Stevens was killed in a terrorist attack last month.

Romney has been lambasting the administration for being weak on Iran. In October, he charged that Obama's Iran policy has endangered the United States and the world. Iran, Romney said, "has never posed a greater danger to our friends, our allies, and to us. And it has never acted less deterred by America, as was made clear last year when Iranian agents plotted to assassinate the Saudi ambassador in our nation's capital."

So has the EU come to America's rescue? The move to outlaw Iranian gas imports and place new restrictions on its financial system, decided at a meeting of European Union foreign ministers in Luxembourg, will certainly increase pressure on Tehran. And Iran's leaders are already feeling the pinch: Earlier this month, they watched helplessly as the rial plunged by 40 percent against the dollar, causing rioting in the streets.

Over the last two years, the White House has consistently lobbied the Europeans to put Iran in a vise -- part of Obama's signature multilateral foreign policy approach. While travelling with the president on the election campaign, White House spokesman Jim Carney promptly issued a response to the EU sanctions push: "Rallying the world to isolate Iran and increasing the pressure on its leadership so that they stop pursuing a nuclear weapon has been a top priority for the president."

Catherine Ashton, the EU's chief diplomat and lead negotiator with Iran, stressed that it is "very, very important that Iran is sent a very strong signal from this European Union foreign affairs council that we want to see a negotiated agreement."

But Ashton might be a bit optimistic about EU members' abilities to hold a tough line. European doves, including Swedish Foreign Minister Carl Bildt, continue to hold out hope for carrots over sticks toward Iran. "I think there are voices that sound like they want a war," Bildt said in connection with the new EU sanctions. "We don't want war."

Nonetheless, the EU's new sanctions package contains a ban on Iranian gas imports, new restrictions on Iran's Central Bank (CBI), and measures strengthening existing penalties on Iranian shipping. In addition, the EU's top diplomats froze the assets of 34 Iranian organizations -- including the National Iranian Oil Company and Iran's Ministry of Petroleum -- to prevent Tehran from raising funds it might divert to its nuclear program. It also singled out Iran's minister of energy, Majid Namjoo, for activities related to Iran's nuclear and ballistic missile programs.

According to the Wall Street Journal, the sanctions will turn the screws on Iranian bank transactions: "The level of the threshold will depend on the sector, with humanitarian trade in food and medicines having a ceiling of 100,000 euros. But for many other items, any transaction over 10,000 euros with an Iranian bank will need preapproval."

However, the sanctions announced are still targeted, not broad-brush measures that could grind Iran's economy to a halt.

The new EU measures build on an earlier round of restrictions on the Iranian economy. On July 1, European oil sanctions went into effect, preventing the energy-starved Europeans from importing more Iranian crude oil. BBC Persian business reporter Amir Paivar neatly captured the effect of the sanctions: "the European Union implemented an oil embargo to slow down the ‘blood circulation' in the Iranian economy. The financial sanctions approved today target the ‘nerve system."'

Compounding Europe's potent economic measures, its primary satellite provider Eutelsat also kicked official Iranian media off its outlets. Eutelsat spokeswoman Vanessa O'Connor said Monday that the satellite service will not permit the broadcasting of Iran's state-run Press TV and the Islamic Republic of Iran Broadcasting's nine TV channels and 10 radio stations because of "reinforced EU council sanctions."

And last week, perhaps in anticipation of new shipping sanctions, the world's largest container company, the Danish conglomerate Maersk, pulled the plug on deliveries and pick-ups in Iranian ports.

The economic toll that U.S. and EU sanctions have taken on Iran is breathtaking. The number of ships docking at Iranian ports has shrunk by more than half in 2012. The International Energy Agency reported that Iran's September oil production plummeted to its lowest levels since the Iran-Iraq War. And the EU's new sanctions will inflict further pain on Iran's interconnected energy and maritime industries by preventing EU citizens or companies from "transporting or storing Iranian oil or petrochemical products."

To Obama's credit, his strategy of economic warfare is making Iran bleed. Targeted sanctions caused Iran's oil profits to shrink to $2.9 billion in July, from $9.8 billion a year earlier. And the collapse of the rial has only compounded Tehran's economic misery.

On Oct. 8, Iran's Supreme Leader Ayatollah Ali Khamenei blamed sanctions for disrupting Iran's economy, and blasted the Europeans as "foolish" for moving forward with them.

The Obama administration has gone to great lengths to trumpet these successes. It touted its record in a fact sheet on the White House website earlier this year, and with the new EU legislation, it takes another step forward. Nonetheless, Republican presidential candidate Mitt Romney still sees Obama's Iran strategy as his opponent's Achilles heel. "Iran today has never been closer to a nuclear weapons capability," Romney said in an October address at the Virginia Military Institute.

When it comes to imposing sanctions, the Europeans have always lagged behind Washington, and Romney could capitalize on their fears of war to make them sacrifice even more of their trade with Iran. The EU's ability to influence Iranian behavior cannot be overemphasized. The 27-member union conducts annual bilateral trade of over 25 billion euros with the Islamic Republic. That's a lot more than just rugs and pistachios.

European economic giants like Germany export vital engineering equipment to Iran, including civilian equipment that can be used for military purposes. The German engineering giant Herrenknecht AG has apparently delivered heavy tunneling equipment to Iran, which could be used to construct underground nuclear facilities.

But even these latest sanctions leave it to individual countries to craft their own definitions of "dual-use" technologies, meaning the Iranians might manage to get hold of more than President Obama and his closest allies might wish.

All of which explains Israeli Prime Minister Benjamin Netanyahu's upcoming whirlwind tour of European capitals, on which observers expect him to push for even harsher sanctions on Iran. Upping the pressure on Europe has also been on the Americans' sanctions agenda for at least the past several months. In early September and early October, David Cohen, the U.S. Treasury's under secretary for terrorism and financial intelligence, visited the continent for a series of discussions on greater coordination with respect to Iran sanctions efforts.

Indeed, Europeans have traditionally shown skepticism about the morality and efficacy of sanctions. But there are changing moods on the this side of the Atlantic. One senior European official told the Christian Science Monitor that if sanctions brought about a new government in Iran, that would be "really the best result.... But for the moment, we are not seeing that."

The weakest link in the chain may be Switzerland, Washington's interlocutor in Tehran. After the Islamic Revolution in 1979, the Swiss assumed the role of representing U.S. interests in Iran. But speaking for Washington's interests isn't the same as acting in concert. In a public rebuke during the last round of EU energy sanctions on Iran, in June 2012, U.S. Ambassador to Switzerland Donald S. Beyer said "We expressed our disappointment. We would like them to [follow the EU on Iran sanctions]."

The Swiss have refused to implement the EU's full sanctions on Iranian oil, or crack down on the Central Bank of Iran and other key Iranian financial institutions. As a non-member of the European Union, Switzerland is not required to adhere to the EU's Iran policies, but as early as 2010, the Swiss business newspaper Handelszeitung quoted Austrian Foreign Minister Michael Spindelegger saying that the EU expected it would eventually adopt them. Two years later, the Swiss government has yet to come around.

The revelation in late September that the Swiss company Vitol had bought and sold millions of barrels of Iranian oil triggered concerns from the U.S. embassy in Bern. Since 2008, the U.S. has repeatedly rebuked the Swiss for their 18-billion euro energy deal with the National Iranian Gas Export Company. In sharp contrast to other major European energy companies, which have dissolved their oil and gas contracts with Iran, the Swiss-owned EGL still maintains a 25-year deal to import more than 5 billion cubic meters of Iranian gas every year. (EGL inked its contract with the National Iranian Export Company -- a subsidiary of the National Iranian Gas Company, which was placed on the United Kingdom's Proliferation Concerns List in February 2009.)

And like the Germans, Swiss companies are also reported to have delivered to the Iranians heavy earth-moving equipment, including technology suited for deep-tunnel building -- precisely the type of machinery used to construct underground facilities.

But tough as the new EU sanctions are, whether the package can actually affect Tehran's behavior is still open to question. Russia and China continue to trade with Iran, and remain spoilers at the U.N. Security Council, where they shield it from more dramatic international action. And the Obama administration hasn't succeeded in pushing the Europeans to issue blanket sanctions.

Meanwhile, the EU refuses to designate Iran's Islamic Revolutionary Guard Corps (IRGC) a terrorist organization, which would make it much harder for Iran's ruling elites to travel and raise money, isolating and perhaps forcing them to reconsider their recalcitrance. The IRGC is believed to control as much as 50 percent of Iran's economy.

Romney says that if he wins the presidency, he'll raise the pressure on Iran even further, making the Europeans nervous that he might attack Iran's nuclear installations, or look the other way if the Israelis do.

The Europeans know they won't have a free lunch from Obama, either, but they've nonetheless shown a willingness to help him. And Europe's new sanctions could take another bite out of Iran's economy, just in time for Obama to claim that they're working -- and that they're the last, best hope for peace.


National Security

Afghanistan's Fiscal Cliff

Kabul-watchers are rightly worried about what the withdrawal of Western aid money will mean for one of the most impoverished countries on the planet. But everyone's asking the wrong questions.

KABUL — Afghanistan is awash in foreign aid. In 11 years of war, the United States and its allies have funneled hundreds of billions of dollars into the country. As a result, international spending is now the biggest part of the economy, making Afghanistan an "extreme outlier" when it comes to aid dependency, according to the World Bank. In 2010, for example, it received about $15.7 billion in development funding alone. That's roughly equivalent to Afghanistan's entire gross domestic product. And with $9.4 billion in public spending versus $1.65 billion in revenues in 2010-11, the country is heading off a fiscal cliff as the international community scales down its involvement ahead of transition in 2014.

But what will be the political consequences of the money running dry? For the time being, international spending has forged a bought peace in Kabul, but many of the political settlements that keep violence at bay -- the agreements and expectations negotiated between elites -- could be upended by the transition.

To benefit from aid largesse, Afghans have had to cooperate. At the Kabul Bank, for instance, which was linked to major Afghan contractors employed by the United States and the International Security Assistance Force (ISAF), cooperation between competing factions enabled nearly $1 billion in insider loans to be siphoned off in recent years. The bank's financial arrangement illustrates the reigning political settlement in the country, uniting a number of national-level networks, most notably those of President Hamid Karzai, a southern Pashtun, and Vice President Mohammed Fahim, a northern Tajik. The Karzai-Fahim alliance has been crucial to stabilizing relationships between north and south in Afghanistan, and has been underpinned by the flow of international money, which provided an incentive to play along with the existing order.

This situation is replicated in hundreds of smaller, localized political agreements across Afghanistan. The country remains fragmented among rival networks of strongmen, many of whom have been co-opted by the central state and the international community. A drastic decline in funding will undoubtedly generate instability as the reigning political deals are renegotiated. Yet, even as the international community charges ahead with its exit strategy of increasing local troop levels and building bureaucratic capacity, there has been little serious analysis about the way its spending is interlinked with Afghan politics.

This week, I published a paper on Afghanistan's private security companies (PSCs) that examines the relationship between international spending and Afghan politics. Fed by the military surge, the PSC industry in Afghanistan has grown to a monstrous size, with high-end estimates of 60,000-80,000 employees in 2011, most of them armed Afghan guards. Unlike Iraq, the PSC industry in Afghanistan is largely dominated by Afghans, and as result it has become deeply interlinked with the Afghan government and local politics. Many of the newly rich PSC owners were former commanders who fought in the Soviet and civil wars and were able to mobilize networks of armed men. Some of them, like Matiullah Khan in the province of Urozgan, have become the preeminent strongmen in their areas as a result of their control over supply convoy and base defense contracts for the United States and NATO.

The PSC industry is one example of how international funding, by its sheer scale, has shaped the environment in which Afghan actors make decisions. As such, it has a lot to say about the frequently bemoaned corruption of the Afghan central government.

Take, for example, the critical southern province of Kandahar, where in 2001, the Karzai family was faced with the task of outmaneuvering its principal rival, Gul Agha Sherzai, who had from the beginning secured crucial access to U.S. military patronage. Because of his contracts with the U.S. military -- which allowed him to transform his private militias into "legitimate" PSCs -- Sherzai was initially beyond the control of the central state. But President Karzai eventually outmaneuvered him by empowering his half-brother Ahmed Wali to take control of critical contracting networks, by making patronage appointments, and using the muscle of the central government to intervene directly in private business in Kandahar.

The result was politically beneficial for Karzai, but detrimental to Afghanistan's fragile democratic institutions. The corruption of the central government, in other words, was a product of the structure and scale of the international intervention, which made contracting, not institutions, the determinant of political power in Afghanistan.

So far, the myriad donor nations, militaries, and non-governmental organizations involved in Afghanistan have mostly defined a successful transition as a technical exercise -- one defined by objectives like handing over security responsibilities to Afghan forces, enhancing the capacity of the civil service, and so forth. But the future stability of the country has less to do with Afghan troop levels than it does with whether Afghan powerbrokers can forge a more stable, indigenous order after the international money dries up. There is, perhaps, a silver lining to the coming economic decline: Afghan politicians will have to rely more on their own people and less on a top-down flow of dollars. But the reckoning will not be pretty.

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