On November 27, 2009, the International Atomic Energy Agency (IAEA) voted a strong resolution that expressed “serious concern that Iran has constructed an enrichment facility at Qom [Iran] in breach of its obligation to suspend all enrichment related activities.” This censure of Tehran was preceded by a November 16 report that the IAEA reportedly suspects Iran may have additional hidden nuclear facilities beyond the previously undisclosed underground enrichment facility at Qom revealed during October. Parallel, clandestine nuclear fuel cycle facilities make sense. Without additional secret facilities, if Tehran enriched its low-enriched uranium (LEU) to bomb-making level, it would have to divert fuel from IAEA-monitored facilities.

The IAEA resolution and report coincide with Iran reneging on a tentative nuclear deal reached in Geneva during October. That understanding would have allowed Iran to ship some of its LEU out of the country for processing into fuel for use in nuclear reactors, but not nuclear weapons.

Heightened fears about Iran’s secret nuclear capabilities and stumbling nuclear talks point toward yet another round of UN sanctions. Previous U.S. and UN sanctions against Iran have been “smart” sanctions—targeting individuals and entities related to specific behavior, while leaving the overall economy unaffected. The next round, likely to involve restricting Iran’s imports of gasoline, represents a different approach, designed to have a macroeconomic impact to change the strategic calculus of Iran’s rulers.

The success of such sanctions centers on restriction of Iranian imports of refined petroleum depends on the degree of economic hardship and whether it threatens the regime’s hold on the population; economic impact depends on whether Iran’s refined petroleum suppliers participate in sanctions.

According to the Energy Information Administration, as of 2008, Iran’s internal refining capacity is 1.5 million barrels per day (bbl/d), with plans to increase capacity to about 3 million bbl/d by 2012. Today, consumers are allowed 32 gallons of gasoline per month at the 37 cents/gallon subsidized price. Of the approximately 400,000 bbl/d of gasoline consumed, Iran imported about 94,000 bbl/d by the end of 2007.

Gasoline is important among refined petroleum products because of regime subsidies. In times of gasoline scarcity, Tehran faces a difficult decision between reducing subsidies to raise prices and depress demand or keeping scarce gasoline cheap and allowing pumps to run dry. Either choice is politically perilous. During summer 2007, Tehran instituted limits on the amount of subsidized gasoline for purchase, resulting in riots at gas stations across the country. A substantial disruption in supplies of imported gasoline could precipitate additional riots and reinvigorate the Iranian opposition.

Unilateral options for the United States to restrict such imports are limited because Washington already prohibits U.S. persons from conducting business with Iran, particularly in the oil and gas sector; it is doubtful that import denial via naval blockade is among options on the table at this time for the Obama administration, although there is sentiment on Capitol Hill for blockade.

Unilateral steps short of blockade will have only a marginal impact. The Iran Sanctions Enabling Act of 2009, which passed the House and Senate during mid-October, would allow state and local governments to divest from companies doing business with Iran’s petroleum and natural gas sector. But divestment is unlikely to compel corporations to cut ties with Iran.

The Iran Refined Petroleum Sanctions Act of 2009 would have teeth, as it would authorize the President to deny U.S. government contracts to companies selling gasoline to Iran, and firms tangentially involved, such as shippers and those insuring tankers. Versions of the bill passed the House Foreign Affairs Committee and Senate Banking Committee.

But despite Reliance (of India) cutting off gasoline sales to Iran, it is doubtful that Royal Dutch Shell, Total, Lukoil, Zhuhai Zhenrong, or any of Iran’s other gasoline suppliers would sacrifice lucrative contracts with Iran because of a threat of being cut off from U.S. government contracts. Russia and China could lose economic investments in Iran if those countries participated in gasoline restrictions.

That said, the toughly-worded resolution of November 27 reportedly “had unusual backing from Russia and China, broadening the message of international displeasure with Iran that is frequently voiced in the West.” Beijing is apparently sensitive to the argument that without support for tough diplomatic stance against Tehran (perhaps including another round of sanctions), Israel is likely to take military action that would interfere with Chinese supplies from Iran. The jury, however, is out whether China would vote for sanctions that target Iran’s economy.

The United State has reportedly persuaded the UAE and Saudi Arabia to surge oil exports to China in the event Iran cuts off oil exports in retaliation for Chinese participation in gasoline restrictions. Given Saudi dedication to oil price stability, however, it is unlikely any surge in oil exports will be large enough to make up for China’s loss of Iran as Beijing’s number two supplier of oil.

Even if some of Iran’s international suppliers were recruited to stop selling gasoline to Tehran, the Iranian regime has options to plug any supply gap. For one thing, the IRGC is heavily involved in smuggling goods, oil and gasoline included.

Venezuela has signed a deal with Tehran to supply 20,000 bbl/d of gasoline, which would help plug any shortfall created by sanctions. If Russia so wished, it has enough excess refining capacity to plug the gasoline gap. And though there is always cause for skepticism about Iran’s technical-industrial prowess in the petroleum sector, Iran’s expansion of refining capacity to make the country self-sufficient in gasoline production could be in place by 2012, making import restrictions irrelevant: Any sanctions storm will only need to be weathered for about two years.

Given the Iranian regime’s continued refusal to surrender its nuclear programs in response to economic incentives and threats—what Iranian President Ahmadinejad has characterized as “chocolate in exchange for gold”—gasoline sanctions are unlikely to have enough impact to cause a strategic rethinking in Tehran.

This is not to say they should not be tried, because any economic pressure, even if it not decisive, is welcome. And producing consensus for another sanctions round is useful in case force has to be used later. But there is little leverage to compel international corporations to suspend gasoline sales to Iran, and Tehran has options for plugging the shortfall and dampening economic damage. Because of the low likelihood of success of another round of sanctions, the breakdown in nuclear talks, and the absence of a regime-change alternative focusing on the Iranian opposition, the West is moving toward having to decide between accepting an Iranian nuclear bomb or bombing Iran.

After months of seemingly fruitless effort, the Obama administration suddenly appears to have made progress both on improving Russian-American relations and on resolving the Iranian nuclear issue. After the Obama administration announced that it would not implement the Bush administration’s plan to deploy ballistic missile defenses in Poland and the Czech Republic aimed at protecting Europe from Iranian missiles—a plan strenuously opposed by Moscow—Russian President Medvedev recently suggested that Moscow might go along with tougher sanctions on Iran for not cooperating with the International Atomic Energy Agency (IAEA) and the UN Security Council on its nuclear program.

Further, at the P-5+1 talks with Iran in Geneva, Tehran has agreed to send “most” of the uranium that it has enriched to Russia in order to be converted into “desperately needed material for a medical research reactor in Tehran” (so reported the Washington Post). There have even been reports that Washington and Moscow are pushing Israel to cooperate with the IAEA, sign the Non-Proliferation Treaty (NPT), and give up its nuclear arsenal in order to create a Middle East nuclear-free zone that Iran would agree to be part of.

There may be far less here, though, than meets the eye. Instead of the advent of Russian and Iranian cooperation with the United States, what we may be witnessing instead is a limited convergence of Russian-American interests along with Iran making a show of cooperating with both Washington and Moscow in order to divide them.

Some in the West see Moscow’s willingness to consider increased sanctions against Iran now as a concession to Washington in return for canceling the BMD deployment plan for Poland and the Czech Republic. The Russian press, though, has claimed that Moscow’s agreement to allow the United States to transport lethal materiel to Afghanistan via Russian airspace was the Kremlin’s reward to Obama for canceling the East European BMD deployments, and that Russia is not altering its policy toward Iran at America’s behest.

Moscow would prefer that Tehran not acquire nuclear weapons, and could hardly ignore the American announcement that Iran has another enrichment facility in the vicinity of Qom that it had not declared to the IAEA (as it is bound to do). Moscow’s willingness to convert Iran’s enriched uranium, though, is not a break with past Russian policy. Indeed, Vladimir Putin has for several years offered to resolve the Iranian nuclear issue through Russia providing all the uranium enrichment services that Iran needs for an atomic energy program (performing the enrichment through a “joint venture” either in Russia, Iran, or possibly somewhere else). If both America and Iran accepted this proposal, Russia’s importance to both would be greatly enhanced: America would be reliant upon Russia to make sure Iran did not acquire weapons-grade uranium, and Iran would be dependent on Russia for restraining America vis-a-vis Tehran.

But while the Bush administration appeared willing to accept such a solution in the past, Tehran always responded that while it was willing to acquire some enriched uranium from Russia, it also insisted on enriching some of its own—which is exactly what is unacceptable to Washington and others. It was partly Putin’s frustration with Tehran for not fully adopting his solution to the nuclear issue that appears to have triggered Russian support for previous UN Security Council sanctions against Iran.

Of course, when Moscow did vote in favor of sanctions, the Iranian press denounced Russia in the bitterest terms for—once again—being willing to betray Iran in order to curry favor with America. Russian officials and commentators would then attempt to appease Tehran by claiming that Moscow had actually helped Iran by watering down the much harsher penalties that America and Britain had wanted to impose on it.

Something similar could occur this time as well. Tehran’s uncertainty about whether Moscow really might seriously cooperate with America in imposing harsher Security Council sanctions against it this time may well have motivated Iran to let Russia convert “most” (but not all) of its enriched uranium, in the expectation that Moscow will point to this “increased” Iranian cooperation as reason to delay imposing new sanctions against Tehran as well as watering down those already in place. Unlike the United States, which does not do much business with Iran, Russia has important economic stakes there, which it hopes to increase. While Moscow doesn’t want Tehran to acquire nuclear weapons, it doesn’t want to impose sanctions that would damage Russian economic interests in Iran either. What Russia wants, then, is to cooperate just enough with the United States to convince Washington that it is working with it responsibly (and perhaps obtain some concession for doing so) while at the same time preserving its important relationship with Iran.

And as for Russia encouraging Israel to cooperate with the IAEA, sign the NPT, and give up its nuclear weapons: Moscow could hardly do otherwise at a time when the Obama administration has intensified the longstanding U.S. call for Israel to do all these things. But perhaps unlike some in the Obama administration, Moscow knows full well that Israel is highly unlikely to dismantle its nuclear arsenal. Israel’s position, then, allows Moscow to argue that Iran cannot be expected to make progress on nuclear disarmament unless Israel does. Israel’s likely refusal to do so, then, is a convenient excuse for Moscow not to seriously join with the United States to push Iran on this.

The Obama administration is trying to get Iran, Russia, and Israel to all change their policies. But while Iran, Russia, and Israel do not like one another’s policies, none of them is willing to change its own. Because of the way that these three governments interact with one another as well as with the United States, it is highly likely that Iran, Russia, and Israel will each continue to pursue its preferred policies and thus frustrate the Obama administration’s efforts to get them to change them. Despite press reports to the contrary, then, Russian-American relations—insofar as the Iranian nuclear issue is concerned—are not likely to improve, and the Iranian nuclear issue is not likely to be resolved as a result of the Obama administration’s current diplomatic initiatives.

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President Obama continues to seek direct talks with Tehran in face of its suppression of Iranian oppositionists. But now is not the time to engage Tehran, given its violent suppression of the Iranian people and the American troop pullback from Iraqi cities.

If President Obama extends a warm hand toward the clerical-military rulers of Tehran after they assassinated protesting Iranians like Neda, he is likely to wind up with warm blood on his hands. Business as usual is unseemly in the face of cold-blooded murder. And if the President reaches out to Iran while he draws down from Iraq, he is apt to encourage Iranian proxies to step up their attacks against withdrawing American forces and an Iraq weakened by the U.S. drawdown.

Here are the foundations of an alternative approach:

Lead Europe. On July 1, the EU floated the idea of recalling its ambassadors from Tehran, which elicited a strong response from Iran. Tehran’s chief of staff of the armed forces said that the EU had “totally lost the competence and qualifications needed for holding any kind of talks with Iran.” Having just returned to Washington from trips to Paris, Brussels, and Madrid, I heard scores of European parliamentarians, national legislators, and Iranian dissidents clamor for strong American leadership to isolate the Iranian regime and pressure Europe to use its economic clout as leverage against Tehran.

Iran’s rulers seriously fear isolation, particularly from Europe, on whose trade the Iranian economy depends. The EU as a group represent Iran’s largest trade partner, receiving one-third of Iran’s exports, mostly in the form of energy products, to the tune of €11.3 billion in 2008. The value of EU exports to Iran was even larger: €14.1 billion.

Just as the EU suspended negotiation of a Trade and Cooperation Agreement with Iran in August 2005, when Iran resumed enriching uranium, Europe is now primed to curtail its trade with Iran. Now is the time to lead Europe in isolating the Iranian regime, instead of standing on the sidelines while the European Union ponders.

Engage the opposition. With the Islamic Revolutionary Guards Corps now pulling the strings for Supreme Leader Khamenei, any negotiation with the West only buys time to expand Iran’s stock of low-enriched uranium and expands the number of centrifuges at the Natanz enrichment facility. If the United States has any hope of actually halting that enrichment, Washington must take the lead in isolating Iran and engaging the regime’s opposition.

Leadership means speaking out on behalf of those Iranians protesting in the streets of Iran’s major cities, as well as reaching out a hand to Iran’s main opposition groups, including the “disloyal” Iranian opposition. Though much is made of “moderates” like Khatami and Mousavi, they are a “loyal” opposition, which accepts the legitimacy of the Islamic Republic’s system of governance in which clerics rule by divine right: Velayat-e Faqih.

Iran’s “disloyal” opposition proposes a democratic and secular state, in which responsibility for governing is taken out of the hands of unelected Ayatollahs in favor of democratically elected leaders. Such oppositionists include the Mujahedeen-e Khalq (MEK) and the parliament in exile of which the MEK is a part, the National Council of Resistance of Iran (NCRI). Based in Iraq and in Paris with extensive support networks in Iran, Tehran considers them serious threats to its survival.

Protect Iraq. As suppression of street politics in Iran dominated the news cycle, Iraq dropped below the radar screen of news. However, Iraqi developments have an impact on U.S. diplomatic leverage over Tehran. It was appropriate to withdraw from Iraq cities on June 30, because of the commitment the United States made in its Status of Forces Agreement with Iraq, but such troop drawdown is being portrayed as a retreat by Iran’s proxies in Iraq.

Muqtada al Sadr, the fiery Shiite militia leader, compares the American withdrawal to the revolt against British occupation forces in 1920. Iran is also likely to view the diminished U.S. role in Iraq as an opportunity to fill the vacuum with Iranian proxies armed with improvised explosive devices manufactured in Tehran. Iranian President Ahmadinejad stated as early as 2007, “Soon, we will see a huge power vacuum in the region. Of course, we are prepared to fill the gap.”

Having interviewed tens of Iraqi Sunni and Shiite politicians during a research trip to the area, I determined that a precipitous American withdrawal would provide the Iranian regime an incentive to pour additional arms to its proxies like the Muqtada al Sadr. Because of the possibility of Iran misperceiving the United States as weak in Iraq, it is even more important for the Obama administration to replace its “wait and see” Iran policy with concrete actions to isolate Tehran and engage its opposition.

A policy package. Engaging the Iranian regime was never likely to be successful, and was as much about appearing to have made a good faith effort at diplomacy to keep the anti-Iran coalition together rather than a genuine plan for halting uranium enrichment. In the past, Tehran has used negotiations as a ploy to buy time and as a mechanism for inducing concessions from the West without reciprocating. But since the events following the June 12 election, the regime is even less likely to be responsive to engagement because it needs to take a hard line against the West for domestic political purposes.

Building on the foundations described above, the Obama administration should undertake these specific measures:

• Induce the EU to impose crippling economic sanctions on the Iranian regime, such as restrictions on export of gasoline products to Iran because of its strong dependence on foreign sources; intensify sanctions on banks in Dubai and elsewhere in the Gulf that cooperate with Tehran to circumvent UN and Treasury restrictions on Iranian banks.
• Urge European allies to withdraw their envoys from Tehran; during the mid-1990s, a temporary withdrawal of some 12 European Union ambassadors succeeded in dissuading Tehran from continuing its assassination of Iranian dissidents in Europe.
• Engage Iranian dissidents by removal of their main groups from the U.S Foreign Terrorist Organizations list—the Mujahedeen-e Khalq and the National Council of Resistance of Iran—following the lead of the European Union, which delisted the MEK and never designated the NCRI.

The latest contribution to Middle East Papers is by Robert O. Freedman, who blogs about Israeli affairs at MESH. As Iran’s nuclear drive continues unimpeded, and the Obama administration pursues a policy of “engagement,” Israel approaches a moment of decision. Freedman explains why diplomacy and sanctions are unlikely to succeed, and considers plausible scenarios of an Israeli resort to military action against Iran’s nuclear facilities. Download here.

There are no foolproof metrics by which to measure the impact of sanctions, whether related to proliferation, terrorism or other issues. On that discreet point the recent GAO report on the impact of Iran sanctions gets it right, and its recommendation that more be done to assess the impact of sanctions is constructive.

Given the nature of the targets in question (terrorist networks, rogue regimes), assessing the impact of sanctions will never be easy. Open source financial data isn’t enough. Intelligence is needed to isolate the impact of each specific sanction. The effect of sanctions is often felt over an extended period of time, making the impact of any particular sanction difficult to isolate from the impact of other efforts aimed at the same targets over the same (or overlapping) periods of time. Ideally, we would want to know which financial measure led to which specific impact. For example, we would want to know the relative impact of denying illicit actors access to the U.S. financial system, or forcing them to conduct transactions in softer currencies or via inefficient transfer mechanisms. Unfortunately, tasking the intelligence community to focus its collection on these issues and make impact assessments is a tall order, coming at a time when it is stretched thin to support wars in Iraq and Afghanistan and track nuclear programs in Iran and North Korea.

But on the specific question of the impact and utility of sanctions targeting Iran today, the GAO report simply misses the point. Its findings and recommendations would have been much more useful had it separated analysis into pre-2006 sanctions and post-2006 targeted financial measures. Instead, the report lumps analysis of Iran’s economy into one block of time, ignoring the complete tactical shift in sanctions that took place in 2006.

It’s not news that the country-wide “shotgun sanctions” of the kind slapped on Iraq in the 1990s were largely ineffective. An analysis of those sanctions programs led the Treasury Department and others to develop a graduated and carefully targeted sanctions program, aimed not at entire countries but at specific illicit actors and focused on deterring illicit behavior. These are not your grandfather’s sanctions. To reflect that reality, they usually are not even called “sanctions,” but are described as targeted financial measures.

The GAO report does note, almost in passing, that new sanctions have been put in place, but focuses only on the multilateral U.N. resolutions passed in December 2006 (UNSCR 1737) and March 2007 (UNSCR 1747). It does not assess the impact of U.S. unilateral sanctions (although it lists some of them) or the impact of U.S. efforts to leverage market forces against illicit actors, including Iran. Such efforts have yielded results. Indeed, just this week Bahrain’s Ahli United Bank, the kingdom’s largest lender by market value, suspended business with Iran, and came under pressure to freeze the Iranian operations of its affiliate, Future Bank (which Ahli United established as a joint venture with two Iranian banks in 2004).

Nor does the report account for the impact these and other unilateral efforts have had in leading to other multilateral actions. For example, U.S. designation of Bank Sepah led to its inclusion in UNSCR 1747. U.S. efforts also led to the determination by the Financial Action Task Force (an intergovernmental body that works by consensus and includes China and Russia) that Iran’s lack of a comprehensive regime to prevent money laundering and terrorism financing “represents a significant vulnerability within the international financial system.”

Where the GAO does have data, its metrics sometimes raise more questions than they answer. For example, a major U.S. aim of pre-2006 sanctions has been to deprive Iran of oil and gas export revenue. The GAO questions the efficacy of these sanctions, identifying a total of $13,561 million in binding contracts (Appendix IV). But the sanctions were never aimed at Iran’s investment in petrochemical plants or refineries and gas processing plants for domestic consumption. (If Iran wants to consume more oil and gas at home, all to the good: that leaves less for export.) As my colleague Patrick Clawson has shown, those domestic categories comprise $12,935 million of the $13,561 million in contracts. That leaves a modest total of $626 million in oil and gas export projects—of which $500 million is for an LNG facility where much of the work is on the port. What’s left? A paltry $126 million in binding contracts for oil exploration and production since 2003. (This leaves aside the $4,450 million Azadegan project, which the GAO report notes has been withdrawn.)

Finally, while the GAO report notes the recent NIE on Iran’s nuclear intentions and capabilities, it seems almost oblivious to the NIE’s most significant conclusion: that the tool most likely to alter Iran’s nuclear calculus is targeted political and economic pressure, not military action. According to the NIE, Iran’s decision to halt its nuclear weapons program in 2003 was “in response to increasing international scrutiny and pressure resulting from exposure of Iran’s previously undeclared nuclear work.” The key judgments conclude that the intelligence community’s “assessment that the [nuclear weapons] program probably was halted primarily in response to international pressure suggests Iran may be more vulnerable to influence on the issue that we judged previously.”

The GAO report is likely to be interpreted as a negative assessment of the current program of targeted financial measures, but the truth is the report has very little to say about them. They need to be disaggregated from earlier efforts and accurately assessed in their own right. In the final analysis, there is plenty of evidence pointing to the fact that targeted financial measures are working.

The Chinese national oil company Sinopec has signed a contract to develop Iran’s Yadavaran oil field, according to articles in today’s Financial Times and International Herald Tribune. From Iran’s point of view, the deal is a triumph. It exposes the inability of the United States to build a global coalition to impose economic sanctions on Iran.

By the terms of the contract, Sinopec will have to subcontract with Iranian firms, which will as a consequence, at least in theory, acquire much-needed expertise. But the PRC’s record in Africa and other areas of overseas investment suggests that the Chinese will be quicker to use Iranian firms for manual labor than for sophisticated processes that would involve technology transfer.

From China’s point of view, the award constitutes another step in Beijing’s effort to secure energy supplies from the ground up, supplies that the PRC is acquiring the means to protect en route to the mainland through its program of military modernization. The contract may also be seen as progress in China’s campaign to secure influence in the Middle East at the expense of the United States. The deal, coming on the heels of last week’s NIE downplaying the imminence of an Iranian nuclear weapon (see Steve Rosen’s post on the subject), promises to complicate U.S. efforts to secure Chinese support for economic sanctions should evidence emerge that the Iranians have re-started their weapons program.

Issues left outstanding in this initial contract need to be resolved, including the distribution of oil recovered in the second phase of production. The relationship between the Iranians and the Chinese could sour as Sinopec enters into development of Yadavaran. But at this point, the thought is small comfort.

Conventional wisdom, if one reads the daily papers and the unnamed European officials quoted therein, is that a third UN Security Resolution targeting Iran is now highly unlikely in wake of the release of the National Intelligence Estimate (NIE) on Iran’s nuclear intentions and capabilities. The assessment opened with the zinger that Tehran halted its nuclear weapons program in the fall of 2003. This was indeed startling, especially since it came just two days after officials announced in Paris that China signed on to a third UN resolution and that a text was being negotiated targeting Iranian banks.

But don’t be confused by the ruminations of the fourth estate. In fact, the NIE has not undermined the newfound international consensus that another UN resolution targeting Iran is needed. Indeed, it was also this week that news broke of Chinese banks refusing Iranian clients lines of credit, in line with the recent finding of the Financial Action Task Force (FATF) that Iran’s lack of a comprehensive regime to prevent money laundering and terrorism financing “represents a significant vulnerability within the international financial system.” (FATF is an intergovernmental body that works by consensus and includes China and Russia).

To be sure, there is much to discuss and debate about the NIE. But on the issue that serves as the threshold of the UN sanctions quesiton the report is clear: even if it was suspended in 2003, Iran did have a clandestine nuclear weapons program that it has yet to fully disclose. For the parties involved in shaping the next package of political and economic sanctions, that is the key. These diplomats must also be pleased with the estimate’s other—though less publicized—major finding: that the tool most likely to alter Iran’s nuclear calculus is targeted political and economic pressure, not military action.

(Editor: More from Matthew Levitt on Iran sanctions here, here, and here.)