Conjuring images of nuclear terrorism and the “annihilation” of the Jewish state, the spectre of an Iranian bomb readily haunts the Western imagination. But Tehran’s nuclear ambitions also pose a very different type of challenge to America. This challenge is not years from fruition, as a warhead still seems to be. It is instead already unfolding.

This Iranian challenge is borne of America’s policy of trying to economically isolate Iran in retribution for its apparent pursuit of nuclear weapons, and for alleged support for Middle East militias that are deemed to be inimical to the American national interest. Heavy economic investment in the Iranian economy, runs the argument, not only provides the Tehran regime with the spare cash it needs to fund both of these policies. It also sends out a clear message to other miscreants that such wrongdoings do not go unnoticed and unpunished but always come at a heavy price.

The trouble for Washington is that any attempt to meaningfully isolate the Iranians does not just mean cutting off its own trade with the mullahs, as the United States has done since imposing a full trade embargo in 1995. To stop the Iranians from simply looking for alternative markets elsewhere it also requires the close cooperation of other countries, including its closest friends and allies the world over. Hitherto these sanctions have had mixed fortunes, penalizing Iran in some respects while barely touching it in others, but in the future they look set to inflict more harm on Washington than Tehran.

UN Roadblocks

In the course of 2007, the United States will be sharply stepping up pressure on many other countries to cut their economic and commercial links with the Iranians. The reason is simple: trying to persuade the United Nations Security Council to impose a package of meaningful sanctions on Tehran is virtually impossible when the Russians and Chinese can veto any meaningful proposals. The first such package, Resolution 1737, was passed on December 23, 2006 but imposed only the mildest of measures despite months of intense diplomatic wrangling. If, as seems likely, the mullahs continue with their programme of uranium enrichment, then Washington will find the path to another, more stinging, resolution far more arduous. This will prompt the administration to look outside the Security Council, relying on its own unilaterally imposed measures instead, to put pressure on Tehran.

Even at the very best of times, prompting one’s international allies to abstain from doing business with another country is of course a very difficult task indeed. A lot of trade, income and jobs can be at stake, and Iran, as one of the largest and fastest-growing Middle Eastern economies is no exception: last year the Iranians bought about £1 billion worth of British goods and thousands of jobs are said to depend on this market. But there is one very obvious further complication. Iran has vast amounts of oil and natural gas: its oil reserves are estimated to hold 120 billion barrels, which is surpassed only by Saudi Arabia, while the size of its natural gas deposits are probably outsized only by to those of Russia. In today’s extremely tight energy market America’s allies can ill-afford to sacrifice their own stake in Iranian oilfields, knowing that if they do so then the Chinese will not waste a minute in snapping them up. Iran currently pump out around 3.5 million barrels of crude oil every day, of which 2.3 million is exported into international markets. And with more foreign investment, its vast reserves could probably produce a good deal more.

Stark Choice

This presents governments and businesses in Japan, Pakistan and Europe with a stark choice. Should they respect Washington’s wishes by distancing themselves from Iran’s energy sector, looking elsewhere for lucrative contracts to develop oil and natural gas fields and finding other sources of energy supply? Or should they risk incurring American wrath by making such investments, facing retaliatory measures in the U.S. market that could potentially impose enormous damage on their business interests?

Hitherto the pendulum has been swinging marginally in Washington’s favor. Numerous Western oil companies have shied from investing in Iran for fear of incurring American retribution, most notably BP, whose chairman, Lord Browne, decreed in January 2005 that “politically Iran is not a flyer…because 40% of BP is in the U.S. and we are the largest producer of oil and gas in the U.S.”

Browne would have been only too well aware that Washington has several ways of sanctioning any companies that go too far inside Iran. It can, for example, invoke domestic legislation that prevents any company with a presence in the United States from doing business with another country that supports terrorism. In 2006, the mere spectre of such laws has been sufficient to frighten several European banks- ABN Amro, UBS, Credit Suisse and Standard Chartered- into substantially reducing their presence in Iran. Another option is simply to invoke the recently enacted Iran Freedom and Support Act. Under the terms of this legislation, any foreign entity that invests more than $20 million in Iran’s energy sector risks provoking draconian economic retaliation.

China’s Predatory Tactics

But if in 2007 an energy shortage looms, and if China continues to deploy highly predatory tactics to meet its own fast-growing need for oil and gas, then America’s allies will be more tempted than ever to openly defy Washington’s pressure. Since policy towards Iran impinges so strongly on matters as vital as nuclear proliferation and terrorism, such defiance will risk creating huge political rifts. In September the French announced that they would probably not be severing their financial ties with Tehran. “We generally prefer measures that are decided in the framework of the United Nations. We have never liked unilateral sanctions,” announced a spokesman for the French foreign ministry.

The Pakistanis desperately need Iranian natural gas, and look ready to build a pipeline in spite of immensely strong U.S. pressure not to do so. Tokyo urgently needs Iranian oil, and has spent the last two years committed to developing Azadegan, a giant Iranian oilfield, that in their absence the Chinese will pounce on.

In fact, in today’s tight energy market, sanctioning any country with oil and gas deposits is looking increasingly futile. America’s trade embargo against Cuba, merely gives the Chinese and others an entirely free hand to drive a stake hard and deep into Cuba’s untapped oil fields.

Grand Bargain

So if Washington’s policy of isolating Iran exacts such a heavy political cost, then it is more important than ever before that the United States finds ways of striking up a dialogue and a “grand bargain” of political reconciliation with Tehran. Lifting economic sanctions, or at the very least allowing American allies to invest as they think fit, should be seen as real priority.

Of course any such approach would leave the Bush administration vulnerable to charges that it is “appeasing” a callous and dangerous regime, one that is openly committed to the destruction of Israel. But such accusations are easily countered. For by opening up strong commercial links with the United States, the Iranians would have much more to lose by initiating any hostilities. Not only that, but the Iranians might recognize that their critics also have an equal interest in maintaining the status quo rather than trying to implement any regime change. So removing sanctions would therefore undermine the chronic and extremely dangerous state of mistrust between Iran and the United States.

Stronger trade links would also raise standards of living among ordinary people in a way that is likely to undermine the mullahs’ regime. Put money in people’s pockets and of course you change their ideas, expectations, and values. Edward Gibbon famously wrote about the corrosive effects of opulence on the Roman mentality, but one only has to look at the changes in Britain, where a strand of plutocracy began to creep in more than a decade back, to see the powerful changes it can bring about. If standards of living were to rise dramatically in Iran over the coming years, the days of the theocratic regime would be numbered. The regime would gradually lose its Islamist character–something it was doing in any case before Ahmadinejad’s election last summer–and there would be strong popular pressure for political freedoms to match economic liberties.

To meet Iran’s challenge to America, it is more important than ever that the White House follows what the Iraq Study Group has recommended: negotiating with Tehran and then lifting sanctions against Iran.

Roger Howard is the author of Iran Oil: The New Middle East Challenge to America (IB Tauris, 2007) and a contributor to Foreign Policy In Focus.

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