Beyond Containment:

A New Strategy to Engage Iran

A Presidential Decision Directive

by Michael Schearer

American Defense Policy, NSST-576-01 Dr. Joseph J. Collins April 14, 1998

THE WHITE HOUSE

WASHINGTON
April 14, 1998

PRESIDENTIAL DECISION DIRECTIVE NO. 1 TO: Secretary of State Secretary of Defense Chairman of the Joint Chiefs of Staff Iran

SUBJECT:

Introduction / Background Since May of 1993, the United States has followed a strategy known as "dual containment" for addressing security issues in the Persian Gulf region. This policy is rooted in the notion that the U.S., as the world's sole remaining superpower, has a unique responsibility to neutralize, contain, and [hopefully] transform both Iran and Iraq into responsible members of the world community.1 This strategy commits the U.S. to political, economic and military isolation of these regimes. Dual containment has been justified by the Clinton administration as a logical progression of U.S. policy in the region and the culmination of a trend toward a more direct American strategic role in the Gulf. U.S. security policy in the Persian Gulf region has long been rooted in the critical objective of maintaining uninterrupted flow of oil to the world market at prices not detrimental to the economies of the U.S. and its allies. The requirement for free flow of oil has consistently been accepted as a vital U.S. national interest.2 With the dissolution of the Soviet Union and the viability of Israeli sovereignty assured, access to oil remains the most important regional priority.

This critical strategic consideration has resulted in increasing political and military commitments to the Gulf states, principally the nations comprising the Gulf Cooperation Council (GCC).3 In his 1980 State of the Union Address, President Carter outlined what became known as the Carter Doctrine, formally committed the U.S. to preventing any hostile power from dominating the region.4 As the U.S. role became increasingly direct, the Reagan and Bush Administrations continued to see Iran and Iraq as key strategic players, attempting to balance one against the other such that neither would achieve a dominant position that might ultimately threaten U.S. interests. The current dual containment strategy incorporates several elements from previous U.S. policies. It calls for prevention of any power from dominating the region. It focuses on maintaining supportive relations with the GCC nations, especially Saudi Arabia, which, as the regions largest oil producer, is critical to ensuring moderate oil prices over the long term. Where the dual containment strategy departs from past policy prescriptions is in its notion that Iraq and Iran and are no longer strategically important. The policy disavows the need for any political relationship with these states while at the same time calling for the U.S. to assume a much larger strategic role in managing gulf affairs. Clearly dual containment has more successful in the case of Iraq than Iran. U.S. attempts to contain Iran have met with limited success. The dual containment strategy calls for mobilizing international political opposition against Iran combined with U.S. economic sanctions.5 While Iran has suffered some economic losses due to U.S. unilateral sanctions, European and Asian nations have been quick to fill the void left by American business. In fact, Iran's GDP growth rate was 3.4% in 1997 despite U.S. sanctions. 6 Congressional initiatives aimed at imposing secondary boycotts against foreign parties doing business with Iran have been

strongly opposed by U.S. allies as unjustifiable coercion.7 Member states of the European Union and Japan contend that trade and contact with Iran, rather than isolation, will succeed in moderating Irans behavior by giving Iran a stake in international community. According to Jeffrey J. Schott, Senior Fellow at the Institute for International Economics, U.S. sanctions have: 1. Delayed some new investment in Iranian oil and gas fields and imposed modest costs on the Iranian economy; 2 .Imposed costs on US firms and workers that would normally compete for sales to and investments in Iran; 3 .Incited US-European tensions and hampered cooperative efforts in support of US policy objectives; and 4. Induced no significant change in Iranian policy.8

The efforts of previous administrations to hinder Iranian weapons procurement have been frustrated by the willingness of nations like China and Russia to supply arms and technology. Additionally, the election in 1997 of a relative moderate Iranian President Mohammad Khatemi has accelerated the debate over U.S.-Iran policy.

The Problem with Dual Containment Managing the Gulf security environment continues to be a major challenge. Underlying tensions among Gulf countries portend sustained volatility and conflict in the region. Contentious problems such as acquisition of Weapons of Mass Destruction (WMD), political tensions within the GCC, potentially destabilizing ethnic and Islamist opposition within GCC states, economic strains, and Irans desire to shift the balance of power and reduce the U.S.

military presence will likely persist for the foreseeable future. The region is in some ways inherently unstable and dual containment perpetuates this status quo. Dual containment applies an equal treatment for two countries with different political dynamics posing different kinds of threats, and requires cooperation from an unlikely number of nations within the region and around the world.9 The continued emphasis on simply containing these regimes without acknowledging their important geostrategic role is not a viable strategy for the long term. The fact is Iran will continue to be an important player in the regional political and security environment. U.S. policy should change to reflect this basic reality.

Objectives America's key interest in the Gulf remains largely unchanged since the end of the Cold War: maintaining uninterrupted access to oil at stable prices for us and our allies. It is considered axiomatic that this access is critical to Western and by extension, global prosperity. The U.S. has pursued the goal of regional stability, with variations on the means to that end, to ensure the free flow of oil. Prevention of regional hegemony, a product of the Carter Doctrine, has emerged as the broad policy approach designed to achieve the goal of stability. The dissolution of the Soviet Union reduced the specter of superpower confrontation in the region resulting in a shift from containment of Soviet adventurism in the region to containing the hegemonic pursuits of both Iran and Iraq. The U.S. policy response has moved to a direct interventionist policy to achieve its objectives. In taking the responsibility for maintaining security in the gulf, the U.S. has an interest in sustaining its forward presence in the region to maximize its strategic military agility and power projection capability.

However, as we have seen, containment of Iran as a means to these objectives has clearly failed. Our strategy should be shifted. To accomplish this goal, the primary U.S. objectives toward Iran should be seen as: y prevention of further progress in Iran's nuclear program and other weapons of mass destruction; y y prevention of the means of delivery for weapons of mass destruction; prevention of Iranian blockade of the Straight of Hormuz, and thus, access to a large percentage of the world's oil and natural gas reserves; y y lessening of tensions between Iran and its neighbors; moderating Iranian policy toward terrorism.

Options In reviewing the current U.S. policy toward Iran, there are a number of options that present various means (and along with them, varying degrees of likely success) to accomplish U.S. objectives: (1) Continue the current policy of containing Iran by enforcing current primary sanctions against Iran and secondary sanctions against those businesses that deal with Iran. (2) Strenghthen U.S. policy by vigorously pursuing all means necessary to accomplish U.S. objectives, including but not limited to stronger economic sanctions, military strikes against nuclear facilities, and covert action to topple the fundamentalist regime. (3) Move from a policy of containment and isolation to one of engagement, using economic leverage and the cooperation of allies to moderate Iranian policy toward the West and bring them into the "family of nations."10

Analysis of Options (1) Continue the current policy of containing Iran by enforcing current primary sanctions against Iran and secondary sanctions against those businesses that deal with Iran. The first approach to U.S. policy concerning Iran would be to maintain the current strategy, which involves sanctions against Iran as well as secondary sanctions designed to target businesses who deal with Iran. Maintaining current U.S. policy would be seen as an attempt by the U.S. to force change upon Iran through primarily economic means. However, there are serious problems to this option. Anthony Lake admits this "strategy depends heavily on active coordination and consultations with friendly countries. Iran needs to hear a steady and consistent message from the Western countries whose approval and trade it seeks."11 However, the reality is clear: European and Asian nations have been quick to fill the void left by American business. Furthermore, secondary sanctions meant to target businesses dealing with Iran have been seen by other nations as an exportation of U.S. law. Such continued sanctions are likely to provoke a trade confrontation between the United States and European Union.

(2) Strenghthen U.S. policy by vigorously pursuing all means necessary to accomplish U.S. objectives, including but not limited to stronger economic sanctions, military strikes against nuclear facilities, and covert action to topple the fundamentalist regime. ANALYSIS

(3) Move from a policy of containment and isolation to one of engagement, using economic leverage and the cooperation of allies to moderate Iranian policy toward the West and bring them into the "family of nations."12 ANALYSIS

Policy Recommendation Move from a policy of containment and isolation to one of engagement, using economic leverage and the cooperation of allies to moderate Iranian policy toward the West and bring them into the "family of nations."13

(1) Pursue a strategic relationship with Iran. Iran is rapidly becoming the dominant regional power in the Gulf. In fact, "Iran is OPEC's second largest oil producer and accounts for roughly 5% of global oil output. The country holds 9% of the world's oil reserves and 15% of its gas reserves."14 Additionally, Irans political and economic influence continues to grow in the Trans-Caucus and Central Asian states. Irans role as a regional leader will further solidify as its economic, political, and military strength continues to increase. Irans natural gas pipelines have the potential to connect European markets with vast gas resources of Persian Gulf nations. Long a vision of European energy planners, Iran's substantial resources have the potential to meet European energy needs well into the future. Irans resources and strategic geography will have a far-reaching effect on the Worlds energy balance. Iran, while increasingly subject to U.S. efforts to isolate it, has tried to give its relationship with China a strategic dimension. Since 1993, senior Iranian officials, including

then-President Rafsanfani, have said Iran must counter U.S. isolation efforts by building new alliances with South and East Asian countries, including India and China. Iran has sought to broaden its overall political and economic relations with China as a means of balancing U.S. attempts to isolate Iran. Iran is also pursuing closer ties with Russia. Although China has replaced Russia as the number one supplier of Iranian conventional weapons, Russia has become the leading sponsor of Irans nuclear power and ballistic missile development programs. Both China and Russia have refused to forswear conventional weapons and WMD technology sales to Iran. Establishing a U.S.- Iranian strategic relationship would help prevent further ties and the formation of a formal Chinese-Iranian-Russian alliance in opposition to U.S. interests. A U.S. relationship with Iran would also help further isolate Iraq, by joining the interests of Iraqs greatest regional adversary with those of the Worlds sole super power. Iran appears to believe that the U.S. presence in the Gulf is long-term and is intended to prevent Iran from achieving its natural right to preeminence in the Gulf. Although directed mainly at Iraq, the large and ever expanding U.S. naval presence in the Persian Gulf, appears to have resulted in Irans large naval build-up in the 1990s. A strategic relationship would avert further tension and possible naval confrontations in the Gulf.

(2) Eliminate Economic Sanctions and Secondary Sanctions. The Administration should repeal Executive Order 12959 banning U.S. trade and investment in Iran, including the trading of Iranian oil overseas by U.S. companies and their foreign affiliates.15 The Administration can head off a trade confrontation with Europe by waiving sanctions provisions of the Iran-Libya Sanctions Act16 where necessary.

Unilateral economic sanctions have been completely ineffective in influencing Iranian policies.17 Sanctions have only alienated European allies, hurt U.S. business interests, and driven Iran closer to potential U.S. adversaries such as China. The elimination of economic sanctions would improve relations with the European Union, increase U.S. business opportunities and improve relations with Iran. Internationally, the United States and Israel stand alone in their attempts to isolate Iran economically. Despite U.S. sanctions, Irans economy is showing increased strength. Irans economy grew 3.4% in 199718 and the IMF has praised Irans revived growth and lower inflation. Internationally, countries and companies, have been openly critical or defiant of the U.S. embargo. U.S. allies have been unwilling to curtail economic an political ties to Iran. Organizing a broad secondary boycott against Iran has resulted in undue tensions with U.S. allies and could trigger international trade litigation against the United States The EU countries strongly oppose ILSA and similar laws as extraterritorial application of U.S. law. European countries have a large economic stake in Iran. At $14 billion in Iranian debt, the German stake is the largest. Several French and German banks have resumed loan guarantees for Iran. Canada, resisting pressure from Senator DAmato, sent a delegation to Iran to provide Iran with long term credit. Since December 1995, Iran has been repaying the principal on its debts. Arrears are down from $11 billion in 1994 to less than $200 million. France, India, Pakistan, and China have all increased their purchases of Iranian oil. Iran signed a range of agreements on economic and military cooperation with India. Turkey, South Africa. The GCC states (Saudi Arabia, Kuwait, UAE, Bahrain, Oman, and Qatar) announced that they would not follow the U.S. investment and trade ban on Iran.

Iran has found buyers for the oil previously purchased by U.S. firms. Sanctions have adversely affected U.S. business interests in the region. The French oil company Total signed a contract with Iran to develop two oil fields off Sirri island. Total replaced the U.S. firm Conoco, Inc. which withdrew when executive order barring U.S. companies form helping develop Iranian petroleum reserves. Additionally, Iran has had little difficulty acquiring non-sensitive America products. It can easily import American goods through such Persian Gulf trading hubs as Dubai. An estimated $200-$300 million in U.S. goods exported to Dubai was reexported to Iran. Iran still able to buy U.S. oil industry equipment form third parties and also can acquire similar equipment from European and Canadian suppliers.

Begin the Process of Establishing Normal Diplomatic Relations with Iran: Offer constructive dialogue with authoritative Iranian officials via the U.S.-Iran Claims Tribunal at the Hague The United States and Iran have had limited direct diplomatic contact through the U.S.Iran Claims Tribunal at the Hague, which was established, pursuant to the Algiers Accords that settled the hostage crisis. This forum can be used to negotiate the easing of economic sanctions in return for the opening of dialogue with authoritative Iranian officials. Many positive developments have facilitated this opportunity. President Khatemi has stated that Iran seeks improved relations with the West and the six states of the Gulf Cooperation Council. (Saudi Arabia, Kuwait, Bahrain, Qatar, Oman, and the UAE) Foreign Minister Kharazzi visited the Gulf states in November 1997 in a successful effort to obtain their participation in the Tehran hosted OIC summit. Kuwait, Qatar and Oman maintain friendly relations with Iran. In response to recent moderating statements from Tehran, Bahrain and Iran agreed to return ambassadors. Saudi

Arabia has stated that Saudi-Iranian ties will never be severed. Additionally, Irans policy in Central Asia has emphasized economic cooperation over Islamic ideology. Initial U.S.- Iranian diplomatic relations can be based on the Syrian model. Like Iran, the State Department has deemed Syria a state sponsorer of terrorism, a possessor of WMD, and an opponent of the Middle East peace process. Nonetheless, Syria was a critical ally in the Gulf War and will play a vital role in any long-term U.S. brokered Arab-Israeli peace settlement. As with Syria, the level and pace of renewed U.S.- Iranian relations will be determined by the extent to which the Iranians moderate their WMD, terrorism, and peace process policies. Significant progress has already been made. Conventional Arms and WMD: Mohsen, Irans Revolutionary Guard commander since 1981 was forced to step down as a result of his open support for Khatemis opponents. Reza was an avowed proponent of radical foreign policy and exporting the Islamic revolution. Following the Iran-Iraq War, Iran embarked on an ambitious program to rebuild and modernize its conventional military forces. The program is largely complete. Irans arms acquisition has fallen from 2 billion per year 1989-92 to about 500 million currently. In an effort to compensate for its conventional military weaknesses relative to U.S. and Iraqi forces, Irans main aim in building up its military is to defend itself against the United States and Iraq. Largely in response to Iraqs WMD programs, Iran appears to be making a vigorous effort to obtain WMD technology. Nonetheless, ballistic missile technology transfer concerns are quickly becoming irrelevant. Iran is assessed to be rapidly nearing self-sufficiency in missile production and will field the indigenously produced Shahab 3 within year or two. Iran is a party to NPT and accepts International Atomic Energy Agency (IAEA) visits to declared nuclear facilities. IAEA visits to Iranian nuclear facilities since February 1992 have found no evidence to

indicate Iran is developing nuclear weapons. State Department arms control officials maintain that Iran has not violated the Nuclear Non-Proliferation Treaty to which it is a party. On March 5, 1997 the Director of the Arms Control and Disarmament Agency, John Holum, told a subcommittee of the House International Relations Committee that Irans nuclear program had made virtually no progress. Additionally, Iran is a member of the CWC. Terrorism: Although Iran is suspected of supporting terrorist organizations, and publicly praises their terrorist attacks against Israel, there appears to be little hard evidence that Iran directs their operations. Hizballah receives most of Iranian aid and Iranian arms with which it conducts raids against Israeli forces occupying southern Lebanon. Hamas is not dependent on Iranian financing, and thus Iran wields far less influence in the West Bank and Gaza.

Discontinue Covert Operations against the Iranian Government. Congress has approved funding authority for covert operations against the Iranian Government in the past. However, the State Department has refrained from supporting the Peoples Mohahedin Organization of Iran (PMOI), as the group retains ties to Iraq, that it killed several Americans before the Shah fell and it supported the takeover of the U.S. embassy in 1979. The group lacks widespread support within Iran. Conclusion Current U.S. policy of containment has reached an impasse. Attempts to isolate Iran have proven unsuccessful. Continuing with sanctions in the face of international opposition locks the U.S. into a status quo of dubious utility. A potential thaw in relations with Iran would have clear strategic benefits for the U.S. While the U.S. may rightfully have problems with much of Irans behavior but continuing to insist that they be resolved before any rapprochement is

possible may only ensure that nothing will change. With the election of Khatami, the U.S. might have a historic opportunity. While this new approach may be risky, it is worth exploring to change this untenable status quo.
Anthony Lake, "Confronting Backlash States," Foreign Affairs 73 (1994): 46. As President Clinton's then-Assistant to the President for National Security Affairs, Lake probably best espouses the Clinton Administration's justification for "dual containment."
2 1

Lake, 47. The nations of the GCC are Bahrain, Kuwait, Oman, Qatar, Saudi Arabia, and the United Arab Emirates.

President Jimmy Carter, "1980 State of the Union," delivered January 21, 1980. Carter said, "Let our position be absolutely clear: An attempt by any outside force to gain control of the Persian Gulf region will be regarded as an assault on the vital interests of the United States of America, and such an assault will be repelled by any means necessary, including military force."
5

Lake, 54.

United States Department of Energy, Energy Information Administration, Country Analysis Brief: Iran (Washington, D.C.: GPO, 1998). Testimony of Jeffrey J. Schott, Senior Fellow, Institute for International Economics, before the House Committee on International Relations, "The Iran and Libya Sanctions Act of 1996: Results to Date ," July 23, 1997.
8 7

Ibid.

Barbara Conry, "America's Misguided Policy of Dual Containment in the Persian Gulf," Cato Institute Foreign Policy Briefing No. 33, November 10, 1994.
10

Lake, 45. Lake, 54. Lake, 45.

11

12

Lake, 45. United States Department of Energy, Energy Information Administration, Country Analysis Brief: Iran (Washington, D.C.: GPO, 1998).
14

13

"On May 6, 1995, following a review of U.S. policy toward Iran, President Clinton issued an Executive order (EO 12959) banning U.S. trade and investment in Iran, including the trading of Iranian oil overseas by U.S. companies and their foreign affiliates." Kenneth Katzman, United States Congress, Congressional Research Service, CRS Issue Brief: 93033: Iran: Current Developments and U.S. Policy, January 2, 1998. "The Iran-Libya Sanctions Act (ILSA) was passed unanimously by Congress and signed into law by President Clinton in August 1996. ILSA imposes mandatory and discretionary sanctions on non-U.S. companies which invest more than $20 million annually (lowered in August 1997 from $40 million) in the Iranian oil and gas sectors." United States Department of Energy, Energy Information Administration, Country Analysis Brief: Iran (Washington, D.C.: GPO, 1998).
17 16

15

Schott.

United States Department of Energy, Energy Information Administration, Country Analysis Brief: Iran (Washington, D.C.: GPO, 1998).

18