Effective policy that keeps Iran in check Financial sanctions, not appeasement or confrontation, are taking a toll. Now is the time to ratchet up the pressure.

Posted: December 18, 2007

Rachel Loeffler is a Council on Foreign Relations International Affairs Fellow at the University of Virginia's Miller Center of Public Affairs on leave from the U.S. Treasury Department

If the focus on Iran remains mired in the recent National Intelligence Estimate, the world will be missing the most important headline yet.

To many people, America's Iran policy comes down to a choice between appeasement and confrontation, flailing diplomacy or military threats. But there is a third route that is generating enormous pressure: Global financial sanctions have set off a debilitating process of isolation that has engulfed Iran in a costly battle for international financial access.

Now is the time to ratchet the pressure up a notch.

The financial firestorm began in September 2006, when the United States took the unprecedented step of cutting off one of Iran's largest banks - Bank Saderat - from the American financial system. Over the next 13 months, the United States systematically froze the assets of Iran's four most significant banks and severed them from any remaining access to New York, a financial nerve center of the global economy.

This wasn't out of financial spite. It turns out that Iranian banks are profoundly entangled in Iran's weapons proliferation and terrorist agendas. According to information from the U.S. Treasury Department, Bank Melli - Iran's largest bank - has not only provided financial services on behalf of Iran's nuclear and missile industries, but has also facilitated the transfer of $100 million to the Iranian Revolutionary Guards Quds Force - the terrorist arm of Iran's elite military apparatus.

Emboldened by the success of U.S. action, the international community has joined the fray. The Financial Action Task Force - a group of experts from the world's leading economies (including Russia, China, and the Gulf Cooperation Council) - issued a striking statement in October telling member countries to advise their banks about Iran's worrisome financial practices. The United Nations also passed two Security Council resolutions imposing severe financial restrictions on Iran and specifically freezing the assets of its fifth-largest bank.

This drumbeat of financial warnings has touched a nerve in the global banking community. Profoundly sensitive to reputational risk, several major global banks such as UBS and Deutsche Bank are publicly reducing their dealings with Iran. Even Chinese banks are reportedly curtailing their letter-of-credit business, despite the fact that the government just signed a major oil deal with Iran.

This global pile-on has taken a measurable toll on Iranian financial psychology.

Iranian businessmen are showing their own lack of confidence in that country's banking system by moving to places like Dubai as foreign banks dissolve relationships with Iranian banks. Amazingly, an International Monetary Fund report recently revealed a request by the Iranian government for assistance in strengthening its own anti-money-laundering framework. That small gesture, whether genuine or calculating, reflects Iran's recognition that membership in the global financial community is not cost-free.

Iran's financial appetite is a double-edged sword: The very global banking network it has cultivated to facilitate trade and commerce is vulnerable to market skittishness when foreign banks pull the plug. No matter how high the price of oil climbs, Iran's petrodollars, petroeuros or petroyen must be invested in some lucrative fashion. At stake here is not the accumulation of capital, but Iran's ability to deploy that capital. If Iran cannot move its money around, it remains the equivalent of a rich man in a pauper's prison.

While leaders grasp for the "next step" with Iran in light of the NIE, the answer is right in front of them. Sustained commitment to financial pressure is the best option for keeping Iran in check. To date, the United States has led this financial squeeze on Iran. But there are finite limits to American power, both militarily and financially. The more quickly global leaders realize that financial tools are credible policy options, the sooner the full bill for Iran's illicit activities will come due in Tehran.

E-mail Rachel Loeffler at rachel.loeffler@yahoo.com.

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