by Jay Solomon
At a triumphant press conference in Tehran that May, Erdogan and Lula announced that they had succeeded where the West had failed. Ahmadinejad, allegedly with Khamenei’s backing, had agreed to a revised version of the fuel swap deal with only marginal differences, they said. Iran would ship out 1,200 kilograms of enriched uranium to Turkey in exchange for fuel rods. Iran would also allow increased monitoring by the IAEA. In return, the push for new sanctions against Iran at the United Nations would be halted, the leaders argued.
“America is angry over the proximity of independent countries like Iran and Brazil….That is why they made a fuss ahead of your trip to Iran,” Khamenei told Lula after the marathon negotiating session, according to Iranian press reports.
The United States and the Europeans, however, didn’t support the initiative, viewing it as a ploy to ward off more economic pain for Iran. Furthermore, the new agreement’s terms no longer carried the weight the earlier plan’s would have. The country’s fuel stockpile had grown by over 1,000 kilograms in the six months since the Geneva meetings. This meant that the transfer of 1,200 kilograms of fissile material to a third country no longer had the value it once did, since Iran would retain enough nuclear fuel to make an atomic weapon. And the Turkish and Brazilian initiative didn’t require Iran to stop enriching uranium to a level of purity that, as previously noted, the United States viewed as near weapons grade.
“The confidence that the original…deal would have done is greatly diminished,” said a senior U.S. official who discussed the latest agreement with Turkish and Brazilian diplomats. “This is, in essence, grasping at straws that somehow this would help resolve the issue. But this is an area…we don’t agree with them on.”
The Turks and Brazilians were incensed by the West’s rejection of their diplomacy. They said they had only implemented what the Obama administration had required, and that a huge potential breakthrough was being missed. However, they didn’t address U.S. concerns that Iran’s capabilities had greatly increased during the six months between the two sets of negotiations.
The promised fourth round of economic sanctions was approved by the UN Security Council in June, essentially ending the Obama administration’s initial outreach to Iran. Even before the sanctions were imposed, Obama signaled that his initial strategy to woo Tehran and Khamenei had so far failed. In March 2010, speaking to the Iranian people in another speech marking the Persian New Year, Nowruz, he voiced frustration with Khamenei’s unwillingness so far to respond to his overtures. “For reasons known only to them, the leaders of Iran have shown themselves unable to answer that question. You have refused good faith proposals from the international community,” Obama said. “They have turned their backs on a pathway that would bring more opportunity to all Iranians, and allow a great civilization to take its rightful place in the community of nations. Faced with an extended hand, Iran’s leaders have shown only a clenched fist.”
CHAPTER 8
Black Gold
The Treasury Department’s financial war was bearing fruit as President Obama prepared to launch his reelection campaign in 2012. Iran’s major banks were all blacklisted by the United States and Europe. Its shipping firms and airlines were being cut off from the global economy. And major corporations were severing their Iranian ties, believing the threat of losing access to the U.S. economy far outweighed whatever profits they could still reap from the Iranian market. Tehran, meanwhile, was offering few signs to the international community that it was serious about engaging in diplomacy to curb its nuclear program.
Despite the radical measures already in place, Iran was exporting more than two million barrels of oil per day to Europe and Asia. This kept Tehran’s coffers relatively flush, as crude was then selling at well over $100 per barrel. Tehran, meanwhile, was expanding its nuclear program at a rapid pace. The country had installed thousands of new centrifuges at its nuclear fuel production plant at Natanz and had secretly opened the third facility in Qom. These advances were allowing Tehran to amass large stockpiles of uranium enriched to 20 percent purity levels, dangerously close to weapons grade. Iran was on the verge of having enough fissile material for an atomic bomb.
Frustrated with Iran’s advances, Congress began to maneuver on its own to force the Obama White House to impose a total embargo on Iran’s oil exports, the plan Stuart Levey had hinted at for years. Congressional and Treasury officials privately referred to this as the “nuclear option” in any financial war against Iran’s economy. The United States hadn’t taken such measures against an enemy’s economy since the 1940s, when the Roosevelt administration imposed an embargo on all Japanese oil imports. The Imperial Japanese Navy responded by attacking Pearl Harbor in 1941, dragging the United States into World War II.
But there remained fears inside the U.S. government that such a radical step could drive up oil prices, hurting the United States’ own economic recovery from the recession that had begun in 2008. Healing the U.S. economy had been President Obama’s primary focus during his first term, and he wouldn’t do anything that placed the recovery at risk, White House officials said.
The United States’ main tool to enforce such an embargo would be to sanction Iran’s central bank, Bank Markazi, through which all of Iran’s oil sales flowed. Treasury officials believed countries couldn’t buy Iranian oil without financial ties to Bank Markazi. Emerging economic powers such as China and India, however, had opposed most U.S. sanctions against Iran and might reject U.S. demands to cut off their imports, even though they would place themselves at risk of being sanctioned. Their refusal to comply with a U.S. policy demand could expose Washington as an emperor with no clothes, administration officials feared.
“If you sanctioned the Iranian central bank, you had to really think about whether the policy could be implemented,” Levey told me in 2010, as the policy debate about Bank Markazi was beginning to gather pace. “To take the step and have China and India not comply, you could see a real challenge to American power and prestige.”
Indeed, China, India, and other developing nations had been discussing developing a global currency that could stand beside the dollar. A public fight over Iranian oil sanctions could accelerate this debate, American officials believed. And China and India could simply have continued buying Iranian oil in U.S. dollars in a direct rebuke of Washington. Successive U.S. administrations feared that an overreliance on sanctions could hurt the country’s status as the world’s economic safe haven and Wall Street’s preeminence as the globe’s leading financial center.
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THE U.S. OIL WAR on Iran started quietly in the spring of 2009, early in Obama’s presidency. The White House dispatched its point man on Iran policy, Ambassador Dennis Ross, to the Persian Gulf and Asia to discuss Iran’s energy trade and emerging nuclear program. Ross and the White House began conceptualizing what was essentially an oil-offset strategy: the major Arab oil producers, Saudi Arabia, Kuwait, and the UAE, would increase their exports to the Asian powerhouses, China, Japan, South Korea, and India. In return, these countries would cut back their purchases of Iranian oil. The plan, in theory, would keep Asia’s economies humming without driving up oil prices. And the loss of oil sales would place enormous pressure on Tehran’s bottom line.
Many of the Arab leaders were wary of welcoming Ross and distrusted him because of his close relationships with successive Israeli governments. Some Arab leaders derisively referred to Ross as the White House representative of Likud, the hawkish Israeli political party headed by Benjamin Netanyahu. In private discussions they described Ross as pursuing Israel’s interests above those of the United States. And Ross’s significant involvement in the Mideast peace processes under both Presidents George H. W. Bush and Bill Clinton was why Washington hadn’t pushed Israel harder to make concessions to the Palestinians during those negotiations, they argued, leading to the failure of those efforts.
Despite this bad blood, there were a few exceptions. In the royal courts of Riyadh, Kuwait, and Abu Dha
bi, Ross found audiences surprisingly receptive to his emerging energy scheme, according to U.S. and Arab diplomats. Officially, neither the Saudis nor the Emiratis wanted to publicly commit to pressuring Iran through the energy markets. This would break from their official policy, which went back decades, not to use oil as a geopolitical weapon. But in private they communicated to Ross their willingness to increase their production capacity as a means to punish Tehran.
The U.S. envoy heard an increasingly hawkish line on Iran from the Saudi and Emirati royal families during his stops—positions similar to the one espoused by the Israeli government. This private convergence of Israeli and Arab positions on Iran bolstered Washington’s hopes of pressuring Tehran. Give sanctions a chance to alter Tehran’s stance on its nuclear program, Arab and Israeli officials told Ross, but also plan for military action if they failed.
Another U.S. envoy, General David Petraeus, visited Saudi Arabia shortly before Ross and was stunned by King Abdullah’s tone. Destroy Iran’s nuclear program, the general was told, and roll back Iranian influence in the region. “Cut off the head of the snake,” the monarch demanded.
In talks with the Chinese, Ross and other U.S. officials played up the possibility of Israel launching unilateral military strikes against Iran to stop its nuclear program. Beijing was worried that such an attack would destabilize the broader Middle East and threaten China’s ability to import oil not just from Iran but from all the regional producers. Ross’s response to the Chinese was that the best way to prevent such an apocalyptic scenario was to help Washington increase financial pressure on Tehran; such a move would convince the Israelis that military action wasn’t necessary.
In the months after Ross’s trip, major Arab oil exporters began replacing Iranian energy exports in Asian markets. The UAE’s Crown Prince Mohammed bin Zayed al-Nahyan, on a private mission to Beijing in 2010, communicated his government’s willingness to quadruple its oil exports to China to offset any reduction of purchases from Iran. Saudi Arabia, meanwhile, which was already exporting 700,000 barrels of oil per day to China, told Chinese officials Riyadh was willing to ramp up its production even more to assuage China’s supply concerns.
Saudi officials and members of the royal families started publicly threatening an oil war against Iran if it didn’t back off on its nuclear program. This kind of acrimonious talk, coming out of the Saudi palaces, was revelatory. “Iran is very vulnerable in the oil sector, and it is there that more could be done to squeeze the current government,” Prince Turki al-Faisal, a former head of Saudi intelligence, told a private gathering of American and British servicemen at an airbase outside London in the spring of 2011. “To put this into perspective, Saudi Arabia has so much [spare] production capacity—nearly 4 million barrels [per] day—that we could almost instantly replace all of Iran’s oil production,” the prince said.
President Obama and Secretary Clinton personally raised the issues of sanctions on Iran and the scaling back of Tehran’s oil sales with a string of foreign leaders throughout 2011. White House officials said sanctions on Iran were Obama’s number one issue in conversations he had with world leaders that year, particularly in China and Russia. “In 2011, every bilateral meeting that the president had with an important country, Iran sanctions were the top issue. This was extraordinary,” Ben Rhodes said. “These countries, especially the Chinese, they pay close attention to how you rank your asks. We told them: ‘This is our biggest issue. This is our core interest.’ ” The tools to break Tehran’s oil economy were falling into place. But the question remained: would the White House employ them?
In the meantime, there were fears inside the Obama administration that they were running out of time. In late 2011 and continuing into 2012, U.S. intelligence agencies detected stepped-up activity by the Israeli military that presaged a possible strike against Iran’s nuclear facilities. The White House was particularly alarmed when Israeli aircraft flew into and out of Iranian airspace, ostensibly as a dry run for a commando raid. President Obama responded by dispatching a string of aides to Israel, including national security advisor Thomas Donilon, to walk Benjamin Netanyahu back. “We spent many hours in these consultations with them that had the purpose of essentially dissuading that strike,” said a senior U.S. official who took part.
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LATER IN 2011 THE U.S. CONGRESS stepped up its pressure on the White House to take out Iran’s oil exports, even as the Treasury’s financial campaign was ramping up. The need to stop Iran’s nuclear program was one foreign policy issue that generated nearly uniform bipartisan support on Capitol Hill, largely because of the threat Tehran posed to Israel. Legislation targeting Iran was framed, in part, through the lens of the Jewish state’s security concerns.
A coalition of U.S. lawmakers had been repeatedly challenging the Obama administration and the Treasury Department to impose ever more draconian measures on Tehran. In 2010 Congress had rammed through legislation that carried “extraterritorial power,” meaning that other countries would need to abide by U.S. law. This broke sharply from previous American sanctions regimes. The new law, the Comprehensive Iran Sanctions, Accountability, and Divestment Act (CISADA), not only required the United States to blacklist Iranian companies and individuals alleged to be involved in Tehran’s nuclear program and support for terrorism, but also required the United States to sanction entities anywhere in the world—be they Chinese, Russian, or Emirati—if they were doing business with blacklisted Iranian firms. U.S. sanctions law was increasingly becoming international law.
The White House resisted CISADA, fearing that its secondary sanctions would alienate U.S. allies and place the administration on a collision course with key investors in the American financial system, such as China and Japan, who saw the financial war on Iran as a direct threat to their economies. Still, Congress unanimously passed the legislation. The State Department and Treasury established units to enforce the laws. Billions of dollars in fines on foreign companies, mostly European, followed for their violations of U.S. sanctions laws. Many were tied to the cases exposed by Robert Morgenthau and the New York prosecutors.
The same coalition of American lawmakers assembled again in 2011 to press the Obama White House to target Bank Markazi, the Iranian central bank. The initiative was overseen in the Senate by a Democrat, Robert Menendez of New Jersey, and a Republican, Mark Kirk of Illinois. It was supported by AIPAC, the powerful pro-Israel lobby. This coalition had been privately arguing for years that the blacklisting of Bank Markazi was possibly the only financial tool that could force Iran to rein in its nuclear program.
Arab governments had for decades complained that AIPAC essentially dictated U.S. foreign policy in the Middle East, particularly with regard to the Israeli-Palestinian peace process. But Iran’s neighbors, including the UAE, had also recently shown a willingness to target Iran’s finances. In November 2011, AIPAC circulated a letter to Congress calling for sanctions on Bank Markazi. Ninety-seven out of one hundred U.S. senators supported the letter, placing major pressure on the White House to act.
The administration’s economic planners pushed back. Treasury secretary Timothy Geithner took the lead in pleading the administration’s case to Congress. He argued that the law, while well intentioned, could cause a destabilizing spike in global energy prices that could kill the United States’ economic recovery. Chinese leaders had already been murmuring about reducing Beijing’s holdings of American debt, and passage of the law could further raise economic tensions between Washington and Beijing at a time when the United States could ill afford it.
The White House called for a more measured implementation, stressing that China, India, and other major buyers of Iranian oil wouldn’t pull out of the market overnight. They needed time to slowly reduce their dependency on Tehran, a process that would take months if not years. “There’s not an issue we worked on as intensively diplomatically as getting cooperation on those sanctions. It took lots of work to cut the Iranians off, essentially,” said
Rhodes.
The confrontation peaked in late 2011 and fed into the U.S. presidential campaign. Republicans accused President Obama of not wanting to confront Tehran during an election year. Menendez and other Democrats accused the administration of attempting to deceive Congress by promising “crippling” sanctions against Iran but then refusing to implement the one measure that could tip the balance.
A tense standoff played out in the Senate that month as Democrats and Republicans attacked top administration officials. “You have rebuffed [sanctions on Bank Markazi] every step of the way even though it is the sanctions law that we have given you that has allowed you to achieve some limited progress,” Senator Menendez told the Treasury’s David Cohen and the State Department’s number three diplomat, Wendy Sherman. “I find it pretty outrageous that while the clock is ticking and you ask us to engage in a more reasoned effort,…you come here and say what you say, which really undermines your relationship with me for the future.” Geithner fired back, telling Congress it didn’t fully understand the economic and diplomatic ramifications of sanctioning Iran’s central bank, which some foreign diplomats and U.S. lawmakers argued was an act of war. “I am writing to express the administration’s strong opposition to this amendment because, in its current form, it threatens to undermine the effective, carefully phased, and sustainable approach we have undertaken to build strong international pressure against Iran,” Geithner wrote in a December 1, 2011, letter to Senate leaders.
To no avail. The Senate passed the law 100 to 0, forcing the administration to blacklist Bank Markazi in July 2012. The European Union, fortifying the congressional action, joined the United States in imposing its own ban on any purchases of Iranian oil by its twenty-eight member states. Even the most hawkish U.S. officials said they were stunned by the pace at which Iran’s energy exports fell. In less than a year, Iran’s crude exports dipped to as low as 750,000 barrels a day from levels close to 3 million. South Korea and Japan cut their imports to zero, which meant they had to scramble to find new suppliers. China and India pared back their own imports even while they continued to gripe to the Obama administration.
