The Iran Wars

by Jay Solomon

  “That was the statistic I found most surprising,” the Treasury’s Adam Szubin told me about the plunge in Iranian oil exports. “We began at a time of $90-a-barrel oil and China growing. We brought their exports down so low that they had to limit production, which in turn harmed their infrastructure. That’s what really surprised me.”

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  EVEN AS THE OIL EMBARGO went into effect in 2012, Congress wasn’t finished pursuing its own financial war on Iran. Powerful lawmakers such as Menendez and Kirk believed it was primarily their legislation that had pushed Tehran toward a financial cliff and had compelled Treasury to act as forcefully as it did. Congressional staffers, partnered with largely conservative Washington think tanks, were looking at ever newer ways to squeeze Iran’s oil profits and ability to conduct financial transactions. Iran had emerged as a laboratory for concocting innovative ways to inflict economic damage.

  A lethal weapon came from an unlikely source: the Foundation for Defense of Democracies (FDD), a little-known think tank based near Dupont Circle. The FDD is a small operation that focuses on combating Middle East extremism and, in particular, promoting the security of the United States, Israel, and other democracies threatened by radical Islam. Among its benefactors was Sheldon Adelson, the Las Vegas casino magnate who’s been among Israel’s most powerful financial supporters in the United States. Adelson once publicly called for the United States to detonate a nuclear device in an Iranian desert to prove to Khamenei the United States was serious about stopping Tehran’s nuclear program. But the FDD wasn’t hard-line enough for the mogul, and he cut off his funding in 2013.

  The FDD’s executive director, Mark Dubowitz, was South African–born and Canadian-raised, and his Farsi-speaking research team fixated on the Iranian nuclear threat. They provided a constant stream of reports to U.S. lawmakers on Iranian companies and individuals that they believed should be sanctioned for their roles in developing Tehran’s nuclear program. These targets ranged from units of the Revolutionary Guard to obscure Iranian trading firms in Dubai and Hong Kong. Dubowitz and his FDD colleagues were convinced that the financial pressure on Tehran wasn’t extreme enough to force the Iranians to capitulate. They were looking for a new financial bomb to drop.

  They found it in a Belgium-based financial firm called SWIFT, which hosts the international computer network that facilitates virtually every banking transaction in the world through an extensive messaging and financial tracking system. Without access to SWIFT, companies and countries would be reduced to a primitive form of barter trade. Few Americans had ever heard of it, despite its critical importance to businesses everywhere.

  In late 2011, Dubowitz turned his efforts toward kicking Tehran off the SWIFT network. He was joined in this by Richard Goldberg, then the deputy chief of staff to Senator Kirk, the Illinois conservative. Goldberg, in his late twenties and a naval intelligence officer like his boss, was an aggressive congressional staffer who had no problem ruffling feathers on the Hill. Dubowitz and Goldberg worked as a one-two punch. At times the pair appeared to be driving U.S. sanctions policy on Capitol Hill by themselves after Senator Kirk suffered a stroke in early 2012; Goldberg was even nicknamed “Home Alone” due to the perception that he was acting without supervision.

  Dubowitz called Goldberg and pointed him to the SWIFT website. Despite international sanctions, Iran had been using SWIFT to continue conducting oil trades and to procure energy-related equipment and technology. Nineteen Iranian banks and twenty-five Iranian entities used SWIFT more than two million times in 2010, sending 1,160,000 messages and receiving 1,105,000. These messages and transactions allowed Iran to conduct $35 billion in trade with Europe alone that year, Dubowitz and the FDD concluded. In Dubowitz’s mind, Iran was exploiting a legal loophole in the international financial system.

  By 2012, SWIFT represented one of Tehran’s last entry points into the global financial system. But as Dubowitz and Goldberg had discovered, the company’s bylaws required that its services not be used to facilitate illegal activities. SWIFT’s own rules obliged it to prohibit access to users if they were facing international sanctions. Senior executives of the global financial institutions that formed the board of SWIFT in Brussels had the power to expel a user who “has adversely affected…SWIFT’s reputation, brand, or goodwill.”

  Goldberg drafted legislation to target SWIFT’s board of directors through the Senate Banking Committee. Treasury was initially hesitant about the idea of using SWIFT as a tool of economic warfare, U.S. officials said. The Obama administration was sensitive to the perception that SWIFT was being politicized in the dispute over Iran’s nuclear program. Treasury did not want to further complicate Washington’s relationship with SWIFT and threaten access to the financial data it used for counterterrorism operations. The agreement Stuart Levey had reached with the organization during the George W. Bush administration to gain access to this data remained controversial in Europe. There may also have been hesitation because of a concern within the U.S. government about the loss of financial intelligence into Iranian activities that SWIFT provided.

  The Obama administration sought to persuade key legislators that it was better positioned to pursue this matter quietly rather than having Congress adopt punitive measures against a critical global financial actor such as SWIFT. But Congress once again overrode the White House’s concerns and unanimously passed the SWIFT legislation in February 2012. The European Council soon followed suit and announced that “no specialized financial messaging shall be provided to those persons and entities subject to an asset freeze.” Dubowitz and Goldberg joked that Iran had been “de-SWIFTed.”

  Once again, the threat of congressional sanctions, passed over the objections of the Obama administration, played a critical role in persuading foreign governments, in this case the EU, to comply with U.S.-led pressure on Iran. Tehran, meanwhile, saw one of its final entry points into the global economy shut off. All of its major banks were sanctioned, as was its central bank. And the SWIFT network, which Iranian banks had still been able to use, was closed to it now. A complicated trade based on barter and smuggling would emerge as Tehran’s only means to do international business.

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  THE SANCTIONS WERE HITTING Iran’s economic managers in Tehran hard, particularly the central bank. I visited its gleaming blue-and-black headquarters, which stared up at the snow-capped Alborz Mountains, in the spring of 2014. The sleek office tower, more than twenty stories tall, didn’t appear to be an institution under siege. Construction cranes and tree-lined streets stretched out below the modern building. But inside its offices, bureaucrats were feverishly working to fend off financial collapse. Many acknowledged they had underestimated the power of the U.S. Treasury.

  My primary interlocutor at Bank Markazi was its number two official, deputy central bank governor Akbar Komijani. He, like a large number of senior figures in the Iranian government, had studied in the United States. In Komijani’s case, he received a Ph.D. in economics from the University of Wisconsin in the 1970s. He spoke fondly of the frigid winters in Wisconsin and the radical campus politics of the time. His English was fluent even though he hadn’t visited the United States in decades.

  Komijani had been a senior Bank Markazi official under the administration of the reformist president Mohammad Khatami in the late 1990s and early 2000s. Like many in the leader’s administration, Komijani was purged from government after the election of Mahmoud Ahmadinejad in 2005. He returned to academia for nearly a decade, while a surge in global oil prices filled Iran’s coffers. Komijani and other Iranian economists, though, became horrified by Ahmadinejad’s financial policies and rampant spending on populist programs—as just one example, the president had lost billions on a program for subsidized housing for the poor.

  Komijani was one of a team of economists who were called in by President Hassan Rouhani after his election in 2013. Many of them said that while they had known the financial situation in Iran was bad, they were stunned by what t
hey saw on the books. The government’s balance sheet had a black hole of more than $200 billion, much of the money assumed to have been lost due to corruption. Bank Markazi also had incurred huge debts to the country’s banks and state-owned companies, in part due to the low-income-housing scheme.

  The only solution to Iran’s financial woes, Komijani and Rouhani’s economic planners concluded, was accessing the more than $100 billion of Iranian oil revenues frozen in overseas banking accounts because of the U.S. sanctions. To get the funds, the Rouhani team knew, they needed to quickly enter into negotiations with the Obama administration to end the standoff over the nuclear crisis. “The sanctions were a catalyzer that exposed many other problems in our economy,” said Komijani in between cups of Persian tea. “If the negotiating process is speeded up, the country can have access to increased oil revenues and better access to overseas assets….We will have the opportunity to import the necessary inputs for our industrial capacity.”

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  EVEN AS KOMIJANI AND OTHERS tried to right their country’s economic ship, the impact of the U.S. financial war was being felt across Iran. Oil exports had fallen to below 1 million barrels a day from more than 2.5 million before the U.S.-EU embargo went into effect. The value of the rial had fallen by 30 percent against the dollar in one trading day. And Iran was being forced to engage in a medieval form of barter to import key commodities and everyday household goods, selling its oil in exchange for wheat and tea from India, rice from Uruguay, and zippers and bricks from China.

  Industry in the country seized up. A Wall Street Journal reporter traveling through Iran after the sanctions hit home saw factories and plants firing employees by the hundreds of thousands and taking radical cost-cutting measures to deal with the twin evils of a spiraling cost of imports and slackening demand for their products at home or abroad. At the Alborz industrial complex near the city of Qazvin, not far from the Caspian Sea, factory owners were eliminating paid holidays, reducing the numbers of free meals given to employees, and cutting the workweek by a day. Dairy companies wrote Supreme Leader Khamenei and said that if the economic siege didn’t end, they would all go out of business. Iran’s car industry, the largest in the Middle East, was posting production declines of 60 to 80 percent; some producers of spare parts were working at only 40 percent capacity because of a shortage of cash and a lack of raw materials.

  Visiting the Iranian city of Delijan, three hours south of Tehran, our Iranian reporter saw an industrial area with 160 factories grinding to a halt. Once a model for economic growth, the city and its fifty thousand inhabitants had been producing everything from paint to industrial textiles. A university outpost had opened and offered advanced vocational training. Services businesses, such as catering and cargo transportation, had taken root. Delijan firms had been selling to Afghanistan, Iraq, and Turkmenistan. But once the sanctions hit in 2012 and the currency plunged, the cost of maintaining the factories snowballed. Many smaller factories shut down. Dozens of the bigger ones were fighting bankruptcy. At Bam Shargh Isogam, a manufacturer of insulation sheets in Delijan, a manager told the Journal reporter that he had fired more than half of his 350 employees and didn’t pay the remaining workers for months. “From the owner to the line worker, no one is safe,” the manager, who called himself Bijan, said. “Our country is facing an economic disaster.”

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  A DECADE EARLIER, Stuart Levey and other Treasury officials had initiated a campaign to gradually wall off Iran from the global economy. Now the wall was nearly complete.

  CHAPTER 9

  The Arab Spring

  Iran may have been facing economic disaster, but it wasn’t going to shrink from defending itself or its allies from the revolutions that swept the Middle East in 2011. Tehran’s Green Revolution of two years earlier had to some extent created the climate for these democracy movements, which eventually posed a major threat to Iran’s closest Arab ally, Bashar al-Assad of Syria. A collapse of the Assad regime, Iranian officials knew, would threaten Tehran’s regional influence and its ability to send arms and funds to Hezbollah in Lebanon and to Hamas and Palestinian Islamic Jihad in the Palestinian territories. Whatever gains Tehran had made in its struggle against the United States and its allies since the Iraq War would be undermined by regime change in Damascus.

  For the Obama administration, the political tumult raised the prospect of vastly reshaping the Middle East but also posed limitless quandaries for U.S. policy. Close American allies in Egypt and Bahrain were under threat, as were their governments’ repressive rules. Should the White House support change and risk greater regional instability? Or should it back its partners at the cost of lives and human rights? A long-standing U.S. adversary turned partner, Moammar Gadhafi, was also facing a revolt in Libya. Would the United States back its red lines and prevent the killing of innocents there?

  Behind the headlines, the Obama White House remained fixated on engaging Iran on the nuclear issue. To challenge Tehran’s role in the shifting Middle East placed the diplomacy at risk. But if the United States stood back, Iran could grow even more powerful and feed into the region’s spiraling violence.

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  IN FEBRUARY 2012, U.S. spy satellites tracked the beginning of a massive Iranian airlift of weapons, supplies, and soldiers into Syria to support the Assad regime. The planes were largely Russian Ilyushin jets owned by Iranian airlines such as Iran Air, Yas, and Mahan, which the Revolutionary Guard had turned to in order to make up for the aging Boeing aircraft grounded by lack of maintenance. The planes flew west over Iraqi airspace into Syria, sometimes picking up supplies in the holy city of Najaf. Commercial cargo such as cement and electronics components was intermixed with small arms, artillery, and Iranian military advisors, to confuse surveillance or Iraqi inspectors.

  As the year progressed, the Obama administration had gained remarkable insight into the Syria strategy of General Qasem Soleimani, the United States’ old nemesis from the war in Iraq, and the senior leadership of the Revolutionary Guard. Washington used the National Security Agency to tap into the communications between Assad’s senior leadership and the Revolutionary Guard, and the CIA worked with the Israelis to develop a surprisingly effective human spy network. Many of Washington’s closest allies in Baghdad’s Shiite and Kurdish leaderships were close to Soleimani, giving Washington and Tehran a revolving door of intelligence.

  The Iranians had concluded President Assad hadn’t been prepared or equipped for the political rebellion that had gripped his country a year earlier. The Syrian military was heavy-handed and fueled what were initially peaceful political protests by torturing and murdering not only its political opponents but also young children. Damascus’s authoritarian regime ran a police state, but it had never developed a sophisticated capability to control crowds or to disperse large-scale political protests. A largely hidebound military also didn’t have an advanced ability to use the Internet and telecommunications to do surveillance on its enemies. Assad and his clique only understood one language in confronting dissent: brute force.

  General Soleimani and his staff concluded that Syria’s growing civil war risked dooming Iran’s closest ally in the Arab world, according to American intelligence. The collapse of the Assad regime would choke off Tehran’s ability to use the land bridge in Syria to funnel arms and money to its allies in Lebanon and the Palestinian territories—the front lines in Iran’s war against Israel. Syria was the linchpin in Iran’s overseas network, which projected the Revolutionary Guard’s power from the Caspian Sea to the Mediterranean. Soleimani wasn’t going to lose Syria without a fight.

  The turning point for the Iranians came in July 2012, when Syrian rebels assassinated Assad’s brother-in-law and number two intelligence chief Assef Shawkat, a close ally of Tehran’s. Two other top Syrian security officials were killed in the blast in Damascus. Soleimani and his cohorts concluded that Assad’s regime had been increasingly penetrated by the Sunni rebels, who were receiving growing financial and mi
litary support from Saudi Arabia, Qatar, Turkey, and the United Arab Emirates. The rebels were also closing in on Syria’s largest city, Aleppo, which would give them strategic control of Syria’s north and a greater ability to launch strikes on the Assad family’s stronghold on the Syrian coast and on Damascus. The fall of Assad and his government could be days or weeks away, some officials in the United States concluded.

  The Iranians dispatched top military advisors to Damascus to help Assad push back the rebels’ gains. The Revolutionary Guard started transferring telecommunications equipment to Assad to allow him to better track the movements and communications of his enemies. And the IRGC began mobilizing its closest Shiite allies, Hezbollah from Lebanon and a slew of Iraqi and Afghan militias, to fortify Assad’s defenses. “Some countries might have concluded that defending Assad at that point was useless, a lost cause,” said a U.S. defense official who tracked the intelligence out of Syria in the summer of 2012. “But Soleimani concluded the opposite. They had no choice but to go to the mat for the Syrians.”

  It was unclear, though, if the Obama administration would take up the challenge.

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  THE POLITICAL REBELLIONS THAT broke out across North Africa and the Middle East beginning in late 2010—a revolutionary surge known as the Arab Spring—had caught the Obama administration and nearly every Mideast government off guard. The revolts were fueled by economic stagnation, a youth bulge in the Arab world, and charges of corruption levied against the strongmen and dictators who had ruled Egypt, Tunisia, Libya, and Bahrain for decades. The advent of the Internet and Arabic-language satellite channels such as Qatar’s Al Jazeera helped spread word of the revolutions rapidly from Tunis to Tripoli and Cairo. There were political rumblings as far away as Yemen, Lebanon, and Iraq.