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44–881 CC






JULY 23, 1997

Printed for the use of the Committee on International Relations


BENJAMIN A. GILMAN, New York, Chairman
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HENRY J. HYDE, Illinois
CASS BALLENGER, North Carolina
EDWARD R. ROYCE, California
JAY KIM, California
TOM CAMPBELL, California
JON FOX, Pennsylvania
LINDSEY GRAHAM, South Carolina
ROY BLUNT, Missouri
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SAM GEJDENSON, Connecticut
TOM LANTOS, California
PAT DANNER, Missouri
WALTER CAPPS, California
BRAD SHERMAN, California
BOB CLEMENT, Tennessee
BILL LUTHER, Minnesota
JIM DAVIS, Florida
RICHARD J. GARON, Chief of Staff
MICHAEL H. VAN DUSEN, Democratic Chief of Staff
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FRANK RECORD, Senior Professional Staff Member
ALLISON K. KIERNAN, Staff Associate



    Hon. Alan Larson, Assistant Secretary, Bureau of Economic and Business Affairs, Department of State

    Mr. Patrick Clawson, Senior Research Professor, National Defense University

    Ms. Sarah Miller, Editor, Petroleum Intelligence Weekly

Prepared statements:
Opening statement of Chairman Benjamin A. Gilman, a Representative in Congress from New York
Hon. Robert Menendez, a Representative in Congress from New Jersey
Assistant Secretary Alan Larson
Mr. David Welch
Mr. Patrick Clawson
Ayatollah Dr. Mehdi Haeri Khorshidi
Ms. Sarah Miller
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Mr. Jeffrey J. Schott
Additional material submitted for the record:
Responses to questions submitted for the record

House of Representatives,
Committee on International Relations,
Washington, DC.

    The Committee met, pursuant to notice, at 10 a.m. in room 2172, Rayburn House Office Building, Hon. Benjamin A. Gilman (chairman of the Committee) presiding.
    Chairman GILMAN. The Committee will come to order.
    It is with great pleasure that we welcome the distinguished Administration and private-sector panelists before the Committee this morning to discuss the Iran-Libya Sanctions Act (ILSA), and give us their perspective on the effects of this act 1 year after its enactment in August 1996.
    The Committee's review of ILSA implementation comes at a time of heightened debate within the Administration and within Washington policy circles over the future direction of U.S. policy toward Iran and toward other terrorist nations.
    Some prominent outside observers are calling for a dialog and more moderation in our policy toward Iran as part of a review of a broader strategy of dual containment of both Iran and Iraq. The debate thus far centers around the question of whether our nation should offer incentives to moderate its behavior toward its neighbors in the Gulf and in the Middle East region as a whole.
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    This debate over our Iran policy has only accelerated in the wake of the May 23 election of Mohammad Khatami as President. A relative moderate on social and domestic issues, he was elected on nearly 70 percent of the vote and will take office in mid-August.
    The Administration has reacted with justifiable caution to these events, stressing, and I believe correctly, that there should not be any change in U.S. policy unless Iran takes clear steps to improve its international behavior. These steps should include a declared end to its support for international terrorism, a reduction in its conventional arms buildup in the Gulf, and a clear statement that it is not trying to acquire or produce nuclear weapons or the means to deliver them.
    Unless and until Iran is moving to accomplish these objectives, we should not alter our stance toward this country, and we should vigorously enforce ILSA as an important component of our overall dual containment strategy toward both Iran and Iraq.
    In that regard I would note that the only oil development contract that Iran has signed with a foreign firm since the imposition of U.S. sanctions now appears to be floundering because of a lack of financing, according to a recent report in the Iran Times. A key oil industry publication has also reported that this deal developing the Balal field is on the brink of falling apart because the Canadian and British firms involved in the bidding have been unable to arrange any financing.
    I would welcome the comments of our panelists this morning on the effects of ILSA on this proposed transaction and several others that are now pending between the Iranians and foreign companies.
    I understand that one potential firm waiting in the wings for this particular deal to fall through is the China National Petroleum Corporation. If that report turns out to have some validity, this could be a potential flash point in our U.S.-China relations, particularly in light of increasing Chinese support for Iran's military buildup.
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    I would also ask our panelists to comment on reports that another Iranian oil field development, the Soroush field, has the backing of Germany's Westdeutsche Landesbank. This bank has reportedly put together a syndicate of other banks to provide $90 million in financing this year and another $70 million in subsequent years.
    To the extent that the Administration witnesses and other panelists today can confirm these reports, this Committee will be asking the German Government to clarify its position in this matter. In light of the recent German court decision clearly implicating the Iranian Government in terrorist acts on German soil, we would like to know why a prominent German bank like Deutsche Landesbank, that has in the past been subsidized by government credits, is financing this project—and reportedly doing so with its own funds.
    More troubling still are recurrent reports that foreign firms, particularly the French oil company Total, might be on the verge of signing contracts with Iran to develop the large South Pars gas project expected to require more than $2 billion in capital.
    In a letter I received on July 15 from the chairman and chief operating officer of Total, Mr. Thierry Desmarest, he indicates that increased investment in Iran will, and I quote, ''help further stimulate democratic reform in Iran.'' It would, in fact, appear that this company is intent on proceeding with its contract with Iran, which is clearly a sanctionable event under the terms of ILSA.
    With recent indications from the French Government that it is willing to support French firms in Iran with a new $500-million insurance line of credit, we need to enter into an immediate high-level dialog with France to make certain that it is aware of the implications of imposing sanctions on its leading oil exploration and development firm.
    I would welcome the comments of our panelists on these and other issues related to ILSA as we review its effects on our policies in the region. We also need to explore in particular the prospects for multilateral cooperation in an effort to stop Iran from developing its offshore oil fields and using any of the revenues generated from those fields to fund its nuclear and conventional weapons buildup.
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    I am also asking our panelists to comment on recent developments in Libya and the impact of recent legislation on our policy toward that country. I would like to know how the United States has responded to calls by other nations for the lifting of U.N. sanctions against Libya in light of its continuing refusal to hand over for trial two suspected intelligence agents indicted for the bombing of Pan Am flight 103 in December 1988.
    [The prepared statement of Mr. Gilman appears in the appendix.]
    Chairman GILMAN. We look forward to hearing from our panelists. Our first witness will be Ambassador Alan Larson, Assistant Secretary of State for Economic and Business Affairs. He was sworn in as an Assistant Secretary in July 1996. Ambassador Larson has had a long, distinguished career as a Foreign Service officer, serving in capacities such as Principal Deputy Assistant Secretary of State for Economic and Business Affairs, Deputy Assistant Secretary for International Finance and Development, and our American ambassador to the Organization for Economic Cooperation and Development.
    Mr. Ambassador, we welcome you to the Committee. We will be looking forward to your testimony.
    In the Department of State we have David Welch, Principal Deputy Assistant Secretary of State for Near Eastern Affairs. Mr. Welch is a career Foreign Service officer. He has served in numerous posts in the Middle East and South Asia. We welcome having you here today, Mr. Welch.
    I turn to our Ranking Minority Member, Mr. Hamilton, if he has any opening statement.
    Mr. HAMILTON. Mr. Chairman, I think you are to be commended for having these hearings. I join you in welcoming the witnesses. I look forward to their testimony. I have no opening statement. Thank you.
    Chairman GILMAN. Thank you, Mr. Hamilton.
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    Are there any other Members seeking recognition?
    Mr. Larson, you may proceed. You may put in your full testimony or summarize it, whichever you deem appropriate.
    Mr. LARSON. Thank you, Mr. Chairman. I would like to submit my full statement for the record and make a brief oral summary.
    Mr. Chairman and Members of the Committee, I would like to thank you for the opportunity to brief the Committee on the first year of ILSA. I am going to comment today on ILSA's implementation and on its role in achieving our policy objectives.
    ILSA does not stand alone. As Mr. Welch will outline, it is part of a broader effort to deter Libyan involvement in terrorism, Iranian and Libyan involvement in global terrorism and the spread of weapons of mass destruction. The act underscores the seriousness of our concerns about Iranian and Libyan behavior. It highlights the importance of enlisting multilateral support for efforts to change that behavior. We are working with friends and allies to develop common approaches to this problem and to achieve ILSA's objectives.
    Looking at the first year of ILSA implementation, we believe the act has had a significant deterrent effect on petroleum sector investment in Iran and Libya. Of course, ILSA is not the only factor in investment decisions, and the law has not eliminated petroleum company interest in these countries. Nonetheless, since ILSA's enactment, the information we have gathered and the analysis we have performed does not support a determination that any person has made a sanctionable investment as defined in the act. There are certain cases that we are watching particularly closely, and we will take appropriate action under ILSA if we find that sanctionable activity has occurred.
    Our strategy for implementing ILSA has three main elements. First, we are collecting and analyzing a vast amount of information to keep track of international commercial transactions that may have ILSA implications. The State Department's ILSA unit is charged with monitoring the data, coordinating governmentwide analysis, and ensuring that the Administration is prepared to take timely and appropriate action. Cases are reviewed by the State Department's internal ILSA Working Group and by an interagency working group before any action is taken. The President has delegated responsibility for final decisions about sanctionability to the Secretary of State.
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    Second, we have worked hard to enhance the international business community's awareness and understanding of ILSA. Since the law's enactment, we have informed international petroleum companies and others about the risks of engaging in activities that might be subject to ILSA sanctions. When we have identified firms engaging in questionable activities, we have contacted them directly to make them aware of our concerns. So far, none of the petroleum firms contacted in this way has finalized an investment in Iran or Libya, though some apparently are continuing to give those activities serious consideration. We continue to monitor those cases very closely.
    Third, we have kept other governments informed of our efforts to deter activities contrary to the act. ILSA encourages consultation with foreign governments. When we have contacted foreign firms about questionable activities, we have also tried to engage their governments as well. In some cases, we have raised our concerns at the highest levels of government.
    Press reports and statements by company officials suggest that concern about ILSA sanctions is an important factor in corporate decisions and has had a chilling effect on investment. No foreign firms have so far invested in the 11 oil and gas projects tendered by Iran, though some firms are interested.
    The situation in Libya is somewhat different. Foreign firms have been involved in Libya's oil industry for many years, and there are activities being carried out under agreements that were concluded before ILSA. Nonetheless, we actively investigate reports of new investments in Libya as well as evidence of prohibited transactions that both violate the existing U.N. sanctions against Libya and would, as well, be sanctionable under ILSA.
    Our efforts to implement ILSA have not been without cost. ILSA is a source of friction in our bilateral relations with some of our closest friends and allies. The European Union and the member States have voiced strong opposition to the law, and the European Union has enacted blocking legislation that is designed to prevent its member States from complying with the provisions of ILSA.
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    We are trying to keep our European friends focused on the overriding importance of concerted action on Iran and Libya. The April 1997 U.S.-EU Understanding on the Libertad Act, for example, reiterates the President's commitment to implement ILSA and commits us and the Europeans to work together toward the objective of meeting terms which would warrant waivers under section 4(c) of ILSA.
    Several European countries already have taken important, useful action on Iran. We made it clear, however, that substantial measures, including economic sanctions, are necessary to justify such a waiver, and I would add that I would not be in a position to recommend waivers solely on the basis of measures taken to date.
    We need to keep in mind that despite ILSA's chilling effect on some investment plans over the last year, there is no guarantee that the act alone will prevent all of the investment in commercial activity in Iran and Libya that we oppose. This is why diplomatic efforts to encourage a common, multilateral approach on Iran are essential. By integrating ILSA into our broader strategy with respect to both Iran and Libya, we can maximize its impact and move closer to realizing our goal of changing Iranian and Libyan behavior. This is going to be our prime objective as we move into the second year of ILSA implementation. Thank you.
    Mr. CHABOT. [Presiding.] Thank you very much.
    [The prepared statement of Mr. Larson appears in the appendix.]
    Mr. CHABOT. Our next speaker this morning will be David Welch, who is the Principal Deputy Assistant Secretary in the State Department's Bureau of Near Eastern Affairs. He is a career Foreign Service officer. Mr. Welch has had a number of assignments in the Middle East and South Asia, including Saudi Arabia, Jordan, Syria and Pakistan. Most recently, Mr. Welch was the Deputy Chief of Mission at the U.S. Embassy in Riyadh from 1992 to 1995. In the absence of an ambassador, he served there for 2 years, from 1992 to 1994, as charge d'affaires. He was a member of the National Security Council staff at the White House from 1989 to 1991 and has served in several positions at the State Department.
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    Mr. Welch graduated from Georgetown University School of Foreign Service in 1975. He has also studied at the London School of Economics in 1973 and 1974 and has advanced degrees from the Fletcher School of Law and Diplomacy.
    Mr. Welch was born in Munich, Germany, in 1953, from parents who were also in the Foreign Service, and lived with them in Germany, Brazil, Ecuador and Mexico. Mr. Welch has three daughters.
    We welcome your testimony here this morning, Mr. Welch. Thank you for coming.

    Mr. WELCH. Thank you.
    It is my pleasure to be with you today to discuss Iran and Libya, two of the principal challenges to U.S. foreign policy. The Iran and Libya Sanctions Act, ILSA is our acronym, reflects the shared conviction of the executive and legislative branches that terrorism cannot and will not be accepted or legitimated as an instrument of foreign policy. We reject the notions that the use of violence to terrorize or intimidate is somehow acceptable, or that weapons of mass destruction and their means of delivery are necessary tools of State power.
    I would like to focus a bit on what the Administration has done on Iran and Libya and how ILSA fits into that effort.
    Our approach focuses on three areas: economic pressure, counterterrorism, and arms control and nonproliferation. We have achieved some cooperation with our principal international partners in each of these areas. Equally, we seek greater convergence with them on Iran policy.
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    First, economic pressure. Unilaterally, we have a very strict trade and investment embargo instituted by the President in May 1995. In addition to those unilateral measures, we are implementing ILSA firmly and fairly. For their part, many of our allies have been reluctant to grant Iran extensive access to official credits and guarantees for both economic and policy reasons. This is a first step, but more remains to be done.
    Second, counterterrorism. Events over the past year have heightened our common concerns on terrorism, have led to some useful actions by the European Union, including suspension of the critical dialog and official bilateral ministerial visits, a public confirmation of the existing ban on arms sales to Iran, increased cooperation on reducing Iranian intelligence presence in EU member States, and the recall of all EU member ambassadors from Tehran. At the Denver Summit of the Eight in June, we and our allies called on Iran to renounce the use of terrorism, including threats against Salman Rushdie.
    Third, the area of arms control and nonproliferation. Excellent multilateral cooperation has made it more difficult for Iran to buy arms, dual-use items and technology of proliferation concern. The existing net of multinational arrangements does not stop all transfers of concern, but it has slowed the pace of Iran's programs. We push for compliance with nonproliferation and arms control arrangements should we receive information that transfers are taking place. When we have done so, we have generally received good cooperation from other governments in those types of cases.
    Again, at the Denver Summit, the P–8 called on all States to avoid cooperation with Iran's nuclear, biological and chemical weapons and missile development programs.
    Let me discuss ILSA and what we have done to build greater consensus on Iran among our allies, one of the requirements of the act.
    The Administration has worked to build broad support for a multilateral sanctions regime to inhibit Iran's efforts to acquire weapons of mass destruction and to support international terrorism. The basis of that dialog with our partners is our common conviction that Iran must alter its objectionable behavior. We differ, however, on the tactics for achieving this goal.
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    The United States has taken a range of actions to counter the Iranian threat. Now we must have help from our allies, and we are working to develop the convergence between our approach and that of our allies. We have regular discussions with the EU, Japan, Canada, Australia, Turkey and others regarding developments in Iran and how we should react to its threatening policies. We have suggested a method of reviewing Iran's behavior to come to a common evaluation of any change, be that positive or negative. It is our hope that such a process would lead to a discussion of possible common reactions. We do not have agreement from our allies on this proposal. They remain concerned that the United States seeks to impose a multilateral policy toward Iran. However, we genuinely seek effective methods of cooperation, and we will continue to work with our allies toward that end.
    The act allows the President to waive sanctions for nationals of any country that have agreed to take, ''substantial measures, including economic sanctions,'' that would inhibit Iran's efforts to acquire weapons of mass destruction to support international terrorism. The Administration has stated clearly that economic measures are necessary to justify such a waiver. We have not defined precisely what those measures should be and do not believe it would be constructive to insist that our allies mirror U.S. policy on Iran. However, to merit a waiver, any actions taken by our allies must inhibit Iran's efforts to pursue those objectionable policies cited in the act.
    A brief word about the Iranian elections and the election in particular of Mohammad Khatami as the President of Iran. This is an interesting development, to the extent that it reflects the Iranian people's desire for change. We will have to wait and see whether it produces any positive changes in Iranian policies that threaten our interests.
    On Libya, we face a somewhat different situation. A U.N. sanctions regime exists in Libya for which there is broad multilateral support. Our allies, however, are disturbed by the additional sanctions ILSA places on investment in Libya. We are discussing our allies' concerns while working to maintain their strong cooperation with our efforts to bring to justice those responsible for the bombing of Pan Am flight 103.
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    It is too early to gauge the impact of ILSA on would-be violators of the U.N. sanctions against Libya; however, we emphasize in demarches on possible violations of U.N. sanctions that violators must also risk exposing themselves to ILSA sanctions. We remain committed to raising violations of these sanctions in the appropriate U.N. committee, the Sanctions Committee, even though the structure of that particular committee makes attaining adequate unanimous responses difficult.
    In conclusion, I want to emphasize that sanctions on Iran and Libya are not ends in themselves. The Administration's goal, and I believe it is that of the Congress as well, and its intention in passing this legislation is to see that these nations abandon objectionable policies and become constructive members of the international community. Thank you very much.
    Mr. CHABOT. Thank you.
    [The prepared statement of Mr. Welch appears in the appendix.]
    Mr. CHABOT. Members at this time will have questions.
    First of all, Mr. Welch, the Administration has said Iran must agree to discuss its objectionable international behavior if there is to be a dialog with the United States. Are there any signs that Iran wants to open a dialog with the United States at this time, and should the United States offer to discuss aspects of U.S. behavior that Iran finds objectionable?
    Mr. WELCH. Our position is that we don't oppose dialog per se. On the part of others, we have offered it ourselves. So far Iran's government has not deemed that offer to be worthy of taking it up. Each time we have reiterated this in public, we have said that our agenda for any such discussions would include each of Iran's objectionable behaviors. We have not suggested what their agenda should be. I have no clear indication of what it might be.
    Chairman GILMAN. [Presiding.] Can I ask our panelists, how are our allies in Europe responding to the election of the new government in Iran, and are they likely to revive an official dialog with Iran that was suspended following the April 10th German court verdict that determined official Iranian complicity in the 1992 assassination of an Iranian dissident?
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    Mr. WELCH. Mr. Chairman, I think our allies in Europe have had a reaction to the election result that is not dissimilar to our own. It is an interesting and intriguing result, contrary to their own private expectations about what it might be.
    My understanding is that the decisions taken after the Mykonos verdict was released, that is that first and foremost there is no basis for continuation of the critical dialog and the suspension of bilateral ministerial visits and the withdrawal until now of the European ambassadors from Tehran, those measures remain in effect. We continue our discussion with the Europeans on each of these matters, and I would expect that absent any resumption of the dialog between Europe and Iran, that there won't be any change in those measures for now.
    Chairman GILMAN. Can our panelists tell us why the Administration issued only guidelines instead of regulations governing the implementation of ILSA, although it chose to issue detailed regulations for the Antiterrorism and Effective Death Penalty Act of 1996? It seems to us that the Administration has given itself broad latitude to determine whether or not to impose sanctions under ILSA. If that be the case, we would like to know why that is the case.
    Mr. LARSON. Mr. Chairman, we have not had that type of consideration in mind in opting not to have regulations. We wanted to get a quick start; we wanted to set out arrangements that would very clearly define for the executive branch agencies how we are going to implement this act. I think that the record over the last year suggests that we have moved quickly. We have done a great deal of work both to gather information, analyze that information, to approach foreign firms and foreign governments, and we are determined to implement the act in a vigorous way, including taking appropriate action if and when we find any evidence that a firm has conducted an activity that would bring it in violation of ILSA.
    Chairman GILMAN. Gentlemen, recent reports, as I indicated, in the Iranian Times state that the French export insurance company agency, Coface, has extended a $500-million line for Iran. Does that extension violate any understandings we had with our allies about extending new credit lines to that country?
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    Mr. LARSON. Mr. Chairman, over several years we have worked with our allies to try to persuade them that the extension of new official credits was an unwise policy. I don't have the details on the particular Coface loan or guarantee to which you referred, and I would need to get more information on that before I would make an assertion about whether it violates understandings. I think that the general point that I can make this morning is that we have been discouraged in the past over the difficulty that we have had in getting sufficient cooperation from European governments in restricting official credits to Iran.
    Chairman GILMAN. If this is the case, and facts are verified about what Coface is doing, would that be a sanctionable action against France?
    Mr. LARSON. I think, Mr. Chairman, the answer to your question would depend a great deal on the details. There was at the time that ILSA was implemented a debate about whether purely financial transactions should be included, and at that time the judgment was made, I think for good and sufficient reason, that certain types of purely financial transactions would not be considered sanction-able activities under ILSA. The law makes quite clear that there are circumstances where financing, when, for example, it basically puts the financing agency in a position that it has an equity stake, is royalties or things like that, would be a sanctionable activity. So I think one would have to look into the details of the particular transaction.
    Chairman GILMAN. Are we looking into the details?
    Mr. LARSON. We are investigating every single case that we hear about of investment or financing of Iranian oil and gas production, and we will certainly be investigating this one as well.
    Chairman GILMAN. Thank you.
    Just one last question, and I know I am exceeding my time.
    Is it your assessment that ILSA has succeeded in reducing investment in Iran's energy sector?
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    Mr. LARSON. Yes, Mr. Chairman, it is. Certainly 1 year is a short period of time when one is talking about foreign investment decisions, and we will be quite ready to acknowledge that ILSA is not the only factor that enters into decisions on investment. Nevertheless, I think it is notable that during the first year of ILSA, there has not been any activity that we have been able to learn about or identify that would be sanctionable under ILSA. We find it notable that none of the 11 projects where Iran has solicited foreign involvement have resulted in a contract producing that type of involvement, so we do think it has had a chilling effect on foreign investment in Iran's petroleum sector.
    Chairman GILMAN. Thank you.
    Mr. Hamilton.
    Mr. HAMILTON. Thank you very much, Mr. Chairman.
    We obviously have some really big problems with Iranian foreign policy. They don't support the peace process, they export revolution, they support international terrorism, and they seem to be trying to acquire weapons of mass destruction.
    So far as I am aware, we haven't made any progress in changing Iranian behavior in any of those key areas; is that correct?
    Mr. WELCH. I think we have made progress in raising the cost to them of certain of those behaviors. We have not reversed them.
    Mr. HAMILTON. So what you have today then is an Iran that is very belligerent toward the United States, an Iran that is very rigid in its policies and has been for many years; that is implacable in its opposition to the peace process and supports terrorism as an instrument of policy. You are now in the 18th year of the Iranian revolution. The policy which you have set out in your statement, Mr. Welch, is a policy that I have heard for many, many years. That doesn't mean it is the wrong policy, but it certainly has been stated over and over again. I can't see that it has changed Iranian behavior in any way. So how can you say this policy today is successful?
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    Mr. WELCH. I think Iran's behavior, if it chooses to pursue it, must be met by substantial additional cost to Iran. I think we have succeeded in raising the cost to Iran of pursuing the kinds of problem behaviors that you have listed, Mr. Hamilton. That they nonetheless choose to do so is not a failure of our policy, it is a standard of their determination.
    Some of these behaviors are quite threatening to our national security interests. That is one of the principal motivations behind the legislation that we are reviewing today. We would have better success were we not acting unilaterally. We have had some cooperation, in some areas very good cooperation, from our friends and allies around the world. There is more that could be done there.
    I think you have to look at what the alternatives might be to the sort of policy we have pursued also. I think to go to the other end of the scale and pursue engagement more or less for its own sake, dialog that is critical only in name, I think, would be an error.
    Mr. HAMILTON. Let me take up this question of our posture on a dialog. Mr. Murphy, whose name you know, one of the predecessors in the position you are now serving in an acting capacity, speaks about this offer for an official dialog, and I quote him: ''After more than a decade of repetition, coupled with our harsh public rhetoric about Iranian actions and intentions, this invitation is unpersuasive.''
    How do you react to that?
    Mr. WELCH. Well, I can't answer why the Iranian Government has not chosen to pick up on this offer of a dialog. They have made their own calculation for their own reasons that the offer, such as it is, is not persuasive to them. We are not in the business, however, of making offers that are designed to tempt them for talk alone.
    Mr. HAMILTON. Let me have you respond to another question here. Mr. Murphy writes, ''It is now clear that we will make little progress on the items of disagreement, terrorism, nuclear proliferation, peace process and so forth, with Iran unless we engage the Iranians in serious high-level negotiations without preconditions.''
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    How do you feel about that?
    Mr. WELCH. Well——
    Mr. HAMILTON. We haven't made any progress. We haven't changed their behavior. All you have said this morning is that we have raised the cost, which we can't do very effectively, you indicate, without the support of others. So why not try to engage in some way?
    Now, what he is suggesting is a very modest kind of engagement. He is not suggesting swinging to the other end of the pendulum. Specifically, the Council on Foreign Relations report suggests four very modest steps: First, reducing the intensity of the rhetorical war. Obviously, that takes some reciprocity. Second, reducing the economic embargo of Iran to a narrow range of specific items such as components for weapons of mass destruction, missiles, and dual-use technology. There, I think, you would have a lot of support from the European Community. Third, encouraging the IAEA to carry out a more aggressive program of inspections in Iran, and fourth, exploring the potential of dialog with Iran through some nonofficial channels.
    Now, you see the kind of the problem I am wrestling with here. I think this is a very tough policy problem. I think you have had a policy in place for a very long period of time that we have kind of repeated year after year after year. We have always said that the objective of that policy is to change Iranian behavior. We acknowledge that it has not changed Iranian behavior on those areas that are most important to us.
    Now, at the very least, it seems to me, that calls into question your policy and should make us more willing to explore other possibilities, and I guess that is where my thinking is at the moment.
    Now, I see some advantages to the policy we have had there. I mean, after all, our position in the Gulf is strong, and we have followed the policy of containment, and Iran has been frustrated in many of its ambitions, or at least that is my impression. So you don't veer off this policy easily, I understand that. On the other hand, there might be some very modest things that could be done that might kind of break the logjam here, and that is what I have been thinking about.
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    I have asked you to respond to that kind of thinking in a previous encounter that we have had. I have not received a response from you. I look forward to that soon.
    Let me just ask one final question, Mr. Chairman. I know my time has expired.
    I have heard that the EU governments have told us that they will not increase cooperation with us on Iran policy until the threat of sanctions under ILSA is removed. Is that correct?
    Mr. LARSON. Mr. Hamilton, certainly in the discussions that I have been involved with regarding ILSA, that specific statement has not been made. Certainly the European countries on many occasions have made clear their strong unhappiness with ILSA legislation. They have even introduced blocking legislation to make it more difficult for European firms and nationals to cooperate with the legislation. European governments have not said, at least in my presence, that they would not cooperate with us further on Iran until the legislation was repealed.
    Mr. HAMILTON. Well, I think most everybody would like to see your idea of raising the costs to Iran work effectively, and it makes some sense. But it does seem to me that these sanctions that we can apply unilaterally aren't going to raise the cost to Iran all that much. It may raise it somewhat. But if you are really going to have an effective sanction policy against Iran, then we must have multilateral cooperation. It just seems to me that we are a very long way away from that. Every European leader that comes into this city that talks with me absolutely rejects our policy toward Iran. I have just seen no softening of that position at all on their part. So I know you have a tough job here working with them. I don't have any doubt about that. There is a real difference.
    Mr. WELCH. I think, Mr. Hamilton, that we have not exhausted the possibilities to do more together, though they are quite resistant to what they label as the extraterritorial reach of our policy.
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    I also think that even as they oppose what they say or perceive that we are doing, what they propose as an alternative I find not very precise, and where they have suggested engagement, I believe it simply hasn't worked. I think the historical record is quite good in that respect also.
    Mr. HAMILTON. I agree with you there. Their so-called critical dialog hasn't shown any progress either, so far as I know. I don't know all of the elements of it.
    Well, OK. Thank you very much.
    Thank you, Mr. Chairman.
    Chairman GILMAN. Thank you, Mr. Hamilton.
    Mr. Berman.
    Mr. BERMAN. Thank you, Mr. Chairman.
    If I could just try to review for one moment the thrust of the testimony. It is my assumption from what you said that we can pretty safely say that no threshold investment in this sector of the Iranian economy has taken place since the passage of the sanctions legislation; is that a fair conclusion?
    Mr. LARSON. Yes, sir. I think what I said is that to our best information and analysis, there has been no action since the passage of ILSA that involves sanctionable activity under ILSA. There has not been that type of an investment.
    Mr. BERMAN. I assume it is equally true that the Iranians have sought seriously and forcefully to obtain investments in that sector. I have been told that by some of the recipients of their efforts.
    Mr. LARSON. Well, that is correct. The Iranians are seeking foreign participation in at least 11 oil and gas projects.
    Mr. BERMAN. And as I understand the purpose of this legislation, it was not so much to assume that in the short term that it would cause a change in Iranian policy, but rather to impede, make more difficult, raise additional obstacles to their efforts to pursue the more costly aspects of some of their very disruptive policies internally, externally, in pursuit of weapons of mass destruction, support for terrorism, et cetera, et cetera.
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    That no one, neither the President when he signed it nor the Congress when it passed it, assumed that this sanctions effort was an effort to produce a quick change in Iranian policy, but rather to increase the cost of pursuing the policies we don't like. Is that a reasonable conclusion?
    Mr. WELCH. That is exactly correct. I would add that as in any of these efforts, while the success rate in deterring investment appears so far to have been good, deterring all investment was not the objective either; it was to make this pinch. Iran's oil exports account for the lion's share of its export earnings. They need to expand those. They have a very rapidly growing population and tremendous economic needs. They can't do it without this investment. This investment is now obviously going to come to them at a much higher price.
    Mr. BERMAN. Assuming the Europeans are offended by the presumptuousness of our extraterritorial actions in this area, but given the fact that it has so far deterred the investments that were sanctioned activity, what is the difference whether the Europeans like what we are doing or don't like what we are doing if their business entities, their State corporations, in the end, for all of the whining and complaining, do not make the sanctioned investments?
    Mr. WELCH. ILSA would deny certain U.S. benefits to foreign companies who elect, nonetheless, to pursue an investment in Iran's oil and gas sector of a certain magnitude. It is their choice. And so far, I think it has worked to deter some of these companies. But the focus really of our effort isn't ILSA per se, it is what Iran does that we all find objectionable.
    Mr. BERMAN. Let me just quickly ask you two short questions before my time runs out.
    First, is there anything in our policy that would prohibit us from doing what Ambassador Murphy argues for, and that is using the IAEA to encourage a higher level and more effective inspections of Iranian nuclear facilities?
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    Mr. WELCH. Knowing Mr. Hamilton's interest and your own, Mr. Berman, in this particular analysis of the dual containment problem, I reread it last night. The only area, I think, to answer your specific question, where I believe our unilateral latitude is circumscribed more than he accounts for in the article is in allowing certain U.S. business transactions with Iran.
    Mr. BERMAN. In other words, every other thing he advocates is not inconsistent with the present Administration policy of dual containment?
    Mr. WELCH. Some are underway.
    Mr. BERMAN. And then the second question is there are rumors that a high-level Italian Government and commercial delegation, have gone to Iran to try and put together an investment in the Iranian energy sector. Are you aware of these rumors? Do you have any knowledge of whether this is true or not? Are we doing anything about it?
    Mr. LARSON. I am not aware, Congressman, of any specific details on that. What we have found in implementing this act is that we often hear about rumors, and there certainly are discussions that are ongoing all the time, but we have seen absolutely nothing that would indicate substantial activity by Italian interests in Iran at this stage, and certainly not the types of activity that would call into question whether an ILSA sanction was called for under the act.
    Mr. BERMAN. Thank you.
    Chairman GILMAN. The gentleman's time has expired. Thank you, Mr. Berman.
    Mr. Davis.
    Mr. DAVIS. Thank you, Mr. Chairman.
    I would like to focus further on your comments as to how you are gauging our success as far as discouraging Iran from engaging in the type of conduct that was proscribed by the legislation. You conceded to Mr. Hamilton that our principal success has been in increasing the price that Iran has to pay. I wonder if you are seeing any secondary effects as far as having increased the price to pay in terms of creating stress on the country or the relationship between the elected and the electorate, such that we are seeing, for example, some positive changes internally, for example, the recent election results.
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    Mr. WELCH. I think it is a little harder to be precise in that area. It is notable, though, that this is the first Iranian election, and there has been such a surprising political outcome. Many of the people who voted in this election can't remember the revolution. Most of Iran's population is quite young. They are essentially making their political choice in an environment that is shaped only by the experience with the clerical leadership that has come in after the revolution.
    I think it is principally for their own domestic reasons. Foreign policy does not appear to have been a factor in this election, and those domestic reasons are important to them. They see the revolution as having constrained their opportunities of expression in their civil liberties. They see that the economic situation in Iran is worse today than it was in 1979, by a considerable amount, Mr. Congressman.
    So I think to the degree that the Iranian people are looking for change, they are also measuring what change has occurred and coming up with a pretty poor answer. They delivered it Iranian terms at the ballot box.
    Now, I am not suggesting that this election was sort of a watershed event in Iranian democracy in the sense that everybody who wanted to participate was allowed to participate. You had 238 potential candidates, and it suddenly got narrowed to 4. So the range of choice was somewhat circumscribed. But within that range of choice, they certainly delivered a very clear signal. I think it is because things at home are not very good.
    Mr. DAVIS. What can you identify to us as the realistic prospects for further engaging our allies around the world in supporting our efforts to isolate Iran through the type of sanctions provided for in ILSA?
    Mr. WELCH. Well, first and foremost, this is a serious issue that requires serious and sustained American leadership. As I sit here today, we are giving that leadership, up to and including the President of the United States. This is a matter that is of substantial importance in our foreign policy, and I think our allies know and understand that.
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    The second thing is to point out the areas where we agree that there are problems that Iran presents to all of us, not so much as a U.S.-Iranian issue, but as an issue that deserves to be addressed by the world community. Those of terrorism and weapons of mass destruction in particular have very compelling rationale. I think we have done fairly well in broadening the international consensus on dealing with those issues.
    If you went back 10 years ago to ask where we were then, you would find really quite a different European relationship with Iran where the controls on what they sold were much less restricted than they are today.
    This agreement, I think, can be brought. There are challenges to that. I wouldn't say that they are insuperable ones. And because, as others have said, we have not totally succeeded in changing Iranian behavior, they continue to provide us fresh evidence that they are a problem, and that evidence is compelling to our friends.
    Mr. DAVIS. Thank you, Mr. Welch.
    Thank you, Mr. Chairman.
    Chairman GILMAN. I thank the gentleman.
    Mr. Ackerman.
    Mr. ACKERMAN. I pass, Mr. Chairman.
    Chairman GILMAN. Mr. Luther.
    Mr. LUTHER. I pass, Mr. Chairman.
    Chairman GILMAN. Mr. Berman.
    Mr. BERMAN. Thank you, Mr. Chairman.
    I would just like to get on the record what the Administration's understanding of our allies', the Europeans, the Japanese, policy is with respect to exports of munitions list items to Iran at this particular time. Could you speak to that?
    Mr. WELCH. Yes, and then maybe if Al wants to add anything.
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    We have a common policy that there should be no exports, no items to sensitive countries like Iran.
    Mr. BERMAN. What kind of items?
    Mr. WELCH. Sensitive items to military end-users. This is, I believe, something that all of the partners in Wassenaar agree to. That isn't to say that there are not transfers of items taking place to these military end-users. Where we find out about those, we investigate them, and as I mentioned in my prepared remarks, the cooperation we have had from the signatories in those cases has been good.
    Mr. BERMAN. So the transfers that you are talking about are essentially transfers that violate the Wassenaar Agreement and violate the country's own internal laws and regulations. They are technical, illegal transfers that the governmental entity, at least officially, did not know about?
    Mr. WELCH. Yes. I would presume that is the case.
    Mr. BERMAN. You are not talking about government-approved transfers?
    Mr. WELCH. No, these governments do not transfer military items to Iran.
    Mr. BERMAN. When you say sensitive, I assume that means no military items and no dual-use items going to military end-users?
    Mr. WELCH. Correct.
    Mr. BERMAN. OK. Thank you.
    Chairman GILMAN. Mr. Sherman.
    Mr. SHERMAN. The sanctions so far have worked well. You have told us that there has been substantial foreign financing for a major energy project in Iran, but there is the effort of Germany's Westdeutsche Landesbank to perhaps enter into a disguise scheme in order to provide $90 million to an Iranian firm to finance an oil project in Iran, and this scheme seems to have acquired the support of the German Government. The scheme involves the German bank making a loan to an Iranian finance company which would then proceed to finance the oil project.
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    If this Ponzi scheme system of evading the sanctions goes forward, will the Administration respond and treat it as a violation of ILSA?
    Mr. LARSON. We have been following very closely the proposed transaction to which you have referred. We have seen reports that the German bank is proceeding with this loan, but we don't have the details at this stage, Congressman. We have been sufficiently concerned about the reports that we have raised it with the bank as well as with the German Government. We have pointed out to both that we oppose any arrangements such as the rehabilitation of this oil field that would create revenues that Iran could use to support international terrorism or acquire weapons of mass destruction, and we are going to continue to raise those points and to monitor this transaction very closely. We don't have enough information at this stage to make a final determination about the sanctionability of the transaction.
    Mr. SHERMAN. How is the Administration responding to the close relationship between Iran and Syria, and would the Administration consider asking Congress to expand ILSA to include Syria, given the fact that both Iran and Syria are cooperating so closely on terrorism, particularly through Hezbollah?
    Mr. WELCH. We find Iran's activities in Lebanon and with relationship to certain groups that operate either in Lebanon or Syria-controlled Lebanon or have branches or offices in Damascus to be one of the clearest pieces of evidence of Iran's support for terrorism. This is a matter that we discuss regularly with the Syrians, and others, including the Government of Lebanon. This is a very problematic policy on the part of the Iranians, and has, I think, been problematic for the Syrians, too. At this point we are not suggesting any expansion of the measures that we have in effect on either Syria or Iran as State sponsors of terrorism.
    Mr. SHERMAN. What will the Administration do if Total, the French oil company, goes through with the deal to expand the natural gas field or develop the natural gas field in South Pars?
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    Mr. LARSON. We are following the Total issue very, very closely, Congressman. We have made clear to Total, as well as to the French Government at a very high level, that we will take appropriate action under ILSA if we find that the sanctionable activity has occurred. The information that we have at this stage suggests that this deal has not been finalized.
    Mr. SHERMAN. Thank you.
    Just one more comment I would like to make, and that is that the United States is spending billions of dollars to defend Europe, and our attitude toward the Europeans seems to be that we humbly accept whatever the Europeans do to help us and our security efforts elsewhere in the world, but if the Europeans feel that they can make money by undermining our security, they are free to do so without any effect on our security relationship with them in their own defense. We are now on the verge of expanding NATO at a cost of billions of dollars to the U.S. taxpayers, some of that admitted, some of it not admitted.
    There may come a time when the Iranian Government is a sponsor of some great terrorist act in the United States, and it will be based on weapons that they have developed with money that they have acquired from the European continent unwilling to join us in tough sanctions against Iran. Maybe at that point Americans at our State Department will begin to reflect on the fact that on that day Prague will be safe, Warsaw will be safe, Budapest will be safe, and all of the Western European capitals will be extremely safe, and there may be hundreds or thousands of American casualties due to some great terrorist act, and those deaths will be in part caused by the fact that the Europeans have undermined our national security at a time when we are expanding beyond anything we would have expected a few years ago our efforts for their security.
    I realize time doesn't permit you to respond to those comments, but if you want to submit a response in writing, I am sure that that would be made a part of the record.
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    Chairman GILMAN. The gentleman's time has expired.
    You may submit a response of course in writing. To both panelists, there may be some questions that will be submitted by our Members, and I will ask for a response in writing from you.
    [The information referred to appears in the appendix.]
    Chairman GILMAN. Ambassador Larson, when will we get final information about the Westdeutsche Landesbank transaction?
    Mr. LARSON. The nature of our information-gathering process is that we use all information sources available to us, so it makes it difficult for me to say that some date specific we will know more than we do today.
    Chairman GILMAN. Well, can we set a deadline on getting that information?
    Mr. LARSON. Well——
    Chairman GILMAN. How long have we been asking for that information?
    Mr. LARSON. Oh, you mean from the——
    Chairman GILMAN. From the bank.
    Mr. LARSON. Well, we will certainly continue to press both the German Government and the German bank for information about this transaction. Those efforts are going on at every opportunity.
    Chairman GILMAN. Can we set a deadline for getting that information? Last year, Mr. Menendez told me he sent a letter to the President, and I am going to ask that Mr. Menendez' statement be made part of the record.
    He said he sent a request to the President along with 31 of our colleagues concerning a $23-billion natural gas deal that Turkey signed with Iran just after ILSA was signed into law. I am quoting from Mr. Menendez' statement: ''The response I received in October was ambiguous about the Administration's intent and stated, we are actively collecting, assessing and verifying information on this arrangement, and information on any other arrangements that come to our attention involving Iran's oil and gas sector to determine whether they cross the standards set in the law.''
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    Mr. Menendez went on to say, when my staff inquired as to the status of the assessment last December, Turkey was seeking bids for construction of the pipeline, and again he was told that the arrangement was being assessed and that the United States was attempting to find an alternative energy source for Turkey to dissuade it from implementing the deal.
    Then he goes on to say, now I understand that construction on that pipeline began in March of this year and that the deal is moving ahead. He is left to wonder if the Administration ever finished its assessment or if it intends to wait until Iran has derived the entire $23 billion in revenue before it comes to a conclusion as to whether or not the deal was in violation of the law.
    Mr. LARSON. Mr. Chairman, let me respond specifically to the points about Turkey. We have reviewed Turkey's latest gas import plans, and it is our view that they do not appear to constitute sanctionable activity under ILSA. Under the terms of a memorandum of understanding that was reached on May 14th of this year involving Turkey, Turkmenistan and Iran, Turkey is going to buy gas from Turkmenistan. Iran will permit this gas to transit its territory. The Turkish Government has assured us that Turkey will not purchase gas from Iran. We expect that Turkey is going to fulfill these assurances, and we are going to monitor developments of this transaction very carefully to make sure that no activity that would be sanctionable under ILSA takes place in the future.
    Chairman GILMAN. I want to ask, in pursuit of that question, will Iran be receiving any revenue from this transaction?
    Mr. LARSON. The only revenue that Iran would receive from this transaction would be the transit fees for the gas to flow through a pipeline from Turkmenistan to Iran to Turkey.
    Chairman GILMAN. How much would that revenue be?
    Mr. LARSON. My understanding, sir, is that that has not been settled on. It is going to be the subject of negotiations among the parties. It is clear that both Turkey and Turkmenistan would have a strong financial incentive in making sure that those transit fees are as small as possible and represent essentially a market price for the transit of this gas to its territory.
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    Chairman GILMAN. Mr. Larson, what is your estimate of when? Will this pipeline ever be built? What is your assessment?
    Mr. LARSON. I have no reason at this stage to doubt that it will be built.
    Chairman GILMAN. And any idea when?
    Mr. LARSON. I would want to supply a correction for the record if my recollection is wrong, but my recollection is that it could be built within 2 years.
    [Mr. Larson's reply was submitted following the hearing.]

    The memorandum of understanding does not specify a completion date for the pipeline and leaves many details, including prices, routes and infrastructure, to be worked out through subsequent negotiations among the parties involved. I would not want to speculate as to when the pipeline might be completed.

    Chairman GILMAN. And if the pipeline is built, will there be sanctions imposed under ILSA against any Turkish energy firms involved in the gas pipeline?
    Mr. LARSON. Well, the transaction, as it has been worked out in this May 14th memorandum of understanding, constitutes a transaction that would bring gas from Turkmenistan into Turkey. So long as that continues to be the case, it is our judgment that this transaction doesn't involve sanctionable activity under ILSA.
    This does represent an apparent change in the plans to which you referred when you were posing the question, because at an earlier stage, it was reported that there were plans for Turkey to buy gas from Iran. They have changed, it would appear, those plans. It may be that concerns about ILSA were a significant part of that concern. I know that this issue was raised by many Administration officials with Turkish officials, including myself and others, over the last year. The Iranians may also have had doubts about Iran's ability to deliver gas in any event.
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    Chairman GILMAN. When this pipeline is completed, can Iran eventually sell gas to the European nations?
    Mr. LARSON. Sir, I don't believe that this pipeline goes beyond Turkey, but again, I would want to correct that for the record if my understanding is wrong. The pipeline is essentially going from Turkey to the Iranian border so that this Turkmenian gas can flow to Turkey, but by transit in Iran.
    [Mr. Larson's reply was submitted following the hearing.]

    The memorandum of understanding specifies that the pipeline will be used to transport gas from Turkmenistan across Iran to Turkey and, eventually, Europe. The memorandum does not envision any transmission of Iraniam gas to Turkey or to Europe.

    Chairman GILMAN. If it were found to be a fact that they could sell to European nations through the pipeline, would that be a violation of the sanctions?
    Mr. LARSON. Well, to my mind, the issue is whether Iranian gas is going to Europe, or for that matter, whether it is going to Turkey. Our assurance from the Turkish Government is that they are going to be buying gas from Turkmenistan, not from Iran, and that is a very important factor in our evaluation of this transaction.
    Chairman GILMAN. If it was a sale from Iran to Turkey through Turkmenistan, would that be sanctionable?
    Mr. LARSON. Well, that is a different set of facts. We would need to know the details of those facts to make that judgment.
    Chairman GILMAN. Let's assume the facts are that Iran is selling its gas through Turkmenistan to Turkey. Would that be sanctionable?
    Mr. LARSON. No, no. The point that I wanted to stress here is that as I interpret ILSA, sales per se, or purchases per se, are not a sanctionable activity, and I think that is spelled out in a fairly straightforward manner in the act.
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    At the same time, I think the specifics of the transaction, whether this is an investment as determined under the act, would be an important thing that would need to be evaluated. I do think that it is notable that over the course of the first year of ILSA, that a transaction that was portrayed earlier as a transaction that would involve in the future significant import or purchase of Iranian gas by Turkey has become a transaction that involves the significant purchase by Turkey of gas from Turkmenistan, not from Iran.
    Chairman GILMAN. One last question. Does the joint Libyan-Tunisian offshore oil project that was awarded in May require sanctions against the Saudi and Malaysian firms involved?
    Mr. LARSON. Mr. Chairman, are you talking about the so-called November 7 Libya-Tunisia project?
    Chairman GILMAN. I am sorry?
    Mr. LARSON. My understanding of your question was that you are referring to a project that has been called the November 7 project that travels the offshore boundary between Libya and Tunisia. If that is correct, I would explain that these two countries formed a joint venture corporation to exploit these potential reserves. A contract for the development of the field reportedly was awarded to Nimir Petroleum of Saudi Arabia and to Petronas of Malaysia. We are making inquiries into this matter. We have not made a determination as to whether a sanctionable activity has occurred.
    The information that has been provided to us at this stage suggests that the value of the investment is $30 million over 5 years.
    Chairman GILMAN. And you are still looking at that?
    Mr. LARSON. We are looking into it actively, sir.
    Chairman GILMAN. How long will it take you to make a decision on that?
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    Mr. LARSON. Well, it depends on how long it takes to verify the information. We need to rely on information that we regard as credible. Among the things that we need to look at are the value of the investment. I don't want to be in a position of relying on a press report that says that the value of the investment is only $30 million, because that has implications for ILSA. I want to be sure that the value of the investment was not actually $50 million, for example, because that would be part of an assessment of whether it is sanctionable.
    Chairman GILMAN. Ambassador Larson, have there been any sanctions imposed under ILSA against any company or any investment firm?
    Mr. LARSON. No, we have not imposed sanctions during the first year, and I think that my assessment of what has happened is that firms have taken seriously ILSA, and they have tried during this first year to conduct their affairs in such a way that does not bring them into conflict with the law. That is not a guarantee that this will continue to be the case, but I think it has been the case during the first year.
    Chairman GILMAN. My time has run.
    Mr. Berman.
    Mr. BERMAN. No other questions.
    Mr. Sherman.
    Mr. SHERMAN. Mr. Chairman, I would like to submit some questions for the record.
    Chairman GILMAN. They will be submitted without objection.
    [The information referred to appears in the appendix.
    Chairman GILMAN. I want to thank our panelists for being with us this morning and for being candid, and we will submit some written questions.
    Our first witness on panel two will be Dr. Patrick Clawson. Dr. Clawson is a senior research professor at the Institute of National Strategic Studies of the National Defense University. He is the author of over 30 scholarly articles as well as senior editor of the Middle East Quarterly. We are pleased to have you with us today, Dr. Clawson.
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    Our additional panelist is Ayatollah Dr. Mehdi Haeri Khorshidi. Dr. Haeri teaches Middle East and Islamic studies in Bochum and Koln Universities in Germany as well as practices law representing Iranian and other foreign refugees. In 1996 Dr. Haeri founded the Council for the Defense of the Tenets of the Shia religion. He presently coordinates his activities with the Iranian National Conference.
    We also have Ms. Sarah Miller, editor of Petroleum Intelligence Weekly, and Mr. Jeffrey Schott, senior fellow at the Institute of National Economics.
    Dr. Clawson, you may proceed. You may put your full statement in the record and summarize it, however you may deem appropriate. Dr. Clawson.
    Mr. CLAWSON. Thank you very much, Mr. Chairman. Thank you for inviting me here today. I would like to submit my full statement for the record and just summarize it and make a few additional remarks.
    When ILSA was being considered by Congress a year ago, critics claimed that the act would hurt U.S.-European relations and would not affect Iran. The critics have been wrong on both points. In fact, U.S. and European attitudes about Iran have come closer, and Iran has had significant problems attracting investment for its oil and gas industry.
    On the first point about European policy toward Iran, in the years since ILSA was enacted, European attitudes toward Iran have shifted substantially. In 1996, European governments and European opinion was openly dismissive of U.S. complaints about Iran. Those complaints were regarded as motivated by domestic U.S. politics rather than by real concerns about security.
    Over the last year, European toleration for Iranian misbehavior has significantly diminished. For instance, in March of this year, the Norwegian State Secretary for Foreign Affairs announced that the Government of Norway calls for international economic sanctions against Iran over the Rushdie affair. Mention has already been made earlier this morning about the German court decision in April of this year, which found that Iranian officials at the highest level had been responsible for four murders in Germany in 1992.
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    Since that case, there have been a variety of European reactions, which reinforces the anger over Iranian sponsorship of killings in Europe. Let me mention, for instance, that the majority of the members of the Italian Chamber of Deputies has petitioned the Italian Government to take a stronger stance against Iran, including reopening the murder case against an Iranian diplomat who killed an Iranian opposition figure in Rome in 1993. Also, there has been considerable interest in Europe about the fate of an Iranian editor by the name of Faraj Sarkuhi, who has been under arrest in Iran recently. The editors of the two prominent Paris newspapers have appealed for his release last month, and so did 50 prominent British writers.
    I think it is fair to say that European opinion now regards Iran as a problematic country and that Europe understands better the reasons for tough U.S. policy. However, it is true that European governments still profoundly disagree with the United States about how to induce Iran to change course. They continue to argue that the best course is to support Iranian moderates rather than to apply pressure.
    There is little prospect that Europe will adopt economic measures against Iran soon. However, I think it is fair to say that since ILSA has passed, we have seen significant progress in evolving European attitudes about Iran.
    But what has been ILSA's effect on the Iranian economy? We have heard this morning about Iran's inability to carry on its major investment programs that it was so hoping to attract foreign investment for.
    Let me just highlight for you the importance that these investment programs have for Iran. The gentleman who recently was elected as President of Iran, Mohammad Khatami, predicted that Iran would become a net importer of oil within 15 years if current conditions persist, and emphasized how important it is for Iran to attract foreign investment which will allow Iran to expand its output and renovate its oil fields. I think that the Iranian leaders are well aware how much this investment is necessary for them.
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    Mention has been made of the South Pars field project. That gas field, which has in it actually some oil as well as gas, is far and away the single most important project being considered by Iran today. The French firm Total, which is actively negotiating for South Pars, clearly feels that it does not have to particularly worry about the threat of U.S. sanctions. Indeed, Total's managing director, in an interview that he gave to a French newspaper in May, was quite dismissive of the threat of sanctions, because he said that he thought that U.S. policy on Iran might change.
    If the South Pars project were to proceed, that would be a considerable blow to our effort to deter investment in Iran. I hope that we can find some way to kill the South Pars development. We may be able to do that without having to have an open confrontation with France or the French Government. These big projects are so complex that they can be easily stopped, despite highly publicized agreements. Iran has already signed one deal to develop South Pars, which was announced in 1992. But that deal fell apart by 1994. Perhaps the best course of action regarding South Pars may be to allow Iran and Total to claim that they reached a deal, but then to watch the deal slowly fall apart and not to sanction Total until such time as the deal actually gets implemented, which I hope will be never.
    To be honest, I think that the question of South Pars is much more important than the question of the Westdeutsche Landesbank deal which has been made mention of earlier. To be sure, Westdeutsche Landesbank has found a loophole in the law, and if others try to exploit similar loopholes, then it may be necessary to revisit the question of how investment is defined. But the South Pars deal is of such a size and such importance, that if it proceeds, I think we will receive a serious setback to our effort to reduce investment in Iran's oil and gas.
    Despite the successes that we have had with regard to ILSA this past year, the sad fact is that the United States is losing the propaganda war with regards to Iran. There is a widespread perception in the Middle East, in Europe, and here in the United States that Washington's attitude is the barrier to dialog, whereas, in fact, it is Tehran which flatly refuses talks, while Washington repeatedly and at all levels states its readiness for official discussions. U.S. sanctions toward Iran are seen by many as ineffective, if not counterproductive, while in reality Iran has not been able to attract foreign investment or loans for a single one of its priority oil and gas projects. U.S. policy toward Iran is seen as creating friction, if not a crisis, with the European allies, when, in fact, European elite and government attitudes toward Iran have become much closer to the U.S. view to continued unacceptable Iranian actions.
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    Partly because of its success in the propaganda war, Iran does not yet see its foreign policy as unsustainable. The United States has not to date convinced Iran that the United States has the will to perservere, to outlast the Islamic behavior, nor has the United States demonstrated to Iran that America and its allies will stand together. Tehran expects that despite U.S. opposition, it can acquire the finance and technology it wants. Until these circumstances change, the Islamic Republic is not likely to change its unacceptable foreign policy behavior.
    Thank you very much, Mr. Chairman.
    Chairman GILMAN. Thank you, Dr. Clawson. We appreciate your comments.
    [The prepared statement of Mr. Clawson appears in the appendix.]
    Chairman GILMAN. We will proceed with the additional panelists, and then we will address questions.
    We will now proceed with Dr. Mehdi Haeri Khorshidi, who I noted teaches Middle East and Islamic studies at the Universities of Bochum and Koln in Germany, as well as practicing law, representing Iranian and other foreign refugees, and founded the Council for the Defense of the Tenets of the Shia Religion. He is presently coordinating his activities with the Iranian National Conference.
    Dr. Haeri, you may proceed. I know you have a translator/interpreter with you. Please proceed.

    Dr. HAERI. Mr. Chairman, thank you very much.
    Mr. LADAN. Mr. Chairman, before I start translation, with your permission and for the record, I would like to state that I am here on behalf of the Iranian National Conference, INC. Ayatollah Haeri and I are members of the Coordinating Committee of INC. I am here as an adviser and a translator for Dr. Haeri. My name is Amir H. Ladan.
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    Chairman GILMAN. Thank you. And would you proceed to translate.
    [Statement and testimony of Dr. Haeri through an interpreter.]
    Dr. HAERI. Mr. Chairman, distinguished Members of Congress, I want to thank you for inviting me to testify before this very important hearing. I can assure you the work you are doing and what is said here today is being watched very carefully and with great interest both in my country and in the Iranian diaspora.
    I speak here today on behalf of all Iranian people who yearn for freedom.
    It is not without considerable personal risk that I have come here today, for we all are only too well aware of the Tehran regime's penchant for assassinating its opponents and critics, but the work you and we are doing is of greater importance than one man, and we must not be stopped by threats and intimidation.
    I appear here before you, an Iranian, a son of a deeply religious family, who spent most of his life in religious studies in the holy cities of Qom and Najaf, where I was a disciple of Ayatollah Khomeini and a classmate of President-elect Khatami. I willingly relinquished my high position in the court of Ayatollah Khomeini, who we thought would become a new Gandhi, but turned out to be a Nero, and I went to prison because I dared to write a book about the absolute necessity to separate religion from the State if we Iranians wish to protect and preserve the dignity of Islam, the true teachings of the Holy Koran, the integrity of our homeland and our ancient civilization. I spent 4 years in prison before I managed to escape to Germany, where, mercifully, I was given sanctuary.
    I consider it an act of God to have been given this unique opportunity to come here to this haven of freedom and democracy in order to tell you, speaking as I am in the name of the many millions of silent, oppressed, humiliated Iranians, who are looking to you, to the American people, for encouragement and hope, to tell you thank you, thank you very much for your Iran-Libya Sanctions Act, the only effective response so far to the evil regime which now dominates our lives in Iran.
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    I know my time is limited, and I wish to be very brief. Let me state here and now that your act of containment has succeeded beyond any expectations. I am not the only one who claims this. Let me give you two pointed examples from official Iranian sources:
    The present Minister of Oil, Mr. Gholamreza Aghazadeh, as quoted on Tehran radio, conceded this when he said that Iran expected an investment of $7 billion for 10 major oil projects, but since the Iran-Libya Sanctions Act of August 1995, absolutely nothing has materialized.
    And more, Mr. Mohsen Yahyavi, Deputy Chairman of the Iranian Parliamentary Subcommittee on Oil, on January 23 was quoted in the English-language newspaper Iran News, similarly conceding the dismal failure of Iran's investment policy in the oil industry as a result of your legislation. His exact words were: ''Despite widespread arrangements by the Ministry, foreign contractors are not much interested in engaging in petroleum projects in Iran.''
    There are many other similar admissions of their failure and your success. What more does one need to be convinced of the value of this law?
    The 20 million voters who represent 69.5 percent of the Iranian electorate did not vote for Mr. Khatami, but against Ayatollah Khomeini, the so-called Divine Guide, who, according to the present Constitution, still wields absolute authority in Iran, and will continue to do so until the people of Iran will tell him, no more.
    No more spending billions of dollars to obtain weapons of mass destruction. No more use of State terror, no more torture and assassination of dissidents. No more spending enormous funds to propagate terrorist movements all over the globe. No more subverting the regimes in Algeria, Egypt, Saudi Arabia, and the Persian Gulf States. And no more financial military support for Hezbollah in Lebanon and Palestinian extremists of Jihad and Hamas, who, at the behest of the present rulers of Tehran, do their utmost to subvert the peace process in the Middle East.
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    The vast majority of the people in Iran do not want these dangerous policies; they do not subscribe to them, and they abhor those who have devised them and try to spread the madness.
    While the rulers in Iran today may believe that what they are preaching and practicing is an obligation ordained by God, I am here to tell you that by pursuing those policies of hatred and destruction which they believe in, they are sinning before God, they are committing sacrilege, they are defaming Islam and cause millions of people to turn away from it.
    From my intimate personal knowledge of the present rulers in Iran, I can assure you that these are certainly not people one can hope to conduct a rational dialog with. Just look at what happened to Germany and how badly that country has been humiliated by Iran, notwithstanding its critical dialog with the government in Tehran.
    What we seek is to do away with this madness and return to our deserted mosques, pray and let the people of Iran freely elect their representatives and leaders in a truly democratic way so that they may lead Iran out of darkness of the Middle Ages and back into the family of nations.
    Mr. Chairman, I am submitting with this testimony a brief article I have prepared to be included in the hearing record. The article is a special report on the struggle and suffering of religious leaders and groups who believe in the separation of church and State.
    Chairman GILMAN. We will accept it as part of the record. Thank you.
    Dr. HAERI. Thank you, Mr. Chairman.
    You, Mr. Chairman, and Members of this distinguished Committee and this honorable House, can help us achieve freedom and democracy by continuing to stick to your sanctions guns which have already achieved so much and will achieve so much more if you continue this sanction.
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    Do not be impressed by the guile and duplicity of the present rulers. They are destined to fail; there is no way that they can succeed in their quest to rule the Persian Gulf, to strangle the lifeline of the free flow of crude oil through the Straits of Hormuz, impose their pernicious and warped policies on their neighbors, and threaten the whole region with terror, nonconventional weapons and sheer, brute force.
    Yesterday, Rafsanjani called on all Islamic countries to deprive the United States of oil. If Americans are deprived for 6 months, it will become hard for them to maintain security. Fifty Muslim nations are situated at the world's most strategic positions and deserve to become world-dominant powers. This took place yesterday, Mr. Chairman.
    Chairman GILMAN. Where was that statement issued?
    Dr. HAERI. It was in Tehran Times, Mr. Chairman.
    Chairman GILMAN. Rafsanjani?
    Dr. HAERI. Yes, it was stated by President Rafsanjani.
    Chairman GILMAN. Thank you very much.
    Dr. HAERI. I am missing one section here, I am sorry.
    Mark my words, distinguished friends. More sanctions, more pressures are a proven recipe for more encouragement to the Iranian people to rise up and end their long, cruel nightmare of pain and oppression. Iranians will not forget that even at the time when the prospects of change in Iran looked bleak and remote, the United States of America stood firm in its principles, a beacon of freedom and inspiration.
    And to those of your businessmen who feel that they have lost business opportunities in Iran as a result of your sanctions, I have only this to say: Do not forget that this is the same regime that, after it came to power, immediately closed down your businesses, closed your offices, and nationalized your assets. Today, as the sanctions are so obviously successful, the Iranian leaders are trying to create divisions between American business and the American Government. Do not let them get away with this.
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    Do not act penny wise and pound foolish. Be assured that once freedom and democracy will prevail in Iran, we will remember very well who helped us bring this about, and we will remember you not only with our deep gratitude and love, but also with open arms and great new business opportunities.
    Mr. Chairman, may God give you and this Congress and this Nation the wisdom, strength and compassion required to support and lead us into a better, brighter future. In this period in human history, when the people of the world are moving toward freedom and democracy, let us remember the words of our Holy Prophet, whose birthday is today: It is a Moslem's duty to always advance with his times.
    Thank you, Mr. Chairman.
    Chairman GILMAN. Thank you, Dr. Haeri, and thank you for the good translation. It is a pleasure having you with us.
    [The prepared statement of Dr. Haeri appears in the appendix.]
    Chairman GILMAN. Our next witness is Ms. Sarah Miller, editor-in-chief of Petroleum Intelligence Weekly. Since 1976 Ms. Miller has held various journalistic posts with McGraw-Hill Publications, working her way from energy correspondent for Business Week to editor-in-chief of Petroleum Intelligence Weekly. She has covered OPIC and the world oil markets extensively.
    Ms. Miller, you may put your full statement for the record and summarize it, or whatever you see fit. Ms. Miller, please proceed.

    Ms. MILLER. Thank you. I have submitted the full text, and I will be brief here in summing up my remarks. I wish to thank you for the opportunity to speak and submit those remarks, and to note very briefly that although this sanctions issue is evidently an emotive one, I am speaking here as a journalist and editor primarily, without meaning to advocate any particular position.
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    That said, I would like to start with one general comment on the context in which this legislation arose. It relates to the fact that the law narrowly pinpoints investment in oil as grounds for imposing sanctions against companies based outside the United States.
    It seems ironic that the United States should adopt a policy that is aimed at restricting access to oil and gas in a part of the world in which the issue of paramount national importance to us is unimpeded access to those same resources. To many, such brandishing of the oil weapon used so effectively against us in 1973 appears shortsighted.
    I will now move on to the specifics of the effects of ILSA. It is clear that Tehran's effort to bring outside investment back into Iran's petroleum industry has been hampered by ILSA and the preceding 1995 ban on U.S. investment, and I think enough has already been said about that today that I won't go into detail, other than perhaps to note that of the 11 projects that have not in effect been signed up for, only three are for oil or gas field developments. The others are for infrastructure deals that hold little appeal for big oil firms, in any case.
    The final point I would make on the 11 deals is that the separate Sirri development taken up by Total is the one existing project going on with a foreign company in the country, and that looks to be grandfathered in ILSA. That said, the Malaysian State oil company, Petronas, last year took 30 percent in that Sirri project alongside Total, and that the status of Petronas investment under ILSA is still somewhat murky, as I understand it.
    While impressive in many ways, this litany of thwarted achievement about which you have heard so much today does not tell the full story. Several other factors need to be understood to fully appreciate why so little international investment has gone into Iran's oil and gas industry to date, and why it could become harder for the United States to keep a lid on in the future.
    One is the unattractive nature of the investment terms on offer by Tehran. Iran set out to attract foreign firms back into its oil patch in 1991. The aborted Conoco deal in 1995 would have been the first fruit of those efforts. For the 4 intervening years, no laws blocked even U.S. firms from taking up Iran's offer, much less any others. Tehran's terms were simply not competitive in the global marketplace for investment capital.
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    So it could be argued that the lack of foreign investment does not reflect the power of Washington so much as it reflects the failure of Tehran to offer attractive conditions for investment. If Iran made the terms sufficiently appealing, there might be little Washington could do to stop the stampede of foreign companies into Iran.
    A second factor likely to influence the ease and effectiveness of U.S. sanctions over time is the prospect that oil developments will increasingly take a back seat to much larger natural gas deals, since Iran ranked second only behind Russia in the size of its gas reserves. Total's South Pars contract would be the first step down this road. Waiting in the wings is the $20-billion project agreed to last year by Tehran with Turkey and subsequently expanded to include Turkmenistan, about which you have already heard.
    Next on Tehran's list of chosen gas customers is Pakistan, and beyond that, India. The government of these rival States have been discussing gas purchases from Iran and elsewhere for years. So far, their mutual antagonism have blocked any joint project; however, there are indications that that may be changing. Senior Pakistani officials have talked in recent weeks of a willingness to see a pipeline from Iran and possibly Turkmenistan extend on into India. Although New Delhi is yet to receive any firm proposal along these lines, Indian officials say they would welcome such an initiative.
    Which raises a third factor that may complicate the Iranian sanctions equation over time. That is the likelihood that Far Eastern oil and gas companies will play a growing role in Iran. Many of these are State-owned, and most are less amenable to U.S. pressure than their European and Canadian counterparts. Besides its stake in Total's Sirri deal, Malaysian Petronas is in talks beyond that already negotiated by Total. It is likely that this would be the gas targeted at Pakistan and India.
    China National Petroleum Corporation, or CNPC, has here, among other places, been mentioned as a possible substitute for Pell Frishmann and Bow Valley in Iran's Balal field. CNPC's recent expensive forays, as far afield as Kazakstan, Venezuela and Sudan, suggest that its ambitions in Tehran may well extend beyond Balal.
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    A final element that can only become more important over time is the role played by U.S. sanctions in leaving the oil- and gas-rich former Soviet States of the Caspian region dependent on Russia. However, numerous analysts have stressed recently that Iran provides an alternative to Russia as a path to open waters for the enormous oil reserves trapped in Kazakstan and Azerbaijan.
    I will cut short at this point and submit a more extended version of that, as well as my comments on Libya, for the record.
    Chairman GILMAN. Thank you, Ms. Miller.
    [The prepared statement of Ms. Miller appears in the appendix.]
    Chairman GILMAN. Our next witness is Jeffrey Schott. Mr. Schott is a senior fellow at the Institute for International Economics in Washington, and during his tenure at the Institute, Mr. Schott has been a visiting lecturer at Princeton and an adjunct professor of international business diplomacy at Georgetown University. Previously Mr. Schott was a senior associate at the Carnegie Endowment for International Peace, and an official of the U.S. Treasury Department.
    Mr. Schott, we welcome you to the Committee. We look forward to your testimony. You may submit your full statement for the record and summarize if you see fit.

    Mr. SCHOTT. Thank you very much, Mr. Chairman. I welcome the opportunity to come before the Committee today. My comments draw on my 20 years of experience, both in the government and outside, on issues relating to the use of economic sanctions. I have been a sanctioner myself and know the problems and the opportunities that can be taken advantage of through the use of these measures.
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    I will briefly summarize the written statement that I have prepared. I will submit the statement in its entirety for the record.
    Chairman GILMAN. Without objection.
    Mr. SCHOTT. Thank you very much, sir.
    Let me start by saying that the policy objectives of the ILSA are laudable. What is at issue is the whole package of initiatives that the United States can pursue to try to achieve those laudable policy goals. I believe the tactics in the law could be improved, and as a result, we are finding problems in achieving rapid progress in their achievement.
    U.S. trade and investment relations with Iran have been essentially cut off for the past 2 years. The sanctions have been costly to both Iran and to the United States, and yet, when you look at the results to date, they are quite modest. There has been some delay in new investment in Iranian oil and gas fields and a modest cost imposed on the Iranian economy. There have been costs imposed on U.S. firms and workers as well that would normally compete for sales to and investments in Iran. We have seen an intensification of U.S.-European tensions that has hampered cooperative efforts in support of U.S. policy objectives, and that was drawn out very clearly in questions that you and Mr. Hamilton and others on the Committee raised with the witnesses from the State Department this morning. Finally, there has been very little significant change to date in Iranian policy.
    Let me just briefly note a few points on each of these modest effects of the sanctions to date. Contracts for the development of Iranian oil and gas properties have been delayed. U.S. sanctions deserve some credit. However, much of Iran's problems in attracting new investment derive from self-inflicted wounds. Ms. Miller, I think, made that point very clearly just a moment ago. Will these delays significantly affect Iran's production capabilities over time? Can these sanctions be sustained over the long term?
    The evidence so far is probably not. Foreign investments would have to be cut back for quite some time, plus oil revenues would need to be curtailed if U.S. sanctions were to have a noticeable impact on Iranian production capabilities. Given the tension in U.S.-European relations, I am skeptical that either of these developments is likely to happen. Therefore, if you look at both the supply side and the demand side, if we are successful in cutting back on Iranian production, it will have an impact on the price and oil; over time it could drive up world oil prices and actually cushion the revenue impact on the target country. Indeed, the costs of sanctions to Iran have been more than offset by the higher prices Iran has received for its oil exports in the past 2 years.
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    So one must be very cautious. Simply imposing costs on the target country may satisfy a thirst for retribution, but it does not necessarily promote the achievement of the U.S. foreign policy objectives.
    We also know that there is a cost to U.S. firms. This is often underestimated in the calculation of the sanctions impact, and yet it is important if the political process in the United States is to sustain the sanctions policy over a period of time. The more sanctions cost U.S. firms and workers, the harder it is going to be to maintain political consensus at home for the maintenance of those policies.
    A recent study conducted at the Institute for International Economics calculated the cost of sanctions imposed by the United States in 1995. The cumulative impact of 26 separate sanctions incidents resulted in a reduction in U.S. exports of $15 billion to $19 billion, in commensurate reductions in employment in U.S. export industries, and in the reduction in export wage premiums available to U.S. workers. Those numbers are more fully covered in my testimony.
    I think one of the concerns that has been raised most clearly in this hearing is the fact that ILSA has intensified U.S.-European tensions. As Mr. Welch admitted earlier this morning, the threat of secondary sanctions against firms that participate in new Iranian oil field development has not encouraged our European allies to cooperate more closely with us in our policy on Iran. If anything, the legislation has exacerbated frictions regarding the extraterritorial reach of U.S. law and even provoked a European challenge to U.S. law under the World Trade Organization. This is related to the European actions against the Helms-Burton Act regarding sanctions against Cuba, and indeed, the vehemence of the European reaction to the Helms-Burton Act reflects in large measure their interest in preempting secondary embargoes that could be applied in the Iran and Libya context, where, unlike Cuba, the Europeans have substantial economic and political interests.
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    I would be happy to discuss in more detail the viability of the European case in the WTO, if the Committee is interested.
    To conclude, have sanctions been successful in meeting the U.S. foreign policy objectives? To date, the answer has to be that there is very little evidence to support the view that there has been notable success. In light of the experience of the past 2 years, the recommendation that I would give the Committee is that the United States should review its use of sanctions because sanctions need to be used with care. They are blunt policy instruments that are easily circumvented. Contrary to popular belief, there is no such thing as smart sanctions that maximize benefits with minimal costs. I think the smart sanctioner will realize these limitations and tailor measures to better match the costs of these policies with their anticipated results.
    I agree with Mr. Hamilton's earlier remarks. We need multilateral cooperation with our policies if our policy objectives are going to be achieved, and I believe that ILSA is an obstacle to that result.
    Thank you very much, Mr. Chairman.
    Chairman GILMAN. Thank you very much, Mr. Schott.
    [The prepared statement of Mr. Schott appears in the appendix.]
    Chairman GILMAN. I will be asking some questions, but I would first turn to Mr. Fox.
    Mr. FOX. Thank you, Mr. Chairman. I thank the panel for their enlightening testimony. I would ask these questions: How should the United States respond to the election of Mohammad Khatami as President? Should any U.S. sanctions on Iran be relaxed as part of opening to Iran, and what concrete steps must Iran take that would indicate meaningful change on issues of most concern? Anyone on the panel.
    Mr. CLAWSON. Sir, Mr. Khatami's record certainly suggests that so far his interest has been in domestic policy issues, not in foreign policy issues, and I think it would therefore be surprising if he would take an initiative in the foreign policy sphere which could be highly controversial for him at home.
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    That said, the United States may be interested in exploring with his government whether they are interested in making changes in policy. However, it would be inappropriate for the United States to assume that Iran will make those changes and, therefore, to change U.S. policy unilaterally before Iran has taken some steps.
    It is much more likely that what the United States will do is state its willingness to explore with Iran whether or not some quid pro quos can be reached. However, the greatest barrier to this remains that the Iranian Government has said that it is not interested in dialog with the United States. So long as that policy remains in place, the prospects look poor that we will have an opportunity to explore this matter further.
    Mr. FOX. Can you answer this question, anyone on the panel. Why have Qatar, Jordan and other Arab allies of the United States called for a change in U.S. policy toward Iran that could improve relations with Iran that would benefit the Arab-Israeli peace process, and do Arab States in the Middle East feel vulnerable to an Iranian backlash of U.S. policy toward Iran?
    Mr. SCHOTT. Let me try to answer your question, Mr. Fox, about the same way I would have answered your previous question.
    I think there is a great concern that the United States and the European Union don't display a common front in confronting and objecting to the outrages in Iranian society that Dr. Haeri has so poignantly mentioned. This tension makes neighboring States feel vulnerable to being caught in the crossfire and raises the risk that they will not be able to fully rely on the effective response of either the United States or Europe if the two powers are working possibly at cross-purposes, and I think that causes their uneasiness.
    Mr. FOX. Thank you very much.
    Thank you, Mr. Chairman. I appreciate the time you have given me to ask questions. I will turn it back to other Members.
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    Chairman GILMAN. Thank you, Mr. Fox.
    Mr. Sherman.
    Mr. SHERMAN. Thank you, Mr. Chairman.
    I wonder if the latter two panelists could address the next couple of questions, the first of which is, does development of energy resources in Iran require capital from abroad or expertise from abroad? Which of those two elements, or is it both, is Iran seeking from Europe and other countries?
    Ms. MILLER. I would say that it is seeking some combination, although the probable emphasis at this time is on the capital, in the sense that where expertise might be of most value at a technical level would be in oil fields on shore where they have not indicated any willingness to have foreign involvement in any case. The foreign involvement has been limited to projects offshore, presumably for reasons of not wanting a lot of foreigners in the country, as well as the fact that those oil fields have been run for so long by the State company.
    So in that sense I would say that at this time the emphasis would be more on the capital, but it is a combination.
    Mr. SHERMAN. What would motivate foreign countries to invest in Iran where they take a very high political risk that the doctor pointed out to us that American businesses faced nationalization a couple of decades ago? Are European investors eligible for political insurance from their own governments, or do they just see the rates of return being so high that they are willing to take the political risk, the risk of expropriation or political violence?
    Ms. MILLER. Oh, you mean political risk from the Iranian Government as opposed to political risk from the U.S. Government?
    Mr. SHERMAN. Either. I am simply thinking a European company making an investment in Iran could lose it all, not as a result of business calamities, but as a result of political calamities. Their investment could be expropriated or could be destroyed through violence. Given those risks, are they able to get insurance against those risks from some European analogue of OPIC, or is the rate of return so high that they are willing to endure those risks?
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    Ms. MILLER. Well, of course, neither has been the case so far with the one project exception, with Total, they haven't done so.
    I would say that it is seldom discussed in those terms in the sense that I would say that by far the perception within the industry is that the political risk attaching to a project in Iran would be largely from the United States, which is why I asked that question, that you are at risk from sanctions and other retributions, that relative to the instability of governments in a lot of places where the oil industry invests, that Iran would be considered a relatively safe bet.
    Mr. SHERMAN. That says something about the countries in which oil companies——
    Ms. MILLER. Indeed.
    Mr. SHERMAN. I would like to ask the doctor whether he believes that a change in government in Tehran could occur peacefully, or whether only moderate changes can occur without either civil disruption or outright violence.
    Dr. HAERI. The present regime only understands force and sanctions and pressure and only responds accordingly. Containment is one of the workable solutions.
    Mr. SHERMAN. Thank you, Mr. Chairman.
    Chairman GILMAN. The gentleman's time has expired. Thank you, Mr. Sherman.
    Dr. Haeri, you are affiliated with the Iranian National Conference. Can you provide us with an outline of the Conference's beliefs, goals, and something about its membership? Could you briefly give us a sketch of that?
    Dr. HAERI. Iranian National Conference (INC), is an all-encompassing organization which includes those who favor a monarchy to those in favor of a republic, socialists and a variety of other ideologies. The Iranian National Conference was born 2 1/2 years ago, and it was the first time that such an umbrella group was created. The hope is to create democracy and a parliamentary government in Iran.
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    Chairman GILMAN. Thank you.
    Dr. Haeri, you were a disciple of Ayatollah Khomeini, and I know you were also a classmate of President-elect Khatami and that you relinquished your high position in the court of Ayatollah because of your objection to what turned out to be not a new Gandhi, but turned out to be a Nero, as you said in your testimony.
    Can you tell us, what can we expect of the new President Mr. Khatami? Will he be either willing or able to change the situation inside Iran for the better?
    Dr. HAERI. Khatami as a President has no power to implement change. The structure and the new Constitution, which I have brought a copy with me, gives all power to Ayatollah Khomeini, who is the supreme guide, the supreme leader. President Khatami does not even have a military adviser, which means he is not party to any intelligence; he cannot make any changes. He may have some good intentions, but he has no power to implement change.
    Chairman GILMAN. What is the relationship between the military and Ayatollah Khomeini? Is there a good relationship between the two?
    Dr. HAERI. First I want to add that was if there was any change to be made, it would have been done when Rafsanjani was elected, because he was the only one who could stand up to Khomeini. In regard to the military, the relationship is very, very poor simply because Khomeini has sent nonmilitary people, people from the Revolutionary Guard and others—for example, one of Khomeini's friends who is a nonmilitary, he is a veterinarian, Khomeini overnight has made him a two-star general with seniority, so all other generals have to, of course, salute him and respect him and listen to what he says. Putting Revolutionary Guards into different branches of military has created a lot of dissatisfaction.
    Chairman GILMAN. Do you believe our Nation can forge a new relationship with the Islamic Republic under its present regime?
    Dr. HAERI. The answer, he said, is no simply because the regime for 18 years has told its supporters that the United States is a satanic regime and that we cannot have any dealing with. Even if they decide to make any changes, those people would not allow it; the present regime, with present makeup, and the orthodox leadership, because there is a center around Khomeini of 15 people that they control the government, they would not allow it.
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    Chairman GILMAN. Thank you for your analysis.
    To all of our panelists, in your view how should our Nation respond if it is conclusively determined that Iran was substantially involved in the June 1996 bombing of the Khobar Towers complex?
    Dr. Clawson.
    Mr. CLAWSON. Yes, sir. If it is conclusively demonstrated that Iran was involved in the Khobar Towers bombing, then I think that the U.S. Government is going to have to take some firm responses, and that probably is going to involve the use of military force by the United States. I say this because the U.S. Government has stated rather firmly that it would respond in this circumstance, and failure to do so could create the impression on the part of rogues around the world that the United States does not stand up for its interests, does not follow through on what it has said it would do, and does not react when its soldiers are killed.
    In theory, we could take nonmilitary measures in consultation with our allies, for instance, proposing multilateral sanctions of the sort that were adopted against Libya after the indictments of Libyan nationals for their terrorist bombings of French and American planes. However, I would be skeptical that we could achieve agreement at the United Nations on such sanctions, and I think that we might exacerbate the relationships we have with the other members of the Security Council if we were to propose this there.
    Also, it could make it look like we would respond to threats against the United States only if we got the approval of Security Council members. It is important for us to establish the principle that when our vital interests are at stake, we are prepared to respond unilaterally, if need be.
    Chairman GILMAN. Ms. Miller, Mr. Schott, do you agree with that analysis?
    Mr. SCHOTT. Not really. Having looked at the military possibilities, they are both very temporary and not very effective. Even if it is a bombing mission, it would have only transitory impact on the Iranian economy and perhaps a perverse impact on the political situation. It could cause a rally-around-the-flag response or could be used by the regime to further enrage the population against us. But the possibility of such action could be used very effectively to reopen the discussion with the European Union on how we can jointly react to Iran.
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    Perhaps, Mr. Chairman, you may recall back in 1995 hearings before a subcommittee of this Committee on this problem when the State Department disclosed that it had not consulted with Europe before the issuance of the Executive order. Our diplomacy has improved since then, but it has been working at a distinct handicap because the sanctions or the threat of sanctions are directed against the very people that we want to cooperate with us and change their own policies so that they will impose multilateral sanctions in lockstep with us. If there is clear evidence of this terrorist activity, we could bring that evidence to the Europeans and say: ''Listen, we are going to go forward and act unilaterally, but it would be better if we revisited the efficacy of multilateral sanctions, and if you would agree to go into that, we could consult with the Congress about revising the types of penalties that were designed to promote the cooperation that we seek.'' I think that would be the appropriate way to proceed.
    Chairman GILMAN. Ms. Miller, do you want to comment?
    Ms. MILLER. No.
    Chairman GILMAN. Assuming that ILSA succeeds in reducing investment in Iran and Libya's energy sectors, how long would it take until their economies are affected? Anyone want to venture?
    Dr. Clawson.
    Mr. CLAWSON. Well, Iran has not been able to expand its oil and gas income as quickly as it would hope, so one could say that it has already been affected in the sense that the hope for growth is not taking place. However, what would happen with less investment is that the income would, over time, fall short of what might have been hoped for, and that kind of a slow deterioration is hard to notice. It is hard to grab people's attention when things just aren't going quite as well as you might like.
    So I am skeptical that there would ever come one moment in time when it was clear that the sanctions are working. I think that instead, the effect would be a slow and cumulative one. The kind of statements that we saw Khatami making about the poor prospects facing Iran unless there is some sharp change in policy suggests that we are already grabbing the attention of the leaders, and I don't think that we will ever see one moment in which things change overnight in that regard.
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    Chairman GILMAN. Dr. Haeri.
    Dr. HAERI. ILSA has demonstrated its effect, and he is answering it this way: That if there was any way of bringing into the picture the allies, the European Community, especially utilizing the Mykonos trial and the threat to Salman Rushdie, if the United States was capable of bringing them into join in the sanctions, the regime would not last a year.
    Chairman GILMAN. Mr. Schott or Ms. Miller, any comment?
    Mr. SCHOTT. Just one short additional point. It really depends on the price of oil, and that will be affected by a variety of factors, both related to the sanctions and unrelated to the sanctions. How much Iran can squeeze domestic production or reduce oil consumption domestically and put it into exports; how much other countries will increase their production in light of tightening supply and demand balances in the world economy; and a number of other factors. If the price of oil goes up, there will be more hard currency coming in, and that will enable money to be put into oil field development, so a lot of different factors are at play. And it would be very hard to determine that. I think Mr. Clawson is right, that there won't be any moment in time, and that is why the sustainability of the policy is so important and why I stress that in my testimony.
    Ms. MILLER. No, I essentially agree with that. Go ahead.
    Chairman GILMAN. Should our Nation press aggressively for a resolution banning Libyan oil exports? Any comments?
    Mr. CLAWSON. It would be quite difficult for us to achieve such an agreement at the United Nations. Mr. Schott made reference to, for instance, the possibility of reopening with the European Union the question of sanctions against Iran post-Khobar Towers determination. That sort of skips the question of the Russians and the Chinese, who are going to be the big barriers in any U.N. discussion. If we try to raise the issue of an export ban on Libyan oil at the United Nations, I think we would find that no matter how much we pressured the West Europeans, that we would not be successful at pressuring the Russians and the Chinese to agree to such a ban. I think that they would regard that as altogether too intrusive an action that we were taking against the Libyans. So I would be skeptical of the chance for success.
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    Frankly, I don't think we would win a lot of propaganda victories by pressing for such a resolution. Sometimes you might press for a resolution knowing you are not going to get it, but I don't think that that would be terribly productive in this case. I don't think we would win a lot of propaganda points by doing that kind of an action.
    Chairman GILMAN. Mr. Schott.
    Mr. SCHOTT. Yes, if I might add on to that, I think we have tried and failed because Europe has substantially different security interests in the maintenance of supplies from Libya and the Persian Gulf, and a cutoff of oil would dramatically affect Europe, which is the principal purchaser of supplies from Libya. A bilateral deal, even forgetting the problems in the United Nations that I agree with Dr. Clawson would be insurmountable, even a bilateral deal would not be feasible, given European attitudes. Note that the Europeans do not seem to have changed their policy toward Libya despite recent reports that Libya has been purchasing various missiles from North Korea that could target certain countries in the southern tier of the European Union. I don't think even that has encouraged them to rethink their policy.
    So I would be highly skeptical of the Europeans moving forward to ban Libyan oil.
    Chairman GILMAN. Thank you. One last question. ILSA requires the Administration sanction foreign companies who invest more than $40 million in Iran's oil industry. And despite the legislation and its remarkable success, there are indications that the French oil company Total is preparing to sign a deal with the Iranian Government to develop the natural gas field in South Pars as we discussed before.
    What should the Administration do if Total or any other oil company signs such a deal? And do we expect Total to be able to find the necessary financial partners to, in fact, go forward with the project?
    I would ask that to any of the panelists.
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    Dr. Clawson.
    Mr. CLAWSON. Yes, sir. The South Pars deal is such a complicated deal that there are really only a handful of companies in the entire world that can manage such a complex deal, and Total is one of those firms. I don't think that there are more than three or four other non-American firms that could handle such a deal. So this is a high priority issue.
    And I would say that we have to come to some agreement behind the scenes that is not going to rub Total's face in the dirt because both the French Government and the Total management has taken such a public stance that they are not going to pay attention to ILSA on this matter. But I hope we can work out some kind of a behind-the-scenes deal that allows Total to claim that it is not paying attention to our sanctions, while meanwhile guaranteeing the project does not proceed.
    It is unlikely that Total is going to climb down from its clear drive toward signing a deal. I just hope that we can find ways to get Total to guarantee that even though it signs a deal, it doesn't actually proceed to carry that through to fruition.
    Chairman GILMAN. Dr. Khorshidi, did you want to comment on that?
    Dr. HAERI [Through interpreter.] He feels that Total by itself cannot finance the whole project, and it needs partners, and so far they have failed to appropriate the right partners, and he feels the sanction has had something to do with it.
    Chairman GILMAN. Thank you.
    And Mr. Schott or Ms. Miller.
    Ms. MILLER. Well, I think it is probably the case that Total needs partners or would like them, and that sanctions have played the role in delaying that.
    I also think that in time that field is so large that the likelihood that we can prevent any company of substance, especially as the Asians become more interested in that, Asians who are simply not vulnerable to U.S. sanctions at an economic level, that it will get developed. But, you know, I may be wrong.
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    Chairman GILMAN. Mr. Schott.
    Mr. SCHOTT. I think once the law is enforced, as it must be if this deal goes through, then diplomacy will be much more difficult. Given the problems cited by Dr. Clawson and Ms. Miller in the near term, I think that the preferred policy would be to take advantage of the delay to try to resurrect an effective alliance with the European Union on this matter.
    But once the deal is concluded, there will be legal and political obstacles to trying to unravel it. So the time to seek alternative solutions is right now.
    Chairman GILMAN. One last question of the panelists. What is the likelihood of our unilateral pressure on Libya to produce for trial in the United States or United Kingdom the two Libyan defendants in the Pan Am 103 case? Anyone want to voice an opinion on that? Dr. Clawson.
    Mr. CLAWSON. I am just struck by how far the Libyan Government has gone to find some kind of a solution to this matter. They have made a whole variety of different proposals about where to hold the trial and under what conditions and circumstances to hold the trial. It seems like every 6 months they make another concession on this matter, going so far as to provide a whole lot of very incriminating information to a French investigating judge last year.
    If we just wait awhile, the trend line suggests that at some point the Libyans will finally give in. We may have to make some minor accommodation to them so they can claim some victory, but I am quite optimistic that at some point in the game the Libyans are going to give in on this matter, just because they have done so much over the last few years.
    Chairman GILMAN. Dr. Khorshidi.
    Dr. HAERI [Through interpreter.] No comment.
    Chairman GILMAN. Mr. Schott or Ms. Miller.
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    Mr. SCHOTT. I take a somewhat different view having dealt with Libyan problems and sanctions when I was in the government and studied them since then. I think this is a classic case of salami tactics, and essentially they are making small concessions but really saying no.
    And how we can turn those ''yes, buts'' into ''yes, we will do it'' is very difficult. I think their answer is still going to be ''no'' for some time to come until we find more effective leverage.
    Chairman GILMAN. Well, again, I want to thank our panelists for the time and patience and for your excellent views. I am sure it will be extremely helpful to our Committee as we assess our sanction legislation.
    The Committee will stand adjourned.
    [Whereupon, at 12:55 p.m., the Committee was adjourned.]

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