Congressional Quarterly,
CQ Congressional Testimony
July 25, 2006 Tuesday
COMMITTEE: HOUSE JOINT ECONOMIC
HEADLINE: ENERGY AND THE IRANIAN ECONOMY
TESTIMONY-BY: ILAN BERMAN, VICE PRESIDENT
AFFILIATION: AMERICAN FOREIGN POLICY COUNCIL
Statement Ilan Berman Vice President for Policy American Foreign
Policy Council
Committee on House Joint Economic
July 25, 2006
Chairman Saxton, Vice-Chairman Bennett, distinguished members of the
Committee: It is a privilege to appear before you today to discuss
the subject of the Iranian economy and U.S. policy options.
There is no greater foreign policy challenge facing the United States
today than the one posed by the Islamic Republic of Iran. The Iranian
regime’s persistent work on its nuclear program, and its intransigence
in the face of international demands, has catalyzed a growing crisis
that threatens international peace and security. So far, however,
there has been little public discussion about the economic dimension
of the current crisis, or of the financial levers available to the
United States and its international partners to alter Iranian behavior.
WHAT FUELS IRANIAN INTRANSIGENCE?
More than any other factor, Iran’s defiance in the current stand-
off with the West over its nuclear program has been made possible by
energy. Over the past several years, the Islamic Republic has emerged
as a bona fide energy superpower. Home to approximately 10 percent of
world oil, Iran is the second largest exporter in the Organization
of Petroleum Exporting Countries (OPEC), producing an average of
3.9 million barrels of oil per day. At the same time, Iran sits
atop the world’s second-largest reserves of natural gas (some 940
trillion cubic feet). As a result, Iran’s economy is overwhelmingly
energy-based. Today, the vast majority (80 to 90 percent) of Iran’s
export earnings, as well as about one half of its budget and a quarter
of its gross domestic product, is derived from energy exports to the
international community.
In the past, this energy-dominated economy has led to wild fluctuations
in Iran’s financial fortunes. During the late 1990s, plummeting
world oil prices left the Iranian regime nearly bankrupt.2 Today,
however, quite the opposite is true; the rising price of world oil
generated by political instability associated with the War on Terror
has provided Iran with a staggering fiscal windfall. As of March
2006 (the end of Iranian calendar year 1384), officials in Tehran
were publicly estimating their country’s hard currency reserves at
some $50 billion.3 These added resources and financial cushion can be
expected to dramatically increase the Iranian regime’s willingness to
engage in risky regional behavior, as well as to accelerate the pace
and scope of its strategic programs, in the months and years to come.
Iranian officials have attempted to solidify this economic status
through a major expansion of their country’s international energy
profile. Over the past two years, Iran has signed two massive
exploration and development accords, worth an estimated $100 billion
over the next twenty-five years, with China alone.4 A growing number
of other nations, including France, Malaysia, Japan, Canada, and
Italy, are now engaged in the development of existing oil fields
within the country, and this involvement is expected to increase
as recent discoveries including the Azadegan field and Bangestan
reservoirs in southern Iran, as well as the offshore Dasht-e- Abadan
site near the southwestern port city of Abadan begin to come online.
Iran has also commenced efforts to become a major global exporter
of natural gas. Since 2002, it has supplied Turkey with substantial
natural gas deliveries via a bilateral pipeline link and, according
to official Turkish government statistics, could provide roughly 20
percent of total Turkish natural gas consumption by the end of the
decade.5 A similar arrangement is emerging between Iran and Armenia as
part of a pipeline, currently under construction, that could supply
Armenia with up to 47 billion cubic meters over a period of 20 to 25
years, beginning in 2007.6 Iran has opened similar discussions with
Georgia, and has even taken steps to coordinate natural gas policy
with Moscow as part of a Russia-led natural gas cartel now emerging
in the post-Soviet space.
At the same time, the Iranian regime has dramatically increased its
ability to leverage its strategic location in the Strait of Hormuz,
the principal passageway for roughly two-fifths of world oil trade.
According to U.S. intelligence estimates, a sustained national
military rearmament over the past several years has provided Iran
with the ability to temporarily shut off the flow of oil from the
Persian Gulf, even with a Western military presence in the region.
It is a testament to this energy clout that, as the international
crisis over Iran’s runaway nuclear ambitions has deepened, Iranian
officials have repeatedly raised the specter of a disruption of energy
trade in the Persian Gulf. Regime officials such as Mohammed-Nabi
Rudaki, deputy chairman of the Iranian parliament’s national security
committee, have warned that the Islamic Republic has the power to
“to halt oil supply to the last drop from the shores of the Persian
Gulf via the Straits of Hormuz” should serious measures be undertaken
against the Islamic Republic at the United Nations.9 Similarly, Iranian
president Mahmoud Ahmadinejad has warned the United States and Europe
that the global price of crude has not yet reached its “real value.”10
Even Iran’s Supreme Leader, the Ayatollah Ali Khamenei, has threatened
the West with disruptions in fuel shipments from the Persian Gulf in
the event of a “wrong move” against Iran.11 And regime officials have
concretely demonstrated their capacity to do so, holding a week-long
series of aerial, naval and ground maneuvers in the Persian Gulf in
April 2006 to showcase the force-projection capabilities of their
elite clerical army, the Pasdaran.
ASSESSING IRANIAN VULNERABILITIES
Given such posturing, it is not surprising that some analysts have
concluded that energy is Iran’s “trump card” in its dealings with the
West. This economic leverage, however, is a two- way street and on
at least three fronts, Islamic Republic is susceptible to economic
pressure from the international community.
Commodity shortages
Despite massive oil exports of some 2.5 million barrels a day, Iran
currently imports more than a third of its annual consumption of over
64.5 million liters of gasoline from a variety of foreign sources
(among them India, France, Turkey and China) at an estimated cost
of more than $3 billion annually.13 These imports are not surplus;
Iran reportedly maintains just 45 days worth of gasoline domestically,
and requires steady supplies of refined petroleum products from abroad
for the continued functioning of its economy. Mounting international
pressure, moreover, is already raising the costs of these deliveries.
One leading Iranian policymaker has predicted that the regime will
need to spend an extra $5 billion this year alone to maintain its
established policy of deep subsidies on the sales of gasoline and
avoid domestic rationing.15 This suggests that the imposition of an
embargo on foreign gasoline supplies to Iran could achieve rapid
results ranging from the depletion of hard currency reserves to a
work stoppage in many of Iran’s industrial sectors.
Centralized economic hierarchy
Today, the vast majority of regime wealth is concentrated in the
hands of a very small number of people, whose associates and relatives
dominate the Iranian economy. The extended family of former Iranian
president (and current Expediency Council chairman) Ali Akbar Hashemi
Rafsanjani, for example, now virtually controls copper mining in Iran,
the regime’s lucrative pistachio trade, and a number of profitable
industrial and export- import businesses. A related economic
power center is Iran’s bonyads, the sprawling, largely-unregulated
religious/social foundations overseen by Iran’s Supreme Leader, which
account for between 10 and 20 percent of Iranian national GDP. Given
this economic hierarchy, targeted financial measures that restrict the
ability of these individuals and organizations to access international
markets and curtail their capacity to engage in commerce are likely
to have an immediate and pronounced effect on regime decision-making.
Foreign direct investment
The dozens of billions of surplus dollars collected by the Iranian
government over the past two years as a result of the rising price
of world oil have done little to diminish Iran’s need for foreign
direct investment. According to authoritative estimates, Iran’s energy
sector still requires some $1 billion annually to maintain current
production levels, and $1.5 billion a year to increase capacity.
Without such sustained capital, studies say, Iran could revert
from an energy powerhouse to a net energy importer in the span of
very few years.19 Given the scope of current investment in Iran,
it is unrealistic for the U.S. and its allies to expect to be able
to achieve a comprehensive economic isolation. However, if broad and
forceful enough, multilateral sanctions may complicate Iran’s access
to foreign funding, and/or force a depletion of the hard currency
reserves that the regime has amassed over the past several years.
THINKING BEYOND THE UNITED NATIONS
Today, the United States has the ability to capitalize upon these
vulnerabilities. International economic sanctions can help to slow
Iran’s nuclear progress and signal the international community’s
opposition to an Iranian bomb. If coupled with effective public
diplomacy, such measures can also drive a wedge between the Iranian
government and its people over the prudence of nuclear acquisition.
Moreover, history has shown that the effectiveness of sanctions can
be enhanced by the speed and scope with which they are applied.
It is becoming exceedingly clear, however, that the United Nations
is not the optimal vehicle by which to apply such pressure. Already,
protracted diplomatic wrangling has provided Iran with valuable time
to reduce its economic vulnerabilities. In recent months, Iran has
carried out large-scale transfers of assets from Europe to financial
institutions in China and Southeast Asia, as well as initiating a
major privatization of governmental funds. Most recently, Iran’s
parliament has approved a new fiscal budget that calls for a halt to
imports of refined petroleum products and the institution of gasoline
rationing starting this Fall.3 The goal of these efforts is clear:
to limit Western economic leverage over Iranian behavior.
Timing should also be a major consideration. In late May, Secretary
of State Condoleezza Rice signaled a sea change in American policy
toward Iran when she announced that the United States would join
Europe in proffering a “package” of incentives aimed at bringing
the Islamic Republic back to the nuclear negotiating table. Iran,
in turn, has maintained that it is studying the offer and will
provide a formal reply in late August.24 It is unclear whether
the international community will wait until then to seek Security
Council action against Iran, but it is reasonable to expect that
forceful international action still remains some weeks or months
away allowing Iran to continue minimizing economic vulnerabilities
and forging ahead with its nuclear effort. All of this means that,
if and when economic sanctions are again on the table, their stated
task to alter the regime’s behavior with relation to its nuclear
program will be even more difficult to achieve than it is today.
Moreover, if and when United Nations sanctions do materialize, they
are likely to be deeply influenced by politics. Russia and China both
wield veto power over Security Council action against Iran, and while
Moscow and Beijing appear to have endorsed more robust measures against
Iran should the current negotiations fail, any steps taken will need
to be carefully calibrated so as to preserve the support of those
states. As a practical matter, this means that the economic pressure
applied against Iran will be both gradual and limited in scope.
Given these difficulties, Washington would be far better served by
the establishment of an economic coalition outside of the confines
of the United Nations. Through such a construct, the United States
would have far greater ability to control the timing, extent
and application of economic pressure on Iran, without Security
Councilimposed constraints. It would also provide the U.S. and its
coalition partners with greater political flexibility to apply those
specific measures most likely to alter Iranian behavior.
THE LIMITS OF IRANIAN OIL POWER
Today, Iran holds the ability to exert a high price from the world
if it is stymied in its nuclear efforts. But political and economic
realities suggest that Iran’s oil power is far more limited than
commonly understood.
Iran could indeed curb oil exports, as regime officials have repeatedly
threatened. However, if the Islamic Republic withdraws oil from world
markets, it faces the prospect of losing much- needed long-term energy
clients, such as China and India, which can be expected to quickly
seek replacement suppliers. Moreover, the resulting perceptions that
Iran is an “unreliable” energy partner are likely to reduce foreign
direct investment flowing into the country thereby placing Iran’s
current status as a global energy player in jeopardy.
By the same token, a cut-off of oil exports is likely to reverse
Iran’s recent political gains abroad. Simply put, should Iran’s
energy brinksmanship hurt the economies of its political allies,
those countries are far less likely to unconditionally support Iran
on the perceived source of the economic turbulence: Iran’s nuclear
program. This change will be true in spades for major investors into
Iran’s energy sector (such as Japan, China and France).
Most of all, Iranian officials despite official bluster understand that
actual use of the “oil weapon” is likely to carry dire consequences
for their regime. The international community’s current diplomatic
overtures toward Tehran have been generated in no small part by
problems attaining consensus on more robust measures. Substantial
Iranian interference with the global energy market could change all
that, galvanizing a consensus for aggressive containment or even
regime change on the part of numerous energy-hungry nations.
Is there a guarantee that sanctions will succeed in altering Iranian
behavior and curbing its nuclear efforts? The answer is no. On the
contrary, American policymakers should refrain from seeing economic
sanctions as an isolated measure; historically, a strong correlation
exists between the imposition of sanctions and the subsequent
escalation to the use of force (e.g., Panama in 1989, Iraq in 1991,
and the Balkans during the mid-1990s). However, what is clear is that a
failure by the international community to promptly utilize its existing
economic leverage vis- a-vis Iran will make other, less attractive
solutions chief among them the use of force much more likely.
Ultimately, the United States must make a choice. Is it, and the world,
willing to pay the political and economic price associated with a
serious strategy to confront Iran? The alternative is to internalize
a permanent hike in the cost of doing business with a region dominated
by an atomic Islamic Republic.

Armenian Airbus crash due to ‘human factor’: minister
Agence France Presse — English
July 26, 2006 Wednesday 9:25 AM GMT
The crash of an Armenian Airbus plane off Russia’s Black Sea coast
in May that killed all 113 people on board was caused by a “human
factor”, Russian Transport Minister Igor Levitin said Wednesday.
“Weather conditions were difficult, the human factor played its role,”
Levitin was quoted by the Interfax news agency as saying at a press
conference, held about the results of an inquiry into the crash of
the A320 liner belonging to Armavia airlines.
Tatyana Anodina, head of the intergovernmental aviation committee
that took part in the enquiry, said: “The main pilot did not ensure
control of the plane as far as angle and altitude were concerned,”
ITAR-TASS reported.
“The co-pilot did not ensure necessary control on the descent,”
Anodina said, adding that an alarm system had gone off as the plane
plunged but that it was too late to regain altitude.
The Airbus A320 plunged into the Black Sea on May 3 amid rainy weather
as it was coming in to land in Sochi — a popular coastal resort city
in southwest Russia.

U.S. Preparing Azeri Airport for Incursion into Iran?
PanARMENIAN.Net
26.07.2006 16:11 GMT+04:00
/PanARMENIAN.Net/ The U.S. is going to reconstruct one the
Azeri military airdromes in order to refuel NATO jets flying to
Afghanistan. According to Jonathan Henick, the PR officer at the
U.S. Embassy in Azerbaijan, negotiations are held with the Defense
Minister of the republic on the issue. The American diplomat remarked
that before the Azeri side chooses an appropriate airdrome the
facilities of the international airport after Heydar Aliyev will be
used for the purpose, reported Day.az.

The International Herald Tribune: “Dutch Disease” Threatens Azerbaijan
PanARMENIAN.Net
26.07.2006 16:34 GMT+04:00
/PanARMENIAN.Net/ For Azerbaijan, the biggest question at present
is what to do with the so-called “wall of money” that will start
to accrue once the oil begins to flow. Some observers are already
predicting a bad case of pending “Dutch disease”- by which an increase
in oil revenues renders a country’s manufacturing less competitive
by raising the exchange rate – unless Baku manages to divert both
state and private investment into the non-oil sector and addresses
the subject of income disparity between the new rich and the growing
number of disgruntled or desperately poor,” Thomas Goltz wrote for
The International Herald Tribune.
“For now, the question of the political ramifications of future
oil-related wealth is on hold as investors, citizens and former
pipe-dreamers celebrate the realization of what is now a “pipeline
to somewhere.” I hope my zany motorcycle circus of six years ago
played some little part in this process. I also hope that the current
leadership of Azerbaijan will use the occasion of its new-found wealth
to win more than just fair-weather friends and address some of the
urgent social issues at play here on the shore of the Caspian,”
the observer wrote.

House of Representatives Voted Against Kars-Tbilisi-Baku Railway Project Financing
PanARMENIAN.Net
26.07.2006 17:19 GMT+04:00
/PanARMENIAN.Net/ The House of Representatives today voted to help
ensure that U.S. regional cooperation and economic integration is
maintained by making certain that no Export-Import funding is used for
a railroad project sponsored by the Turkish and Azeri governments that
seeks to exclude Armenia from economic and regional transportation
opportunities, reported the Armenian Assembly of America.
Lawmakers approved H.R. 5068, the Export-Import Bank Reauthorization
Act of 2006, which included an amendment by Congressman Joseph Crowley
(D-NY), along with Congressmen Edward Royce (R-CA) and Brad Sherman
(D-CA), ensuring that taxpayer dollars will not be spent on efforts
that would isolate Armenia – which is already facing dual blockades
by Turkey and Azerbaijan.
In a statement submitted for the House record, Crowley said “This
language will assist in promoting stability in the Caucasus region,
help in ending long standing conflicts, and save U.S. taxpayers the
responsibility of funding a project that goes against U.S. interests.”
“Passage of H.R. 5068 with the Crowley-Royce-Sherman provision,
which was modeled after H.R. 3361 helps ensure that the U.S. will
not be party to the flawed policies of Armenia’s neighbors,” said
Executive Director Bryan Ardouny.
“This time we must ensure that Armenia is not bypassed,” Ardouny said.

120 People to Be Evacuated from Lebanon to Armenia Tomorrow
PanARMENIAN.Net
26.07.2006 17:42 GMT+04:00
/PanARMENIAN.Net/ 120 Armenians will be conveyed from Lebanon to
Yerevan July 27. According to Armenian Deputy Foreign Minister
Gegham Gharibjanian, 51 of them, mostly foreigners, requested the
Department for Migration at the RA government to grant them the status
of temporarily protected persons. Gegham Gharibjanian remarked that
the status will be granted to them in the near future.
All those who wish to arrive in Armenia will be granted a free 3-month
visa. The Armenian Embassies in Lebanon and Syria of on working round
the clock, reported the RA government’s press office.

IMF Highly Appreciates Cooperation with Armenian Government
PanARMENIAN.Net
26.07.2006 17:49 GMT+04:00
/PanARMENIAN.Net/ Armenian Foreign Minister Vartan Oskanian met today
with Permanent Representaive of the International Monetary Fund in
ARmenia Nienke A. Oomes, reported the RA MFA press office. The
interlocutors discussed the Armenia-UMF cooperation. Former OMF
Permanent Representaive James McHugh, who was also present at the
meeting, gave a high estimate to the collaboration with the Armenian
government and successful implementation of joint projects. By the
guest’s request Vartan Oskanian briefed on the current stage of the
Nagorno Karabakh conflict settlement.

TIGRAN TOROSIAN BELIEVES QUANTITY OF ARMS AND MONEY CAN’T ALWAYS BE DECISIVE FACTORS IN WAR
AZG Armenian Daily #140, 27/07/2006
Opinion
Azerbaijan had many opportunities to make sure that the end of the
war isn’t always conditioned by the quantity of arms or money. Tigran
Torosian, Speaker of RA National Assembly, said this at today’s
meeting with the representatives of the Armenian youth. He emphasized
that in 90-ies, in the course of the military actions in the Nagorno
Karabakh conflict zone, Azerbaijan was stronger thanks to its military
capacity, but only the people who fought a war for the sake of their
homeland took the victory. He added that since the end of 20th the
political situation is quite changed and there are international
game rules that one should take into account. As for the militant
statements of Azerbaijan, Torosian conditioned them by the lack of
Baku’s will to recognize the independence of NKR. “But Baku realizes
that there are no preconditions or prospects for resumption of the
war,” he emphasized. He also focused the attention to the fact that
the international community more frequently gives preference to the
people’s right for self-determination. He underscored that NKR people
achieved their independence in accordance with the international law
and the legislation of USSR.

ARMENIAN PARLIAMENTARY FORCES DISCUSS AMENDMENTS SUBMITTED BY OPPOSITION PARTIES
AZG Armenian Daily #140, 27/07/2006
Speaker of the National Assembly Tigran Torosian and the leaders of
Parliament factions discussed the amendments to the Electoral Code
suggested by the opposition. The opposition suggests adoption of 100%
proportional electoral system and forming of electoral committees
exclusively from members of political parties. The participants of
the meeting did not come to consensus on these questions. Before late
august a parliamentary workgroup is to be created in order to consider
the notes by the Venice Commission and the opposition suggestions.

DAVID HAROUTIUNIAN: ARMENIAN JUDGES WILL HAVE TO BE VERY CAREFUL IN ACCEPTING GIFTS
AZG Armenian Daily #140, 27/07/2006
Judiciary Reforms
>From now on the Armenian judges will have to be very careful in
accepting gifts, Armenian Justice Minister David Haroutyunian said
during a press-conference today.He said that the Justice Ministry
16-member working group set up in Mar 2006 has already drafted a
package of court system reforms. One of the key points is that the
Armenian judges must abstain from accepting any kinds of gifts. They
can do this only during weddings, their own birthdays and birthdays
of their relatives but then too they should report on gifts to the
Commission on Ethics. Haroutyunian said that from now on the first
instance courts will specialize in criminal, economic and other
cases. The Economic Court will be dissolved, the Court of Cassation
divided into two chambers of three judges each. From now on it will
be the authority of the Council of Justice to announce vacancies
and to test applicants for judges. Of 25 judges passing the exam
the Council will select 16 ones and will submit the list for the
President’s approval. However, they will enter into their offices
only after completing a 1.5-year training course at special School of
Judges.Haroutyunian said that judges have no right to have private
businesses or to hold some paid position. They must be politically
neutral and not affiliated to any party. They can take part in
elections only as voters or electoral commissioners.
At the same time, Haroutyunian refused to comment on his future
political activities saying that this was not the topic of the
discussion.
By Nana Petrosian