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Iran Advice for the Obama Administration

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Update from AIJAC

November 14, 2008
Number 11/08 #04


This Update concentrates on additional advice for the incoming Obama Administration on dealing with the Iranian nuclear conundrum.

First up is American law professor Orde Kittrie, who argues that the key to having leverage over Iran to get it to halt ongoing illegal nuclear activities is Iran's need to import some 40% of its refined petroleum products. He points out that almost all Iran imports come from just five companies in various countries. He then shows how US Federal and state governments have considerable leverage over all of these companies, and that moreover, Russia and China, the major barriers to additional UN sanctions on Iran, are in no position to substitute as refined petroleum suppliers. For this important exploration of an idea which Obama has himself raised, CLICK HERE. Kittrie mentions recent strong criticism of Ahmadinejad by 40 Iranian economists, more on that is here.

Next up, Washington Institute for Near East Policy Iran specialist Mehdi Khalaji argues that efforts to dialogue with the Iranian government have been tried before and are not likely to work now because the government does not control the security and foreign policy issues that the West wants to discuss. He suggests it is necessary to try and engage Iran's Supreme Leader Ayatollah Ali Khamanei -  and looks at who he is and how he sees the world ie. as the leader of global Islam, not of Iran. He suggests an effort to approach Khamanei directly, which he says is unlikely to be successful, but which would at least demonstrate to the world a US effort at diplomacy at the highest level and therefore make attaining tough sanctions easier. For the full piece, CLICK HERE. Meanwhile, Iranian reactions to Obama's election are detailed here, and as Khalaji suggested, it seems far from clear they are interested in serious negotiations. More Iranian reactions are canvassed here.

Finally, the New York Times two weeks ago published an important piece on the architect of some of the most important and successful  efforts to place pressure on Iran, Stuart Levey, US under secretary for terrorism and financial intelligence at the Treasury Department. It describes the success of the informal financial sanctions he developed, which have badly hampered  Iran's access to credit and other financial instruments. While the piece was written before the last election, it provides details on one important kind of leverage on Iran that is currently working,  has bipartisan support in the US,  and is likely to continue or be strengthened as part of any future efforts to increase leverage on Iran. The piece also discusses Dubai's role in facilitating legal and illegal trade with Iran. For the whole story, CLICK HERE. This piece suggests that there may not be time for the financial sanctions to work and the Washington Post published a good piece canvassing various opinions on how much time there is before Teheran can build nuclear weapons.

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How to Put the Squeeze on Iran

Cutting off its gasoline imports may be the only peaceful way to get Tehran to abandon its nuclear weapons program.

By ORDE F. KITTRIE

Wall Street Journal, NOVEMBER 13, 2008

If Barack Obama is to persuade Iran to negotiate away its illegal nuclear weapons program, he will first need to generate more leverage than what the Bush administration is leaving him with. The current U.N. sanctions have proven too weak to dissuade Tehran's leaders, and Russia and China seem determined to keep those sanctions weak. Meanwhile, the regime continues to insist there are no incentives in exchange for which it would halt or even limit its nuclear work.

However, Tehran has an economic Achilles' heel -- its extraordinarily heavy dependence on imported gasoline. This dependence could be used by the United States to peacefully create decisive leverage over the Islamic Republic.

Iranian oil wells produce far more petroleum (crude oil) than Iran needs. Yet, remarkably for a country investing so much in nuclear power, Iran has not developed sufficient capacity to refine that crude oil into gasoline and diesel fuel. As a result, it must import some 40% of the gasoline it needs for internal consumption.

In recent months, Iran has, according to the respected trade publication International Oil Daily and other sources including the U.S. government, purchased nearly all of this gasoline from just five companies, four of them European: the Swiss firm Vitol; the Swiss/Dutch firm Trafigura; the French firm Total; British Petroleum; and one Indian company, Reliance Industries. If these companies stopped supplying Iran, the Iranians could replace only some of what they needed from other suppliers -- and at a significantly higher price. Neither Russia nor China could serve as alternative suppliers. Both are themselves also heavily dependent on imports of the type of gasoline Iran needs.

Were these companies to stop supplying gasoline to Iran, the world-wide price of oil would be unaffected -- the companies would simply sell to other buyers. But the impact on Iran would be substantial.

When Tehran attempted to ration gasoline during the summer of 2007, violent protests forced the regime to back down. Cutting off gasoline sales to Iran, or even a significant reduction, could have an even more dramatic effect.

In Congress, there is already bipartisan support for peacefully cutting off gasoline sales to Iran until it stops its illicit nuclear activities. Barack Obama, John McCain and the House of Representatives have all declared their support.

On June 4 of this year, for example, Sen. Obama said at a speech in Washington, D.C.: "We should work with Europe, Japan and the Gulf states to find every avenue outside the U.N. to isolate the Iranian regime -- from cutting off loan guarantees and expanding financial sanctions, to banning the export of refined petroleum to Iran."

He repeated this sentiment during the presidential candidates' debate on Oct. 7: "Iran right now imports gasoline . . . if we can prevent them from importing the gasoline that they need . . . that starts changing their cost-benefit analysis. That starts putting the squeeze on them."

How do we stop the gasoline from flowing? The Bush administration has reportedly never asked the Swiss, Dutch, French, British or Indian governments to stop gasoline sales to Iran by the companies headquartered within their borders. An Obama administration should make this request, and do the same with other governments if other companies try to sell gasoline to Iran.

But the U.S. also has significant direct leverage over the companies that currently supply most of Iran's imported gasoline.

Consider India's Reliance Industries which, according to International Oil Daily, "reemerged as a major supplier of gasoline to Iran" in July after taking a break for several months. It "delivered three cargoes of gasoline totaling around 100,000 tons to Iran's Mideast Gulf port of Bandar Abbas from its giant Jamnagar refinery in India's western province of Gujarat." Reliance reportedly "entered into a new arrangement with National Iranian Oil Co. (NIOC) under which it will supply around . . . three 35,000-ton cargoes a month, from its giant Jamnagar refinery." One hundred thousand tons represents some 10% of Iran's total monthly gasoline needs.

The Jamnagar refinery is heavily supported by U.S. taxpayer dollars. In May 2007, the U.S. Export-Import Bank, a government agency that assists in financing the export of U.S. goods and services, announced a $500 million loan guarantee to help finance expansion of the Jamnagar refinery. On Aug. 28, 2008, Ex-Im announced a new $400 million long-term loan guarantee for Reliance, including additional financing of work at the Jamnagar refinery.

Or consider the Swiss firm Vitol. According to International Oil Daily, Vitol "over the past few years has accounted for around 60% of the gasoline shipped to Iran." Vitol is currently building a $100 million terminal in Port Canaveral, Florida.

Last year, when Minnesota Gov. Tim Pawlenty discovered that an Indian company, Essar, was seeking to both invest some $1.6 billion in Minnesota and invest over $5 billion in building a refinery in Iran, he put Essar to a choice. Mr. Pawlenty threatened to block state infrastructure subsidies and perhaps even construction permits for the Minnesota purchase unless Essar withdrew from the Iranian investment. Essar promptly withdrew from the Iranian investment.

Florida officials could consider taking a similar stance with Vitol.

The Minnesota example is not the only precedent. U.S. outreach to foreign banks and to oil companies considering investing in Iran's energy sector has reportedly convinced more than 80 banks and several major potential oil-field investors to cease all or some of their business with Iran. Among them: Germany's two largest banks (Deutsche Bank and Commerzbank), London-based HSBC, Credit Suisse, Norwegian energy company StatoilHydro, and Royal Dutch Shell.

A sustained initiative may be able to convince most or all current and potential suppliers that the profits to be gained from continuing to sell gasoline to Iran will be dwarfed by the lost loan guarantees and subsidies and foregone profits they will incur in the U.S. from continuing to do business with Iran.

Last Sunday, a group of 60 Iranian economists called for the regime to drastically change course, saying that President Mahmoud Ahmadinejad's "tension-creating" foreign policy has "scared off foreign investment and inflicted heavy damage on the economy." The economists said the current sanctions, as weak as they are, have cost Iran billions of dollars by forcing it to use middlemen for exports and imports. Halting Iran's gasoline supply could contribute to reaching a tipping point -- at which economic pressures and protests convince the regime its illicit nuclear program poses too great a risk to its grip over the Iranian people.

If the federal and key state governments in the U.S. were to make it their goal to achieve a halt by companies selling gasoline to Iran, it could be a game-changer. It may be our best remaining hope for peacefully convincing Iran to desist from developing nuclear weapons.

Mr. Kittrie is a professor of law at Arizona State University and a fellow at the Foundation for Defense of Democracies. He previously worked for 11 years at the U.S. Department of State, including as a specialist on nuclear nonproliferation and sanctions.

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The Problems of Engaging with Iran's Supreme Leader

By Mehdi Khalaji

PolicyWatch
#1426
November 12, 2008

Iranian President Mahmoud Ahmadinezhad's congratulatory letter to U.S. president-elect Barack Obama was the first of its kind in the history of the Islamic Republic. In his letter, Ahmadinezhad expressed his hope for fundamental change in U.S. domestic and foreign policies. Although some observers speculate that the letter suggests a transformation in the mindset of Iran's supreme leader, Ayatollah Ali Khamenei, about normalizing relations between Iran and the United States, this is unlikely. Majlis speaker Ali Larijani expressed the widespread attitude of Iranian leaders on November 9, saying, "Whoever thinks that Obama will change the U.S. foreign policy is naive."

Background

The United States has made efforts to reach out to the Islamic Republic's leaders in the past, beginning with Zbigniew Brzezinski's November 1, 1979, meeting with the Iranian prime minister, which led four days later to the seizure of the U.S. embassy in Tehran. These efforts have largely failed, primarily because the United States was attempting to work with Iranian presidents and diplomats, despite the fact that they are not in charge of key foreign policy issues or the nuclear program. Ayatollah Khamenei as the supreme leader and the commander in chief of armed forces has the ultimate supervision over the nuclear program, Iran's military strategy in the region, and Iran's foreign policy in general. Any attempt to reach Iran's government is more likely to be successful if it involves the supreme leader. But Khamenei would have to resolve many paradoxes before receiving any American overture directly.

Isolated but Powerful Supreme Leader

In an October 30 speech, Ayatollah Khamenei reiterated that "the Islamic Republic of Iran's differences with America are beyond political differences and [are] more fundamental than that." He urged Iranians to read the documents seized by students from the U.S. Embassy in Tehran twenty-nine years ago, saying that "the goals of Americans are to deprive Iran of its independence and dignity, cause it to regret the Islamic Revolution, and make it again dependent on and obedient to America." The supreme leader added, "The hatred and abhorrence of Iran's nation toward America is deep."

Khamenei's unapologetic, uncompromising hatred for the United States has remained unchanged, a profound mistrust that causes him to underestimate changes in the U.S. political atmosphere or policy. On the eve of the U.S. election, Kayhan, an Iranian newspaper affiliated with the supreme leader, wrote that "no matter who is elected tomorrow, America is our enemy and our relations with it will remain deadlocked. Why? The reason is found in the essence of the two parties. The Islamic Republic of Iran in its government structure relies on the pure Mohammedan Islam, the main feature of which is fighting injustice, while America has an unjust and imperialist nature."

Although some Iranian diplomats and presidents, whether radicals or reformists, have been interested in opening doors to the United States -- and this would seem to include President Ahmadinezhad, as evidenced by his frequent trips to New York -- Ayatollah Khamenei has been able to sabotage any attempt at serious dialogue.

Leading a Country or an Ideology?

Khamenei considers himself not only the leader of the Islamic Republic but also the highest authority on Islamic ideology in the world. He therefore sees himself as responsible for the survival of Islamic ideology and its values, as well as his image as its leader. Because the Islamic Republic has failed to meet its economic, cultural, and social promises, Khamenei has made anti-Americanism the cornerstone of that Islamic ideology.

"America" for Khamenei does not refer to a country like any other, but rather to a point of view diametrically opposed to Islamic ideology, on which the Iranian regime relies for its legitimacy. In his mind, allowing the level of "hatred" toward the United States to diminish is tantamount to recognizing the supremacy of "Western culture." Such a development would be disastrous for Khamenei, because for the last twenty years Khamenei has lived in fear of a "velvet revolution" -- an infusion of Western culture and values that would lead to the overthrow of the regime. Indeed, this fear has led him to kill or arrest political activists and intellectuals and crack down on civil activists, syndicates, and nongovernmental organizations, because he considers them the West's most effective means of waging a "soft war" against Iran.

In order to accept any offer for direct negotiation with the United States, Ayatollah Khamenei would first have to accept that his position is limited to heading a country, not a broader ideology. This could effect a drastic change in Iran's policy in the region and its diplomacy in general.

Today the Islamic Republic's leadership is arguably in a worse position than at any point in the last three decades due to the country's economic crisis, the leadership's lack of a power base in society, and international pressure on the regime. For some Iranian leaders, this state of affairs might justify taking advantage of the election of a new U.S. president to change the tenor of the bilateral relationship. But there is no evidence that Khamenei is among those officials. Although many Iranians may disapprove of Khamenei as a leader, he has succeeded in expanding his power throughout the Islamic world, especially in the Arab Middle East.

How to Reach Out to the Supreme Leader

Based on past experience, as long as the Iranian supreme leader does not see dialogue with the United States as necessary for the survival of the regime, he will be unlikely to make much effort to alter the status quo. Of course, receiving an offer from the next administration for unconditional negotiations will place Khamenei in a difficult position. He has always tried to portray America as responsible for the strains in U.S.-Iranian relations. Asking him to negotiate would undercut this argument and place the burden of responsibility on him for the lack of dialogue.

Khamenei's management model in the past two decades has been to have as much authority as possible with as little responsibility as possible. The first step for dealing directly with the Iranian government is to make its supreme leader responsible. Addressing him directly and publicly with a call to initiate a dialogue will close the exit doors available to him and require him to make a decision. In dealing with the United States, Khamenei's ideal scenario has been "no war, no peace." This strategy has allowed him to continue the nuclear program and minimize the damage associated with it. Given the fact that Iran could well obtain the ability to produce a nuclear bomb in the near future, the United States has to convince him that the "no war, no peace" strategy will no longer work, and that he has to choose either war or peace.

A bold and direct U.S. offer to Ayatollah Khamenei, such as proposing that a top U.S. official meet with him in his Tehran office, would put Khamenei in a difficult position. It is possible -- although not likely -- that he would accept, especially if he believes that Iran faces a direct threat from economic failure or Israeli attack, or if he thought that American officials would treat him respectfully and end U.S. pressures on his regime. But even if he refused to meet, the United States, having tried to solve the problem through diplomacy at the highest level, would most likely find it easier to reach consensus with its strategic allies to increase sanctions on Iran.

Mehdi Khalaji is a senior fellow at The Washington Institute, focusing on the role of politics in contemporary Shiite clericalism in Iran and Iraq.

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Stuart Levey’s War


By ROBIN WRIGHT


New York Times Magazine, November 2, 2008

It has been almost 30 years since the last shah, with a small jar of Iranian soil in his hand and the empress by his side, flew into exile, ending 2,500 years of dynastic rule and a valuable American alliance. The United States vowed to “honor the will” of Iran’s people, and its ambassador to the United Nations, Andrew Young, mused that Ayatollah Khomeini might be hailed as “somewhat of a saint, when we get over the panic.” Over the next nine months, however, young zealots twice seized the American Embassy and its diplomats, a harbinger of tensions to come. Washington has struggled to figure out what to do about Tehran ever since. Fear still defines policy.

Iran will be perhaps the most daunting strategic challenge for a new American president. There is no shortage of problems elsewhere: America is overextended in Iraq, underdeployed in Afghanistan, constrained on Pakistan and stymied on the Arab-Israeli conflict. But Iran is different. It has become the superpower in the region where the United States has invested the most manpower, money, blood and prestige. Washington can’t make enduring progress in the Middle East or South Asia without a denouement in the long showdown with Iran.

But what tools does Washington have? Since 1979, five presidents have failed to influence, engage or outwit Iran. The Carter administration accepted the revolution — then took in the shah, which led Iranians to suspect that Washington wanted to restore the monarchy, as it had in 1953. When radicals took the embassy, Washington froze Iran’s assets and broke off relations. The Reagan administration put Iran on the terrorism list after Lebanese Shiite suicide bombers struck two American diplomatic offices and a Marine barracks in Beirut — then sent envoys to Tehran to swap arms for hostages abducted in Lebanon. The first Bush administration promised “good will begets good will,” then isolated Tehran once it helped free the last hostages in Beirut. When Iran offered a lucrative petroleum deal to an American company, the Clinton administration banned the import of Iranian oil, but it later lifted an embargo on Iranian caviar, carpets and pistachios to signal a potential opening. The current Bush administration worked closely with Iran on Afghanistan after 9/11, then labeled it part of the “axis of evil.” It orchestrated four United Nations sanctions resolutions, then offered talks and trade if Tehran stopped enriching uranium that could be used in a nuclear weapon.

In short, each American administration since 1979 has been driven to such distraction by Iran that it has had to continually revise its own policies. Can a new president do better?

He will inherit few effective tools. Diplomacy is, at the moment, going nowhere. Efforts in the United Nations and the International Atomic Energy Agency have done little to prevent Iran from growing ever closer to acquiring the capacity to manufacture nuclear fuel. At the same time, there is very little genuine enthusiasm in Washington today for a military option in Iran. Other endeavors have had limited impact. Last year, Congress approved an astonishing $400 million for intelligence operations against Iran, but senior officials acknowledge that covert actions — primarily aid to ethnic proxies and broadcasts into Iran — are only an irritant to its security services. American officers have actually had trouble finding effective ways to spend much of the money. In Iraq and Afghanistan, U.S. Special Forces have focused on the Quds Force, Iran’s covert military wing, and its local agents. Dozens have been detained; truckloads of Iranian arms have been uncovered. Tehran has been forced to adapt its tactics, alter routes, pull back some of its people. But again, U.S. officials concede, the United States is unlikely to fully curb Iran’s involvement in its two neighbors, parts of which once belonged to Persia and share either a language or a religion.

What remains, in one form or another, is the idea of sanctions. Over the decades, Washington has embargoed imports from Iran, forbidden visas for officials and even sanctioned the entire Revolutionary Guard Corps — the first time the United States has ever sanctioned a section of another country’s military. But each effort has fallen short. Energy-hungry China now buys Iran’s oil in huge quantities. Tehran has found other outlets for trade and travel. And sanctions are slow to take effect.

One new concept, however, has begun to get Tehran’s attention. In January 2006, Stuart Levey, the under secretary for terrorism and financial intelligence at the Treasury Department, was having breakfast in Bahrain when he noted a local newspaper article about a big Swiss bank that cut off business with Tehran. He clipped the article. It gave him an idea.

Governments traditionally focus on actions they can enforce themselves. Reading about the Swiss bank, Levey decided it was time to mobilize the private sector, starting with the world’s banks, to join the effort to sanction Iran. His idea was to prevent a country reliant on global trade — as an ancient empire, a station on the Silk Road across Asia and a modern petroleum powerhouse — from being able to do business outside its borders. “That could spark the right internal debate in Iran,” Levey told me when we met in his spacious Washington office, which was painted hunter green and decorated with collections of vintage American currency. Since that breakfast in Bahrain, he has managed to persuade the U.S. government to back his project; he has also made a lot of enemies in Tehran and created a policy legacy that the next president will have to deal with.

The best place to get a feeling for the challenge Iran poses to any sanctions program is Dubai, where Levey spent a great deal of time refining his approach. The cosmopolitan emirate, situated near the mouth of the Persian Gulf, is famed for an indoor ski slope and a man-made island in the shape of a palm tree, with villas for the superrich on each frond. But Dubai has also become the latest battleground for Iran and the United States, so in the late summer heat, I walked the concrete path along Dubai Creek, a grimy inlet that winds through a section of town long predating today’s slick skyscrapers. Old wooden dhows, each painted the traditional baby blue and white, were moored four and five abreast for more than a mile along the wharf. Crews using carts were hustling to load televisions and appliances, food and toys, tires and even cars to ferry to Iran.

Dubai’s citizens, unlike Iranians, are mostly Sunni and Arab. Yet trade across the gulf has gone on so long that many of Dubai’s elite, including members of the emir’s inner circle, are of Iranian descent. Each major change in Iran creates a new wave of migrants: merchants left in the 19th century to avoid Persia’s new tariffs; traditional families fled in the 1930s after the modernizing monarchy banned the chador; modern-minded Iranians left after the 1979 Islamic revolution forced women back into the chador.

The biggest migration, however, began five years ago, in anticipation of sanctions and other U.S. pressures. Thousands of Iranian businesses simply set up local offices, opened bank accounts and imported goods from abroad to Dubai. When wares arrived, they were turned around and sent to Iran by dhow, container ship or air. “The best place to do business in Iran,” an Iranian businessman quipped, “is in Dubai.” Dubai now has as many Iranians as it does its own citizens. Trade has steadily grown; according to Nasser Hashempour, vice president of the Iranian Business Council in Dubai, it topped $14 billion last year.

On my first day in Dubai, I had lunch at the Iranian Club, a compound with a sports facility, stadium, theater and hotel. The stadium is where President Mahmoud Ahmadinejad spoke last year. The hotel’s lobby had separate clocks for Tehran and Dubai, a half-hour apart. A manager’s office was decorated with pictures of Ayatollah Khomeini and Hassan Nasrallah, Hezbollah’s leader.

I later stopped at the Iranian mosque, now being expanded, across from the Iranian Hospital, which has tended to many of Dubai’s royals. I visited the Spice Market and chatted with Iranian merchants. At American University, I was told, Iranians are the second-largest group in the student body. They’re also among the biggest buyers and flippers of Dubai real estate. My hotel overlooking Dubai Creek had an Iranian clientele, an Iranian sports channel available in the rooms and an annex with Iranian-run businesses. It was within two blocks of Tehran Restaurant, Iranian shops where Farsi was more common than Arabic and several Iranian banks.

“There are so many Iranians here,” Hashempour said with a chuckle, “that we tell a joke: When people in Dubai are asked to pray for rain, it ends up raining in Iran.” Since 2003, the number of Iranians in the United Arab Emirates has doubled to more than 450,000, he told me, and the number of Iranian businesses quadrupled to almost 10,000. Most are in Dubai, giving it the world’s second-largest concentration of Iranian expatriates (after California).

Because Dubai has no oil, unlike the United Arab Emirates’ other sheikdoms, it has survived on trade — from its old wharf on the creek to the high-tech Jebel Ali, one of the world’s largest ports. Most traffic — including Israeli cargo — is for re-export elsewhere. At least 20 percent goes to Iran. So, despite sanctions, Iran’s shelves are well stocked, even with American goods. Maytag refrigerators, Diesel clothing and Victoria’s Secret lingerie are quite popular. Legal American exports to Iran — from clothing and cigarettes to musical instruments and bull semen, all considered agricultural, educational or humanitarian goods and thus exempt from sanctions — increased tenfold during the Bush administration.

“The easiest thing to do in the world today is trade,” the Iranian foreign minister, Manouchehr Mottaki, told me over the summer when I met him in New York City. “Economic advantages attract partners. Right now, a number of American companies are working with Iran. But because of their conditions, I can’t give their names.”

Iranians now have an estimated $300 billion in assets in tiny Dubai alone. Emiratis profit handsomely from these ties: outside Dubai’s new free-trade zone, entrepreneurial foreigners need local partners, who must hold 51 percent of any business. Citizens of Dubai can earn up to $100,000 annually just by putting their names on a license, leaving the work to the Iranians. Iranian money is not alone in driving Dubai’s growth, one U.S. official told me, but there’s so much Iranian money in property, investment and trade that it’s hard to cut off. “Dubai,” he said, “is not going to shoot itself in the foot financially” for the sake of sanctions. Dubai and Iran are now so economically interdependent, local analysts told me, that the city-state has become to Iran something like what Hong Kong is to China. Sanctions seem only to strengthen such ties.

Stuart Levey says he thought his new sanctions could succeed where so many had failed. But he knew his idea might be a tough sell. He was not part of the Bush administration’s inner circle. Some officials still mispronounce his name. (It rhymes with “Chevy,” a Treasury official advised me.) In February 2006, his colleagues in the Treasury Department persuaded Secretary of State Condoleezza Rice to let him travel with her to the Middle East, and he hoped to make his pitch at some point along the way. He waited, stop after stop; he spent most flights chatting with his seatmate, Gen. Raymond Odierno, the current commander of U.S. forces in Iraq who was then the Pentagon liaison with the State Department. “I did, often, feel like a fifth wheel,” Levey recalled. Finally, on the way home, he was summoned to Rice’s private cabin to lay out his seven-point proposal.

Levey’s pitch was simple: Banks were only as reputable as their clients’ practices. And the reputations of banks that did business with Iran were at risk as long as Iran financed extremists and pursued missile and nuclear technology. More basically, he argued, Iran had bad banking habits, with little oversight to prevent money laundering. It had even begun asking foreign banks to remove traces of a transaction’s ties to Iran, a practice known as “stripping.”

Levey’s idea was to press banks not to do business with Iran until it complied with international standards. Rice bought in. “She was thrilled,” Levey wrote in an e-mail message to his staff from the plane. “She especially liked options 1, 2, 6 and, if necessary, 7. . . . Truly, this one hour made the whole trip worthwhile.”

“It gave us a new lever,” Rice later told me. “It’s not sanctions in the traditional sense.” Levey has since made more than 80 foreign visits of his own to talk to more than five dozen banks. Several countries required multiple trips to reassure suspicious (or just annoyed) governments about American intentions — and then to persuade the banks. Levey offered specifics. U.S. intelligence, he told them, had traced $50 million transmitted by Iran’s Bank Saderat through a London subsidiary to a charity affiliated with Hezbollah in Lebanon. Saderat, which has 3,400 offices worldwide, is Iran’s equivalent of Citibank. Its Lebanon branch, Levey said, also supposedly sent millions of dollars to Palestinian extremists.

The Treasury Department then started blacklisting Iran’s biggest banks, urging other nations to follow suit. In 2006, Saderat was barred from direct or indirect business with U.S. banks. In early 2007, the department sanctioned Bank Sepah for financing projects to develop missiles that could carry nuclear weapons. (Sepah, meaning “army,” was established with money from Iran’s military pension fund and is now associated with Revolutionary Guard projects.) The Treasury Department then blacklisted Bank Melli, Iran’s largest bank, for supposedly helping to finance defense industries under U.N. sanctions.

Iran has angrily denied illicit activity. Its banks pledged compliance with international practices. Tehran complained to the International Monetary Fund. Some banks even wrote to the Treasury Department to protest. Iran’s Central Bank governor spoke of “financial terrorism.” Yet the innovative efforts have spread. Actions against Iranian banks became a feature of Security Council sanctions resolutions, beginning in 2006. Last June, the European Union blacklisted Melli and froze its assets. Last month, Australia sanctioned Melli and Saderat, while the U.S. blacklisted the Export Development Bank of Iran, which it claimed had taken over many of Sepah’s accounts and provided services for missile programs. The Treasury Department is also scrutinizing Iran’s Central Bank and considering blacklisting it too, which could undermine not only the country’s banking system but also international support for the U.S. campaign.

The momentum has surprised even Levey, a Harvard-educated lawyer who once specialized in white-collar criminal defense. Big banks in Britain, France, Germany, Japan and Italy curbed business with Iran, even with longstanding clients. Only a few would admit it; most prefer to silently go along and keep their options open. “They’re not happy with what’s happening,” a European diplomat told me. “They complain about U.S. pressure, but accept it. They hope it will pass soon.”

Even banks in Muslim countries, from Bahrain to Malaysia, have cut back their Iran business, bankers told me. Most surprising has been the shift by several Chinese banks. “We haven’t had Chinese banks tell me that they won’t do deals with Iran,” Levey told me. “They just stop.”

So far, more than 80 banks have curtailed business with Iran. A European bank official told me its business dropped from hundreds of millions of dollars annually to zero. A Middle East banker said his institution no longer did business with the sanctioned banks. Gulf bankers said medium- and long-term credit for development and trade was drying up. Banks Saderat, Melli and Sepah — which together serviced 80 percent of Iran’s international trade — were losing customers and struggling to find new banking relationships, despite many offices abroad. (None of these sources wanted to be identified as cooperating with the U.S. Treasury Department.) The private sector has proved “quicker to respond” than governments, Rice said. “This really relies on the kind of self-interest — to protect their reputation and protect their investment.”

“Stuart Levey’s war is like ‘Charlie Wilson’s War,’ ” a U.S. official said over coffee in the State Department cafeteria, referring to a former Texas congressman’s campaign to change policy on Afghanistan, a saga made into a movie. “It’s the most direct and aggressive stuff we’ve got going. It delivers.”

The Treasury Department also galvanized global groups. The Financial Action Task Force — the world’s financial watchdog representing the 34 biggest economies — warned that Iran poses a “significant vulnerability” for the world’s financial system. And the Organization for Economic Cooperation and Development, including 30 of the world’s richest nations, has twice lowered Iran’s credit risk — to a 6 on a 7-point scale.

Iran has noticed. On his final day in office, last April, the ousted finance minister, Davoud Danesh Jaffari, complained bitterly about Levey. “We had embarked on a serious and breathtaking game of chess with America’s Treasury Department,” he told his staff. “They had assigned one of their Zionist deputies to halt the Iranian economy. This person would personally travel to many countries around the world. He would use incentives and encouragement to request cooperation against Iran, and if he failed to get any results he would use threats to pursue his goal.”

Treasury officials deny foreign banks were warned that their access to the U.S. financial system was in peril if they didn’t cooperate on Iran. “We never threaten,” Treasury Secretary Henry M. Paulson Jr. told me. “We talk about how important it is not to violate the rules and engage in illicit transactions.” Foreign bankers, however, insisted that threats were always implicit.

The financial squeeze on Iran has had a ripple effect. Iran has the world’s second-largest natural-gas reserves, after Russia. The world’s largest natural-gas field is shared by Iran and Qatar. Development of Iran’s share has been dragging on for years. “Qatar cut a deal quickly and was on its merry way,” said Fareed Mohamedi, an executive in the Washington offices of PFC Energy. “But Tehran never had the funding or technology to develop the gas field independently.” Iran played hardball with foreign firms over development contracts. It wanted to pay them in oil rather than cash. Then came banking pullouts. “We’ve been extremely effective at dissuading multinational oil companies from going into Iran,” said Cliff Kupchan, a former State Department official now at the Eurasia Group who has visited Iran. “Like with the international banks, we’ve invoked reputation risks. That really cramped the Iranian energy sector and could, more or less, impair the gas sector for the foreseeable future. They say they will do a lot of it themselves, but their technological capabilities are uncertain, at best.’

Ordinary businesses have been hard hit, too, according to Western officials and Iranians. Big companies and small bazaaris — as traditional merchants are called in Iran — are increasingly forced to pay for imports in advance, in cash. Exporters are losing clients; raw materials for nonoil industries are harder to pay for. Boutique banks in Europe and Asia have filled some of the vacuum, at hefty costs, although U.S. officials suggest the global economic crisis may scare them away from Iran, too.

Levey’s campaign has coincided with Iran’s own crisis. In his 2005 presidential campaign, Mahmoud Ahmadinejad vowed to put Iran’s oil wealth on every dinner table. But his populist policies have flopped. Calling interest rates “the root cause of injustice,” Ahmadinejad twice ordered banks to lower them, first to 12 percent and then to 10 percent — while inflation has gone as high as 30 percent. The dollar, worth 70 rials at the revolution, is today worth 9,600. Iranians gripe that produce prices have tripled over the past two years while housing prices have doubled.

Ahmadinejad has faced unusual public criticism from senior clerics, former chief nuclear negotiators, former speakers of Parliament and several economists. The finance minister who called Levey a Zionist deputy chastised his own leadership in the same speech for having “no plan for the future.” The president retorted that Iran needed a “culture of martyrdom” to solve its economic problems. He has fired six cabinet ministers with economic portfolios and two Central Bank governors. Since June, his government has temporarily banned two newspapers for publishing articles “harmful to the economy.” And last month, Iran’s bazaaris shuttered their shops to protest against new tariffs, forcing the regime to back down.

For the first time in 30 years, U.S. officials contend, Washington has found a tangible way to pressure Iran. Whatever happens with the Bush administration’s diplomatic or intelligence efforts, this is the program most likely to be continued by the next administration because it has bipartisan support.

And Levey is continuing to pick new battlefronts. In September, the Treasury Department sanctioned Iran’s national shipping company and affiliates in 10 countries for falsifying documents and for transporting cargo on behalf of entities tied to weapons of mass destruction by the United Nations. Treasury officials say the insurance industry is next. “This is one of the most powerful actions that can be taken, short of military action,” Paulson told me. “It’s not a knockout punch, but it is effective.”

It’s no coincidence that Levey has visited Dubai eight times, or that President Bush and Vice President Cheney have both stopped there over the past 18 months, or that Bush hosted Dubai’s emir, Sheik Mohammed bin Rashid al-Maktoum, at Camp David this summer. The ultimate success of Levey’s scheme — and the precedent it could set — depend heavily on Dubai.

In its quest to be a global financial center, Dubai has pledged to honor U.N. sanctions. It’s trying to shed the image of a way station for arms merchants and extremists. A. Q. Khan, the father of Pakistan’s nuclear program, ran a black market through Dubai, funneling sensitive technology to Iran, North Korea and Libya. Dubai was a money-transfer center for Al Qaeda, and 11 of the 19 Sept. 11 hijackers traveled via Dubai.

Despite the strong Iranian presence in Dubai, new restrictions are taking a toll. Of the 48 international, local and family banks in Dubai, all but a handful have cut off new business with Iranian banks cited in U.N. resolutions, said Hamad Buamim, director general of the Dubai Chamber of Commerce. Potential risks are too high. “It’s psychological,” he told me. The emirates have also set up a joint task force with the United States to sift through Iranian-run businesses in Dubai to uncover front companies for Iranian military, government or business entities sanctioned in U.N. resolutions, officials said. At least 30 have been shut down and dozens put on a watch list.

Visas and work permits for Iranians have dried up. “Registering a new company with an Iranian partnership is almost impossible,” said Hashempour, the Iranian Business Council vice president. When Iranian-run companies import goods, the wait in customs has gone from hours to days, even weeks. Passengers on hundreds of weekly flights between Iran and Dubai go through Terminal 2, where iris scans are taken — a practice not used at Terminal 1 for flights from Europe and the United States. Iran formally complained recently that its citizens were being mistreated, “obstructed” and detained in Dubai.

The emirates do not, however, want to be the pioneer in a new “sanctions of the willing,” I was often told. They have not adopted Washington’s blacklist. Several officials expressed frustration with American strong-arming. “Sometimes, yes, we feel that the United States is asking too much,” said Sultan bin Nasser al-Suwaidi, governor of the Central Bank. “They want results to happen immediately, yesterday instead of today or tomorrow. They are demanding. This is what I said to Stuart Levey: ‘You shouldn’t expect it can produce miracles in a short time.’ ”

The Achilles’ heel of U.S. strategy, of course, is oil. It has provided Iran with a huge cushion to absorb financial shocks. Iran’s budget is pegged to a per-barrel oil price of about $60 (though actual spending is somewhat higher), at a time when oil has gone as high as $147. Gary Hufbauer, co-author of “Economic Sanctions Reconsidered” and a fellow at the Peterson Institute for International Economics, told me that banking sanctions are effective, but the odds are still against current sanctions convincing Tehran to change its behavior or cooperate on its nuclear program. The Peterson report concluded: “It is hard to bully a bully with economic measures,” especially against “large targets that are strong, stable, hostile and autocratic.”

It is also possible that the Levey strategy could backfire. Iranians carp at their government over the economy, but such is the Iranian way. “If the Prophet Muhammad were to govern Iran, people would be critical,” said an Iranian businessman who commutes to Dubai. “We are a very demanding people.” The clampdown is uniting many disaffected Iranians around their government, just as they rallied when Saddam Hussein invaded in 1980, said Hashempour. Small-businesses owners have been hit hardest. Meanwhile the state, the Revolutionary Guard’s growing business empire and quasi-government foundations dominate up to 80 percent of business in Iran and are most able to weather the financial storm.

“Yes, they can stop a guy in the Spice Market from getting a letter of credit,” said an Iranian-American investment banker in Dubai who met with Levey. “That’s not fomenting opposition. The guys who are hurting are in the business community. Yes, they hate Ahmadinejad, but they hated him from the beginning. The basic flaw is [the idea] that people who are unhappy with the government can do anything. If the goal is to stop Iran from developing a nuclear capability, nothing that has happened here will achieve that objective.”

Tradition also provides alternatives for those pressed by the lack of access to international credit. Hawala, Arabic for “transfer,” is an informal version of Western Union dating back to the eighth century; it was used initially to avoid bandits. The system is based on trust. To get money to a relative in another city or country, one person gives money to a local hawala. For a small fee, he gets a code word or password to give the relative. The hawala then contacts a trusted friend or agent in the other city. The relative picks up the money upon providing the correct code word. At year’s end, hawalas settle their own accounts. Hawalas are making a big comeback among traders doing business with Iran.

On two scorched mornings in August, I wandered Dubai Creek to talk to dhow crews and check their cargo to Iran. I was on the creek in the 1980s during the Iran-Iraq war, when the world was trying to squeeze Iran into a cease-fire. Dhows then carried vast amounts of American goods. Many still do, but the biggest share of cargo now is Chinese. Economists and dhow captains told me Iranian trade is increasingly looking East.

Dhows thrive off sanctions. But the sun-wizened seafarers thought Washington was making a political mistake. “I may look dirty, but I watch TV and read,” said an engineer on the Ramseh Shams. He was a burly man with disheveled hair, a sweat-stained T-shirt and shorts with an image of Bozo the Clown on them. “The Yankees don’t know who we are,” he declared, as crewmates listened. “Ahmadinejad is not Iran. We are people who love our country even if we’re against our government. It’s the soil we love. Ahmadinejad will be gone in four years. We will not. The United States has lost its sanity in the Middle East. The bully who strong-arms in this region does not last.”

Levey’s campaign may have had a broader punitive impact than any other action against Iran. But sanctions take time. International sanctions on the illegal white-minority government in Rhodesia took 15 years to really bite; and only when South Africa cut Rhodesia off, in its own political self-interest, did the regime begin to collapse.

There is probably not that much time in the case of Iran. The clock on Iran’s nuclear program is ticking faster. Rival projections suggest Tehran might be able to develop a nuclear capacity between 2010 and 2015. The clock on sanctions is moving much more slowly. Levey acknowledged huge hurdles. “But sitting in my place, we have an obligation to use every tool available to us to solve this problem peacefully, and that’s what we’re doing,” he told me.

A senior U.S. official acknowledged as much. “This is not a two- or three- or four-year plan,” he said. “If people are realistic, it’s a 10- or 15-year plan. Of all available options, it seems to me the most sensible thing to do. In the meantime you try to do other things and just hope you can head them off at the pass.”

The ultimate glitch in Levey’s campaign, however, may be that the hard-liners now in power flourish under siege. “I call them weeds who grow in the dark because they thrive in isolation,” reflected Karim Sadjadpour of the Carnegie Endowment for International Peace. “You want to send a signal to the Iranians that belligerence only isolates them and reaps no rewards. But they’re like Fidel Castro; they don’t want a U.S. presence or to open up to the world. It would open up the floodgates against them.”

Because Stuart Levey’s war may result in only limited victories, a growing array of voices — from a former general in the U.S. military’s Central Command to former Bush administration staff members — is calling on the next president to reach out to Iran in direct dialogue. Some support the so-called “grand bargain”: negotiating over all diplomatic, economic and security issues and eventually re-establishing U.S.-Iran ties. A robust rapprochement with Iran still seems unlikely any time soon. But to advance American interests in the region, the next president will have to think more imaginatively than the five presidents whose policies have fallen short for three decades.

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