Misguided Sanctions Against Iran

Although recent U.N. Security Council moves to impose new sanctions against Iran make all the headlines, such measures are mainly for show. Given how adept Iran's ruling hardliners and commanders of the Islamic Revolutionary Guard Corps have been at skirting sanctions, targeting a few more state-owned businesses does little more than create some paperwork for Tehran.

The real game changer is an obscure but ambitious U.S. Treasury Department effort to paint Iran as a corporate untouchable. Launched four years ago and renewed this year, the campaign is run by the undersecretary for terrorism and financial intelligence, Stuart Levey, who has been traveling the world trying to convince corporate leaders that working with Iran is bad for their own business. In just the last three months, he's persuaded multinationals like the German automaker Daimler, the U.S. construction firm Caterpillar, and the Dutch accounting giant KPMG to pull out of Iran. "Stuart Levey and OFAC [Office of Foreign Assets Control] are key players in this," says Mark Wallace, a former ambassador who heads United Against Nuclear Iran, a lobbying group that helps broadcast Levey's message. He estimates that one- to two-dozen foreign companies have stopped doing work in Iran in recent months.

The Obama administration is increasingly relying on this quiet persuasion, not public sanctions, to get Iran to drop its nuclear-weapons program. The problem is that this untargeted effort is isolating the good guys in Iran, not the bad guys.

International and American sanctions against Iran have traditionally been about targeting WMD proliferators and companies associated with the regime's sprawling security apparatus, particularly Iran's huge state-owned banks. But the Treasury effort targets all business ties between Iran and the world, from construction and manufacturing to technology and pharmaceuticals. European banks, particularly those in France, Britain, and Italy, have stopped transactions originating in Iran; even more surprising, so have those in Iran-friendly China and banks in Muslim countries. These "successes" don't do much to prevent Iran from getting the bomb, but do squeeze legitimate businesses in Iran, hurting the general public more than the regime. As an analyst working for a Tehran-based hedge fund in 2009, I saw firsthand that being viewed as bogeymen by foreign banks meant it was much more expensive to secure insurance and obtain lines of credit. This sort of one-size-fits-all approach conflates the regime's roguish behavior with that of all Iranian businesses. As a result, few foreign investors dared touch our fund. So we were left dealing with financial daredevils who had holdings in unsavory frontier markets like North Korea and Zimbabwe. A fellow Yale alum from Goldman Sachs avoided replying to an e-mail of mine for fear of breaking some arcane law.

Meanwhile, systemic isolation enriches Iran's elite military arm, the Revolutionary Guards, which runs a tidy $12 billion annual black-market smuggling venture. (Last September the U.S. revealed the existence of a nuclear-enrichment plant squirreled away on a Revolutionary Guards base outside Qum.) According to one think-tank report, the group—which controls a good chunk of the economy—has dozens of secret jetties scattered along the Persian Gulf coast that it uses to smuggle in banned products.

The U.S. is missing a significant opportunity here. Instead of scaring away foreign investors and corporations, Treasury officials should work with them to identify legitimate firms in Iran to conduct business with. And while it's important to educate foreign companies about the dangers of doing business with the Iranian regime, it's equally important not to confuse the Iranian regime with the Iranian people. The regime rightly sees firms like ours as the biggest long-term threat to their existence. Because employees at my firm deal with Westerners on a daily basis, they don't buy into the state propaganda that the West is to blame for all of Iran's ills. They know the problem is the mullahs' economic mismanagement and are eager for better relations with the West. At present, such progressive firms are few, but they have the potential to become a strong liberalizing force. On its current course, unfortunately, the Obama administration may be bolstering the regime's case: that the Great Satan is out to crush the little guys.