LOCATION: Carnegie Endowment for International Peace, Root Room, 1779 Massachusetts Ave. NW, Washington, D.C.

Events ACA Briefing Series: "Solving the Iranian Nuclear Puzzle" DATE/TIME: Wednesday, March 9, 2011, 9:00 am - 11:00 am LOCATION: Carnegie Endowment for International Peace, Root Room, 1779 Massachusetts Ave. NW, Washington, D.C. Robert J. Einhorn (Keynote), Special Advisor for Nonproliferation and Arms Control, Department of State Kenneth Katzman, Specialist in Middle East Affairs, Congressional Research Service Kimberly Elliot, Senior Fellow, Center for Global Development John Limbert, former Deputy Assistant Secretary, State Department Bureau of Near Eastern Affairs Greg Thielmann, (Moderator), ACA Senior Fellow After four rounds of UN sanctions and on-going discussion of introducing additional measures by the United States and its allies, the effectiveness of sanctions in constraining Iran's nuclear program has come under increased international scrutiny. With an Iranian regime accustomed to withstanding deprivations in the past and increasing political turmoil in the Middle East, measuring the impact of sanctions on the Iranian decision-making process remains a difficult challenge. This panel is intended to provide an informed perspective on the Obama administration's policy regarding Iran sanctions and the role they play as part of an overall strategy to address Iran's nuclear program. What impact have the international and unilateral sanctions on Iran had? Under what conditions are sanctions likely to affect behavioral change in Iran? How do reactions differ between Iran's ruling elite and the general public? What effect will the current political turbulence in the Middle East have on the effectiveness of sanctions? The briefing is the third in a four-part series of ACA policy briefings "Solving the Iranian Nuclear Puzzle." (Transcripts from the first briefing available online here. Transcript from the second briefing available online here) Page 1 of 24

Transcript by Federal News Service Washington, D.C. GREG THIELMANN: Good morning, everyone. I m glad you made it through the Mardi Gras revelries, and I m sure many of you came directly here this morning. We appreciate your presence. Welcome to the third in a series of Arms Control Association panels on the Iranian nuclear puzzle. My name is Greg Thielmann. I m a senior fellow at the Arms Control Association, so that gives you an idea of what a youthful organization we have. Today our focus is the impact of sanctions on Iran s nuclear program. Sanctions constitute a very important part of the international community s strategy to deal with the Iranian nuclear issue. We have had four rounds of U.N. Security Council sanctions and various unilateral measures undertaken by the United States and other nations. Additional measures are being considered by the U.S. Congress. I need to mention at the outset one time constraint on our discussion this morning. Our keynote speaker will not be able to stay until the bitter end, so we will be moving, after his presentation, directly to questions and answers. Then we will resume our other speakers and have a second round of questions later on. Everything will be on the record this morning. There will be a transcript of this session available in a few days. And, as usual, we request that you silence your electronic devices, but I understand from the technicians that we have to answer you to ask you to turn them off completely so that we have no interference. And that s a reminder to myself as well. There is broad support in the United States for the general concept of imposing sanctions on Iran, but there is some controversy on their goals, on the prospects for their success, and what success really means. I can t think of anyone who can offer a more informed and authoritative commentary on these issues than our keynote speaker. Robert Einhorn has been at the center of U.S. nonproliferation and arms control policy implementation for many years. You have a summary of his impressive career on our biosheet. I would only add, from personal knowledge in the State Department, that Bob s expertise and professionalism are legendary. We re honored to have him lead off our program. Over to Bob. ROBERT J. EINHORN: Great, thank you very much for those nice remarks. I don t think you re you know, you re not too old to be in the Arms Control Association; I wouldn t worry about that. (Laughter.) Daryl, thank you very much, the Arms Control Association, for inviting me to speak about sanctions and Iran. The U.S., along with its partners in the P5+1 have been pursuing a what we call a dualtrack strategy toward Iran to seeking to prevent Iran from acquiring a nuclear weapons capability. And as part of that strategy the Obama administration from the outset has sought to engage Iran. Regrettably, the administration s early efforts to reach out to Iran were not reciprocated. Iran rejected a balanced proposal to refuel its Tehran Research Reactor. It only accepted key elements of Page 2 of 24

that proposal after the passage of time and the accumulation of enriched uranium by Iran had diminished the confidence-building value of the original proposal. Iran continued during 2010 its fuel cycle programs in defiance of a variety of U.N. Security Council resolutions and it stonewalled the IAEA s investigations, including of the origins of the covert enrichment facility near Qom as well as of the possible military dimensions of Iran s nuclear program. And given Iran s failure to engage seriously, we and our partners were left with no alternative but to place greater emphasis on the other complementary component of our dual-track strategy; that is, political and economic pressure. In June last year, the Security Council adopted Resolution 1929. 1929 was the strongest of the Chapter 7 Resolutions imposed against Iran. But perhaps more important its broad coverage of the financial, commercial, transportation and other sectors provided a platform on which U.N. members could build in implementing their own sanctions. Soon after Resolution 1929 was adopted, the European Union announced a comprehensive set of measures against Iran, including a full prohibition of new investment in Iran s energy sector, bans on the transfer of key technologies and strict steps against Iran s banks in correspondent banking relationships. Before long, Canada, Australia, Norway, Japan, South Korea and others followed with their own measures aimed at building upon and complementing the measures contained in Resolution 1929. Russia voted for 1929, which banned the sale of major categories of conventional arms to Iran. And Iran had been a major market of Iran's I m sorry, of Russia s arms industry and so this was a significant sacrifice for Russia. And in particular, the Russians cancelled the sale of the S-300 air defense system. China also voted for Resolution 1929. And although we continue to have concerns about the transfer of proliferation-sensitive equipment and materials to Iran by Chinese companies, there is substantial evidence that Beijing has taken a cautious, go-slow approach toward its energy cooperation with Iran. The United Arab Emirates, which has long been a financial and trans-shipment hub for Iran, has also taken strong steps in recent months to curtail illicit Iranian activities. The United States, of course, has also acted. Last July, the president signed into law the Comprehensive Iran Sanctions Accountability and Divestment Act, also known as CISADA. CISADA expanded the scope of existing Iran sanctions to cover refined petroleum products, a wide range of financial transactions and abuses of human rights. Altogether, this emerged a powerful coalition of states that are willing to impose substantial costs on Iran in the hope of getting it to negotiate seriously over its nuclear program. It s clear that the sanctions have begun to have an impact. Iran is increasingly isolated from the international financial system, with limited access to financial services from reputable banks. Major banks like HSBC and Deutsche Bank have pulled out, deciding that the reputational risk of aiding Iran s illicit transactions is just not worth it. And without access to financial services, Iran has found that it s much more difficult to conduct commercial transactions of any sort. Iran is increasingly unable to secure needed foreign investment, financing and technology to modernize its aging energy infrastructure. Major European and Asian firms, such as Shell, Eni, Total and Inpex, have decided to end all of their dealings with Iran. As a result, Iran may be losing as much as 50 to $60 billion in potential energy investments. This threatens Iran s oil and gas production and export capacity over the long term, which is a serious problem for a country that relies so heavily on oil and gas revenues for its government expenditures. In addition, major energy traders like Lukoil, Reliance, Vitol, Glencore, IPG, Tüpra and Trafigura have stepped up have stopped wholesales of refined petroleum products to Iran. Jet fuel providers for IranAir have also been affected by CISADA. Six major fuel providers have Page 3 of 24

terminated some or all of its IranAir contracts. This is this has effectively reduced servicing points and routes available to IranAir. The U.K. and the Netherlands are just two among several places where Iran can no longer refuel its aircraft. Iran s shipping is also impaired. Large shipping companies like Hong Kong-based NYK are withdrawing from the Iranian market, and reputable insurers and reinsurers such as Lloyd s of London no longer ensure Iranian shipping. IRISL, Iran s shipping line, has been especially hard-hit. The U.N. s Iran Sanctions Committee has noted IRISL s involvement in the shipment of goods in violation of Security Council resolutions. And IRISL has been sanctioned by the United States, the EU countries, Japan, South Korea and others. As a result, it s had difficulty repaying loans and maintaining insurance coverage, and this has recently led to the detention of at least seven of IRISL s ships. Major shipbuilding companies are refusing to build ships for IRISL and IRISL is finding that it no longer is welcome in the world s major ports, especially in Europe. Major European and Asian businesses are also distancing themselves from Iran. To name just a few, Daimler, Toyota and Kia have stopped exporting cars to Iran. Iran is also being sanctioned on the human rights front. Individuals responsible for egregious human rights abuses in Iran are subject to travel and financial restrictions. A key goal of sanctions is to drive up the cost of intransigence and bring Iran s leaders to the conclusion that unless they accept constraints on their nuclear program, their future will look a lot dimmer. But sanctions are also meant to impede Iran s access to the equipment, materials and technology it needs for its WMD delivery programs. Aided by the dual-use restrictions and inspection provisions of 1929, we have alerted potential sources of sensitive items and have stepped up our efforts to interdict sensitive shipments. We believe Iran has had difficulty in acquiring some key technologies and we judge this has had an effect of slowing some of its programs. These various sanctions are clearly registering with Iran s leaders. We can see it clearly from the very active efforts Iran has mounted around the world to circumvent the sanctions. While the high price of oil has at least temporarily cushioned Iran from some of the effects of sanctions, the sanctions are already taking a significant toll and the impact will only increase over time. But while Iran s leaders are feeling the pressure, the sanctions have not yet produced a change in Iran s strategic thinking about its nuclear program. So far, they seem only to have made a tactical adjustment. They may believe that by making superficial gestures, such as simply showing up at P5+1 meetings, they can reduce international support for sanctions. We saw this in recent P5+1 meetings with the Iranians. They certainly didn t come to the Geneva meetings in December or the Istanbul meetings in January prepared to negotiate seriously. For their part, the P5+1 countries outlined their approach resolving the nuclear issue. They pointed out that given current levels of mistrust, it would not be visible to go directly to negotiations on a long-term final agreement. Instead, they favored a phased approach in which confidence could be built incrementally. In Istanbul, they outlined key elements of initial of an initial confidencebuilding phase, an updated version of the fuel-supply arrangement for the Tehran Research Reactor and several transparency measures which would give the IAEA greater access to Iran s program. The P5+1 countries made clear that Iran can have a civil nuclear-energy program but with that right comes the responsibility to demonstrate convincingly and verifiably that Iran s nuclear program is devoted exclusively to peaceful purposes. Unfortunately, Iran refused to discuss these ideas or any other substantive ideas. Instead, they set two preconditions. One was that the P5+1 countries had to publicly and explicitly acknowledge an Iranian right to enrich uranium. The second was that the P1 countries P5+1 countries had to lift all sanctions from the outset of the negotiations. Page 4 of 24

The P5+1 countries collectively rejected these preconditions as unreasonable and unacceptable and the Istanbul meeting ended without fixing a date and venue for another meeting. One of the silver linings of this disappointing Istanbul meeting was that Iran s behavior, and especially the preconditions, has reinforced the unity of the six. We have determined that in the wake of Istanbul we have no choice but to increase the cost to Iran of refusing to engage seriously. This will mean tightening existing sanctions and developing new ones. It will mean unilateral steps as well as steps agreed with or coordinated with other countries. It will mean staying a step ahead of Iran as it seeks to set up new front companies, establish new banking relationships, reflag ships and otherwise circumvent sanctions, and it will require a very broad and active campaign. But as Secretary Clinton has said, sanctions are not an end in themselves but a means to build leverage toward a negotiated solution. Even as we sharpen the choice for Iran s leaders, we ve left the door open for diplomacy if Iran is prepared to engage in serious discussions. We ve shown Iran that we re serious about negotiations, and now it s up to Iran to demonstrate that it s serious as well. Thank you very much. I m prepared to take questions, hear your comments. MR. THIELMANN: And if we could if we could start with the press to make sure that they have had a chance. Yes, sir. We ll have microphones going around. Please give your name and affiliation as well before your short question. We ll go over here. Q: Arshad Mohammed of Reuters. Mr. Einhorn, what is your can you shed any light on where things stand in the payments issue that has arisen between India and Iran over Iranian crude exports to India? It s my understanding that the Indian central bank barred the use of the payments mechanism that had been used to settle that account at the end of last year, and that while Iran has kept delivering fuel, India has built up a couple of billion dollars in arrears. And essentially, I have two questions. One, is it indeed the U.S. administration s desire that India not be able to use the previous payments mechanism? And, two, are you, in a certain sense, moving either deliberately or accidently toward a circumstance where you are actually seeking to disrupt Iran s ability to make transactions for its oil exports? MR. EINHORN: Frankly, I don t know the exact state of play between Iran and India in terms of payments for India s oil imports. The Indian authorities on their own, without prodding from the United States, decided no longer to use the Asian Clearing Union as a vehicle for paying for Iranian crude. We think that was a good thing. We think that the ACU mechanism was not a very transparent mechanism and provided opportunities for abuse, and so we think it s a good idea that they re looking for an alternative payment mechanism. We know that discussions have been ongoing between India and Iran to try to find an acceptable means of payment but I don t know that they ve reached any final conclusions at this stage. MR. THIELMANN: Over here. Q: Thank you. Indira Lakshmanan from Bloomberg News. Mr. Einhorn, could you tell us you said at the end that the U.S. has no choice but to increase the cost to Iran of pursuing a suspected nuclear weapons program tell us a little bit about the timeframe and what exactly you re thinking of that could go beyond the unilateral steps the United States Treasury has already taken and beyond the multilateral steps that have already been taken? What more can be done? MR. EINHORN: Well, a variety of things can be done. We can tighten the implementation of existing sanctions. Many countries have adopted these measures, but implementation is not uniform and we will, you know, seek, through consultations with a variety of partners, to get countries to implement existing sanctions effectively. But we can also expand sanctions in a variety of ways. And we re in Page 5 of 24

the process of doing that. A number of alternatives are under consideration. I don t want to itemize them right here. MR. THIELMANN: In the middle AP. Q: Doug Birch, Associated Press. First, what is the administration s assessment of Iran s intentions with its nuclear program? Is it that you believe that they re going to that they intend to build a bomb, that they have not yet decided whether or not to build a bomb? Which is it, if I could ask? And if you re going to are you going to go for another round of sanctions through the Security Council? And if so, how are you going to persuade countries like China and Russia, which have shown reluctance to agree to the existing sanctions? MR. EINHORN: In terms of Iranian intent, obviously, we can only speculate on their intent. And it may not be clear to Iranian leaders what their intent is, in the sense that they you know, each of the leaders may have a different view of the motivations for this nuclear program and the end state of this program. We believe that, at a minimum, Iran is moving to the threshold of a nuclear weapons capability. They are clearly acquiring all the necessary elements of a nuclear weapons capability, whether it s the fissile material they would need, whether it s the delivery systems they would need they ve pursued a very active ballistic missile testing program and also with respect to the weaponization activities that would be required. We think that they are consciously moving each of these elements to, kind of, a threshold to give them at a minimum, to give them the option to acquire nuclear weapons if they, in the future, were to decide to do that. In terms of prospects for additional Security Council action, right now, we re not seeking further action by the Security Council. We believe there are a wide range of steps that can be taken by the international community to increase pressures on Iran before having to go to the Security Council again. But if Iran s intransigence continues, and especially if they take further provocative steps, like further boosting their enrichment level, then we would always have the option of returning to the Security Council. MR. THIELMANN: In the back. Q: Thank you. Yong-ho Kim (ph) with Voice of America. I d like to ask you about the loophole issues and, a little bit, focus on the twin brother of Iran on the sanctions issues, which is North Korea. Some experts say that because of their experience in 2005, North Korea may have a very good idea of how to deal with the financial sanctions by the United States and some financial institutions may still want to do business with North Korea. And also, we have the China factor, which is also related to the Iran issue. So all these kind of barriers how do you deal with it? What s your response to this, you know MR. EINHORN: I don t understand your question. Q: I m basically asking about the efficiency of the U.S. sanctions on North Korea, specifically. MR. EINHORN: We believe that the measures we ve adopted toward North Korea and not just the United States, but other U.N. members in accordance with U.N. Security Council resolutions have been effective. You know, clearly, it s become very difficult for North Korea to engage in much commercial activity. It s become even harder for North Korea to continue to pursue a range of illicit activities that are banned by the Security Council, including the sale of conventional arms. A number of shipments have been stopped, have been interdicted, because of Security Council resolutions. North Korea essentially has no access to international financial centers. So we believe that these measures have been effective. But there s a big difference between Iran and North Korea. North Korea s needs are much less than Iran. North Korea s need to engage with the rest of the international community are much less than Iran s needs. And if you have a neighboring country that is prepared to meet, you know, many of your Page 6 of 24

needs many of your relatively small needs, in terms of fuel, in terms of food then it becomes more difficult to put effective pressure on. And North Korea has such a neighbor. MR. THIELMANN: In the very back. Q: Thank you, Mr. Einhorn. My question is a follow-up to the previous question. How are you trying to overcome the challenge that you just mentioned, that China is actually baffling all your efforts to stop the transaction with Iran and North Korea? Would you touch on the challenges you are trying to overcome with Chinese cooperations toward these two countries? MR. EINHORN: I m going to stick with Iran at this meeting. We can do North Korea some other time. You know, China s position has been ever since adopting Resolution 1929 that they re prepared to live up to the terms of 1929, but they re not prepared to go beyond to what they call unilateral sanctions that a number of countries have adopted with respect to Iran. But nonetheless, they have been responsive, we believe, in their own way, to concerns about China s engagement with Iran s energy sector. Clearly, they have some investments in Iran. China places a high priority on energy security. But we believe, for whatever reasons, they have exercised voluntary restraint. They ve adopted what we call a go-slow approach. Now, again, we can only speculate on the reasons for that. I think a good explanation for this is that Chinese energy companies have learned what all the major European and Japanese companies have learned, and that is Iran is not a good or reliable business partner. They re difficult in contract negotiations. You know, things take a long time to develop there. China has very broad energy interests all over the world, and I think China has learned that it s not good business to place their bets on Iran and that there are other opportunities, including in the United States, available for them to promote their energy security needs. MR. THIELMANN: Back in the corner here. Q: Thank you. Carey Lynn (ph), Le Monde. What s the status of the new national intelligence estimate that s been mentioned in the press? And do you feel any what is the impact, if any, of the global context the Arab turmoil right now on the standoff with Iran? Thank you. MR. EINHORN: The first was the status of the NIE and the second was what? Q: The impact, if any, of the global context the turmoil in the Arab world on the standoff with Iran s nuclear program. Thank you. MR. EINHORN: The status of the NIE is that it s a classified document. (Laughter.) On the implications of the turmoil in the Middle East, it s too soon to tell. We have been hearing a lot of triumphalist rhetoric from Iran s leaders about developments in the Middle East suggesting that there s an Islamic wave sweeping across the Middle East, that these protesters have been inspired by Iran s own revolution. I think these statements really distort reality. As some Egyptians have said, this is an Egyptian revolution; this is not an Islamic revolution. Clearly, they don t see themselves as having been inspired by Iran in 1979. So even though and it s very interesting that Iran praises protesters in the Middle East for taking actions that they brutally repress at home. I don t think this irony has escaped anybody that Iran engages in a brutal crackdown on any dissent even while it s, you know, talking about how noble the protesters are elsewhere. It s too early to tell but I think Iran s leaders are much more concerned about these developments and the implications for Iran s domestic situation than they let on. MR. THIELMANN: Daryl? Q: Daryl Kimball. Thank you again, Bob, for being with us here for this discussion of these important issues. A lot of the attention over the last few months has been on the confidence-building Page 7 of 24

measures, the TRR proposal on sanctions. You mentioned that one of the issues that the P5+1 tried to bring up at the Istanbul talks were the transparency measures safeguards and measures that Iran needs to take that are referenced in Security Council resolutions. Could you just remind us about what those issues are, what the P5+1 was bringing up, again, at Istanbul and why those are important from a nonproliferation standpoint, given where Iran s sort of fuel-cycle activities are today? MR. EINHORN: On this Tehran Research Reactor proposal TRR, I ll call it back in summer of 2010, the U.S. came up with an idea for a confidence-building measure. Iran, in June of 2010, had I m sorry, 2009, 2009 had written to the IAEA and said this Tehran Research Reactor, which was supplied by the United States during the Atoms for Peace era was running out of fuel; could you help us? The IAEA sent notes to the United States and Russia. We, in the U.S., in December of 2009, came up with an idea that we thought was a win-win proposition. We spoke to the Russians. They agreed. We spoke to Mohamed ElBaradei, then director-general of the IAEA, and he agreed and took it on as his own proposal. And the idea was that Iran would ship out of the country 1200 kilos of enriched uranium enriched to 3.5 percent, enough to power, you know, a light water reactor. It would be turned into reactor fuel. And actually, by Russia it would be enriched up to near 20 percent, sent to France. France would produce reactor-fuel elements, send it back to Iran to fuel this reactor, which is used to produce isotopes for the treatment of cancer. We saw this as a win-win proposition. The idea at the time, Iran had roughly 1500 kilos of enriched uranium. If you send 1200 out, then they re left with far less than they would need for a single nuclear weapon. And it would they could continue to enrich, but it would take them a year or so to build back up. And we thought that this way, first of all, both sides would have an opportunity to gain confidence in the ability of the other side to deliver. And you know, some countries in the Middle East who are concerned about the accumulation of enriched uranium could rest easy because it would take a year or so to build up to the level necessary to produce a bomb. So we thought it was a win-win proposition. ElBaradei liked it very much. He thought it was a great idea. He pitched it to the Iranians. He actually pitched it to Ali Salehi, who is now foreign minister. And October 1st, 2009, we had the first Obama administration engagement with Iran in the P5+1. At that meeting on October 1st, there was a lot of sterile plenary statements and then a few of us, led by Undersecretary Bill Burns, asked to see the Iranians privately. And so we spent about an hour on the side and we had a very good exchange. And the Iranians agreed to this proposal. They agreed to a number of other proposals, too that we would meet again before the end of the month, that Iran would cooperate fully with the IAEA s investigation of the Qom enrichment facility. But within two weeks after that, the Iranians walked back. They could no longer accept this. And they had a variety of reasons for it. But then in May of 2010, Iran, Turkey and Brazil came up with what they called the Tehran Declaration, and at that point, they accepted the 1200 kilos leaving the country, which was a good thing, but in the interim period, they had produced a lot more enriched uranium. You know, they had about 3000 kilos by then, so allowing 1200 to leave the country no longer would have produced the same confidence-building value as the original proposal. So it was no longer good enough. So what we tried to do in Istanbul, just a couple of months ago in January January 21st, 22nd was not to move the goalposts, but to, you know, reset the proposal to what it was originally. So the idea was Iran would have to stop producing enriched uranium at the near-20-percent level. In February of 2010 it had upped its enrichment level to 19.75, near 20 percent. They would have stop producing at that level and ship out the new material produced then. They would also have to ship out a large amount of material produced at the 3.5 percent level. We didn t Page 8 of 24

provide a specific number, but basically, roughly what we were after was, after shipping out that material, they would be left with roughly the amount of material that they would have been left with, had they accepted the original proposal. So our idea was to kind of, you know, set the clock back to the original idea and restore the confidence-building value. So they would be significantly below the amount required for a single nuclear weapon. So we put these ideas to the Iranians in Istanbul. We put a number of what we call transparency measures, as well. And these were measures which, mostly, Iran had accepted before. If you recall, in the 2003-to-2005 period, Iran had provisionally accepted the IAEA Additional Protocol. It wasn t formally bound by it, but they said that they would act as if they were bound. And they adopted a number of measures for example, they allowed the IAEA to visit factories where centrifuge components were produced. So what we suggested was that they return to some of these measures that they had previously practiced not to adopt the whole Additional Protocol. We realized at this stage, they weren t prepared to do that but some of these measures. And we thought that the combination of this updated Tehran Research Reactor proposal, plus these transparency steps would be important ways of building confidence. We knew that, you know, this was not the solution to the issue. This doesn t get at the heart of the problem. But it would be an important confidence-building step and, we thought, could be built upon as we pursue a long-term solution. But unfortunately, the Iranians were not prepared to discuss it. They insisted that we first accept these preconditions, which I mentioned earlier. MR. THIELMANN: We are getting to the end, here, but maybe a couple more questions. And you don t have to be a journalist to ask them. Sandy? Q: I m Sandy Spector. Bob, earlier, you mentioned the progress that Iran was making toward the capability to develop a nuclear weapon. And you mentioned three areas where progress was being made I think that was the phrase you used fissile material production, where they re continuing the accumulation of low-enriched uranium, missile developments, which you mentioned and then the third area you said was weaponization. So is it the U.S. view, now, that weaponization activities have restarted? MR. EINHORN: Let me refer to the IAEA Director General s report, in which he suggested that nuclear weapons-related activities may have continued beyond 2003. The NIE addresses this issue, but as I mentioned before, it remains classified. MR. THIELMANN: In the back James. Q: Thank you. James Acton from the Carnegie Endowment for International Peace. Bob, I wanted to ask you a bit about the new centrifuges the IR-2m and the IR-4 that Iran is testing in the pilot plant. Would the installation of these centrifuges in the fuel-enrichment plant constitute one of these provocations by Iran that could lead the U.S. trying to get a new Security Council resolution? And given the IR-2m and the IR-4 use distinctly different materials from the IR-1, do you think the sanctions regime for the control of those new materials is sufficiently robust to prevent Iran manufacturing them in large numbers? MR. EINHORN: Clearly, taking down the P-1 machines, which are pretty inefficient, and replacing them with more advanced machines would enhance Iran s capability. I don t know where I d put them on the provocation chart and what steps would be warranted. But in terms of verification, I mean, clearly, as long as Iran continues to permit IAEA inspectors to go both to the Natanz pilot facility and Qom and you know, the Iranians have told the IAEA that they plan to install a few cascades of advanced centrifuges for R&D purposes at Qom as long as they permit access, we d have a pretty good handle on what they re doing with their with these advanced centrifuges. Page 9 of 24

Our understanding is that these advanced centrifuges are not yet ready for mass production. The Iranians don t yet have sufficient confidence in them to produce them on a large scale and using them for, you know, production of enriched uranium. You know, it s taken them quite a long time to graduate from the P-1s, to more advanced centrifuges. And that s fortunate. It s lengthened the period of time that Iran could break out in a meaningful way. It s given us some more time for diplomacy, which is a fortunate thing. MR. THIELMANN: Maybe one more question. I see Michael in the back. Q: Hi Bob. Michael Adler from the Wilson Center. Just following up on James question, is the reason that they re not ready to break out into advanced production because they lack the raw materials or is there a design problem? And one other technical question: If they were going to give more LEU as part of a TRR deal, what would the LEU where would it go? Would it be bought by the Western countries or would it be used to make fuel for something else? And then one overall question: You have confidence that sanctions will eventually work. Could you explain, down the line, how sanction would eventually convince the Iranians to come around? MR. EINHORN: No, I can t answer that question how they re can you answer that question? (Laughter.) In terms of breakout, you know, the main determinant of breakout is not, you know, the design of the machine or whether they can have access to, you know, carbon fibers or whatever. The main determinant is a political one a decision by Iran to break out. And you know, we just can t calculate how they would see their interests. But breaking out, leaving the NPT, kicking out inspectors and so forth would be an incredibly provocative action and very risky for Iran to undertake. And doing that when you have only a very inefficient machine, like the P-1, makes very little sense. And that s provided some confidence that they re not going to break out soon because it would make no sense for them to break out with a machine that produces material so inefficiently. So I think, the pacing factor I mean, it s a political factor. And you know, we don t see breakout as imminent at this stage. You know, where would the enriched uranium go, that might be sent out under a TRR deal? There are all kinds of options. There are all kinds of ways it could be done. I don t want to go through all of them but there are many different combinations of it. And you know, I don t have any good answer on your third, speculative question. I mean, we hope that, as the costs mount, that thoughtful Iranians will recognize that things are going to look a lot worse for them. As I mentioned in my remarks, they depend very significantly on revenues from sale of oil and gas, you know, to run their government, to run their country. Production of oil is declining, actually, in their country. And it s not going to pick up without lots of capital and lots of technology, both of which they re having a difficult time getting. So if you re a thoughtful Iranian and looking at the future of your country, you see things are not going very well. You know, the price of oil is, for them, a nice near-term cushion but it s not a solution to the problem. And the only way that Iran can become a successful and prosperous country is for them to get out from under the sanctions. And the only way to get out from under the sanctions is to address the concerns of the international community about their nuclear program. So you know, when will they be convinced? When will they come to the calculation that they have to start cooperating? I don t know. All we can do is try to sharpen the choice for them, and that s what we re trying to do. GREG THIELMANN: Bob, thank you very much. (Applause.) Thanks very much for this. MR. EINHORN: OK. MR. THIELMANN: In the remainder of our time we re going to hear from three experts on the different aspects of our sanctions topic, and the speakers can either remain seated or come to the podium, whichever is more comfortable. Page 10 of 24

First we re going to hear from Dr. Kenneth Katzman, a Congressional Research Service specialist on the Middle East, who should make every member of Congress grateful for their easy access to him. Then from Kimberly Elliot, a senior fellow at the Center for Global Development, whose research and writing on the uses of economic leverage will provide an invaluable empirical grounding to our discussion. And finally, from Ambassador John Limbert, diplomat, scholar and distinguished professor at the U.S. Naval Academy, whose linguistic, cultural and political encounters with Iranians have helped us all to understand better the task before us. After all have spoken, we will then return to taking questions from the floor. Ken? KENNETH KATZMAN: Thank you, Greg, and the Arms Control Association, for inviting me. My comments are my own, not that of CRS or any member or committee of Congress. As usual, I m not a diplomat. I ve never been a diplomat. And my comments tend to not be particularly diplomatic. My goal today is to clear up the confusion over the multiple overlapping sets of sanctions now enforced against Iran. Let me say at the outset, with the exception of the United States, which has a comprehensive ban, there is no broad international ban on civilian trade with Iran. Ambassador Einhorn mentioned that Daimler, Mercedes, basically Hyundai and was it Toyota? Toyota also have pulled out, stopped selling automobiles to Iran. There is no there is no international sanction that sanctions the sale of automobiles to Iran. There is no international ban on buying crude oil from Iran or natural gas from Iran. The United States has a ban. The United States has had a comprehensive trade ban on Iran since 1995. There was a temporary loophole allowed from 2000 until the CISADA law, which Ambassador Einhorn mentioned. There was a loophole that allowed the import of Iranian carpets, caviar, nuts, pistachios, pomegranates. The CISADA law that was enacted last July has now closed that loophole, so no imports from we re back to the original trade ban of 95 to 2001. Before I continue further, I just wanted to answer the Reuters gentleman. It s my understanding actually that India and Iran have found a new payment mechanism for the Asia Clearing Union. He s got his headphones on. (Laughter.) Hello? Well, for the floor anyway, they ve agreed to use a bank in Germany (Cross talk.) MR. KATZMAN: OK. They ve agreed to use the Europäish-Iranische Handelsbank of Hamburg, EIH, which is a bank that is actually sanctioned by the United States under various executive orders, but it is not sanctioned by Germany and it is allowed to operate in Germany, much to the consternation of some around town. But anyway, EIH has accounts with NIOC, the National Iranian Oil Company, and therefore it is a mechanism that India and Iran have agreed to deposit Indian payments for crude oil to this bank, which then go to NIOC. So that addresses that issue. Let me also say, to get back to the original theme, there was legislation in the last U.S. Congress to sanction foreign purchases of long-term long-term purchases of Iranian crude oil, but that measure was not enacted. That would be payments where a buyer would pay upfront for a large amount of Iranian oil, a year s worth of oil, give Iran a big upfront payment. But that legislation was not enacted in the last Congress. To obtain a consensus at the United Nations, the U.N. sanctions adopted since 2006 and, remember, the U.S. the United States has had fairly stiff sanctions on Iran since pretty much really since 1984, I would say, when Iran was put on the U.S. terrorism list for the bombings of the Marine barracks Hezbollah in Lebanon and the U.S. embassy there. But there have been no Page 11 of 24

international no U.N. sanctions until very recently, 2006. The U.N. sanctions are intended to be fairly surgical. In other words, to stop Iran from acquiring WMD-related material parts, components, et cetera, but not to harm the Iranian population, not to affect the civilian economy, and Russia still to this day there was discussion of a possible new U.N. resolution, although Ambassador Einhorn seemed to downplay that for now but Russia s position is, we do not want to cross the threshold from sanctions at the international level that sanction WMD and move to sanctioning the civilian economy and hurt the Iranian people. However, as Iran has, as we ve heard, balked at you know, idea after idea Iran has rejected. There has been on agreement. Other countries national measures have expanded and they are beginning to touch the Iranian civilian economy, particularly the energy sector and the banking sector. Iran, I would say, is now viewed by international businessmen, international CEOs as third rail. If you touch it, you die. There is simply no economic percentage return to investing in Iran, dealing with Iran will affect your business with the EU and the United States. And the sanctions are beginning have given multinational corporations a stark choice: You either do business with Iran or you do business with the United States and the EU. And just for points of comparison, Iran s GDP is $850 billion a year. The combined GDP of the United States and the EU is almost $30 trillion a year. So you have less than 1-to-30. It s not a close call who you re going to choose. Sanctions on the energy sector are not mandated by U.N. resolutions but they are authorized by the language in Resolution 1929, passed last year, which basically draws a connection between Iran s oil revenues and its WMD program. Very little new investment in Iran is evident. Many oil and gas projects are stalled, even where there has been memoranda of understanding agreed to. These projects do not seem to be moving forward. Many companies have now agreed to wind down their business and certainly not make any new investments. There are some European companies that were given an exemption from sanctions recently in September and November. It s because they have agreed to not do any new business. But they cannot sort of pull out precipitously because under their arrangements with Iran, these companies make the up-front investments. They find the oil, bring the oil out of the ground, start pumping the oil, and they get paid back as the oil is sold. So, if they left today, they would be out all this money that they ve invested. So their argument is we need to stay in until we are paid back and then we can leave. So that s why these companies, they ve been given a pass on sanctions but they re still there for now, but they are winding down their business but not precipitously ending their business. The new law, CISADA, has had the intended effect of dramatically reducing gasoline sales to Iran. We re talking 75, 80 percent reduction in sales to Iran of gasoline. Iran, however, is trying to compensate. And, actually, the law actually enabled Ahmadinejad to get, finally, agreement on reducing subsidies for gasoline. He was able to argue that the international sanctions are reducing sales to us. We need to curb consumption of gasoline. We need to have the price of gasoline rise. And this is how the Majlis then adopted the subsidy reduction and oil prices, gas prices in Iran are now closer to the world price and consumption is decreasing. We have not seen not clear evidence of any gasoline shortages in Iran. They have held up some gasoline shipments that they were selling to Afghanistan, possibly because they were fearing some shortages, but no long gas lines like we had in the 70s here with the oil embargo. Further steps, to just wind up. What are various Iranian Green Movement activists what do some of them want? Some of them want a comprehensive worldwide ban on buying oil from Iran. The downsides are obvious. We now have oil prices back over $100 a barrel. If there is a ban on oil sales by Iran, the price will rise dramatically. It would be you know. Page 12 of 24

Now Libya is somewhat off the market, or half off. If you take another 2.6 million barrels a day out of the market, the price is going to spike dramatically at a time when the Western economies are trying to recover. So, it s very difficult to sell that idea. Other opposition. Activists say mandating or sanctioning oil service companies; in other words, applying U.S. sanctions to oil service firms that are helping Iran explore for oil. That is a choke point because Iran does not have the capability to exploit difficult fields. If it s a simple field where you just put a drill in the ground, yes, the Iranians can do it. If it s a fractured field, a difficult field, crossing geological boundaries I m not an oil expert; this was explained to me the Iranians and even the Chinese and other companies do not have the skills. That comes from the West. If these Western oil service companies leave, then that would be very difficult on the Iranian energy sector. What many are talking about is economic sanctions have been well-ploughed. We ve done a lot internationally, nationally, U.N., and the time it s time to look at other areas. Human rights some talk about trying to get our European partners to reduce their diplomatic representation in Iran, ask Iran to reduce the size of its embassies in Europe, some talk about asking the you know, basically dis-inviting Iranian officials not to visit Europe; you know, the visit s off, this type of thing. There s talk of expelling Iran from the U.N. Commission on the Status of Women, which it acceded to in 2009 and which sort of was a head-scratcher how they got on there in the first place. Others talk about such things as, you know, World Cup soccer matches, even talk about sanctioning Iran air flights. So, there are other areas that people want to explore other than economic sanctions, and I expect these other type of ideas to get more discussion in the coming year. Thank you. MR. THIELMANN: Thank you, Ken. Kim? KIMBERLY ELLIOT: Thank you, Greg, and thanks also again to the ACA for inviting me to join this panel. As Greg said, I m here not as an Iran expert and so I, you know, rely on Ken s reports, like everybody else in town, and I m eager to hear what the ambassador has to say as well, specifically about Iran. So I m sort of here to, A, provide some sort of historical and empirical evidence on sanctions in general, and then I ll offer a few thoughts on how those might apply in the case of Iran. Just so you know, this was work that was done with Gary Hufbauer and Jeff Schott and others when I was at the Peterson Institute for International Economics, right across the street before I moved to the Center for Global Development. As I said, our approach was empirical. Our aim was to try and find every case of economic sanctions that we could in the 20th century. So we have 200 episodes of sanctions, starting with World War I up to 2000. And just to give you a couple of just again, so you know understand sort of where I m coming from in terms of talking about success of sanctions, first of all, we looked at a broad range of foreign policy goals not commercial disputes, not fights over trade with China, but foreign policy but a broad range within foreign policy, from relatively modest, like getting a particular political prisoner released up to, you know, Gulf War I, and trying to get Saddam Hussein to withdraw from Kuwait, or Iran now, or North Korea to give up nuclear weapons. So, a broad range of goals, but with success measured against an instrumental standard. That is, we recognize that sanctions are frequently used for important political signaling, symbolic reasons, but you would use a different standard in terms of assessing success there. So what we were looking at is, can we identify a change in the behavior or the policy or even the regime itself in the target country? And then the third important thing is that in terms of trying to then assess the sanctions contribution to a given foreign policy outcome, we looked at whether or not it contributed importantly. But in order to call it a success for sanctions, we didn t require that the sanctions be the only or even the primary factor in a particular case. Page 13 of 24

And what you often find and Ken was talking about now some of the diplomatic things that might be used vis-à-vis Iran particularly in these very big and difficult cases, it is a range of tools that need to be engaged in order to produce success, including, in some cases, military or covert action. So, to get to the bottom line, across these 200 oh, and one other thing I should say and I ll get to the U.S. results, but the 200 episodes are not just the U.S. We, again, tried to be as comprehensive as possible. I m sure we missed some cases that were only reported in foreign language among smaller countries, but about two-thirds of the 200 do involve the U.S. Overall, for the 200, about 1in 3, by our standard, we judge to have been somewhat successful. For the U.S., the overall again, because it does dominate the dataset for the U.S. overall was about 1 in 3, but very big changes over the course of the post-war period. So in the early post-world War II period, roughly 1945 through the 1960s, half of U.S. sanctions, by our standard, achieved some degree of success 60 percent, actually, when the U.S. acted unilaterally. Those things plunged after the 1970s to around just a little bit below the overall average of a third for all U.S. sanctions, but to less than 20 percent for U.S. unilateral sanctions. So, Ken s point about the U.S., you know, having comprehensive sanctions for 20 years, you know, not surprising that those didn t have very much impact in Iran. What we re seeing now is the result of getting the U.N. on board, getting the EU to act very strongly. So I think that s a very important thing to note, that U.S. unilateral actions have not been very effective over the last several decades. So what are the conditions under which sanction are relatively more likely to be effective? I think this is not going to be a happy message for anyone in the room, but also not surprising when you think about it. The first is they re relatively more successful when the sanctioner s goals are relatively limited and clearly defined. It s important that the target knows what it needs to do and that the sanctioner isn t moving the goal posts. It s sort of what we call our modest category of goal cases modest goal category. Sanctions had about a 50-percent success rate to 30 percent in all other cases. The second condition was that they re relatively more likely to work against allies than against enemies sorry, but that s what the evidence suggests and more likely against democracies than autocracies, which, again, isn t surprising, right? You have more trade, more aid, more investment, broader relations. You know, diplomatic relations are more important with your friends than with your enemies. And the final one is that the costs have to be in line with the goals. So when you re talking about a major ambitious goal, the average impact on the target s GNP, by our estimation, was 5.5 percent. That s a lot 5.5 percent of GNP. So, you have to be able to have a pretty big impact, again, when your goals are ambitious. So that suggests a not-very-promising outlook for sanctions vis-à-vis Iran. But I don t want to leave it on such a pessimistic note, so what I did was to go back, and I looked at the results for sanctions against Libya, because we have I mean, these have been going on a while so we ve done even when the cases are not totally finished we do interim assessments, and some of these are finished, but Libya, Iraq, Iran and North Korea. And against those four targets over the last 30 years or so, we found we have nine discrete episodes of sanctions. And of those nine, against those tough targets, we judged five of them actually, so just over half, to have been somewhat successful. And you wouldn t have expected that because they do all involve ambitious goals of dealing with trying to deter weapons of mass destruction, regime change. These are all autocratic regimes. The U.S., as a lead sanctioner, but others as well, often had hostile relations with these governments. And in most of these cases, with the exception of Iraq, you know, our estimates of the economic costs were not that high, in part because a lot of them were unilateral U.S. or the sanctions Page 14 of 24