US issues new sanctions on Iran's state banks

WASHINGTON - The Bush administration yesterday announced tough new sanctions against three of Iran's largest state-owned banks, a move designed to increase pressure on the Iranian government by cutting it off from financial institutions around the world.

The move - accompanied by sanctions on key branches of Iran's military, nine Iranian companies, and five Iranian officials - sends a strong signal that senior officials in Washington are losing patience with diplomatic efforts at the United Nations to convince Iran to halt its uranium enrichment program.

"Unfortunately, the Iranian government continues to spurn our offer of open negotiations," Secretary of State Condoleezza Rice said yesterday.

The new sanctions follow a series of increasingly bellicose statements by senior US officials warning that Iran will face serious consequences unless it curbs its nuclear program and ends its alleged support for militants in Iraq, Afghanistan, and the Palestinian territories.

Bush administration officials said the sanctions are intended to make it more difficult for Iran to finance its nuclear program and support militant groups by eliminating access to the US financial system, and by extension financial institutions worldwide.

Although Iranian companies do almost no business in the United States, officials said they believe the sanctions will influence foreign banks and investors to voluntarily sever ties with the Iranian entities to protect their reputations. The United States could use its considerable financial power to punish foreign institutions that continue to do business with the sanctioned entities.

The announcement sparked fears that the White House could use the moves to justify military action against Iran.

Senior State Department officials gave assurances that they are still committed to diplomacy, despite frustration at months of delays in obtaining a third round of sanctions at the UN.

"We do not believe conflict is inevitable," Undersecretary of State Nicholas Burns told reporters. "It is certainly not desirable."

Yesterday's package of sanctions included the long-expected, controversial designation of Iran's Islamic Revolutionary Guard Corps as a "proliferator" of ballistic missile technology. It also designates the elite Qods Force as a supporter of terrorism for providing weapons and funding to the Taliban and to anti-Israeli militants in Lebanon and the Palestinian territories.

The designations bar Americans from any transactions with the Iranian groups and freeze those groups' assets on US soil, a largely symbolic move.

Bush administration officials said they hope the additional pressure will convince Iran to negotiate an end to its nuclear enrichment activities, which the United States believes is intended to produce nuclear weapons. Iran insists its nuclear program is for peaceful purposes.

Critics said the designations will make it much harder to achieve a diplomatic agreement from Iran now and in the future, since the Revolutionary Guard is an influential political force with members dispersed throughout the Iranian government and diplomatic corps. Iran's ambassador to Iraq, for example, who has met with US officials, is believed to be a member of the Qods force.

"You are sending a signal that you really don't want to deal with the leadership in this country, that you really want regime change in Iran," said Vali R. Nasr, professor at the Fletcher School of Law and Diplomacy at Tufts University. "This administration is making it difficult for the next administration to conduct diplomacy with Iran."

Paul Pillar, a former CIA analyst who coordinated US intelligence on the Middle East from 2000 to 2005, said the designations were likely to strengthen the hand of Iran's president, Mahmoud Ahmadinejad. The sanctions, he said, could give the Iranian people the impression that Washington is bent on confronting Iran rather than negotiating.

On Sunday, Vice President Dick Cheney delivered a fiery speech warning Iran of "consequences" if it continues down its current path. And at a recent press conference, President Bush said, "If you're interested in avoiding World War III, it seems like you ought to be interested in preventing [Iran] from having the knowledge necessary to make a nuclear weapon."

The administration's internal debates over designating the Revolutionary Guard a proliferator of missile technology has received widespread attention, but administration officials said the sanctions on banks could have a far more immediate effect. If foreign financial institutions bow to US influence and cut ties with Bank Melli, Iran's largest bank, it could falter, wreaking havoc on Iran's economy. Bank Mellat and Bank Saderat were also sanctioned.

"No bank wants to engage in the reputational risk involved in dealing with publicly identified pariahs," said Matthew Levitt, former deputy assistant secretary for intelligence and analysis at the Treasury Department.

A similar designation against Bank Sepah, another Iranian bank, in January, crippled it.

Levitt said the sanctions announced against nine companies affiliated with the Revolutionary Guard will also have a significant impact, as the no-bid contracts between the Iranian government and the companies are believed to be the Guard's main source of revenue. At least one of the companies, Khatam-ol-Anbia Construction Group, has been awarded billions of dollars in contracts to develop Iran's oil and gas fields.

For more than a year, US officials have conducted what they call a "whisper campaign" against Iranian financial institutions, advising more than 40 major international banks about the high risks of doing business with Iran. Yesterday, Stuart Levey, a US Treasury Department undersecretary for terrorism and financial intelligence, told reporters that the majority of Iran's banking system is now under US sanctions.

Yesterday, some analysts questioned why so few of the State Department's arguments against the entities related to Iran's nuclear program. Only one bank was accused of having direct links to Iran's Atomic Energy Organization. Others wondered about the timing of the announcement, which comes just weeks before the UN Security Council is expected to consider another round of multinational sanctions.

"Why today? Iran has been building missiles for 20 years," said Jon Wolfstahl, a senior fellow at the Center for Strategic and International Studies, a Washington-based think tank. He said the unilateral move will make it harder to convince Russia and China - who hold veto power - to support new UN sanctions.

Burns said yesterday that the United States is committed to obtaining a third round of UN sanctions. But he made uncharacteristically blunt statements about Russia's and China's ongoing arms sales to Iran, and noted that China has increased its trade with Iran, even as European countries have curbed trade to send a warning.

Still, analysts warned that sanctions are useful only if they convince Iran to negotiate an end of its uranium enrichment.

"Otherwise, we are going to find ourselves in the unenviable position of deciding whether to engage in a military conflict or tolerate a nuclear Iran," Levitt said.