<html><body><P>American Enterprise Institute</P> <P>July 26, 2007</P> <P>[Edited transcript from audio tapes]</P> <P><BR> <TABLE cellSpacing=1 cellPadding=1 width="100%" border=0> <TBODY> <TR> <TD> <DIV class=BodyText>9:30 a.m. </DIV></TD> <TD> <DIV class=BodyText>Registration</DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>9:45  </DIV></TD> <TD> <DIV class=BodyText>Opening: </DIV></TD> <TD> <DIV class=BodyText>The Congress and Divestment</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Speaker</EM>:  </DIV></TD> <TD> <DIV class=BodyText>Representative Brad Sherman (D-CA)</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>10:30   </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><STRONG>Panel I: Divestment and Its Policy Implications</STRONG></DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Panelists</EM>:  </DIV></TD> <TD> <DIV class=BodyText>Patrick Clawson, Washington Institute for Near East Policy </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Ken Katzman, Congressional Research Service</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Danielle Pletka, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Moderator</EM>: </DIV></TD> <TD> <DIV class=BodyText>Omeed Jafari, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>Noon  </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD><STRONG>Luncheon and Keynote Address</STRONG></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Introduction</EM>:</DIV></TD> <TD> <DIV class=BodyText>Christopher DeMuth, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Keynote Speaker</EM>: </DIV></TD> <TD> <DIV class=BodyText>Senator Jon Kyl (R-AZ)</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>1:00 p.m.  </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><STRONG>Panel II: State Divestment</STRONG></DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Panelists</EM>:  </DIV></TD> <TD> <DIV class=BodyText>Senator Ted Deutch (D-FL)</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD>Senator Craig Johnson (D-NY)</TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText>Sarah Steelman, Missouri State Treasurer</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText><EM>Moderator</EM>:  </DIV></TD> <TD> <DIV class=BodyText>Danielle Pletka, AEI</DIV></TD></TR> <TR> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR> <TR> <TD> <DIV class=BodyText>2:30  </DIV></TD> <TD> <DIV class=BodyText> <DIV class=BodyText>Adjournment</DIV></DIV></TD> <TD> <DIV class=BodyText> </DIV></TD></TR></TBODY></TABLE></P> <P>Proceedings:</P> <P>Danielle Pletka:  Good morning everybody.  Good morning. Welcome to the American Enterprise Institute.  I am Danielle Pletka, the vice-president for Foreign and Defense Policy Studies here at AEI.  </P> <P>This year has seen a bipartisan groundswell of support for divestment from Iran and the Sudan on both the state and the federal level.  Today, we will have an opportunity to hear from two prominent Congressional leaders, Representative Brad Sherman and later, Senator Jon Kyl; two State officials, State Senator Ted Deutch and Missouri State Treasurer Sarah Steelman.  </P> <P>Divestment is often confused with sanctions, but the concepts are really quite different.  Divestment is a choice made by individuals, funds and/or financial institutions not to hold stock in a company or bank that does business with the particular rogue state and, often, with state owned institutions.  This is a moral choice about where to put money and a conscious decision about our national security interests.  But it is also a financial choice.  Is Iran, which is the topic of our conference here today, a good risk?  Are the Mullahs who run Iran s National Oil Company good business partners?  </P> <P>There are upsides and downsides to divestment and to the many bills now pending in state and federal legislatures.  Identifying who is doing business in Iran and who is not, is a real challenge.  Here at AEI we have done our best to use open-sourced information to identify companies, banks and export credit agencies around the world that are doing business in Iran.  We have identified billions in businesses and underwriting and more than 300 separate transactions between 2000 and the present.  Our database, which is at <A target=_blank href="http://www.aei.org/iraninteractive" target=_blank>www.aei.org/iraninteractive</A> for those who would like to look at it, is not perfect and we have really welcomed corrections to it and we will continue to welcome them in the future.  </P> <P>So, how will divestment actually go forward?  Which bill will pass in the Congress?  I am pleased and honored to welcome Congressman Brad Sherman to AEI for the first time. Mr. Sherman is a Democratic member of the House of Representatives, representing California s 27th Congressional District since 1997.  He is a member of the House Foreign Affairs Committee and Chairman of its Subcommittee on Terrorism, Nonproliferation and Trade.  He is also a member of the House Financial Services Committee and the Budget Committee and a member of the House Iran working group.  He is also the co-sponsor of the Iran Counter Proliferation Act of 2007, which calls for the elimination of the national security waiver for the imposition of sanctions on companies and entities that operate in Iran.  It will also ban imports from Iran and severely restrict exports to Iran and prevent foreign subsidiaries of U.S. companies from doing business with Iran.  Congressman Sherman is also the co-sponsor of the Iran Sanctions Enabling Act of 2007, which authorizes state and local legislatures -- governments, excuse me  -- to direct divestiture from and prevent investment in companies with investments of US$20 million or more in Iran s energy sector.  Congressman, this is a most important topic, one of the very, very few about which the Democratic Party and the GOP truly agree and we thank you for joining us today.</P> <P> Brad Sherman:  Hello.  I am Brad Sherman from California s best-named city, Sherman Oaks.  It is a pleasure to be with you.  I will be talking about our overall policy toward Iran, focusing on economic pressure and focusing within that on divestiture efforts.  With me is Don MacDonald, in the back; he is the staff director of my Subcommittee on Terrorism, Nonproliferation and Trade.  Don and I have a good division of the work in the office.  He does all the thinking, the strategizing and the research; my job is to stand here and look beautiful, and I do it so well.  This should be the beginning of a dialogue with everyone, even those around the corner who I cannot see.  And so if you can get Don your email address, we will keep you informed as things develop.  We will be on the floor with a major bill on Monday so things are developing quickly.  </P> <P>Now I see there are a few reporters here.  I have just one interesting tidbit.  You have finally found the source that will attack the Bush administration s foreign policy from the right.  And it is a Democrat with 100 percent ADA voting record at the AEI.  For all the loud bluster and statements about national security, 9/11, the threat alerts, and WMD, the centrifuges continue to turn at Natanz and we could prevent that, especially if we began at the beginning of this administration or even in the last administration, but even if we act now by putting economic pressure on this regime.  </P> <P>The reason we do not is because so much of this town, especially the administration, has a deep ideological anathema to anything that would inconvenience a multinational corporation.  And the key to preventing Iran from having a nuclear weapon is to be able to use our broadcasting facilities - and we have got them - to get a message to the Iranian elites and the Iranian people that their economy will be strangled, their diplomats will be isolated, their country will be in a tailspin if they continue to develop a nuclear weapon.  The reason that message is not getting through is because I cannot lie that well in Farsi.  The fact is -- and we will see this as I develop the speech and we will see it in the rest of this conference - that we have used only the tiniest degree the economic and diplomatic pressure that we can put on Iran.  </P> <P>Now, both the far left and the far right and some not so far have an attitude toward Iran: Well they will develop nuclear weapons.  It will not be a problem.   The far left says, As long as we smile at them, hold hands and sing Kumbaya, so what if they have nuclear weapons?   Well, first of all, a nuclear Iran would shred our nonproliferation policy.  The Gulf Cooperation Council has already announced that they are going to do whatever Iran does.  And if medium-sized countries in the Middle East start having nuclear weapons, why should Argentina, Brazil, or Burma act any differently?  Second, you embolden the number one state sponsor of terrorism, rated that way by the State Department for the last decade and longer, to engage in even bolder and more obvious terrorist acts around the world.  </P> <P>Those terrorist acts then guarantee eyeball-to-eyeball confrontation with the United States.  What happens when Hezbollah grabs 100 Americans in Lebanon?  What happens when the Strait of Hormuz is interfered with?  You go eyeball-to-eyeball with a hostile nuclear power.  Now, you can say, Hey, we did that in 1963 and things still turned out all right.   Yes we played Russian roulette with our friends in Moscow, again and again, particularly in the Cuban missile crisis.  Do you want to play that game again with a new partner?  And finally, if this regime is on its way out - and many of us pray for that day - they could hit the United States either in an effort to regain popularity with the Iranian people or to go out with a bang.  </P> <P>Now there are those on the right who are equally na�ve; they say, Oh, Iran will have nuclear weapons.  No problem.  We will have missile defense.   And I know despots around the world dream of the ultimate despotic Viagra which is an ICBM, just like the big boys in the Cold War.  But the fact is if you look not emotionally at Iran s geopolitical position but, rather, strategically, you will see that they will focus on smuggling a nuclear weapon, not on sending one, because you do not have to be a rocket scientist to get a nuclear weapon into the United States.  A nuclear bomb -- they vary in size; they are about the size of a person, which also varies in size.  But a nuclear bomb is a lot easier to smuggle than a person.  It does not complain when it is in a trunk; it does not make noise; it does not eat; it does not drink and it is harder to detect than a person.  </P> <P>I am from California; it has come to my attention that there are people who have been able to smuggle people across the U.S. border.  And just in case you think our southern border will become impervious, not only to itinerate workers but even to sophisticated national intelligence organizations, the number of people employed by the federal government in making sure a nuclear weapon is not smuggled, say, from the United States into Alaska, in case you think Anchorage is dispensable -- the number of people on that mission right now is zero.  So smuggling a nuclear weapon into the United States is phenomenally easy.  It may get slightly harder; it will become just extremely easy.  </P> <P>And furthermore, an Iranian nuclear bomb smuggled into the United States gives that country so many more options than an ICBM: plausible deniability, creative ambiguity, the possibility not of detonation upon arrival but, rather, proof and an announcement that a nuclear bomb is somewhere in some apartment building somewhere in the Washington area.  Now, would you like to negotiate?  I think that we could well be in this situation in a few years.  Some would say ten; some would say five, or four.  The steps we have to go through is to change American policy, change the policy of multinational corporations, change policy at the U.N., change policy in Moscow, have that affect --the politics of Iran and get Iran to change its policy all before they have enough nuclear material.  We have very little time to wait.  </P> <P>Now, the focus here is on divestiture, and let me focus on the Iran Sanctions Enabling Act and divestiture in general.  Iran needs multinational corporation participation in its economy.  When we look at Iran in trying to change its behaviors, we are blessed with two advantages.  The first is that the ayatollahs have mismanaged the Iranian economy to a great extent.  How great an extent?  They are rationing gasoline in Tehran.  Now, why is this?  It is not because Iran has to import 43 percent of its refined petroleum, although that is an Achilles heel for Iran if we were able to get U.N. sanctions or anything else that prevents Iran from importing refined petroleum products.  No, Iran can currently get all the refined petroleum products it will pay for.  The problem is, it has to pay world prices or forego world prices on the oil that it would export and it traditionally sells that gasoline for 25, 30, 35 cents a gallon; they find that to be expensive.  So you have a regime that is willing to see angry motorists in gas lines who, by the way, are aware of kind of the irony of being in a gas line in Tehran in order to avoid the cost of subsidize in gasoline.  This is not a regime with unlimited economic resources.  </P> <P>The second advantage we have in Iran is a very complex and dynamic political situation.  It is not a democracy but it is a state where you can complain in a gas line and if too many people are complaining in a gas line, you may see a change in policy.  That is very different from North Korea where no one has ever been recorded complaining about anything and lived to tell about it.  </P> <P>Now, in terms of divestiture, the goal is not to divest.  The goal is to change the behavior of companies by convincing them, first, that investment in Iran is really not good business.  They face an expropriation risk and many assets have been expropriated in Iran over the decades; they face a host of other business risks; they face a loss of opportunity to invest elsewhere and then, finally, they will be getting a reputational risk in the United States generally, in the United States investment community and they will lose investment dollars.  Galvanizing this country to divest has an additional advantage than its effect on companies and that is that it helps mobilize us here in the United States to get the U.S. government to change its other policies independent of the ones that deal with investment in corporate stocks and bonds.  </P> <P>Now, the barriers to investment need to be swept away at the Federal government and then we need to agitate nationwide. And I know I am with leaders here in State government who have persuaded their state governments to be well better than the Federal government and to actually go ahead and divest.  Here at the Federal government, we will be lucky if we partially remove what I regard as the insubstantial barriers to divestiture because these barriers are probably more of an excuse than a reason.  But let me review them in what we ought to be doing about them.  </P> <P>The first affects ARISA plans, that is to say, any private sector pension plan plus mutual funds.  And that is the argument that you have a fiduciary duty to maximize your return and any political considerations are to be ignored; if you lose an opportunity because you are concerned about these political -- then you can be sued.  I do not know of any one who was sued with a recovery when they divested from South Africa and I cannot imagine any court deciding that, as a matter of law, investing in terror is good business.  Imagine a judge turning to an expert in managing finances and saying, Oh, you could have made more money and less risk investing in Iran.   It is clearly false and, certainly, fiduciaries have got to be given a broad range.  But those who manage money are putting this forward as a reason or excuse not to divest.  </P> <P>State governments face this issue, plus they face another issue, which is that state and local governments are part of a federal system in which the Federal government is supposed to establish what our foreign policy is.  We will have a bill on the floor on Monday, I believe; I will be managing that bill.  It is the Iran Sanctions Enabling Act by Chairman Frank and Lantos and it does not go, perhaps, as far as I would like.  In fact, an amendment that I got adopted in committee is being fine-tuned now and so just because the bill is out of committee does not mean that I can publish for you the version that will be on the floor Monday.  </P> <P>The chief -- what the bill does is it sweeps away these arguments.  It allows a private sector divestiture [sounds like] without worrying about the fiduciary duty arguments.  It also frees state local governments the arguments that they are acting disharmoniously with U.S. foreign policy.  By the way, existing law does a pretty good job on that second argument, anyway.  The courts have been good except in matters involving banks, in saying that states can divest from Iran and we have already the Iran Sanctions Act, which I will discuss a little bit later but, clearly, makes it Federal policy to divest from those companies that invest US$20 million in the Iranian oil sector.  </P> <P>Now, the issue to be worked out in the Iran Sanctions Enabling Act is what are the target corporate entities.  One view, the view I would favor, is let the investors decide.  You may have Florida take one view, Missouri take another view.  This should be a free decision for investors.  Believe it or not, we are getting pressure from those who manage money saying, Do not give us total freedom to divest; it will tie our hands, at least a little bit.   And these folks are politically powerful here in Washington.  Furthermore, there may be a good public policy argument to narrow the scope of what we are trying to get people to divest from.  I admire those who have divested from any company that would so much as sell a paper clip to stationery store in Tehran.  </P> <P>But my own view is it may be the best policy and I am gravitating toward this view not just as a result of political reality that I face in Washington but also as to what I think is good economic pressure policy on Iran to say that we should focus on three things:  First and foremost and most obviously, those companies that invest US$20 million in the oil sector in Iran.  Secondly -- and this is included in the bill that we passed last week, the Overseas Private Investment Corporation Bill.  It is a bill governing a part of American foreign aid and export promotion policy that says that you cannot benefit from these OPEC investments and international insurance.  And if you do either of two things - invest the US$20 million in the oil sector or, secondarily, if you make loans to the Iranian government, which includes all the agencies controlled by the Iranian Revolutionary Guard Corps.  </P> <P>Now, included in the definition of a loan to the Iranian government is any sale to the Iranian government, not on a cash basis or a pay within 30 or 45 days basis.  This not only deals with disguised loans where you sell a product now and collect for a couple of years but it also pretty much rules out large infrastructure projects dealt with in the ordinary way.  Everywhere these -- in the world these infrastructure projects go forward, they are not paid for in cash on the barrelhead and so it affects all of those doing large infrastructure projects.</P> <P>And, finally, a third group of companies we ought to be targeting are those who sell ammunitions to Iran of any sort.  Now, that third group -- no U.S. Company could be involved but you may -- but in your divestment efforts you are talking about a lot of European and Japanese-based companies and one or two of them may very well be selling conventional arms to Iran.  </P> <P>So the Iran Sanctions Enabling Act will probably pass Congress on Monday.  It will certainly provide a safe harbor for states and municipalities from the federalism argument, and for ARISA and mutual fund investors, from the fiduciary duty argument -- of course, the fiduciary duty argument for states and localities as well.  But it will apply, by its terms, either just to those companies defined in the Iran Sanctions Act, the US$20 million investors or, if I am successful, include those companies making loans to the Iranian government who are providing munitions to the Iranian government.  </P> <P>A couple of other provisions that will be in this bill: one is no negative [indiscernible].  We are not going to allow anybody to wave this bill around here and say, Hey, Congress in 2007, you could divest from these companies so, obviously, you are not allowed to divest from those companies.  There is no negative [indiscernible] in this bill.  This bill moves the ball forward and as I said in my discussion of fiduciary duty, I think the ball is already in the end zone, anyway.  </P> <P>Second, we are going to make an effort to grandfather in any state statute passed before yesterday or the end of this year or some other date.  So we hope to go a little further for those states that have gone further, all in an effort to allow you to do things that I think you are already allowed to do.  What we also need to do for State and local governments -but this would have to be a separate bill for a separate committee - is provide the same standards for procurement decisions as for investment decisions.  </P> <P>Now, let me take a moment to put this divestiture effort in the context of all of the pressure that we could bring, and for the most part are not bringing, on the Iranian government.  At the state level we can see divestiture and procurement changes.  At the private investor level, we need to see divestment and I have talked about the fiduciary duty issue which is dealt with in the bill we are dealing with on Monday.  We have got a more difficult issue, a more expensive issue to deal with, and that is the tax issue.  </P> <P>As I am sure many of you involved in business understand, if you sell stock of bad company at a profit today, you pay a tax for your decision to purify your portfolio.  We should encourage portfolio purification and that is why I am putting the final touches on a bill that will provide carry-over basis, which means you bought Total at 10; it is now at 20.  You get out of Total; you invest in some other stock; you pay no tax when you sell Total at 20, but your basis in purification company or -- is only 10.  And so, you will eventually pay your tax when you sell that company.  We should be encouraging, not taxing, divestiture.  </P> <P>Then, there is a number of actions the Federal government can take, not relying on the goodwill of those who are making investments or making procurement decisions at the state level.  First, we can focus on procurement at the Federal level.  Second, we can - and we began to do this just last week in the OPEC Bill - deal with a host of other Federal programs and say those companies that are investing in Iran cannot participate.  Now, when we draft this legislation, as we did in the OPEC Bill which I am the author, it is not enough to just say the particular corporate entity cannot get a Federal benefit if it is investing in Iran.  You have to look at the entire affiliated group of corporations.  </P> <P>So you turn to a multinational based in Zurich or Paris which may have a hundred subsidiaries in 50 different businesses around the world and say, Your Nebraska Company may lose this or that at the federal or state level if your Qatar-based company does this or that in Iran.   We have to stop imports from Iran.  Right now, we do not import oil from Iran; we only import the stuff we do not need and they could not sell elsewhere.  </P> <P>To give you an idea of the lack of political will we have on this issue, we have been unwilling in Washington to stand up to the epicureans who want Southern Caspian caviar.  So we import caviar, which is controlled by some of the conservative or Islamic interests in Iran, here to the United States.  If the Bush administration cannot stand up to the epicureans, they cannot stand up to anybody.  So we can deal with imports to the United States.  That can be done by federal executive order; it was a Clinton administration order in 2000 that opened our markets and the Bush administration has continued this.  They could close it tomorrow; they choose not to.  </P> <P>And finally, we can do what we supposedly have been doing for well over 10 years, long before I got to Congress, and that is, we could actually impose sanctions on international oil companies that invest US$20 million in the Iranian oil sector.  Fresh new idea -- it is called the Iran Libya Sanctions Act; it worked so well against Libya, we took the L out of it.  Now it is the Iran Sanctions Act, which we have never applied with regard to Iran.  Now, in Congress our first action is to fix the statute, improve the statute.  We are doing that with HR1400, the Iran Counter-Proliferation Act, and what this would do is close some loopholes in the Iran Sanctions Act by saying that, first and foremost, if a company is found to be making these investments, you cannot just waive all sanctions.  When the President finds a violator, he has to impose some sanctions or she has to impose some sanctions.  </P> <P>It reinforces a total embargo on imports from Iran. It tells American oil companies that they cannot do business in Iran through their subsidiaries and eliminates tax benefits for oil companies whose affiliates violate the Iran Sanctions Act.  These are all important changes in the statute, but the single most important thing we could do vis-�-vis the Iran Sanctions Act is have a President who takes his oath of office to enforce the laws of the United States seriously.  Started in the late Clinton administration, continued after 9/11, continued after the MEK and others told us of the Iran nuclear program; and that is we have an administration policy that they cannot find gambling at Casablanca.  They are unaware of any oil company anywhere in the world investing more than US$20 million in the Iranian oil sector.  </P> <P>Now, the Congressional Research Service sitting in the Library of Congress, no CIA, is able to produce a comprehensive chart of all the companies who are making such investments.  But the official position of the Bush administration is, since they have not received a certified letter from Ahmadinejad announcing that there has been such an investment, no such investment is occurring; therefore, no international oil companies even have to be identified and reviewed to determine whether sanctions should be applied, sanctions which could be waived by the President under current law but could not be waived if we were successful in passing the Iran Counter-Proliferation act.  </P> <P>You know the left is looking everywhere for grounds for impeachment; the one place they have not looked is the Iran Sanctions Act and the refusal of this administration to carry out its duty to enforce the law.  There are several things -- the one other thing that the federal government could do unilaterally, and that is stop Iranian banks from doing business in dollars through the Federal Reserve Board in New York.  We have stopped - too much fanfare - two Iranian banks from doing this; we have not stopped the others.  We forced Ahmadinejad to move some of his accounts across the street from one Iranian bank to another Iranian bank.  That hardly represents all we could do.  </P> <P>Internationally and diplomatically, there are two things we can do.  One is something I have talked about before and that is the World Bank.  You folks in the press -- big tissy. Wolfowitz s girlfriend gets maybe an extra hundred grand from the World Bank -- front page news.  Iran is getting $1.3 billion from the World Bank - most news outlets have not even mentioned that.  When we had Secretary Paulson before our Financial Services Committee, he said that in an effort to save Wolfowitz s job he had carried out an international lobbying effort, talking to other finance ministers around the world trying to save Wolfowitz s job.  I asked him whether he had done anything to try to get finance ministers to not vote for bank or for disbursements from the World Bank to Iran; his response was, no, he had not done anything like that.  They did vote against it at the World Bank and then went out for tea with all the people that outvoted us, which was everybody, in these loans to Iran.  </P> <P>So the one thing you can say is that, unlike the Iran Sanctions Act, the Treasury Department did follow the letter of the law; they did, at least, cast the vote but no effort to actually prevail.  So the good news and the bad news are all in one sentence:  We got a lot of tools that we could be using on Iran sitting in the toolbox.  What that means is we have not had the political will to take the tools out of the toolbox.  The good news is we still got a lot of good tools sitting there in the toolbox.  If we made use of all of these, I think we would put substantial pressure on Iran, but there is one more thing we have to do and it is far more complicated and far more controversial - we need to get Russia on our side.  </P> <P>With Russia on our side we will get U.N. sanctions, serious U.N. sanctions.  With serious U.N. sanctions, Iran will not be able to import refined petroleum products and a host of other things will happen.  How do you get Russia on our side?  You have to go to them and entice them with the possibility of U.S. policy changes in things that are less important to us than they are to them.  We might actually have to change our policy on Apkhazia, but I talked to the State Department of this at the highest levels.  For reasons I cannot understand, we cannot link the Iran issue to Caspian oil pipeline issues with Russia, to Apkhazia or to anything else.  That ensures that we will not get serious sanctions from the U.N.  So we need to act diplomatically and economically.  </P> <P>We need to use all the tools in the toolbox and we need to realize that it does take courage to send American troops into harm s way.  And it even takes courage to be able to sign letters to the parents of the bereaved -- the bereaved parents of those who have died.  But it takes, perhaps, more courage to stand up to, and inconvenience, multinational corporations and we need to see that kind of courage in making foreign policy and economic policy here in Washington.  Let s open it up to questions.</P> <P> Danielle Pletka:  What if I moderate for you?</P> <P>Brad Sherman:  Yes.  I have got about maybe a two-minute conclusion as well.</P> <P>Danielle Pletka:  Very good.  I am going to open up the floor to questions.  If everybody would just be kind enough to follow our ground rules, which is to raise your hand, I will call on you.  Wait for the microphone, please, and identify yourself, make your statement, your brief statement in the form of one and one question only.  And since I am here with the microphone I would like to ask the Congressman one first question.  And I would also like to take a moment to say four years of the Clinton administration, they did not enforce the Iran Libya sanctions act either; pretty frustrating then.  But what I am wondering about is something that has actually bedeviled us here a little bit at AEI in the work that we have done on our interactive, and that is companies that have made a decision in recent years, particularly American companies, to actually move out of Iran.  </P> <P>So actually, most major American corporations have decided to pull out of Iran but they have still got existing contracts that they are finishing out.  How do you deal with and how do you recommend that legislatures and others deal with this question of contracting today?  How do we protect companies that are going to get in trouble for pulling out?  How do you address it?  I am very interested in your answer.</P> <P>Brad Sherman:  First, from the company s standpoint I think they need to take a serious review:  What happens if we stop performance?  Will Iran be able to sue us?  Will they have jurisdiction?  Will that be in courts where there are already victims of terror that have tens and hundreds of million dollars of claims so that Iran would recover nothing?  So I would like companies, not just to say, Oh, we got a contract with the devil.  We must face it because we love contracts, but, rather, what is the practical exposure?  </P> <P>Second, I would like to see companies not expand -- extend these contracts.  With those things in mind, we did put in the OPEC legislation provisions to deal with this very thing and to allow companies that are not expanding or extending to participate with OPEC with their other projects.  And so we do need a sophisticated approach.  I think, though, that when it comes to divestiture, ultimately the power -- we cannot write something so specific here in Washington to say this is the exact model of divestiture; rather, we should provide as much freedom to investors as possible and then have them make their own decisions on this.</P> <P>Vladimir Kara-Murza:  Thank you.  I am Vladimir Kara-Murza with RTVI, Russian television.  Can I ask you Congressman to elaborate a little bit on the point you made about changing U.S. policy towards Russia to get U.N. sanctions on Iran?  Do you  advocate [sounds like], for instance, the U.S. ignoring all the democracy promotion things, forgetting about issues such as press freedom, political prisoners and everything just to get Putin s support in Iran?   Is that what you are suggesting?</P> <P>Brad Sherman:  I think it is more not doing favors for Putin but to look at our policy toward Russia as a people, as a country, as a state with interests that go beyond any particular administration.  When the vice-president goes to Lithuania and criticizes Russia s human rights policy without even mentioning that there are some who think that Lithuania could treat its own Russian speaking minority better, that is not a slap at Putin; it is a slap at the average Russian citizen who, of course, when they think of human rights issues being spoken of in Vilnius, would think of how their own co-nationals or Russian people are being treated.  </P> <P>When it comes to commercial disputes between Ukraine and Russia, we were in the highly unusual position of saying that if a country has provided foreign aid, in this case to the Ukraine through cheap oil, then it has a moral obligation to continue that foreign aid.  That foreign aid is not a privilege; it is a right, and that you cannot discontinue it because you do not -- because there has been a change in either the receiving country or the sending country.  That is a bizarre position for the United States.  We have changed our foreign aid policy either because of changes in the United States or because of this or that action.  And it is bizarre for the United States to say that countries that provide foreign aid are obligated to continue it.  We would never impose that duty on ourselves.  </P> <P>We then turned to Russia and said, You have to charge less than fair market value for your product, oil.   That is a bizarre thing for the evangelic -- the evangels -- I am mispronouncing -- for those who promote capitalism to say to Moscow -- did you ever think Washington would be shouting at Moscow, How dare you act like capitalists?   How dare you charge market prices?   Then you look at the Caspian oil pipeline situation.  Yes, we all want to see the oil move from the Caspian region to markets.  Okay, we said we do not want those pipelines going through Iran; good idea.  Then we say we do not want those pipelines going through Russia.  Why?  </P> <P>Well, because, apparently, we put Russia and Iran in the same category.  So then you look at Abkhazia, Transdniester, Moldova, a host of issues where if you -- you could argue issues either way.  You know, I used to be a lawyer; if you hired me as a lawyer I could make the Russian argument about Transdniester; I can make the Moldovan argument about Transdniester.  The only thing I can say with confidence is that if the United States prioritizes everything, then we have prioritized nothing.  And if a Transdniester argument or an Abkhazia argument that could be argued either way -- every time we come down against Russia, okay, if Russia is opposing us on the Iran issue.  But we should open the door to seeing it their way on those issues where it is very easy to see it their way.  If we had a conference on Abkhazia, you have half the room -- well, you will have no one in the room.  But he would be in the room, and I do not know which side of the room he would be sitting on.  So -- what?</P> <P>Danielle Pletka:  Not your side in a sense. </P> <P>Brad Sherman:  So we could -- on issues that are state-to- state where Russia has national interests, I think we have come out on the anti-Russia side every time Russia has an interest in its own region.  If that is an effort to punish Russia for opposing us on Iran it is pretty comprehensive, except it leaves out the part about negotiating with Russia.  If you start with the idea that Iran s -- that Russia s votes in the Security Council on Iran are no more important to the United States, then the -- whether Caspian oil pipelines go through Russia or whether we note our human rights interest in the Russian speaking minorities abroad, then if you have a thousand equal priorities, you have no priorities at all.  Okay.  I just got myself in trouble with that answer.  Go on.</P> <P>John Cruz:  John Cruz from the House Armed Services Committee.  Congressman, we see polls that the Iranian people have favorable attitudes toward the United States; that surprised us.  Is there a public diplomacy or strategic communications component to your policy to explain to the Iranian people the reason for any hardships they have to endure because of the divestiture?</P> <P>Brad Sherman:  Absolutely.  If you poll in Iran, you find three things; first, -- or four things.  First, their government is unpopular probably pretty much for that reason; it is the only place we are popular.  The only thing their government is doing that the people like is developing nuclear weapons, and, you know, nuclear weapons are popular in every -- you know, take a poll in Brazil: Should we have nuclear weapons?  Yes.  We are a big important country.   And without weighing it against and really discussing the issue, if you just ask the question, Do you want nuclear weapons?   Lichtenstein would say yes.  </P> <P>And then, the final thing you see is if we bomb Iran that is the one thing that would make their government popular.  Any sophisticated program involves carrots and sticks, and that is the one thing I left out on my talk -- it was only a 40-minute talk; I needed more time.  But the one thing that was missing is we ought to have carrots, most of which are coming from Europe but even from the United States.  </P> <P>We ought to have a sophisticated message to the Iranian people and Iranian elites: We are not enemies of the Iranian people.  We want you to be prosperous.  We are not demanding regime change, though if it happens, you can expect us to be upset.  But here are the good things we will do for you if you abandon your nuclear program; here are the things that are being imposed upon you not by the United States but by the peoples of the world, by investors in London and Tokyo, by sanctions at the U.N., by individual decisions of individual investors and by governments around the world.  And that is where the U.N. and World Bank are so important because of that imprimatur.  That whole message has to get across that this is a worldwide effort of carrots and sticks because your government is doing the wrong thing, endangering the world and people around the world understand that.  This is not an effort to punish; this is an effort to get you to change your policy and then reward.  And we look forward to the day when there are no gas lines in Tehran.</P> <P>Dan Dombey:  Dan Dombey, Financial Times.  Congressman, can I just ask you to, perhaps, narrow down a little bit more what you are seeking to do with your bills?  You were talking primarily about changing the behavior of the European and Asian energy companies but you also gave a nod to pre-existing contracts.  Now, in fact, the Bush administration argues that there has not been a significant new investment, precisely because of its policies.  They point to things like the Japanese [indiscernible] they also say that informal financial sanctions mean that European banks and banks internationally are unwilling to underwrite new investments.  So in that case, what are you trying to do if new investments are not occurring on a large scale and you are concerned about the sanctity of contracts?  What is the behavior from European and energy [indiscernible] companies you are looking for?</P> <P>Brad Sherman:  We will send you a collection of Financial Times articles in which companies announce their progress and their contracts and they are moving forward with multimillion and multibillion dollar oil investments, and we will also send you the report from the Congressional Research Service.  I do not think there is any one who believes that not a single investment has been made since 1998 in the Iranian oil sector. And you are right to point out the Clinton administration, at least, went through the motions of following the law and issuing the waivers until 1998.  And then they established the dangerous precedent of saying If you do not like a law, you just ignore it.   </P> <P>If you are a police officer and you happen to think that heroin should be legal, well, if somebody is selling heroin in front of you, you just say, I did not actually see it.  Or maybe I saw it but I was sleeping or sleep walking or something.   So you are right that this dangerous practice of, I do not agree with the law; therefore I see no facts, was established in the Clinton administration.  And that is why I made the point that it did kind of continue after a few things that should have woken up any government.  I would love to take more but I do not know if we have more time.</P> <P>Danielle Pletka:  I think we are a bit limited.  Perhaps we can take one, if you want -- I think you wanted to say another word or two in conclusion and so we are going to have to choose between a questioner or a word of conclusion.</P> <P>Brad Sherman:  Well, I just want to commend -- I know Ted Deutch is here from Florida where they have accomplished a lot.  I know Missouri is represented and I am scurrying through my notes to see the -- who is here from the state of Missouri?</P> <P>Danielle Pletka:  Sarah Steelman, the State Treasurer.</P> <P>Brad Sherman:  Sarah?</P> <P>Danielle Pletka:  I am not sure if she is here this morning.  She [cross-talking]</P> <P>Brad Sherman:  Tell her I went on for 20 minutes praising her efforts in the State of Missouri.  Okay.</P> <P>Danielle Pletka:  Very good.  Let me praise your efforts.  Thank you so much for joining us here today.  Let me encourage everybody to be in touch with the Congressman if you do have questions.  He is open to answering all of them very fully.  So thank you for being here at AEI.  Let me ask everybody to remain seated; we are going to move directly to our next panel.  And thank you again.</P> <P>Brad Sherman:  Thank you.  And Don Macdonald will stay here.  He will educate me on the other wisdom that comes from this podium and also if you give him your email address, we will spam you forever.  Thank you.</P> <P> </P> <P>[Second Panel]</P> <P>Omeed Jafari:  Ladies and gentleman, if you can take your seats we will begin this morning s second panel.  I would like to begin with the introductions and segue right into the discussion.  So to your far right is Danielle Pletka; she is AEI s vice president for Foreign Defense Policy Studies.  To her right, Ken Katzman is a specialist in Middle East Affairs for the Congressional Research Service who provides analysis for members of Congress and their staffs on Persian Gulf political and military and diplomatic affairs, and on U.S. policy in that region.  Dr. Katzman has served in government and in the private sector as an analyst in Persian Gulf affairs with special emphasis on Iran and Iraq.  And to my immediate left is Dr. Patrick Clawson.  He is Deputy Director for Research of the Washington Institute for Near East Policy.  His previous positions include five years as senior research professor at the National Defense University s Institute for National Strategic Studies and four years as senior economist at the Foreign Policy Research Institute, the World Bank and International Monetary Fund.  Dr. Clawson?</P> <P>Dr. Patrick Clawson:  In the last five years, Iran s economic performance has been mediocre; not bad, but mediocre.  The country has had five percent GNP growth each year.  The budget has had some -- government budget has had some small deficits and small surpluses that more or less even out.  The country has very little foreign debt and has now accumulated about US$50 billion in foreign exchange reserves.  Overall, not a bad performance.  However, it is a stunningly poor result, given the extraordinarily favorable circumstances of the last five years.  The other oil-producing countries in the region have been able to do dramatically better -- well, except for Iraq.  </P> <P>And, actually, Iraq s economic performance in the last five years has been quite a bit better than that of Iran - higher growth rates, better government budget outturns and the like.  In fact, if we compare how Iran has done to the expectations of its peoples, the results are also disappointing, to put it mildly.  The mood in Tehran, in the newspapers everyday, in the -- much less in discussions is sour.  People feel that the economic performance of the last two governments in Iran has not been particularly good.  Why?  </P> <P>Well, Iran faces four fundamental economic problems.  First and foremost is cronyism.  The economy is dominated by revolutionary institutions such as the foundations and, increasingly, by firms that are affiliated with the Revolutionary Guard Corps which make extraordinary profits through their political connections.  Economists have the horrible phrase to describe this: rent-seeking.  I was amused to discover just how much that phrase is now even popping up in the Iranian newspapers as [indiscernible] the idea that instead of making money through productive economic activity, that the way to earn income is by diverting income from those productive enterprises into your own pockets, thanks to your favored connections.  </P> <P>The second fundamental economic problem facing Iran is the poor use of government funds.  The government actually has quite ample resources to meet the country s needs but, instead, uses the money for such things as subsidies, which now take up, according to the International Monetary Fund s most recent reports, 23 percent of national income is spent on the government subsidies.  The government is simply not willing to tackle these.  For instance, last month a great show was made of introducing gasoline rationing; it was a sham.  The fact is that the only price at which gasoline is sold is the old subsidized price and Iranians have been given rations but told that, Oh by the way, you can use your first six months ration as you wish.   In other words each person was given six months rations and unless you are an extraordinary gas guzzler, it is going to take you three months to run through that, and then we will see whether or not the government actually does insist that some gasoline be sold at prices higher than the highly subsidized rates now available.  </P> <P>The third basic economic problem facing Iran is youth unemployment.  There is a fair amount of outdated information out there about Iran s population s structure.  Many people say Iran is a young country; that actually is not true.  In fact, the births in Iran in the last three years have been barely sufficient in order to sustain the current country s population.  The population is simply not growing at all and may shrink.  But Iran had a great baby boom after the revolution and that is the age group which is now entering college -- the peak of that is entering college and also entering the labor force.  So that generation -- when there were more than two million people a year born in Iran compared to last year when they were less than one million born in Iran -- that generation is now entering the labor market looking for work and not able to find it.  </P> <P>The IMF report from last year pointed out that even if Iran is able to sustain five percent GDP growth each year for the next five or six years, that unemployment will still continue to rise.  The IMF does not think that Iran will be able to sustain growth that robust.  </P> <P>Well these three problems - cronyism, the poor use of government funds and youth unemployment - are not really problems that are addressed by the divestment issue.  The fact is that these issues of the cronyism, poor use of government funds and youth unemployment provide us with extraordinary opportunities to press Iran and to offer both carrots and to threaten with sticks.  But those really can be done only most effectively by the federal government that the sticks that we should be using at the federal level should be aimed at this cronyism problem; namely, at finding ways to keep money out of the pockets of Iran s leaders, similar to what we have done with North Korea.  </P> <P>And the Revolutionary Guard Corps in Iran has shown itself to be extraordinarily sensitive whenever their personal income stream is threatened.  So there are real opportunities here for those kinds of sticks.  Simultaneously, as Congressman Sherman was describing, we can offer carrots to Iran that would provide for opportunities for job growth, carrots such as membership in the World Trade Organization and, hopefully, these would be a way that we can split the people away from the regime and to say that if it were not for the regime s bad policies, then you would not be suffering the problem of unemployment.  And we have a real opportunity here because so many people in Iran blame the regime hardliners for the country s economic problems and for isolation from the West, which is seen as the core of many of the difficulties that Iran is facing economically.  </P> <P>However, divestment does address a fourth problem, which is a very serious problem that Iran faces and that is the declining oil output.  Iran has been producing oil for almost 90 years; its fields are quite old and output is declining.  It has now been 15 to 20 years that the Iranian oil fields output each year drops by something between 300,000 barrels a day and 400,000 barrels a day; that is the figure that the National Iranian Oil Company s Managing Director cites regularly.  And it has only been by an impressive program of investment, almost all of which have come form Iranian funds themselves, that the National Iranian Oil Company and National Iranian Gas Company have been able to sustain output.  And they have done pretty decent job at sustaining output, but the problem becomes harder and harder each year.  </P> <P>They need foreign technologies and they need foreign managerial skills, in particular, to help work with their complicated and the aging fields.  Foreign money is not as important, frankly; it is mostly the technology and the managerial skills.  There have been a lot of announcements out of Iran over the last decade of major new investments in their oil and gas fields, particularly with Asian companies - Japanese, Chinese and Indians.  Very few of those projects have gone anywhere.  The announcements are typically given extensive coverage but very few of those projects actually have moved forward.  The Japanese project has simply been canceled; the Indian project is in terminal condition and the Chinese were offered a field which you would have to be really desperate to want to invest in that field, and not even the Chinese seem to desperate enough to want to do that.  </P> <P>Most of the actual investment that is taking place has come from North European firms - not from South European firms, but North European firms.  And, indeed, it is a handful of firms that are spending tens of millions of dollars each per annum that are providing most of the action for helping Iran with its investment in its oil and gas industry.  I only know of three such firms; there may be more, but most of the action is coming from a few such companies.  I would suggest that those in the divestment field may wish to consider the advantages and disadvantages of concentrating on just that handful of firms.  At least, so far, that handful of firms has not paid much price for its involvement in Iran, and they are quite openly dismissive of the threats to them from their involvement in Iran.</P> <P>On the other hand, there are advantages to spreading the net wider because the divestment movement has been successful; it is scaring off a number of other companies from investing in Iran.  And so there are pluses and minuses of having a broader focus or having a more narrow focus.  But that -- let me just end my remarks with that observation.</P> <P>Omeed Jafari:  Thank you very much.  Just a quick note: If you have a cell phone, would you please either silence it or put it on vibrate?  Dr. Katzman?</P> <P>Kenneth B. Katzman:  Thank you very much, Omeed.  I confess, I admit it.  I'm the author of the famous CRS Chart that Mr. Sherman referred to in his remarks on the companies that have invested in Iran s energy sector.  And I can send it to anybody and I hope it is correct.  And if it is not correct, please, I ll be glad to add to it at any time.  I want to talk today about the -- not the economy per se, because I think Patrick covered it quite well, but the constituencies of Iran s economy, the politics of the economy, so to speak.  I completely agree with everything Patrick said that the economy is completely mismanaged; its performance is poor.  I'm showing what I have heard from industry sources that they are losing 50,000 barrels a day of production each year.  Patrick cited the higher figures; hard to really know, but they are losing production.  </P> <P>These investments in this chart have just basically held the line; they have very ambitious goals of increasing production way up to, I think, as much as 10 or 12 million barrels a day and they are nowhere near that, not even approaching it.  So all this investment in that chart has not amounted to much, except it has slowed the rate of deterioration.  But what I see is two sort of theaters in the Iranian economy.  You have, in my view, the pole represented by President Ahmadinejad.  He is what we would call as a state controller; he believes in state control of the economy, government employment, lots of subsidies, state management in his campaign.  And since taking office he has proposed new subsidies, marriage funds, soft loans, debt write-offs to farmers, et cetera.</P> <P>His constituency is the working class, the lower classes, many of them in the rural areas way outside of Tehran, way outside the reach of many of the journalists who predicted Rafsanjani would be victorious in the last election; he was not victorious.  The center of gravity in Iran, really, I think, is the rural areas who do not meet Westerners, who do not get interviewed by Reuters, et cetera.  And this is why, I think, polling in Iran and opinion research in Iran is very difficult because many of the people who visit do not get out to the rural areas and encounter this center of gravity that really is Ahmadinejad s political base.</P> <P>To that extent, the gas rationing that was instituted in many ways hurts his political base.  I think it has hurt Ahmadinejad deeply to have this gas rationing, although I take Patrick s point that, perhaps, it is a sham and might evaporate and be undone.  Nonetheless, it is regressive; when you raise the price of gasoline it hurts the poor more.  Many of the poor use their cars as unofficial taxis; they make money off their vehicles.  And when you have gas rationing, you are indeed hurting Ahmadinejad s political base.  </P> <P>The other main -- so we have the state controllers and we have Ahmadinejad s political base.  They do not care about a trade agreement with the West.  Ahmadinejad s political base could not care less if there is a grand bargain that leads to a lifting of sanctions and trade agreements with the European Union, et cetera.  Ahmadinejad s political base does not buy French cosmetics; they do not buy automobiles; they do not buy luxury goods.  They are purely subsistence level.  </P> <P>So Ahmadinejad s constituency -- there is no pressure from his constituency to cave in to international demands.  The pressure comes from the counterpoint to Ahmadinejad s political base which is the bazaris, the private free-capitalist; the merchants, essentially. These are the constituents, really, actually, of the supreme leader who through most of his career actually has catered to the bazaris and Mr. Rafsanjani, who has been obviously a political heavy-weight for many years.  These guys pay attention very much to the bazaris.  </P> <P>Why are the bazaris so important?  Well, they were important in bringing Khomeini to power in 1979, first of all.  Second of all, they are essentially the employment source.  Iran is not an industrial economy.  This is not a world-class economy; this is a very primitive -- basically, a primitive economy.  Iran does not make anything; they do not manufacture anything.  They have a few automobile plants under license from Renault, Peugeot, even some Mercedes, some light aircraft, a little bit of internet software sector.  </P> <P>But basically, the economy of Iran is the big trading families - the bazaris, the tavacolis, the azari ghomis, et cetera.  They have a paper, the Resala Paper, et cetera.  Since they do not make -- the way they make their money is to import goods, mark it up at a profit and sell it.  They do not make anything.  They need cheap employment, low rents, and free trade, and low regulation.  In a sense, they are really quite free market capitalist.  Maybe they would agree even with -- they would sympathize in many ways with the Republican Party in the United States - very much low regulation, low taxes, and free imports.</P> <P>The bazaris are very, very scared of what is going on with the United Nations and the international community.  Because if they are economically isolated and they cannot import any goods, they are going to starve; they are going to go out of business.  They do not make anything; they need to import these goods, mark it up in a profit, and sell it.  If you stop that activity, they die.  They are extremely nervous about the international sanctions that are ratcheting up on Iran.  And I believe that this is a key source of vulnerability and pressure that the international community can and is in many ways bringing to bear on Iran right now.  </P> <P>Now, so far, the two UN resolutions that have passed have not sort of infected or infiltrated into general economic principles.  We have sanctions on basically WMD factories, Iranian officials involved in WMD.  We did get to -- there was a ban on Iranian arms exports directed against their shipments of weapons to Shiite militias in Iraq, Hezbollah, Hamas, et cetera.</P> <P>But so far, the two UN resolutions that have had teeth that have passed have not gotten into general economics.  Now, there is consideration - and we will see how it plays out in New York at the UN - about getting more into general economic isolation - strangling off credits, financing, maybe even shipments of refined gasoline to Iran.  And that makes the bazaris, Rafsanjani, the supreme leader, extremely nervous.  Ahmadinejad, because his base does not care so much, is less fearful.  He is willing to be more defiant, and this is the clash that is going on in the regime right now among these economic interests.</P> <P>Just very quickly, Patrick mentioned and I have done in my paper a lot of work obviously on the bonyads.  These are also very well-connected -- these are reasons why Iran s economy really is so mismanaged.  You have these foundations, the bonyads, that basically took over the Shah s property.  The Shah s people fled and many of these bonyads took over the property.  They run conglomerates; they sell actually Coca-Cola, which is licensed by Coca-Cola Company -- sold them the license to produce Coca-Cola.  And they do and they sell it.</P> <P>And to some extent, they need products because they import goods and give them out to the poor.  So they -- I think the bonyads , which is a key constituency also of Ahmadinejad and all the leadership are not, I think, so happy about economic pressure because they do need a certain amount of interaction with the international community.  The constituency that is the least fearful, I think, of international economic sanctions is the Pasdaran, the revolutionary guard.  They actually benefit if Iran is economically isolated because then they will get all the contracts to construct everything.  If you say that international engineering firms cannot come in and build a metro -- a new phase of a metro or an airport extension, who is going to get the contract?  The gorb [sound like], which is the economic conglomerate arm of the revolutionary guards; it is short for Khatam-ul-Anbia, seal of the prophet.  That is the guard s economic contracting wing.</P> <P>So they are not scared because if any sanctions that scare off international companies -- they will benefit; they will get all the contracts; they will not have to compete with anybody.  So these are some of the competing factors in Iran s political economy that I think make the economy and the political structure extremely vulnerable to international pressure from a unified Security Council.  Thank you.</P> <P>Omeed Jafari:  Dani?</P> <P>Danielle Pletka:  Thank you very much, Omeed, and thank you, Kenneth and Patrick.  I'm going to try and talk a little bit briefly about something a little different. We named this panel Divestment and its Policy Implications, and we have talked a little bit about the implications inside Iran.  We have not talked that much about the policy implications of the divestment movement in the United States and in the countries that are seeking to target Iran s nuclear weapons program in Europe and in Asia as well.  And I think those are not insignificant, and they need to be paid attention to.  </P> <P>What do we have before us on the scene?  We have a number of bills.  At the state level, what you see are fairly straight forward divestment bills dealing with pension funds.  Some of them relate to Iran, some of them relate to Sudan; at my last count, there were 15 such measures.  I think two had -- State Senator Ted Deutch corrected me.  I thought there was only one, but there are two that I think have passed so far and a number of additional ones are pending.  Similarly, as Congressman Sherman outlined, there are a number of bills on Capitol Hill, different measures in the Senate and in the House, and there are a variety of overlapping measures as well.  Interestingly, though, in the House measure sponsored by Congressman Lantos that has seemed to move forward the most quickly at this point, what you see is a whole variety of different things.  You see the questions of divestments, safe harbor, various reporting requirements about which corporations may or may not be involved in Iran, which banks may or may not be involved.  </P> <P>You also see, as he alluded to, amendments to what was once called the Iran-Libya Sanctions Act and what is now called the Iran Sanctions Act, something that as he pointed out has been largely observed in the breach.  And what those amendments would do is take away any discretion on the part of the President - and that would be any President, I should add, and not just President Bush, but whoever follows him in office - to impose sanctions.  It would require the imposition of one sanction and it would allow the President to choose among a small menu of others.  It is not clear which one of these bills is going to become a law or indeed if any of them are going to become law, although I think that given the fairly broad bipartisan consensus, we should expect to see that at least some part of these measures will end up in statute by the end of this year.</P> <P>But I do think that there is a risk here, and part of that risk is something that you have heard of already this morning.  We run the risk that some of this legislation ends up being more interested in the peccadilloes or perceived peccadilloes and profit-making motives of multi-national corporations and less interested in the proliferation in terrorism activities of the Iranians.  That is a little bit troubling and it is going to hurt us, not from the free market standpoint which I embrace although I think that it will hurt that, but because it is going to cause us problems outside the United States.</P> <P>It is not hard for us to lean on American companies and, in fact, most major American companies have announced that they are not continuing to do business in Iran, although they are honoring existing contracts.  The same cannot be said for a whole variety of banks and corporations and funds outside the United States, and that is a lot harder for members of Congress to lean on them.  And it is really hard for members of Congress to lean on foreign leaders to lean on them, and that has caused us a lot of trouble in the past and we need to learn a little bit from them.</P> <P>Now, in parallel to what has been going on at the state and local level, we do see down the multilateral -- we have, as Patrick said, two UN Security Council resolutions.  Ken also talked about the details of them; they do not really bite on the economic level; they are not outside the specific targeted realm and they do not go too far because it was really, really hard to get everybody to agree to go too far.  Now, the real tough nuts were obviously our favorites in the P5 on the Security Council, the Russians and the Chinese.  But in truth it was not that easy to get the British and the French to go along either although I think that they do, at a national level, recognize the gravity of the Iranian nuclear weapons program.</P> <P>Now we are in the process of negotiating with our friends and allies and with the others on the Security Council about a third resolution.  And in fact, what we have seen in the press is that a lot of the things that were left on the cutting room floor for the first two resolutions are in fact back under discussion.  Whether it is petroleum-related issues or it is travel sanctions or it is further restrictions on the credit to the Iranians, all of these are back on the table and are being looked at in a creative way.  </P> <P>But I think as we have heard very clearly from the Russians, they are not really interested in having any of it which means that the negotiating process which will begin anew in earnest when everyone comes back from vacation, which it turns out is about six weeks long everywhere, but here are at AEI apparently -- although I'm working on that.  And when they all come back from vacation, the negotiation process will begin in earnest.  Of course, the Iranians, needless to say, are continuing with what they are doing.</P> <P>Now there has been some progress.  The International Atomic Energy Agency has very excitedly announced that they have made some progress with the Iranians so that the Iranians are going to open and turn over a new leaf and disclosure.  I think this has been, at least from my standpoint, rightly written off by most parties including, by the way, the Russians and the Chinese, to the best of my knowledge, as a negotiating tactic on the part of the Iranians.  They are always interested in turning over a new leaf when they are about to be new sanctions, but it turns out that, in fact, that leaf is not too new and they are going forward as planned with their cascade and their enrichment program.</P> <P>So we have these parallel tracks, we have our national measures; we have our efforts at divestment, at strengthening sanctions; we have got the multilateral efforts.  And the multilateral efforts have spawned, in turn, pretty tough sanctions at the European Union level that have in fact gone a little bit further than the United Nations mandate and those have been -- I think, there is agreement that they have been pretty seriously implemented.</P> <P>Finally, of course, there are U.S. unilateral measures.  And I have to say, and having worked in the government when the Iran-Libya Sanctions Act passed, I'm struck that, in fact, we do see the most stringent application of sanctions and the strongest effort to date from this administration on trying to persuade the international community, corporations, foreign banks, and others to go along with us.</P> <P>I have to give credit to Hank Paulson and Stuart Levey, the Under Secretary of the Treasury for Terrorist Financing and Intelligence, who really have been absolutely tireless in traveling the world and making this argument.  They have, in fact, banned the so-called U-turn transactions.   Two Iranian banks have been targeted.  My understanding is that at least one or two more Iranian banks will be targeted in the near future.  This has made a huge difference.  I think that it has created a climate of -- not only inside Iran, as Patrick and Ken described, but a climate outside of real hesitancy.  It has also had undoubted impact on the Iranian economy.  It is not just the incompetence and bad financial management and other problems inside the Iranian economy; in fact, you see that banks are less willing to do business with Iran.  You see that letters of credit are far harder to come by.  </P> <P>I, at least, understand from those who analyze this that the cost of money to the Iranians has almost doubled.  This makes life very hard for the Iranians, and I do not think that we can pat ourselves on the back [indiscernible] in fact, I think that the Europeans have gone some way.  You have seen the export credits from the German government apparently dropped by 30 percent last year.  They said that they will continue to drop this year.  I have heard and I have not seen reported reliably -- perhaps someone can tell us that a recent trip by our treasury officials has generated a reconsideration of work in Iran by Deutsche Bank, Commerce Bank, and HSBC.  If that is true, that is also very good news.</P> <P>In other words, things are not at a standstill; things are moving forward.  And I would say this is actually having a very negative effect on the Iranian economy.  So will divestment work?  Well, I think that these divestment measures, as I said, at the outset are about choice.  There should be no doubt in people s minds that they will continue to chill the climate.  Even companies that ultimately do go in or banks that do extend lines of credit are, in fact, thinking twice, three times, four times, five times.  They recognize there is a new seriousness.  They recognize that billions of dollars are at stake; in Florida, in California, these pension funds are not small amounts of money and they will make a difference; there is no doubt.</P> <P>But I do think that the effort to tighten up what have popularly been referred to as secondary sanctions that through the Iran Sanctions Act could very well be just what the Iranians are looking for, which is an opportunity to divide the Europeans and the Asians and the United States because in fact this is highly unpopular.  We need to recognize that; we need to recognize that, in fact, when the United States legislates against foreign companies, that it is unpopular with their governments.</P> <P>I have had a change of opinion on this in 10 years.  And one of the reasons I have had that change of opinion is because for years on end, the Europeans refused to recognize the threat; the Japanese also refused to recognize it.  I think we have seen a sea change.  And if we go forward and we begin to sanction foreign companies through more stringent sanctions in the Iran Sanctions Act, I think there will be serious repercussions for our multilateral effort.  It is something that while we may not ultimately heed the warning, we need to at least understand that there are serious problems out there.  I'm not going to talk any further.  Omeed, thank you.</P> <P>Omeed Jafari:  Thank you very much, Danielle.  I would like to open up the floor to questions.  Please wait for the microphone to be passed to you and when you receive it, please say your name and your affiliation.  Yes, sir.</P> <P>James P. Lucier:  I'm Jim Lucier with the Institute on Religion and Public Policy.  And my question is, I think, probably directed towards Patrick or Ken.  It seems to me that there already is an Iranian disinvestment law in effect and that is the one with the statutes to the Iranian petroleum statutes themselves.  As I understand it, the foreign investments are limited to 49 percent and that you will have to sell this investment to the state after -- I think it is 10 years or a certain amount of time.  And in the meantime, you are not sure about repatriating your profits.  So I do not understand why these Northern European companies are investing at all.  I noticed that Total is reconsidering its investment in the South Pars Gas Field.</P> <P>Patrick L. Clawson:  The conditions being offered by the Iranians are not particularly attractive compared to conditions being offered by other countries; although actually on some of the points you mentioned, the Iranians are not so bad.  But over all, the conditions they offer are not that attractive; however, there have been some companies that have been able to do rather nicely, Total not among them.  But for instance, Statoil of Norway has done quite nicely in Iran and is extremely active in the Iranian market.  But on the whole, the problems the Iranians have had attracting foreign investment into their oil and gas industry had been because of their poor terms and their reputation for corruption, and the interminable negotiations that are required because each Iranian official is scared that he will be criticized at home if he leaves a penny on the table for the foreigner.</P> <P>The corruption problem has gotten significantly worse recently.  There was a truly bizarre episode when one of the few foreign companies prepared to send an oil rig into Iranian waters to work there was a Romanian company whose oil rig was then boarded and seized by the Revolutionary Guard Corps and which was not exactly a good way to attract additional companies to send in oil rigs which Iran badly needs.</P> <P>And I would like us -- Europeans -- and Danny is quite right.  The Europeans have been very much more active than they were in the past.  I would like the European governments and the United States to be much more active in figuring out ways in which we can drain the money going to Revolutionary Guard leaders and other corrupt regime figures in the oil and gas business.  Ahmadinejad has been effectively displacing the former corrupt crowd of reformers with his own corrupt crowd and we ought to be targeting them hard.</P> <P>Omeed Jafari:  Yes, Ken.</P> <P>Kenneth R. Timmerman:  Good morning.  Ken Timmerman from NewsMax.  My question is for Ken Katzman.  We heard a lot this morning from Brad Sherman and others about tools in the toolbox and certainly, disinvestment is one of them.  And by the way, my own reading of the Iranian domestic situation is that it has gotten the attention of Iranian leaders and I think it is a very important tool to be using at the state level as well as at the federal level.  It works and it gets people s attention.  The treasury department s tools have been also extremely effective and have gotten the attention of the Iranian government.</P> <P>The one tool that has not been mentioned here and is not really being pursued effectively by the U.S. government at any level is the people of Iran, the pro-democracy tool.  There is a program - and this is why I want you to comment on it, Ken - with the State Department to spend this year -- I think it is around $31 million on democracy promotion programs.  But I have learned from the sources who were involved in this that, in fact, it is the State Department bureaucracy which is kicking and screaming and refusing to allocate these funds to effective programs.  And instead they think that instead of democracy promotion, which is the policy of the Bush administration and which, by the way, was also supported by Congress in authorizing and then appropriating this money -- instead, the policy should be to help artists and painters and singers and dancers.</P> <P>Well, if you could comment on that on the status of the program, that would be helpful.</P> <P>Kenneth B. Katzman:  Well, not all of that is open.  I mean, I cannot really talk about all of that because they are trying to protect the people that are getting the money so they have not specified who -- but part of -- there is a spigot.  Actually, Congress did earmark some of those categories; a small portion are for cultural exchanges, student exchanges.  So I would not say it is all meridian houses, art show, and all this stuff.  But a lot of it is for Radio Farda; a lot of it is VOA -TV as part of the overall -- but what I would say is the Department view -- I'm not speaking for them; maybe somebody is here.  But their view is this money is not about democracy promotion or regime change; it is about behavior modification.  That is their formal position.  </P> <P>This money is to assist the U.S. effort to moderate Iran s behavior to approximate that which was seen under Mohammad Khatami when he was President.  Now, whether one can get to that, whether that is really meaningful to get to that in the first place -- some would dispute that -- that was not some utopia in the first place but that is what they say as far as what the goal is.  As far as specifics of who is getting these funds, I just cannot elaborate on.</P> <P>Patrick L. Clawson:  Can I make a comment?  Ken, I would not be so negative about cultural exchange.  I mean, I think it is quite useful when the United States government offers substantial funding for artists to come to the United States.  Then they get back to Iran, have their passports confiscated and the regime arrested some of them yesterday.  It sends a message to Iranians on who is the problem here; the problem is not United States government.  Or when the U.S. government volunteers to bring Iranian athletes here to the United States to train for the Olympics and the Iranian government says, No.   It is very useful in countering this image which the Iranian government likes to peddle about U.S. hostility towards the Iranian people; it gets the message home to people.  And when the United States government has been advertising about how it is offering scholarships to Iranian students to come to study in the United States, a lot of kids were really pretty excited about that in Iran and then the Iranian government is putting enormous barriers in the way of doing this.  I think it sends a very useful message.</P> <P>It also sends a useful message to those who claim, especially in Europe, but even some in the United States that the U.S. refuses to talk to Iran, which is generally untrue.  The United States has had a long history of high-level dialogue with the Iranian government; very rarely has it been fruitful.</P> <P>But we have certainly also had an active program about reaching to the Iranian people, and I think we should be doing more of it.  And in fact, my criticism of the State Department and of the U.S. government is that how poorly managed many of these programs are and in particular how our legitimate security concerns about visitors have led to extraordinary bureaucratic bungling that has allowed the regime to portray the American government as being hostile to the Iranian people.</P> <P>So when, for instance, the United States decided to cancel the visa of a whole group of Iranians who were coming here for an alumni meeting, nobody told the Iranians before they got in the plane that the visas had been canceled.  So they arrive in airports across the United States, especially in San Francisco, to discover that they were instead going to be handcuffed, taken away to a jail, and then put on the next plane back at their own expense because nobody bothered to tell them the visa was cancelled.  Well, the episode got tremendous play in Iran.</P> <P>And so I would say that we should be doing more on these exchange programs and not less.</P> <P>Danielle Pletka:  Ken, you have heard us talk about this before, but I do think that it is important as we talk about the economic measures to actually talk about one aspect where you have an intersection of the kind of activism that we are looking for with Iranian economic interests with opposition to the regime and with the whole effort to isolate the regime economically, and that is through the trade unions.</P> <P>And what some of us -- and I hate to say it, but probably increasingly few us in this room remember is the good old days of Lane Kirkland and the AFL-CIO and the strong positions that American unions were willing to take - but particularly the AFL-CIO were willing to take - to stand up for groups like Solidarity and for labor union movements in the former Soviet Union and for labor union movements in Asia.  And they were really willing to stand up for people who were being thrown in jail because they were organizers of independent unions because they were people not who were standing up and saying, Let s overthrow the regime, but we are saying, Hey, I want to organize my workers because we want to get better pay and I do not think that you have the right in the government to put some of your people on my labor union board.   This is why Mr. Osanlou is in prison in Iran; this has not been made enough of an issue up.  </P> <P>And I think that if you want to talk about an intersection here of left and right, which is something that we have been talking about, this is an opportunity where we are speaking to Iranian workers -- highly unionized, the national Iranian oil workers union and others, extremely important and profoundly disgruntled.  Even in the highly state-controlled press you can read about how unhappy these people are.</P> <P>Again, they are not unhappy over nuclear weapons programs and I do not care that they are.  They do not like their government; we do not like their government.  We have shared interests and there is an opportunity that I know has been exploited in there in the end.  The Solidarity Institute, which is one of the core grantees of the National Endowment for Democracy, has done a very good work with it.  They are quiet about it, but the truth is that we can do more and let s call on everybody else.  Let s say, the Europeans who care so much about their labor unions, they too could do so much more.  There is an opportunity that is missed.</P> <P>Omeed Jafari:  Thank you.  Yes?</P> <P>Daniel Dombey:  Dan Dombey, Financial Times, again.  I was just wondering if at root you think that we [indiscernible] push for sanctions is going [sounds like]to likely to amount to anything more than what Robert Kagan once called give futility a chance.   Even if everything works, even if foreign companies change their behavior because of the kind of legislation you are talking about or the kind of threat about legislation; even if the UN actions become more effective and has changed qualitatively, do you really think that in the what even someone like ElBaradei says is five to seven years and others think is much less that remains before Iran can get the bomb that Iran will rethink -- its cadres will rethink the fundamental strategic decision that they made so long ago, that they wanted to have a nuclear option, they wanted to go down a nuclear path and that the Revolutionary Guards [indiscernible] endure the privations of the 1980s would endure this as well?</P> <P>Patrick L. Clawson:  Well, I ll first comment about that which is that the sanctions to date, as Ken and Danny have pointed out, that are adapted by the United Nations have been targeted at the WMD programs, the nuclear program in particular.  And they seem to be having some effect.  In November 2004, when the IAEA went to Iran in order to certify Iran s suspension of its enrichment programs, they said that Iran had 1,241 centrifuge rotors, the key element of a centrifuge.</P> <P>Well, the most recent IAEA reports said that Iran now had 1,340 centrifuges; there is a similarity in these two numbers.  Well, this suggests that there is a real problem that the Iranians have.  And by the way, I do not think that those 1,340 centrifuges are working very well.  At least from the data that we have available, they seem to be working very badly.  And that is not surprising.  I mean, making centrifuges is tough.  The United States does not have much experience in this area, but Eurenco, the company from which -- the Dutch-based company from which Aqcon stole the plans which then the Iranians got -- Eurenco is building a private centrifuge facility and hubs in Mexico.  Eurenco says that once it completes that facility and installs the centrifuges, it will be three years before they are at full commercial production.  Now that is in New Mexico.</P> <P>So if we can slow down Iran s nuclear program, we can, in fact, achieve some of the kinds of success we have over the last 18 years where Iran has been pursuing this nuclear capability for 18 years and has not gotten very far.  I mean, okay, we can say, Yes.  Look at all the centrifuges they got, but after 18 years?  Good grief.  And if we can slow them down so that we have not another three years but another nine years, that would be a much more opportunity for us to influence Iranian behavior.</P> <P>That said, I would agree with the thrust of your question, which is that it is unlikely that economic measures alone will be sufficient.  And I think that we should be pursuing, therefore, political and security measures.  And that on the political front we are doing not badly; we have gotten the Russians and the Chinese to sign on board to the idea of sanctions against Iran; we have gotten unanimous Security Council resolutions.  I think we need to be doing more in the security front.</P> <P>And in particular, since European countries have made all of these grandiose promises about security guarantees to Gulf countries -- I mean, France has signed the Treaty of Mutual Defense with Qatar, which I find amusing - Qatar defending France.  But it will be useful if European countries were to put some umph behind this.  And in the face of repeated Iranian threats to close the Strait of Hormuz, this would be a good time to have an exercise how to defend it.</P> <P>And at a time when Turkey is involved in accession talks with the EU, it would be useful if NATO were to actually -- the North Atlantic Council NATO were to order the military staff, which is not too busy these days, to prepare plans for how to defend Turkey from an attack from the East.  So I think that we should be doing more on defensive security measures that could impress upon the Iranian leaders that if they go down this route of pursuing a nuclear capability, that is going to make Iran s security situation worse because Iran s neighbors are going to take counter measures that will leave Iran worse off.</P> <P>Kenneth B. Katzman:  I just want to talk a little about where I think Congress is on your question.  I think what I'm hearing in Congress is they are willing to give the Security Council process a chance for a while and to see if the ratcheting up of pressure does, indeed, rattle Ahmadinejad, the regime and cause change.  What I hear from the Europeans and others is the idea that, Well, we will give it a chance, but if it reaches an impasse, then maybe we have to acquiesce and just accept a nuclear Iran.   That is not where Congress is in my view.  My view is they will not accept a nuclear Iran and they will push and keep pushing until some measures are taken, whether they are successful or unsuccessful.</P> <P>Now, obviously, we get into the issue of security measures at some point, and I'm in the camp that -- I'm not in the camp that sees no value or no possibility for security action by the United States.  I'm not convinced about joint action.  I think this action would have to probably be United States -- Central U.S. capabilities.  I am not a believer that these would be doomed -- would have no value.  I am of the view that if well designed and properly designed, they could have the effect of halting Iran s program.</P> <P>Female Voice:  And I just want to say one thing.  I think I disagree a little bit with Patrick about whether the Iranians have been most successful in their spinning and centrifuges.  I think they have made some pretty serious progress.  I also think that once they progress, they will have progressed and there will be no going backwards.  So I guess I disagree a little bit about that, but I do not disagree with thrust of what he says.  But, you know, there is a tendency when we have these conversations to talk about Iran and the nuclear problem, and I agree that economic measures alone are not going to cause the Iranians to suddenly rethink the wisdom of a program they have actually been pursuing since well before the revolution.  </P> <P>But it will slow them down and we also need to remember some other things.  It is not just us or even us Europeans or even Mohamed ElBaradei and Ahmadinejad; it is us - the Europeans, the U.N. Security council and Iran s neighbors and Hezbollah and Lebanon and Syria and Hamas and the Al-Qaeda people living inside Iran and the support that they are giving to now the Taliban in Afghanistan and the IEDs they are shipping into Iraq and their relationship with Muqtada al-Sadr, and the fact that the Saudis are spending sleepless nights ringing up people who they can find in Washington to say, When are you bombing Iran? </P> <P>These are all important factors, and they will go in a particular direction because they are also pressure points on the Iranian government. So I do think that it is important as we think about this not to look at it too one-dimensional a way.  There are a lot of pressure points -- we may not succeed, but there are a lot of people who are afraid of this and it is not just us Westerners who think the Iranians are bad guys; it is people who have been willing to do business and break bread with the Iranians in the past.</P> <P>Omeed Jafari:  Yes.</P> <P>Dmitri Ivanov:  I have a question for every panelist.  I'm Dmitri Ivanov with [indiscernible].  My question is for every panelist.  Do you personally consider any foreign company with investments, say, in Iran s non-energy sector to be a sponsor of terrorism?</P> <P>Patrick L. Clawson:  Well, I would say that it is quite amusing to watch how when European governments have considered the question of what kind of sanctions we might apply in Iran as we got tougher, that they came to the same conclusion that the U.S. Congress did long ago which is to say that the energy sector is a key point of vulnerability of Iran and that the income of the energy sector goes to the Iranian government, and that, therefore, we ought to concentrate on sanctions about the oil and gas sector.  I have no objections to investments in fields that are indeed run by private firms.  But the difficulty in the Iranian economy is that so much has been taken over by the Revolutionary Guards and by other corrupt areas.</P> <P>So for instance when the Clinton administration allowed the sale to the United States of carpets, you would say, Oh, well.  Great, because carpets are made by ordinary Iranians and sold here.   As soon as something like that got allowed, suddenly this became an opportunity for a dramatic corruption.  And guess who horned their way into the business and insisted on taking a lot of the money.  And so the real problem that we face with regard to Iran is that wherever a profit-making opportunity arises, very quickly, this gets taken over by those connected with the regime.</P> <P>Kenneth B. Katzman:  I would just add to what Patrick said that the carpet industry, too -- let s not have any illusions about who is weaving these carpets.  They are very beautiful carpets, okay?  These carpets are made by young girls, eight, nine, ten years old working in terrible conditions; there is no oversight so -- I mean, they are very beautiful and the product is very nice, but it s just a little aside [audio glitch]</P> <P>Omeed Jafari:  Yes, sir?</P> <P>Ron Dermer:  Ron Dermer from the Embassy of Israel.  It is a question to Dr. Clawson on -- to look ahead at a very interesting point that Mr. Katzman made that where international companies are going to come out, the Revolutionary Guard will step in.  But could it not be the case that by doing so internally within Iran, that could actually cause a huge problem for the regime and that while you may appear to be helping the Revolutionary Guard in the short term, the impact internally on the regime could be very, very problematic?</P> <P>So how would you see an Iran where international companies are leaving and the Revolutionary Guard is getting much, much stronger?  What would be the political dynamic?</P> <P>Patrick L. Clawson:  Well, first, Ken is certainly correct that the Revolutionary Guard is going to try to profit from any situation.  And it is going to be very difficult for us to drain their money.  That said, I'm actually more optimistic that we can find ways of doing this.  And I think, for instance, of the tiffs that the British down in Southern Iraq have had with the Revolutionary Guards.  And those of course have been -- both the seizures this year and the seizures a year and a half ago are, of course, entirely unrelated to what you can see if you stand there on the shore in Basra and you see all these little boats smuggling mostly alcohol into Iran and opium into Iraq.  But the Revolutionary Guards are up their eyeballs in that smuggling business.  And there are ways in which we can drain their income, so I think that we should try doing that.</P> <P>As for the Revolutionary Guards stepping in when foreign companies leave -- look, the Revolutionary Guards do not have the technical capabilities that the international companies are providing.  And so when the Revolutionary Guards have won contracts, their standard procedure is then to go to one of the losing bidders from the international companies and offer to give them the contract to actually do the work after the Revolutionary Guards have skimmed off the corrupt profit margin that they want.  And the Revolutionary Guards simply do not have the capabilities to replace the international firms, in fact, in any of these contracts that we are talking about.  And this process of the Revolutionary Guards then getting the contract, skimming off some money and giving it to the actual work to a foreign company can be well-observed by the Iranian competitors who lost the contract bid, and they are embittered.  And the comments from the Iranian business community about some of these large contracts that the Revolutionary Guards have won have been truly furious.  So yes, the revolutionary guards may make some money out of this process, but at a very high political price.</P> <P>Omeed Jafari:  Yes, all the way in the back.</P> <P>Julie Kosterlitz:  Julie Kosterlitz with National Journal.  I may have missed in an earlier session exactly what the scenario is that people would like to see come of this because it seems that both primary and secondary economic sanctions -- it seems like there is talk of behavior modification; there is talk of regime change periodically; there is talk of stopping or slowing a nuclear weapon.  And it is not completely clear to me what the scenario is, whether this involves negotiations, whether it looks like this would just lead to some kind of grand compromise and how this all fits in with the current dialogue that is going vis-�-vis Iraq.  In other words, where negotiations fit into this process.  Thank you.</P> <P>Danielle Pletka:  I'm not quite sure why -- you certainly did not miss anything earlier about this.  I'm not quite sure why all of those things are mutually exclusive. I think that the aim is to see an end to the Iranian nuclear weapons program and then you have a fairly diverse set of views from then on.  I think a lot of people -- I would hope all of them in that camp would also want to see an end to Iranian sponsorship of terrorism.  I think most of us would like to see them -- and the shipping of IEDs into Iraq and interference in our efforts and the Iraqi government s efforts there.  I'm betting that the Lebanese would like to see them get the hell out of Bekaa valley and stop supporting Syria, and we could probably go on from there.</P> <P>But as to how we get from A to B, this is meant to certainly slow them down to make them see either the wisdom of dialogue or to help the Iranian people see the wisdom of a new and different leadership, which after all will certainly benefit them.  It is always interesting to me that those who pride themselves on opposition to what the United States is not doing in Iraq seem to have absolutely no interest in the human rights and well-being of the Iranian people.  Seventy percent of them, regularly polled, suggested they do not really like their government very much.</P> <P>We have not talked at all about the Iranian-Americans who are being held hostage, but take someone like Haleh Esfandiari from the Wilson Center.  There is a lady who devoted much of her professional life to opening up dialogue and avenues of discussion with the Iranian regime.  She is sitting in Evan Prison in, I imagine, rather unpleasant circumstances right now.  It would be nice to see people like that released from prison, too.  So I think those are all the goals.  And perhaps my colleagues would like to say something.</P> <P>Patrick L. Clawson:  Yeah.  Look, I have a lot of goals in life and if I can make progress towards one of them, then I ll take what I can on that front even if I cannot make progress on other ones.  And so I would be -- would regard it as peculiar in advancing U.S. interests if we said that we have to -- we have achieved nothing unless we have achieved everything.  And I ll be happy to take modest progress in some fronts</P> <P>And I'm also not a believer in magic bullets, and I do not believe in putting all my eggs in one basket.  So I like to have a whole bunch of different policy instruments that I'm pursuing simultaneously.  And there is going to be times when some of those policy instruments do, in fact, conflict with each other and some of those objectives do conflict with each other.  And that is very common in formulating our foreign policy and we do have to make sometimes difficult trade-offs in those fronts.  And if the Iranians were to approach us about some kind of compromises that required us to make difficult trade-offs, we would have to think through about that one.  But at least at the moment, we do not seem to be particularly in that situation.</P> <P>The Iranian hard-liners seem to feel that they are on top of the world and they can blow us off on every single solitary issue you can think of.  And they seem to be quite uninterested on making progress on any issue in any form.  And so at the moment, we do not particularly face those difficult questions. And it is striking -- the extent to which the Iranian government has simply ignored offers of concessions and compromises, whether made by Mr. Solano, the Europeans or whether made by the Russians.  And under those circumstances, it seems quite theoretical for us to be discussing what kind of compromise we ought to be offering next.  I think we are going to have to press the Iranians rather harder, make the choices starker between bigger sticks and bigger carrots before we are going to discover if they are interested in some kind of a compromise.</P> <P>That said, I should add that negotiations with Iran on business matters as well as political matters have usually been characterized by stalemate until breakthrough.  And so there can years of stalemate and then sudden breakthrough.  And Iran negotiations are not typically modest progress until you reach final agreement.  And so we could be on the brink of a breakthrough without knowing it.</P> <P>Kenneth B. Katzman:  I would just add -- you mentioned a regime change trend in U.S. policy and I would have to say, based on what I'm hearing, I do not see that; I do not see a regime change component.</P> <P>There has been flirtation with it; there are elements in the administration that believe that everything that is being done now will fail and we need to -- and maybe this group will push it at some point, although obviously the time left to the administration is getting short.  But as of today, I would have to say I do not see that component present. </P> <P>Now those who believe in that component, I think there is a debate because at the times the administration has flirted with this idea, the belief was we need to overturn within the Persian structure -- the unions, the women, the journalists, the students -- Persian ethnicity.  There are others who feel that that is probably not going to bear fruit and we would need to rethink and look at a periphery strategy of helping Sunnis, Baloch, Kurds, Arabs in the southwest against the Persians.</P> <P>Now that is a debate I think that will never be resolved; but as of right now I do not see that as a component of U.S. policy right now that is very active.</P> <P>Omeed Jafari:  Thank you very much.  That concludes this morning s panel. I would like to invite all of you to lunch served outside in the hallway.  And also note that Senator Kyl is running just a bit late.  There is a vote in the Senate.  He should begin his remarks hopefully around 12:05, 12:10.  Thank you.</P> <P> </P> <P>[Luncheon and Keynote Address]</P> <P>Christopher DeMuth:  Ladies and gentlemen, can we come to order please for our keynote luncheon talk?  Jon Kyl of Arizona served four terms in the House of Representatives, was first elected to the United States Senate in 1994 and was reelected by a large majority again to his 3rd Senate term last fall.  He is a member of the Finance and Judiciary Committees and is the ranking minority member of the Finance Subcommittee on Taxation and IRS Oversight and of the Judiciary Subcommittee on Terrorism, Technology and Homeland Security.  He is the third ranking Republican in the Senate and Chairman of the Republican Conference.</P> <P>Senator Kyl is one of those Senators that actually merits all of the florid encomiums that senators pour upon each other and that think-tank moderators pour on them when they come to our councils.  He is an enormously earnest, diligent, hardworking senator; a very studious man who has become deeply knowledgeable about matters of national security and intelligence and homeland security; and is the one of the truly important leaders in the Senate on defense issues.  And he showed the country and his party a great profile in courage in his leadership on immigration and border security issues earlier this year.</P> <P>He has also been a leader in coming to grips with the current problems in Iran and is the author of one of the leading bills, one of many contenders in both the House and the Senate for providing effective means of Iran divestment.  I m delighted that he would take time to come downtown today to speak to us on this subject.  He has -- I m really honored that he has paid attention and participated in AEI Councils over the years and I m particularly delighted that he would address us on this important subject today.  If you would, please give a warm welcome to Senator Jon Kyl.</P> <P>Jon Kyl:  Thank you, Chris.  Thank you very much.  Thank you.  It is a real pleasure always for me to interact with the scholars at AEI and all of its supporters and I appreciate the opportunity to be here.  As usual, it appears that it is going to be a little bit difficult for those on my left and I to communicate with each other. </P> <P>Male Voice:  [Inaudible]</P> <P>Jon Kyl:  Oh, you have got a screen there.  Well, I have been trying to figure out how to reach the left and that may suggest some new technological means of doing so, since it has been hard philosophically.  But in any event, thank you.  Because of the time here, I think there are some things that we can stipulate to and so I would like to jump right into the subject, the first stipulation being that we all agree that we must act on the multiple threats posed by Iran.  I know we know what those threats are but to summarize, its indefatigable march to acquire nuclear weapons; its missile technology; its direct funding and training and supplying of forces attacking Americans in Iraq; its support of Hezbollah, Hamas and other terrorist groups, including Taliban in Afghanistan; its incarceration of American citizens on trumped-up charges and much more.  These actions confirm what was said in the Administration s National Security Strategy of 2006, and I quote, that the United States may face no greater challenge from a single country than Iran. </P> <P>Yet Western nations react as if a nuclear-armed Iran is no big deal.  Why?  And what should we be doing about all of this?  Should we at least be taking actions commensurate with our declarations about the threat?  Two comparisons come to mind -  one with disastrous consequences, one which resulted in victory.  I speak of the run-up to World War II first and of course the victory over the Soviet Union in the Cold War.  During the run up to World War II, Europe failed to heed the warnings not just of those like Winston Churchill but of the Nazis own promises.  As Thomas Sowell noted in a column earlier this week, quoting Churchill, There never was a war in all history easier to prevent by timely action.   I think each of you can see the immediate parallels to the situation we face today with respect to Iran.</P> <P>Many who cheered on Chamberlain s disastrous policies then, seeking peace at any price, returned during our long battle with the Soviet Union and they told us that our strategy toward the Soviets should be d�tente, featuring bilateral, mutual accommodations to allow peaceful coexistence with the Soviets.  In the end, we prevailed by taking a series of small but decisive steps that undermined Soviet credibility and economic might.  Nathan Sharansky knew we would win when he read Ronald Reagan s characterization of the USSR as the Evil Empire.  Once you understand your enemy, you can defeat him if you have the will.</P> <P>So let us first of all speak to what opportunities are presented in addressing the challenges presented by Iran,   opportunities that characterize the current definition of Iran; I call it Iran s soft underbelly.  As with any conflict, I think you start by surveying the field - assessing your assets and liabilities and your problems and your opportunities.  And there are opportunities in Iran.  Because of time constraints, let me limit them to four specific areas here and then discuss ways that we could take advantage of these opportunities to change the course of history regarding Iran and potentially eliminate the military threat it presents.</P> <P>The first is Iranian public sentiment.  I m sure that many of you were cheered by the news and the Wall Street Journal editorial recently discussing a poll by a group called Terror-Free Tomorrow Foundation.   This poll conducted by Farsi, by phone with over a thousand interviews covering all 30 provinces of Iran, offered empirical evidence of discontent with the current system of government, the state of the Iranian economy and isolation from the West.  Some of the findings:  Close to 70 percent of Iranians favor normal relations and trade with the United States.  Indeed, in exchange for normal relations, a majority of Iranians even favor recognizing Israel and Palestine as independent states, ending Iranian support for any armed groups inside Iraq and giving full transparency by Iran to the US to ensure there are no Iranian endeavors to develop nuclear weapons.  That is astonishing.  </P> <P>In this context, nuclear weapons are the lowest priority for the Iranian people.  Sixty-one percent were willing to tell pollsters over the phone no less that they oppose the current Iranian system of government.  More telling, over 79 percent support a democratic system in which the supreme leader, along with all leaders, can be chosen and replaced by a free and direct vote of the people.  The survey also leaves no doubt that the Iranian economy is the number one issue of concern for Iranians from every region, every age and educational level and class; eighty percent believe the present economic situation in Iran is fair or poor and 9 out of every 10 believe that creating new jobs and curbing inflation should be very important priorities for their government.  Indeed, three-quarters favor Western investment to create more jobs as well as medical education and humanitarian assistance from Western countries to Iranian people in need.  After reading this polling data, I m reminded of what Ayatollah Khomeini said in a TV interview in December of 2005:  What destroys regimes is the people s resistance, their determination and their struggle.   Let s hope he is right.</P> <P>Second, we should be aware of recent reversals for Ahmadinejad.  He suffered a profound humiliation in the polls in last December s municipal elections in Iran; about 90 percent of his allies lost and his critics have been emboldened as a result.  Additionally, many experts believe that Supreme Leader Khameini is trying to curb Ahmadinejad s authority in order to limit the confrontation with the international community, and it has even been reported that he has given the green light to parliament to criticize Ahmadinejad s performance.  Nonetheless, Ahmadinejad is tied to the Revolutionary Guard and other revolutionary institutions, which are very powerful in Iran and he might weather this criticism.  The question is at what cost and for how long?</P> <P>Third, speak to the weak economy in Iran.  With its enormous natural resources and talented people, it should be among the most prosperous countries in the world.  But counter-productive economic policies, mismanagement, widespread corruption and misguided goals such as the quest for nuclear weaponry have dimmed Iran s economic prospects.  Unemployment was 11.5 percent the year ending in March, 1.2 percent higher than the previous year according to the Iran Statistical Center.  Between 700,000 and a million people annually enter a job market that creates only 300,000 to 500,000 jobs.  Additionally, the World Bank has noted that unless the country moves quickly to a faster path of growth with employment, discontent and disenchantment could threaten its economic, social and political system.  Ahmadinejad s decision to inject huge amounts of oil money into the Iranian economy and engage in deficit spending has stoked inflation, which has made it even more difficult for the poor to make ends meet.  The prices of such basic items as beef and poultry and fruits and bread have increased by 25 percent.  Rents have risen by 30 percent.</P> <P>The economic deterioration has occurred in spite of a 37- percent increase in Iran s hard currency earnings derived primarily from oil.  The oil revenue last year, by the way, was about US$50 billion.  But where is all the money going?  Well, much of it is being spent on its WMD programs, on Hezbollah, on insurgents in Iraq and Afghanistan and the like.  None of the economic promises that Ahmadinejad and others have made have been kept and the people realize that he is to blame, not some external antagonist.  Witness a recent open letter by 57 Iranian economists; or last January one-half of the parliament criticized Ahmadinejad for his economic results or lack thereof, which is something that is a real force on the street.</P> <P>Fourth is the energy sector itself, a double-edged sword for Iran.  We know that Iran holds an estimated 10 percent of the world s proven oil reserves.  Its oil exports generate 80 to 90 percent of the country s total export earnings and 40 to 50 percent of its total government budget.  However, its production is declining from a high of six million barrels per day when the Shah was in power to less than four million barrels a day since then.  Further, this output is continuing to decline, as the country has to struggle to pump from aging fields.  Roger Stern, who is an economist at John Hopkins, has predicted that Iranian oil exports could decline to zero to 2015 without a significant increase in investment or a decline in domestic consumption.</P> <P>Despite its plentiful oil reserves, Iran right now has got a refining shortfall and imports about 42 percent of its gasoline.  Costs for the Iranian fiscal year ending in March 2007 are expected to be similarly high, nearly US$7 billion in regime funds, to defray the high cost of gasoline to Iranian consumers.  In fact - and this is significant - Iran will spend more money on gasoline and other subsidies next year than it will receive in revenue from oil and gas revenue, according to IMF projections.</P> <P>Given these realities, Tehran is faced with the choice of either raising the price of gasoline at the domestic pump or begin petroleum rationing.  The regime has attempted rationing; the result was mass protests, a tax on gas stations as this rationing went into effect.  Beyond burning gas stations and looting stores in Tehran, riots took place in major cities like the Holy City of Meshad in Iraq where Iran s heavy water plant is located.</P> <P>It is clear, in other words, that all is not well in Iran.  So we now must determine what steps we can take to take advantage of some of these opportunities that present themselves to us.  So let me now turn to four or five ways in which we could take better advantage of these opportunities.</P> <P>Through a careful strategy of disinvestment, smart sanctions, asset freezing, international trade limits and better targeting of Iran s leaders, we can follow up on the existing discontent in the street.  The eventual result could be regime change.  Near-term pressure could cause policy shifts within the existing regime.  Amazingly, neither Washington nor our international allies have yet seriously tackled the economic dimension of the current crisis with Iran, or adequately explored the financial leverage by which the Islamic Republic can be influenced.  This is surprising, given the formidable arsenal of economic tools that are available to the West, that is to say, assuming we understand the threat.  </P> <P>It is fashionable for us to blame our international allies for failing to be sufficiently strong in this regard but the United States must focus on our own shortcomings as well.  For example, we push and push our allies to pass tougher sanctions such as Security Resolution 1747 but then we take months to slowly implement the sanctions here as contrasted with our European allies.  Such an approach undermines our authority to expect more of our allies and this is just one example.  So what are some of these opportunities?  First, the obvious subject of this conference today, disinvestment.  Thanks to the work of AEI and Conflict Securities Advisory Group and the Center for Security Policy and others, we know with certainty that there are a large number of companies that are key participants in Iran s economy that could be affected by a disinvestment policy.  </P> <P>These companies are among the largest in the world; they are held in most American investor portfolios and public pension funds, including the Thrift Savings Plan that invests on behalf of Members of Congress and many other US government officials.  The investments represent hundreds of billions of dollars.  US disinvestment could have a significant effect on their ability to raise capital.  But in my view, for divestment to work it needs to be applied broadly.  I m troubled by efforts that only seek to target one or two of the economic sectors.</P> <P>It is true that Iran s energy sector is ripe for targeting but money is fungible and any investment in Iran will free up capital that Ahmadinejad can then use to stay in power and invest in pursuits such as developing more advanced ballistic missiles, the nuclear program and so on.</P> <P>So I think we should target total disinvestment from Iran rather than limited segments of the economy and also, of course, other countries such as Syria, North Korea, Sudan, Cuba and the like.  For public sector holdings, this means divesting from all companies that choose to do business with terror-sponsoring states.  At the same time, it means revealing publicly which companies are doing business in countries like Iran, making them answer to the public for providing investments that literally fuel terrorism.  State and federal legislators and public pension fund managers should work together publicly and vigorously develop a disinvestment plan that can be effective in the short term.  This will inform countries and the regime in Tehran in particular that we mean business.</P> <P>When disinvestment from the apartheid regime in South Africa was the popular rage, nearly 200 public pension funds participated in that program and that regime was not killing Americans or threatening to obliterate other nations; we should be at least as aggressive with Iran.  Obviously, disinvestment can be risky.  It should be reserved for only the most egregious and threatening regimes, or else, every faddish, politically-correct cause will foster calls for disinvestment policy and that is not in our best interest.  But that is clearly not the case with Iran today, a regime that denies the holocaust, that threatens other nations with extinction, sponsors terrorism against the United States and so on.</P> <P>Well, you will talk more about disinvestment in this conference so let me quickly now turn to another one of those opportunities, dealing with the energy sector in Iran.  Congress, of course, congratulated itself for passing the Iran Sanctions Act, formerly known as ISA; the problem is the act has not been used.  And it is another example of how US policy fails to live up to our rhetoric, fails to follow through.  And I submit that never using a tool that you have been giving is worse than not having it in the first instance because it says something about your willingness to stand up to a country.</P> <P>Let me give you an example.  Since the beginning of the year, at least two Chinese companies, the China National Offshore Oil Corporation and PetroChina, which is a subsidiary of the Chinese National Petroleum Corporation, have signed deals in excess of US$100 billion with Iran over the next 25 years.  And there are billions of additional projects pending with countries like Malaysia, Spain, Pakistan, and India.  Under ISA there are a broad array of sanctions and then you have seven in particular that the President may invoke.  I believe that the original deterrent effect of ISA and, more importantly, the starvation of Iranian energy sector could be achieved if the State Department and the president were to announce tomorrow that anyone of these pending deals or the deals consummated with Iran since 1999 are investments in the Iranian energy sector; that is the key phrase.  Within the reach of ISA and the entities involved will be subject to sanctions; for example, restricting the investing company s ability to import into the United States.  That would be a message that would be received.  </P> <P>Now obviously, that is not painless.  As you will recall in 1998, when the French Total Oil Company invested in Iran s energy sector we backed down from using the Iran Sanctions Act because of the threat of a trade confrontation from Europe and you know that such a confrontation would be threatened again.  But we have got to ask:  Which do we fear more?  A trade dispute with Europe or China, or what Tehran will do with the revenues of a fully reconstituted energy sector?  If the Administration continues to do one thing while saying another, Congress may have to force the matter by removing the waiver authority presented that were provided for in the Iran Sanctions Act.</P> <P>Here is another opportunity, the multi-lateral sanctions that by any measure had not been particularly effective.  The Security Council Resolution 1747 demands that Iran suspend uranium enrichment activities by May of this year.  Of course, the report of May 23rd confirms that Iran did not comply and yet another round of negotiations has begun on yet another resolution.  With the expiration of the deadline for compliance with this Resolution 1747, we should make it a top priority and test the good relations with our allies to see that a new security resolution, a Security Council Resolution, is adopted and not buy into the Iranian ploys for more time, which, of course, simply help them pursue their nuclear program.</P> <P>We should immediately seek sanctions that will not merely require reporting when an Iranian government official travels, but to ban the travel.  We should not merely ban arms transfers by Iran; we should ban transfers of arms and technology to Iran.  And we should not simply freeze assets of specific Iranian entities or banks but of all Iranian financial assets abroad.  If cutting off Bank Saderat from the US financial system caused pain to the regime - and it did - then cutting the entire financial system out of the world s commerce would make the regime s ability to do business nearly impossible.</P> <P>Achieving these sanctions is obviously very, very difficult.  But they are necessary, given the degree of threat that Iran is posing.  As such, we need to make sure our allies understand our resolve.  And this means conditioning our relationship with Russia on its support.  And the same goes for China; with their voracious thirst for Iranian oil they have resisted supporting meaningful sanctions.  The measure of how seriously we take the Iranian threat will be demonstrated by the pressure that we are willing to impose on a country like China.  We should make clear to the Chinese leadership that, given the gravity of the threat, China must choose between our friendship and Iran s.  Let s not forget that the growth of the Chinese economy is fueled not merely by Iranian oil but also by access to our markets.</P> <P>Here is another opportunity - taking on the elites and their economic power in Iran.  Iran s economy is dominated by very well-connected and powerful people who have formed groups arranged into these relatively tight little hierarchies that control between 33 and 40 percent of Iran s national GDP and about two-thirds of the country s non-oil GDP.  These oligarchical groups - they are called bonyads - control vast assets given to them by the state and they allow these elites to build support for the regime among the working and lower classes by doling out various forms of benefits.  Given these economic hierarchies, targeted financial measures that restrict the ability of these individuals and organizations to gain access to international markets and curtail their capacity to engage in commerce are likely to have an immediate and pronounced effect on regime decision-making.  </P> <P>However, far from targeting these elites, the Clinton Administration actually narrowed our sanctions, for example, by lifting the embargo on the import to the US of Iranian pistachios in addition to caviar and the rugs.  This is a big deal.  I note that the Bush Administration has taken no action to reverse that decision.  Why are we not taking these simple steps like re-imposing the embargo?  No less than the Rafsanjani family, the family of the former president, has built a fiefdom in Iran off the proceeds of this annual trade in pistachios.  Why have we not frozen the assets of all of these organizations, striking at the very power center of the ruling regime?</P> <P>Finally, let s speak to the issue of public diplomacy.  To put it simply, Iran today is one of the few places in the Greater Middle East where the regime is anti-American but the people are not.  Yet we have consistently failed to take advantage of this reality.  We have allowed our public diplomacy to atrophy since the Cold War.  Instead of challenging the lies and propaganda of Ahmadinejad and the mullahcracy [sounds like], we have public diplomacy [indiscernible] Britney Spears.  Instead of the original content extolling American exceptionalism as demonstrated through the Federalist Papers and the Declaration of Independence, we give them rebroadcasts of CNN.</P> <P>It is not enough merely to use all of the ideas on investment and multilateral UN sanctions and actually using our own Iran Sanctions Act.  If we just do that we should not be surprised if the leaders in Tehran use these actions to rally the inherent nationalism of the Iranian people, including the youth of Iran who are predisposed to be receptive to the American message, not unless we explain to the Iranian street what we are doing and why we are doing it.  Our public diplomacy efforts were successful during the Cold War because they were sustained and they were concentrated and they were unabashed.  These efforts did not shy away from recognizing, for example, the evils of the Soviet system.  Presidents Reagan and Bush understand that you cannot defeat your enemy if you are afraid of saying why your enemy is wrong.  You must again make this a part of the outreach of these particular broadcasting systems.  I suggest more Thomas Jefferson and less Anderson Cooper will go a long way to explaining our opposition to the Iranian regime and our friendship for the Iranian people.</P> <P>In conclusion, it is American policy to take no option off the table, and that includes military action.  President Bush has correctly said that we cannot allow the world s most dangerous weapons in the hands of the world s most dangerous regime.  But force is not the best policy.  The problem is that failure to take advantage of some or all of the tools that I have discussed here only serves to make it more likely that force might be used.  By taking serious actions I believe we can prevent Iran from obtaining nuclear weapons.</P> <P>Ronald Reagan observed that history teaches that war begins when governments believe the price of aggression is cheap.  For the Iranian regime, the price of their aggression has been too cheap for too long.  We have the ability to raise the price to a point that the regime will not be able to bear the cost just as we did with the evil empire not that long ago.  Do we have the will to make Ahmadinejad and the ruling elite in Iran pay that price?</P> <P>Christopher DeMuth:  Senator Kyl, thank you for that very impressive and persuasive presentation.</P> <P>Jon Kyl:  You are welcome.</P> <P>Christopher DeMuth:  Senator Kyl has time to take a few questions.  I will call on people.  I believe we have a few microphones roving around the room.  If I could ask you to please identify yourself briefly before your question.</P> <P>Oman Seisan:  Oman Seisan from Radio Farda.  Do you see engagement policy and divestment policy mutually exclusive?  And if not, how do you propose at tailoring a policy on that?</P> <P>Jon Kyl:  Sir, I do not see them as mutually exclusive so long as they are done the right way.  Engagement with a regime that you characterize as evil has to be done in an appropriate way.  And by that I mean it should not be done in a way that suggests to the people of the country that we support what the regime is doing or that we are willing to make inappropriate accommodations with that regime.  It does not mean that you do not discuss things like we are discussing with the Iranians right now, namely, their, as the Administration calls it, quite unhelpful action against US troops in Iraq.  That pretty well takes the cake for euphemisms, I think.  </P> <P>So you have to be careful how you do it so that you do not undercut the efforts at reaching the people of the country who you are trying to reach with a message, which is we do not support - in fact, we oppose - the regime which is repressing you and causing you pain and discomfort and denying you freedoms.  But it does not mean that you are not willing to engage them just as we did during the Reagan years and the Cold War.  And of course, at the same time you are doing that, it is perfectly appropriate to tell the American people and people around the world what international businesses are doing business with such a regime.</P> <P>Tapio Christiansen:  Thank you.  My name is Tapio Christiansen from KREAB.  My question is regarding the presidential waiver authority.  What, in your considered opinion if I may ask, do you see as the prospects that the president will, in the near and medium term, be presented with legislation that would restrict waive authority under ISA?</P> <P>Jon Kyl:  I thought about that question before I came, and I m not sure what it would take but I suspect because of the traditional view that there should be some ability of the president to waive such congressional tools and not make them a mandate, it would probably require a very foolish and aggressive action on the part of Ahmadinejad or the Iranian government to stimulate the kind of reaction that might be -- would undoubtedly be necessary to create the political will to do that.</P> <P>Ken Timmerman:  Senator, Ken Timmerman from Newsmax.  Could you give us your impression of the current status of Al Qaeda in Iran?  We know that the son of Osama bin Laden is in Iran.  We know that Saif el-Adel is in Iran - he is a military leader - other top leaders.  What do you think is -- what is your understanding -- what is the information that you have been receiving of the status of Al Qaeda in Iran today?</P> <P>Jon Kyl:  I m not the best person to give you a chapter and a verse on that, obviously, but we do have some information that is public on it.  Steve Hadley addressed a defense-working group, which I co-chaired with Robert Byrd yesterday in the Senate.  And among the subjects discussed, he touched on that.  I have the impression that it is a complex relationship.  As you know, Iran is ostensibly holding under house arrest key Al Qaeda leadership.  It is also publicly known, I believe, that Iran has assisted at one time or another Al Qaeda movement both through Iran and also into Afghanistan and into Iraq and presumably has supported either Al Qaeda or Al Qaeda-related organizations with other kinds of support.</P> <P>I suspect that Ambassador Crocker or our interlocutors with the Iranians in these discussions that focus on, right now, only Iran s actions against American interest in Iraq will also focus to some extent on the question of Iran s support for Al Qaeda within the country of Iran itself.  And beyond that, I do not think I can say a whole lot more.  That is probably not a very helpful answer.  You probably know more about it, Ken, than I can say here.</P> <P>Dan Dombey:  Senator, Dan Dombey, Financial Times [cross talking] --</P> <P>Jon Kyl:  Before -- This is one of the problems.  We are going to try to tell them why it is in the Iranians -- why it is in their best interest not to support Al Qaeda, why Al Qaeda is as much a threat in the long run to Iran as they are to us.  I always have difficulty with diplomacy which is predicated on the notion that if only we could explain to people why something is in their self-interest then things would be okay.  That may be an appropriate thing to think about but with shrewd countries like Iran or China or others, I always found it difficult to understand a diplomacy predicated on the notion that all might be well if we could just persuade them what was in their best interest.  They have a much better concept of that than we do, I suspect.  I m sorry.</P> <P>Dan Dombey:  Dan Dombey, Financial Times.  Can I ask whether you feel that in final analysis, US measures may be more effective than multilateral measures contemplated by the UN?  I ask that because you said earlier that it may -- you know, what are we afraid of more, a trade war with Europe or China, or Iran using this money that it gets from its energy sector?  But of course, if actions are taken against European companies, big European companies with lots of lobbying power, that is very likely, as one of the speakers said today, to affect whether European governments are willing to back a new round of sanctions of the UN, and there maybe some trade off there.  How do you see the relative merits of those two approaches if it does come to such a trade-off?</P> <P>Jon Kyl:  That is a very good question and, of course, it is impossible really to answer.  One can always say it would be best if we could have a combination of both in which European allies would be shoulder-to-shoulder with the United States in imposing some kind of sanction regime.  It seems to me that disinvestment is a proper and almost necessary component of any kind of financial pressure in any event.  And that it might be just as easy for European countries to agree that it makes sense for international companies, including those headquartered in Europe, to be -- their trade with Iran to be publicly known.  It might be just as useful to have that as one of the economic incentives for Iran as any other kind of sanction that might be imposed by their governments.</P> <P>So I would hope that -- now, maybe this is a vain attempt to do what I just suggested was a vain attempt but I would hope that we could convince the Europeans that it is in their best interests to support transparency, which is the primary condition for disinvestment as one of the easiest and best ways of pressuring the regime.  In many senses, it is the first step to tougher sanctions on down the road, so rather than seeing it necessarily in competition, I really do look at it as something that might afford some common ground for us at the end of the day.  But I do not dispute the fact that it could raise huge issues and retaliation.</P> <P>Christopher Holton:  Christopher Holton with the Divest Terror Initiative.  Sir, do you also think that there is a moral aspect involved in U.S. public pension systems aside from the policy implications from U.S. public pensions systems investing in companies that provide corporate life support to the regime in Iran and other terrorist regimes?</P> <P>Jon Kyl:  Yes, I do.  And the only caution I -- the only caveat I have attached to that answer is that we each have a little different idea of the hierarchy of values, let s put it that way.  And one person's moral cause is another person's something else.  And I do think that those of us who support divestiture always have to bear in mind that this is a double-edged sword.  This can be used in pernicious ways by every group that mounts a moral crusade against - you fill in the blank.  And therefore, we have to be very careful to limit it to those most egregious situations as I noted in my remarks.</P> <P>Since Iran, in my view - and I think most views would clearly fall into that category - I think we can easily justify both on geo-political grounds and on moral grounds.  So the answer is clearly yes but I do put that little caveat that each of us must be aware of here when we present divestiture as a potential weapon here.  And sometimes these weapons can turn around and be used against you if you are not careful.  For example, it does not take a genius to figure out that as public enemy number one in the world, the United States could clearly be the target of all sorts of disinvestment campaigns by environmental groups or -- you name it.  I do not want to speculate.</P> <P>Christopher DeMuth:  Senator Kyl, thank you for being with us.</P> <P>Jon Kyl:  Chris, thank you very much for the opportunity.</P> <P>Christopher DeMuth:  [Inaudible]</P> <P>Jon Kyl:  You are very welcome, thank you.</P> <P>Christopher DeMuth:  We will adjourn for just five minutes and then our next panel, and a very interesting one indeed, will begin.  Thank you.</P> <P> </P> <P> </P> <P>[Third Panel] </P> <P>Danielle Pletka:  Let me just give everybody a two-minute warning, if I might.  We will start in about two minutes.  If people want to move toward the front, that would be fine.</P> <P>Good afternoon, everybody.  If I can ask everybody to be seated for our last panel this afternoon.  If I may make one housekeeping note on your agenda, you see three guests and me, and on the dais you see only two.  New York State Senator Craig Johnson, unfortunately, and, really, regretfully - excuse me -- was not able to be here today.  Unfortunately, the New York state legislature is back in session to discuss pressing legislation.  He is the author of the Iran Economic Divestment Act which is winning [sounds like] its way through the legislature in New York and that can be found in your conference packet.  But I think that we will be very, very well served by our two guests here today.</P> <P>If I may, ladies first, introduce them; Sarah Steelman is the first Republican woman in Missouri history to be elected to the Office of State Treasurer.  She is the 44th state treasurer and she was sworn in in January of 2005.  Prior to that, she served as the State Senator again for the 16th Senatorial District of Missouri.  She is responsible in her position for the management of more than $20 billion in Missouri's annual revenue and oversees the investment of approximately $4 billion in the state's portfolio.  As I said earlier, we are not talking about small amounts of money when we talk about state funds.</P> <P>In her first months in office, she eliminated foreign-owned investment companies from the state's preferred list of financial brokers and dealers to protect tax dollars against terror-related security risks.  She won approval for screening measures to prevent investments in companies identified with financial ties to the governments of nations designated by the U.S. State Department as state sponsors of terrorism; for example, Iran.</P> <P>Among the things that she has been responsible for, she has coordinated strict anti-terror investment policies in the State Treasurer's Office; she has created the nation's first Public Pension Anti-Terror Screening and Divestment Procedures for the Missouri State Employee s Retirement System.  She has developed the nation's first terror-free public investment fund with the Missouri Investment Trust.  And she has offered - the first in the nation - a private terror-free mutual fund and a state college saving plan, the Missouri Saving for Tuition.  Here, we have a woman with a lot of ideas and I'm really pleased to welcome her here.</P> <P>Next to Sarah, we have Florida State Senator Ted Deutch.  He is a freshman state senator representing Florida's 30th district and in his other full-time job - I understand an attorney with the law firm of Broad and Cassel - he sits on a whole variety of committees in the Florida state legislature, including banking and insurance, finance and tax, fiscal policy and others.  And as a freshman senator in the minority, he introduced and passed the nation's first State Divestment Legislation, now law.  The Protecting Florida's Investments Act, which I believe you will also find in your folder, was signed by Governor Crist in June of 2007.</P> <P>Just for your information, that legislation requires that Florida State Board of Administration make efforts to identify companies operating in Sudan and Iran in which state funds have direct or indirect holdings, or could possibly have such holdings in the future.  It also targets companies who have more than ten percent of their total revenues or assets linked to Iran and involved oil-related activities or mineral extraction activities if the companies fail to take substantial action to end its operations in Iran, something we talked about a little bit earlier.  His legislation also requires any state funds from acquiring new securities of any company operating in Iran and Sudan.</P> <P>I'm sure that both of you have a great deal to say and I look forward to hearing it and to an opportunity to chat with our audience a little bit later.  Would you mind starting, Sarah?</P> <P>Sarah Steelman:  Thank you so much Danielle and I'm grateful to the American Enterprise Institute for hosting this and having it.  I very much appreciated Senator Kyl's remarks and -- you know, I'm grateful to be here to provide a little perspective from the show-me state and I do believe that this is one of the most critical issues that is facing our nation and these are really unparalleled times and they need leadership on these issues, so important and so very needed.  As State Treasurer and as a mom, I really think that too often we really forget what is at stake here in our national debate.  And what this is really about is our families and it is about our husbands and our wives and our brothers and sisters and sons and daughters, and it is about keeping them safe and secure.  And in an effort to do so, it seems strange that we send young men and women to defend us in Iraq and some of whom pay the ultimate sacrifice; however, we have not yet used one of our most powerful weapons here, which is America's financial markets.</P> <P>We face serious threats around the world from terrorists and terrorist-sponsoring nations and it was shocking to us in Missouri to find out that we in America are funding the very enemies we are fighting through our investments, literally, billions and billions of dollars worth.  And I believe Missourians are in line with the rest of this nation on this issue.  A recent poll that was conducted for the Senate for security policy showed that more than 80% of those surveyed say that if they learned that a company in which they had invested was found to be doing business in a state sponsor of terrorism, like Iran or Sudan, they would either sell that investment or demand the company to cease doing business with the terrorist-supporting nation.</P> <P>The attacks that took the lives of thousands on 9/11 cost money.  The roadside bombs that kill our soldiers in Iraq and Afghanistan cost money.  The nuclear weapons Iran hopes to use on this country cost money.  So, these threats that we face can be defeated but it will take a resolute and comprehensive response.  The war on terror should be fought on this new battlefield, this economic battlefield.  So, let s cut to the chase; there are literally hundreds of billions of dollars that are making their way directly into the government of terrorist-sponsoring states like Iran, Syria, North Korea and Sudan; and Americans cannot do business in those countries; it is illegal.  But our money, even our taxpayer dollars, our tax money, is investing in these enemies through countless public and private investments.  And there are over 400 publicly-traded international companies that do direct and substantial business with nations the United States has declared to be state sponsors of terrorism.  </P> <P>Those companies include banks, like BNP, which provides billions of dollars to the government of Iran and who I found at the top of our former Treasurer's -- my predecessor s broker-dealer list when I took office.  And that list goes on and on and includes oil companies like Royal Dutch Shell and Total, which contract directly with Iranian government and which could be found in untold numbers of investment portfolios around the world.  Or how about Arab Bank, the bank where families of suicide bombers are instructed to pick up their reward money where I found our state employees' retirement dollars invested?</P> <P>Let me drive that point home a little more.  In Missouri, a Missouri soldier's widow is plaintiff in a wrongful death suit against the company that she says is responsible for the bomb that killed him - against Arab Bank.  That soldier's pension fund held stock in Arab Bank.  I to this day am furious at the thought and with the nine-month fight that I had to wage to get the stock pulled from our portfolio.  It is an outrage, it really is.  And the pension fund of our soldiers and our firefighters, even, are being invested in companies that directly fund Iran.  And if you and the vast majority of others around the world have not been extremely diligent, I'm afraid that your own investments out there may be doing the very same thing.  There are literally billions and billions of dollars in international stock portfolios, public and private, that contain these stocks.  That money is going directly into the hands of those who seek our destruction.</P> <P>Let me tell you a little bit about what we did in Missouri.  In Missouri, we believed it was wrong to use public money - taxpayer money - to fund our enemies and to subject shareholders to the inherent risk associated with these investments.  So, some of the actions that we have taken include the following:  We have implemented a tough anti-terror policy in the Treasurer's Office, in my office, which includes complete prohibitions on doing business with terrorist-sponsoring nations and companies.  And this approach is working.  UBS, Credit Suisse -- those are companies that we are on our broker-dealer list that were doing business with Iran.  UBS, for example, we kicked them off of our broker-dealer list; about two months ago, they came back to us and wanted back on because they have ceased doing any business with state sponsors of terrorism, including Iran.  In fact, they have a very strict policy that they have implemented within their own company that is stricter than what the United States actually requires in economic sanctions.  So we put them back on our broker-dealer list but this is an example of how this kind of policy is working.</P> <P>We implemented the nation's first terror-free public fund, which actually screens out terror-tied stocks from our portfolio and it is managed by State Street Global Advisors and along with a company called Conflict Securities who actually identifies the companies that we do not want included in our portfolio.  And we do that by setting criteria.  For example, if they have a direct financial relationship with the government of Iran then they are -- that company does not even get in to our terror-free portfolio.  And the fact is we are getting a great return on it; in fact, it is up to 30% annualized rate of return, much higher than our benchmark.  And so no one can accuse us of not keeping performance at the top of our fiduciary responsibility, but there is also a risk that we have looked at and those risks have been removed from our portfolio because those stocks are not in our portfolio.</P> <P>We set up the nation's first terrorist screening policy and divestment procedure for public pension fund.  And again, we do basically the same thing except we identify companies who meet certain criteria, mainly that of that direct financial relationship with a government that has been identified as a state sponsor of terrorism.  Once those companies are identified - and again we have used the services of Conflict Securities to do that - then we take that to our Board of Trustees and actually have to vote to divest that company from our pension fund.  And we did that through a change in our governance policies, not through legislation.</P> <P>We are also in the process of offering the first terror-free mutual fund in a State College Savings Plan and every state has a 529 College Savings Plan.  We have -- in the next quarter we will be rolling out a couple of different options for individual investors that is available to any investor in the country who would like to make sure that their personal investments in their child's college savings plan are not going into companies who are subsidizing and helping our enemies.</P> <P>I have actually written every state treasurer across the country to take similar actions; most of the action, though, is coming from state legislatures like in Florida with the Senator's leadership.  We also hosted a police and firefighter terror-free investment summit in Missouri to show and to educate the pensioners about the fact that their pension funds may be invested in these companies and those guys are going to be the first ones out there when they have to deal with another attack.  Hopefully it will not happen but assuming that it probably will happen, they are the ones who are going to be dealing with the security of our families and they are the ones who may not know that their own pension funds are being invested in these kind of companies that are helping fund terrorism.</P> <P>So, those are the things that we have done in Missouri and just briefly go through some of the arguments that seem to come up about why you should not be doing this.  You know, we heard that, "Will the cost not be too high?"  And asset managers might -- the answer to that is asset managers typically sell stocks on a daily basis so the cost should be no different than any sales of stocks incurred through the normal buying process.  And moreover, most asset managers are compensated on a percentage that is computed of assets under management, not their -- or their custodial bank's actual transaction costs.  In the case of what we call the Terror-Free Fund of Missouri, which was Missouri Investment Trust s international fund, the fees quoted by State Street for the screening and management of this fund were within the typical management fees quoted for any actively managed product.  So, the costs were normal.</P> <P>Will Wall Street respond?  Our experience in seeking the managers for our terror-free fund proved that they will.  We received proposals from several firms with products for states that have adopted policies like this, that it requires -- not like this, excuse me -- that it required divestment from Sudan, and we had four very reputable firms present bids to us.</P> <P>Is divestment effective?  And if you put aside the overwhelmingly successful divestment example of South Africa, we have already seen early in this effort a number of companies, foreign as well as domestic, respond to pressure of institutional shareholders when it comes to the issue of terrorism.  For example, as I gave before, UBS and Credit Suisse announced that they were pulling out of Iran.  UBS now operates a global security risk management program that speaks to this very issue.  We also heard this is just too hard or complicated to do, and we have found that using the services of quality companies and based on a sound policy that clearly defines the nature of our business relationship in question, that it is really relatively straightforward to identify major foreign companies operating in these nations.</P> <P>So, even before securing the services of outside help we were struck by how boldly European and Asian companies operating in these countries announced their presence in Iran to their stockholders and to the public via press releases on their website and their disclosures and their financial statements.  So, I know that Senator Kyl talked about transparency.  A lot of the information is out there.  A lot of people do not want you to know the information is out there but if you look as we did in the State Treasurer's Office, we researched it and identified these companies.</P> <P>Will the divestment effort damage returns?  That was one that we still get questions about.  And once again, our experience in Missouri proves otherwise; it does not.  It does not hurt returns or performance at all.  And I would argue that as a fiduciary we have a responsibility to look at the risk presented by companies who are doing business with governments of these countries.  I mean, would you want your money in Iran right now?  I think most people would say no, and I know most of Missourians would.</P> <P>So, whatever arguments you may hear, there can be no argument against this - that we are engaged in a monumental struggle with the most serious of consequences.  And as Lincoln said it, it is truly a question of saving our country.  Every effort and means to fight this fight and every person in this country should be a part of this victory.  And by cutting off the billions of dollars of lifeblood to these regimes, we can make a difference in this fight.  In Missouri, we have never had any intention of sending a message to Iran.  That is a question that I get quite often from journalists:  Why are you trying to send a message to Iran?   No.  Iran is a state sponsor of terrorism as identified by our government -- a state sponsor of terrorism.</P> <P>Iran is responsible for the deaths of countless innocent people around the world, including our own soldiers and we read about it everyday now in the paper.  Iran brags of its intentions to hit our nation with nuclear missiles.  Our goal is not to send a message to Iran; our goal is not to coddle Iran and hope that somehow against every bit of evidence to the contrary, that they will decide they really want to be our friends.  And our goal is certainly not to funnel them billions of taxpayer dollars unbeknownst to taxpayers to build their bombs and fund their favorite terrorists.  Our goal is to keep our country safe.  Our goal is to be responsible fiduciaries and not invest our people's money in volatile outlaw states which are one incident -- one incident away from financial ruin.  Our goal is the same goal that every generation of Americans has shared throughout the history -- our history.</P> <P>We want to do our part, we the people of this country.  Even in the states, we the people, we can and I believe we must stand up and make the difference that we are called upon to make and now is the time to do that.  Thank you.</P> <P>Danielle Pletka:  Thank you very much, Sarah.  Senator Deutch, Ted?</P> <P>Ted Deutch:  Thank you, Danielle.  First, I would -- I know that it is a real honor for me to speak last.  Having the privilege of speaking last at what is nearly a day-long symposium means that everyone will be happy when I'm finished.  So, I appreciate that.  I also will just make a related quick story.  I represent District 30 in the Florida State Senate, which includes [audio glitch] Southern Palm Beach County and part of Broward County.  It is Boca Raton, Delray Beach and Deerfield Beach and Boynton Beach, among others.  And I have occasion to go out to speak to lots of groups, often groups of seniors.  I had that privilege again last week and we spoke about the Divestment Bill and I told them that I had the good fortune of going to Washington next week to speak about it.  They asked where I would be speaking.  I explained, the American Enterprise Institute.  The nice elder woman then asked, "What is that?"  And I explained to her that it is a think-tank.  She asked what that was; I tried to explain and at the end, she just shook her head and she said, "Tell them to stop thinking and start doing."</P> <P>So, I want to commend you, Danielle and Omeed and the American Enterprise Institute for doing exactly that.  You have shown real leadership on this issue.  I very much commend you for putting this event together today.  It has been incredibly informative for me, and I'm sure, for all the participants here.  And it is also a real honor for me to be up here with Sarah Steelman.  Your commitment to this issue from the start and your leadership has been really a huge help and inspiration for those of us who are toiling away in other parts of the country trying to effect some change.</P> <P>Having now been here for this whole symposium thus far, I would like to move us to the point where I think we all are, based on what we have heard today.  There are, as I see it, four legs to this table, four steps that can be taken that can provide some real economic pressure on the Iranian government to cause them to give up the quest for nuclear weapons.  The first is the fact through executive order that American companies cannot invest.  The second, U.N. resolutions -- we have heard about the U.N. resolutions that there is hope that there would be another resolution that will have some teeth that will strengthen the worldwide economic effort.  Third, we have heard much discussion about ILSA, now the Iran Sanctions Act.  There is no question that what we are doing in the various states will have much more power and will be much more effective if the Iran Sanctions Act and the terms thereof are actually carried out.  So I commend Congressman Sherman and Senator Kyl for their efforts there.</P> <P>And then finally, there are the efforts that we are taking at the state and local level.  I would like to get to the discussion but I would like also walk through a bit about what we did in Florida and what is happening now in other states around the country and their legislatures.</P> <P>I was, as Danielle pointed out, the sponsor of the legislation requiring our State Board of Administration that administers the Florida Pension Funds to identify and engage -- and then, ultimately, if engagement fails to succeed, to divest from directly health securities in foreign companies funding the Iranian energy sector.  We took a very narrow approach in our legislation.  There is some difference of opinion; you have heard some of that today already.  We focused on the Iranian energy sector for two reasons.  The first is as we have heard already, again from our speakers - I think Dr. Clawson and Ken Katzman explained this well - that that is the place in the Iranian economy where we might have the best hope to really have an impact by using whatever economic power that we have.  That is number one.</P> <P>The second and perhaps more important point for us in state legislatures is that the critics of divestment on a state level suggest that all we are really doing is getting involved in foreign policy, that it is not our business to make foreign policy.  Obviously, that constitution provides is to be found in the United States Congress.  In fact, by focusing on the same set of companies that the Iran Sanctions Act helps to identify, we are acting completely in accordance with American foreign policy, thereby, I think, negating completely the argument that somehow we are creating our own foreign policy by engaging in divestment.  </P> <P>We have -- the legislation in our state affects about thirteen companies, we believe; out of our managed funds which are about $140 billion, the total amount of our holdings - Florida s holdings in these companies - is about $830 million.  Another point made by critics of divestment is that even $830 million, while it seems like a significant amount of money, really cannot possibly have any effect.  I would suggest that of the $3 trillion that the top hundred public pension funds control that if the percentage in those is even about the same as in ours, we are talking tens of billions of dollars which when combined with these other three steps, both at the United Nations and in Congress, really can bolster that economic fight.  So, it is about $830 million.</P> <P>We passed our legislation unanimously in both the House and the Senate.  The unanimous votes, however, belie the incredibly difficult battle that we had in passing it.  And I think it is worth a moment focusing on those who fought so hard against divestment because these are the same arguments -- it is the same criticisms that Ms. Steelman has raised and that I have touched on some that will be heard and have been heard all around the country.  We have heard this in Ohio, from their pension fund; the Wisconsin pension fund board has made the same comments publicly just recently.  We have heard it in a myriad of states; that is, that the approach that we are taking will lower the long-term rate of return, will have enormous costs, will violate the fiduciary obligation of the pension fund managers to invest solely on behalf of the interest of their --in this case the public employees of Florida and others.  But it is that last point of fiduciary obligation that I would like to spend a moment on.</P> <P>The pension fund administrators would like very well not to have to spend a second thinking about any of these issues, and I understand that.  And I understand that to have to add one more item to their list that they are looking at and trying to determine where to invest funds does in our case have the Florida legislature stepping in and sticking our nose into their business.  But we have done it in Florida and the reason that we ultimately were successful and that it is the legislation now passed the Iran divestment legislation passed Michigan House.  This week it has passed one of the chambers in California; it is going to pass --the other will be enacted into law there.  It is moving in a number of other states.  And the reason is that, ultimately, this is not the money of the pension fund advisers.  It is the money of the public employees of the state of Florida, in our case.  </P> <P>And when we went to speak with them, which is the first step that we took -- and the idea of a summit think is brilliant.  When we went to talk to the firefighters and to the teachers and to the public employees to let them know how their money was being invested, there was outrage.  And that outrage both from groups who are in some ways more represented and whose families are more represented in the active military, the armed forces in Iraq, that being our public employees and our teachers and our firefighters, that even as their kids are on patrol in Iraq, that IED s that are being made, we now believe, with Iranian support are being used against them.  There was outrage.  They wanted us to act on their behalf.  That is the only thing that we were doing in this legislation.</P> <P>Likewise, again, just to touch on the point that was made earlier -- why Senator Kyl actually raised the point -- how is it that you are able to draw a distinction -- and he did rightly and we did and this is the response to those who say otherwise.  The distinction between Iran and other situations where you might think that the policy that a company -- the decision that a company has made to invest in certain areas might be contrary to your own personal views.  Well, this is very simple for us; that is, there is only in the decision that we made in focusing just on Sudan and Iran, is that there is only one country in the world right now actively committing genocide.  </P> <P>And we have not spoken much about Sudan and what is happening in Darfur today and I feel compelled to do it only because if we are going to look at what are the two most -- the two areas in the world where action like this should be effected and can be most effective, they are in the Sudan and then they are with the other country in the world which I has said that it would commit genocide if it has this nuclear bomb.</P> <P>Now, I would also point out that for those of us who do not have the benefit of living in Washington and spending lots of time with policymakers and having great debates, that when we read something like this, which I ll share with you now, which was in a report in The Economist on Iran, -- and I quote: It is not clear, for example, whether Ahmadinejad really doubts that the holocaust occurred or merely why such an event should have been allowed to justify Israel s creation. In blog-o-shpere, the article goes on, translators hold lively debates about whether he really did call for Israel to be wiped off the map or just removed from the pages of time, a phrase which some people seem to think sounds less fierce.   </P> <P>For those of us who are not engaged in the daily business of debate like this in Washington, there is no difference.  We have to take Ahmadinejad at his word, that whether it is wiping off the map or removing the pages from the pages of time, that vowing to eliminate Israel with the development of a nuclear weapon is something that needs to be responded to and in our case that is one of the reasons that compelled us to take this action.  It also helps to address then that -- and to end the argument that there is any sort of slippery slope; there is none.  There is one country in the world committing genocide; there is one country in the world that has said that it will, all the while supporting Hamas and Islamic jihad and Hezbollah.</P> <P>Now, there are questions about whether mandatory divestment is the way to go or whether it can be done by other means.  I have spoken some about that already.  By simply having a requirement that there be some engagement by the pension board of these companies, unless you have the commitment of someone like the treasurer in Missouri, unless you have that kind of commitment and that kind of push, there is no certainty that the pension boards will take the steps necessary first to engage and then ultimately, to divest.  Which is why, ultimately, the way that this has real economic power is by these states taking this kind of action.  The constitutionality question I spoke on some already; there is a further sense -- further argument made that I m sure many of you have heard.  One of the opponents of divestment has suggested that this is really nothing more than, I believe he says -- he calls it chicken soup diplomacy ; that it makes you feel good, but it does not really accomplish anything.  </P> <P>I think we can look only to the examples of South Africa divestment and, today, Sudan and the Save Darfur Movement where the divestment efforts have yielded real results by companies who have chosen to stop doing business there.  Understanding that there are a myriad of differences, very important differences, between these countries, there is still in this case the possibility for a real and positive effect.</P> <P>And finally - and Sarah spoke about this already - the issues about whether there are other equal-value alternatives and whether this would have an impact on a long-term rate of return -- Missouri has already shown and we have shown throughout our process just based on modeling - we did not have anything concrete to show yet - that there are other alternatives in pension funds to these companies.  And so, there is not going to be a dramatic and negative long-term effect on the rate of return.  Ultimately, in our case, the legislation requires first that the companies be identified.  We should have those companies identified within the next few days, actually, should come the initial list.  That will answer what I think is the last question -- criticism that I have raised, which is it is just impossible to identify the companies; it is too hard to tell really what companies these are.  And again, Sarah Steelman spoke to this some.  </P> <P>Ken Katzman has been putting out a report listing the companies who are doing business in violation of the Iran Sanctions Act now for some time.  And we have that benefit and we now -- we will have independent research as well which we hope can be relied upon by others in moving this effort forward.</P> <P>Finally, for indirect investments like mutual funds and hedge funds, the legislation requires engagement with the fund managers to encourage them to move to and to offer alternative funds that do not have the companies at question included in them.  At this point, there is no requirement in our legislation to require them because the funds do not yet exist although we fully expect that as the funds are created and increase in size, it will be easier for state pension funds to move their mutual fund holdings into some of those as well.</P> <P>Finally, by crafting legislation that was targeted, that was constitutional and that is in line really with best practice of corporate governance and pension fund management where we were able to build this diverse coalition of Democrats and Republicans, all of the union members and members of both the House and Senate from the far right to the far left who recognize the importance of what we are trying to do and the possibility that by exercising some economic power, we might well be able to avoid having to use military power in the future.</P> <P>And I would close simply by saying two things:  First, I would encourage, as other states move forward with this, to form the same kind of coalitions that made this legislation successful in Florida.  We cannot allow the portions of the business community who believe that this will interfere with their holdings to suggest to the unions that its members are at risk of seeing diminished returns.  There are clear responses to those that negate the arguments but it is by forming those coalitions that we are best able to do it.  </P> <P>And finally, for those of you here who are at all involved in any way with the private pension fund world, I would suggest that understanding after having been here for an entire day that there is the opportunity through economic sanctions and divestment to provide the kind of immediate economic incentive to cause the Iranians to change their desire, to move away from the desire of nuclear weapons that they recognize that this is a desire that will be shared by others and that it is not just the right policy; it is not just morally correct for us to pursue these policies, but that there is a real opportunity by the creation of mutual funds and private mutual funds for individuals who share these same concerns to do quite well at it.  And I know that the treasurer joins me in offering whatever services we can to help them as they go forward in that endeavor.  It is, again, a great honor for me to be here today and we look forward to any questions.  Thank you.</P> <P>Danielle Pletka:  Perfect.  I have to say, I had not had the opportunity to see the Iran coverage in The Economist and I know that people out in the States -- for you people in Washington is pretty stupid.  But even we are not so stupid as to believe that this debate about what Ahmadinejad said is actually serious; we let The Economist reserve that right to itself.  Let me open the floor to questions and if everybody would just be kind enough to adhere to our rules which I will repeat for everybody who was not here earlier - if you would be kind enough to let me call on you, wait for the microphone, identify yourself and just ask a question.  So this young man here.</P> <P>Howie Slouk:  My name is Howie Slouk from the Republican Jewish Coalition and my question is for Senator Ted Deutch.  You said that the reason you targeted just the energy sector was to help with the constitutional questions. But is that not the exact argument that was struck down by the Supreme Court in the Crosby case in 2000?  That even though Massachusetts claimed they were just doing the same exact thing as Congress, the Supreme Court said that even if it is exactly the same, it still removes some flexibility from Congress and therefore it is not constitutional?</P> <P>Ted Deutch:  We spent -- we looked at that case and -- what has become the seminal case here, the Illinois case.  In both situations there were a number of arguments made about the constitutionality of both of those measures.  Both of them were significantly broader than the legislation that we just passed.  It is not only the fact that it is consistent with American foreign policy that we believe it meets constitutional muster, but that is one.  The Massachusetts is also -- was again like Illinois, broader than the bill that we passed.</P> <P>Danielle Pletka:  Behind the pillar.  There you go.</P> <P>Christopher Holton:  Christopher Holton with the Divest Terror Initiative.  In view of your experiences, both of you, in getting these initiatives passed in both of your states, how do you feel about the efforts by the pension systems in several states now to try to engage companies that do business in terrorist-sponsoring nations?  And do you have a level of skepticism about this latest initiative by several of those pension systems?</P> <P>Sarah Steelman:  Sir, are you speaking about shareholder activity, writing letters and -- you know, I guess I m of the opinion, I think, that it is a step in the right direction.  At least they are thinking about it and realizing that they have some power as a shareholder.  Of course, I think because we need immediate action, and I think -- actually, this article in The Economist points out that we need immediate action, that we are almost to a tipping point in Iran, that it would be better to really send that message with the full force and effect of full divestment.  But every state is different and has different kind of political constraints, so I think any movement in that direction at least is a step in the right direction.  I would take it a lot farther, obviously, but at least they are paying attention.</P> <P>Ted Deutch:  I would only add that I look forward to the response -- I am not sure which you are speaking -- I m just looking at the letter from Mr. Thompson, the Comptroller in New York.  I think that it is a terrific approach to point out that some legislation has passed; there is likely to be more.  It is likely that there will be more stringent sanctions coming; therefore, we are not sure that this is a good investment for you.  Why don t you come back and tell us if we are wrong?  I know that they asked for a response by the end of August.  I ll be very interested to see what the response is.</P> <P>Danielle Pletka:  I d like to ask you a question, if I may take the opportunity while I do not see any hands.  The Wall Street Journal did a very nice piece some time back about this wave of initiatives at the state level on divestment and they noted that so many newer leaders were involved in this.  And I wonder if you could just talk about what brought you to this when this has not really been an issue at the state level before.  And second, I know that you characterized the nature of the opposition; you said you had to fight nine months; you had a unanimous vote at the end but, in fact there, was a lot of back-and-forth before you were able to achieve that.  We understand what the objections were, but I wonder where you think the real objection was coming from.  Was it in fact a constitutional question?  Was it that states are in fact not supposed to be involved in foreign policy?  Or was it simply the idea that we should not be divesting from Iran?  I m curious about that and I do not know the answer.  Either of you.</P> <P>Ted Deutch:  I do not want to answer -- to answer the second question first.  I do not know -- I will give the benefit of the doubt to the pension fund managers in my state and elsewhere that it is not their desire to fend off these actions for the benefit of Iran.  I m very comfortable saying that.  I think for them this is just not something that they want to be told to do.  They may well recognize that, as a policy matter, Iran is a threat but do not tell us where to invest our money.  That is the sense that I get and we have seen that in quotes from -- even the head of the federal thrift made similar comments to that.  I would note -- just like to quickly point out also in responding to your question about why this issue -- in my particular district there are probably more Holocaust survivors than in probably any state legislative district in America.  And the opportunity in this case to be able to try to give some real meaning to the words Never again to them makes this not just an important international issue.  It makes this an intensely personal and local issue as well.</P> <P>Sarah Steelman:  Well, to answer both of your questions kind of at one time that the fund managers -- I mean, there were a number of reasons why I got onto this and one of them was that when I took office, my predecessor had been using a broker-dealer list and at the top of that, the main broker-dealer used by the State Treasurer s Office was a French bank.  And so that annoyed me to begin with; then I found out they were involved in the Oil-for-Food scandal and floating billions of dollars to Iran.  And so we kicked them off our broker-dealer list, started looking at that kind of change in our internal policies to make sure we were not using companies that had those kinds of ties.  </P> <P>But then when I started asking questions of our pension fund managers - because I sit on the board by virtue in holding the office - when I started asking them if they ever asked questions about what are these companies doing that are invested in Iran or in these countries that are identified as terrorist-sponsoring states, I could not get any answers.  They wanted me to go away; they did not want to look at this issue at all and I guess that is the one thing that really triggered it - my curiosity - is because I thought we should be asking questions about at least due-diligence questions at a minimum, let alone looking at what we are investing in and worried a little bit about who it is that we are helping with our taxpayer money.   And then these guys did not want to do that.  They wanted to bury their head in the sand and it was too hard; it might affect the bottom line.  And they did not want another requirement on them to figure out how they should invest their money.  So they -- for all those reasons they did not want to do it.  For all those reasons I wanted to pursue it, so --</P> <P>Danielle Pletka:  Very good.  Omeed?</P> <P>Omeed Jafari:  Omeed Jafari, American Enterprise Institute.  I have a question for you, Ms. Steelman.  How come Missouri did not approach divestment from a legislative perspective, whereas in Florida it was a legislative tool?</P> <P>Sarah Steelman:  Well, for the reasons I said.  We started it in the State Treasurer s Office and because I did not get answers to those questions, I went ahead and identified these companies and how much money we were investing in companies that are meeting that criteria that we spelled out and were able to change the policies from a governance policy point of view for the pension fund.  And then I was able to do something on my own with the Terror-Free Fund without having to go to the authorization of the legislature.  In some states I think that is the way to go and I think the senator made a very good argument as to why it is important to eventually have that in legislation.  Having been in the state legislature, I know how difficult it is sometimes to get things passed.  We also have some unique constitutional restraints in Missouri that made legislation a little more difficult.  So, since I have been successful pursuing it from a fiduciary point of view, I did not pursue it that way.</P> <P>Danielle Pletka:  Yes ma am?  Can you identify yourself and take the microphone?</P> <P>Debra Foyer:  I apologize.  I m Debra Foyer, American Jewish Committee.  Could you describe whether the investments from which you have divested apart from your Terror-Free Fund -- are they direct investments or were any of them investments in mutual funds and how you went about that process?</P> <P>Sarah Steelman:  They are direct investments on the Terror-Free Fund.  Obviously, they are -- we held the stocks.  With the pension fund it is more complicated because you do have a set of mutual funds.  We separated and identified, even in the governance policy, those funds that are held directly by the pension fund have to comply with our divestment policy.  We also in our governance policy added the requirement that part of due diligence with every mutual fund or every non-custodial fund that we hold that we have a series of questions that we ask them about these companies and what they know about relative to their activities tied to terrorism.  So, we were asking the questions -- you know, I would prefer that we take it farther than where we are.  But when you are in a political process, whether it is in a pension fund of eleven members or in the legislature, you take what you can and then, you know, you keep pushing.</P> <P>Danielle Pletka:  I m sorry I m going to indulge myself again and I apologize.  I could do this later by myself.  One of the things that has not come up at all today is this new SEC list of companies that are supposedly involved in Iran, which has come in for a great deal of criticism and I think it absolutely deserves criticism, by the way.  You talked about Conflict Securities Advisory Group which [indiscernible].  We have all talked about the Center for Security Policy and Chris Holton s fine work on terror-free investing.  We ourselves have our Iran interactive map.  But at the end of the day, none of those are authoritative in a governmental sense.  We all like to think our information is as solid as it can be but at the end of the day, none of them are -- none of them have a good housekeeping seal of approval of any federal agency.  And I think the SEC list is an example of how that can go wrong.</P> <P>Some of the legislation on Capitol Hill requires that companies -- that there be an investigation by the office of national -- Director of National Intelligence and the Treasury and then they consult with each other and then they rat each other out of how incompetent the other one was; I m not joking.  Others like Senator Kyl s legislation, actually using a Security and Exchange Commission trigger and force companies that are listed on the American Stock Exchanges to disclose that they are involved in Iran a priori or in separate filings.  What would make your lives easier and if you had to just go forward with a much more simplified system in which you did not have to go out and research and, you know, dial nine eight numbers and say, So, are you investing in Iran?   What would you suggest?</P> <P>Ted Deutch:  Well, the Iran Sanctions Act provides the mechanism to offer that list with that good housekeeping seal of approval from the Executive Branch.  And we are not seeing it, which is why I think that the Congressional Research Service s efforts are so helpful here.  I mean, ultimately, another legislation that is working straight to the Hill is meant to help identify those companies.  Between the resources of the government and the resources of the many interested parties here - non-profits, et cetera - this does not seem that it should be that difficult.  My guess is that a number of people here today have a pretty good handle on which companies are making these investments.  Again, just looking at the Sudan model for a second, it is the non-profits that took the lead there that helped come up with the list that has now become widely accepted.  I think the combination of the federal government and the good work that folks like the American Enterprise Institute do, we ought to be able to do the same. </P> <P>Sarah Steelman:  One of the arguments - because you mentioned this in your last question - that the pension fund managers have used is, Well, we are waiting for a list from the federal government.   And that was actually the first response that I got.  We have asked the federal government for a list of companies that are doing business in Iran and we have never received anything.  And so that has been an excuse by a lot of public pension fund managers to not do anything.  So, I do believe that a list would be beneficial for that reason alone because then that removes an excuse that they have been using.  I think the mere act of asking of the SEC Act -- asking for further information will have an impact itself on companies that are doing business in that capacity right now.  I was actually glad to see them do the list but it was a bit --</P> <P>Female Voice:  [Inaudible]</P> <P>Sarah Steelman:  Yes, it had missing pieces but I thought it was a step -- again, a step in the right direction.</P> <P>Ted Deutch:  If I may - because I know we are winding down - I just wanted to make one observation about this program that you did today and what I think is possible going forward.  There is -- and we saw it; we had this experience first-hand in Florida.  Wherever you are on the political spectrum, this issue is entirely consistent with your political world view.  And I may differ some or in some cases in extraordinary amount, I would imagine, from some of the positions that AEI might publish.  But in this case, whether it is AEI and any other think tanks or my views and the Treasurer s or of Senator Kyl and Congressman Sherman, there is no reason that this should not go forward in a bipartisan way.  In fact, I would offer just as a warning that if as this moves forward it starts to take on the look of an effort put forth primarily by one or another party, ultimately, its success is going to be doomed.</P> <P>Danielle Pletka:  Well, words against partisanship in Washington - we have not heard many of those lately but it is a breath of fresh air.  And let me thank our audience and let me especially thank both of our speakers for their leadership, for their imagination, for their perseverance and for their willingness to slip to Washington to see us today.  Thank you very much.  Thank you all.  We are adjourned.  Thank you.</P> <P>[End of file]</P> <P>[End of transcript]</P> <P> </P> <P> </P> <P> </P></body></html>