In 1996 Congress passed the Iran-Libya Sanctions Act with the aim of, among other things, pressuring the regime in Tehran to stop sponsoring terrorism. For a time, the sanctions did annoy those who wanted to invest in the Islamic Republic. But they soon withered away, since neither President Clinton nor President Bush wanted to sanction our European allies, who were among Iran's biggest trading partners.
Today, nearly 15 years later, the major European states have tired of Tehran's mendacity and begun to cut business ties with Iran. Even the Japanese, who have always been resistant to American-backed sanctions, recently announced the suspension of new oil and gas investments. But China and Russia have filled the void—and will continue to undermine any sanctions effort unless the U.S. decides to punish their subversiveness.
The State Department will soon announce a new list of foreign companies blacklisted for Iranian transgressions. In doing so, Foggy Bottom must understand the futility of naming and fining a few companies while allowing major sanctions-busters, and the governments behind them, to go unpunished. The administration is going to have to choose between maintaining the broadest diplomatic coalition possible—with enormous Russian and Chinese holes in the sanctions regime—and taking on Moscow and Beijing.
The State Department's sanctions czar, Robert Einhorn, likes to tout that the threat of sanctions has led to about $60 billion in energy projects being terminated in Iran. This figure mostly reflects the decision of European firms to back off. Germany and Italy, Iran's most important European trade partners, have recently developed a political consensus—albeit a fragile one—in favor of tougher sanctions. Businessmen, however, remain wary. As Ulrich Ackermann, a spokesman for the German Engineering Federation, remarked: If "German companies pull out, will other, non-German companies replace us?" Thanks to Russia and China, the answer is "Yes."
Russia and China have made it clear that the Iranian energy sector is still open for their business. In 2009, the Chinese National Petroleum Corporation (CNPC) replaced France's Total in a contract to develop a major part of Iran's South Pars gas field. Total had withdrawn from the deal because of increasing pressure from Paris and Washington.
Chinaoil, the trading arm of CNPC, had not delivered gasoline to Iran in 2009 but began doing so in 2010. Unipec, the trading arm of Sinopec—the China Petroleum and Chemical Corporation—also resumed gasoline sales to Iran in the spring of 2010 after a nearly six-year hiatus. According to Reuters, China's Zhuhai Zhenrong has also started shipping gasoline to Iran, sometimes in cooperation with Litasco, the trading arm of Lukoil, Russia's petroleum giant.
Since the passage of Washington's Comprehensive Iran Sanctions Act and United Nations Security Council Resolution 1929—which emphasized in its preamble "the potential connection between Iran's revenues derived from its energy-sector and the funding of Iran's proliferation-sensitive nuclear activities"—Russian and Chinese officials have met openly with Iranian officials on joint energy-sector projects.
Sinopec is developing Iranian oil fields and increasing Iran's capacity to refine crude oil at the Tabriz, Arak and Abadan refineries. CNPC, too, is expanding Iranian oil production, including the important fields in North Azadegan, South Azadegan and Kuhdasht. The China National Offshore Oil Company (CNOOC) has agreed to help Iran develop its natural gas reserves in the Northern Pars field and build gas liquefaction facilities, the development of which has been severely hampered by recent unilateral EU restrictions.
Russian energy giant Gazprom, meanwhile, continues to explore whether to expand Iran's oil and gas pipelines, a critical development for Tehran so long as a European ban on the transfer of liquefied-gas technology remains in place.
For all this, the U.S. government has the capacity to make both Russia and China feel considerable pain. For starters, CNPC has a U.S. subsidiary, PetroChina, which has been listed on the New York Stock Exchange (NYSE) since 2000. CNPC owns 86% of its shares, valued at approximately $170 billion. The Obama administration or Congress could consider banning CNPC from holding any U.S. assets, including shares in its subsidiary. They could also target the interests of Sinopec and CNOOC in their NYSE-traded subsidiaries, which are worth billions.
PetroChina also spent $1.9 billion to acquire oil sands in Alberta, Canada and committed to spend $250 million on oil sands development. The U.S. is the largest consumer of oil from these projects.
The Obama administration could encourage Ottawa, which has been alarmed by Iran's nuclear program and human rights abuses, to use its new energy-sanctions laws to force Chinese companies to choose between Canada's lucrative energy sector and Iran's. Ottawa could easily eliminate the legal fiction in Canadian sanctions law that lets foreign companies off the hook if their parent companies are operating in Iran and their subsidiaries are operating in Canada.
As for Russia, Lukoil sells gasoline in over 2,000 facilities in 13 U.S. states. Those facilities could be a target of sanctions. Gazprom Marketing and Trade, the U.S. subsidiary of Gazprom, should be barred from further natural gas business in the U.S. All of the offending Russian and Chinese companies could be banned from receiving U.S. government contracts and forcibly divested from state pension funds.
And there is strong evidence that U.S. sanctions can successfully hurt Chinese and Russian firms: Moscow and Beijing fought hard, with some success, to have earlier, smaller punitive designations lifted in exchange for Sino-Russian support of Resolution 1929.
Any U.S. action will surely infuriate Moscow and Beijing, as well as those in Washington who have worked to "reset" our relations with both countries. Russia and China could retaliate in a variety of hardball ways that could greatly complicate American and European strategic interests. If Russia were to start delivering S-300 antiaircraft missiles to Tehran, for example, it could well provoke an Israeli preventive strike on Iran's nuclear facilities.
But if the Obama administration does nothing or only sanctions small Russian and Chinese violators (or politically easier targets in Switzerland and Venezuela), growing Russian and Chinese trade with the Islamic Republic will probably crack European resolve, collapsing our Iran policy.
We were always going to have a test of wills with Russia and China over Iran. That day has arrived. Connoisseurs of power politics—Vladimir Putin, Hu Jintao, and Ali Khamenei—are watching. So is Israeli Prime Minister Benjamin Netanyahu, who will decide one of these days whether a nuclear-armed Iran is acceptable, or not.
Mr. Gerecht, a former Central Intelligence Agency officer, is a senior fellow at the Foundation for Defense of Democracies. Mr. Dubowitz is the executive director of that foundation and heads its Iran Energy Project.