Global Insight Perspective
Significance	The IRGC is a formidable economic and political force in Iran, with its interests extending into the oil and gas and banking sectors. The latest sanctions against it, which have been in the pipeline for the past two months, will act as a powerful disincentive to international financial institutions that have yet to sever all ties with Iran.
Implications	Despite Iran’s efforts to shrug off the move, the vastness and depth of the IRGC’s interests will make all business dealings with Iran suffer. International companies will also want to avoid the negative publicity of doing business with the country.
Outlook	The unilateral sanctions against Iran threaten to torpedo efforts to achieve agreement on a third round of multilateral sanctions over the Islamic Republic’s nuclear file.

Going it Alone

Yesterday’s announcement lacked an element of surprise and follows months of reports that the United States was moving to classify the Iran Revolutionary Guards Corps (IRGC) as a terrorist group (see Iran: 16 August 2007: U.S. "Terrorist" Classification for Iran’s Revolutionary Guard to Affect Economy, Gas Investments). However, when the announcement was finally made, both U.S. Secretary of State Condoleezza Rice and Treasury Secretary Hank Paulson spared no punches in a dual strike against the IRGC’s military machine and its vast economic empire. The 125,000-strong IRGC has amassed a parallel economic base after it assumed the assets of Iranians who fled the country following the overthrow of the Shah in 1979. The measure is the first time that the United States has designated the military wing of a country in such a way, in a move that will greatly ratchet tensions between the two historic adversaries.

The sanctions also target three state-owned banks, including Bank Mellat—Iran’s largest, with branches in many European capitals. Such a decision sends an uncompromising message to European countries that the U.S. patience with the indecision surrounding a third round of UN sanctions against Iran is running short. U.S. Under Secretary of State Nicholas Burns, the superpower's point man on the Iran nuclear issue, yesterday remarked, “we are six months past the date where we should have seen a third UN Security Council resolution”. Russian President Vladimir Putin—who recently met Iranian President Mahmoud Ahmedinejad on the sidelines of the Caspian Sea conference held in the Islamic Republic's capital, Tehran—yesterday betrayed the cracks in the international consensus over the Iran nuclear issue, telling reporters, "why worsen the situation by threatening sanctions and bring it to a dead end?....It's not the best way to resolve the situation by running around like a madman with a razor blade in his hand". Even France, whose President Nicolas Sarkozy has proven himself an outspoken critic of Iran’s nuclear ambitions, distanced itself from the United States, saying the focus of international action against Iran must remain the nuclear issue. The superpower's catalogue of grievances against Iran are more widely spread and include the country’s alleged activities in Iraq, Lebanon, Afghanistan and the Palestinian territories.

In Iraq, the U.S. military accuses the IRGC’s military wing—the Quds Brigade—of facilitating attacks by its Shi’a proxies against U.S. forces. Tentative talks between U.S. Ambassador to Iraq Ryan Crocker and his Iranian counterpart aimed at finding common ground on Iraq have given way to a renewed animosity, with many within the Quds Brigade viewing the entrenched influence in Iraq as a springboard in the pursuit of wider regional ambitions. The top U.S. commander in Iraq, General David Petraeus, has warned that an early U.S. retreat from the country would allow the Islamic Republic to strengthen its already-multi-layered influence in Iraq, fuelling resentment by Sunni powerhouses—chiefly Saudi Arabia—which is already deeply uncomfortable at Iran’s defiant posture.

Hitting Where it Hurts

In a show of characteristic defiance, IRGC Commander Mohammed Ali Jafari brushed off the sanctions package, claiming that it would have little impact. Despite the bluster, however, the package is still likely to pack a significant punch.

For Iran's already-troubled oil and gas industry it will become increasingly hard to attract investments, obtain technology and attract knowhow. The country not only has a problem financing its large-scale gas developments, it also lacks the needed technology and experience to monetise much of its assets, especially since most of its largest gas fields are located offshore in the Persian Gulf. Investors, like majors Total and Shell, have already been stalling on making final-investment commitments to the large liquefied natural gas (LNG) projects that they have been awarded, in the fear that they will be slapped, in return, with U.S. sanctions. The new sanctions will reinforce that fear, as IRGC-controlled or affiliated companies permeate the Iranian oil and gas industry's servicing sector.

Under the Iranian buy-back contracts, the Western majors are contracted to construct specific phases and installations of the overall project, with little influence over which Iranian servicing companies are awarded other parts of the vast developments. This means that there is no guarantee that the international majors could not be portrayed as working on a project together with IRGC affiliates, exposing them to potential sanctions as well as public-relations disasters on the U.S. market.

Iran's own answer to the already-stalled development projects has been to award more and more to domestic companies, including IRGC affiliates, in order to make sure that work gets under way. Domestic-led development has been heavily frustrated by existing sanctions, hindering technology imports, but will now be hit even harder as financial actors worldwide will shun Iranian companies out of fear that they might be tied to the IRGC, thus stopping the trickle of imports that has alleviated some of the companies' needs until now.

Outlook and Implications

There are inevitable parallels being drawn with the build-up to the Iraq war, as the United States becomes impatient with sluggish multilateral efforts to counter a perceived threat and takes matters into its own hands. Rhetoric from the administration regarding its arch-foe has been stepped up over recent weeks, and has at times sounded distinctly bellicose. As with the Iraq war, there are different elements trying to make themselves heard within the administration and, of late, the hawks, such as Vice-President Dick Cheney, seem to have had growing influence at the expense of those championing the diplomatic route, such as Secretary of State Rice. One should be cautious before drawing too many parallels with Iraq, however. The stock and influence of the hawks is still considerably lower since the problems in Iran's neighbour, the international dynamics are different and the U.S. military is, in any case, unable to contemplate a full-on assault given logistical constraints.

The administration was at pains yesterday to say that the sanctions did not mean the United States was building up to conflict: “we do not believe that conflict is inevitable,” said Burns. “This decision today supports the diplomacy and in no way, shape or form does it anticipate the use of force.” This has done little to allay the suspicions of administration opponents, however, who point to similar assurances prior to Iraq. Officials were also stressing that they want to continue with efforts to come up with multilateral sanctions via the UN.

There is actually greater international consensus over the threat posed by Iran than there was over Iraq, but the United States is playing a risky game by taking the unilateral path. Finding future allies suddenly becomes more difficult and relations with countries such as Russia could deteriorate, with knock-on effects on other foreign policy priorities. The United States is calculating, however, that it needs to up the ante if it is to shift a highly unsatisfactory status quo, and it believes it can successfully lead the way—in what is already a dangerous standoff—by making Iran more of an international pariah.