SPIEGEL ONLINE

06/30/2008 03:04 PM

On the one hand, formulaic diplomacy is being strictly adhered to. His Excellency, the High Representative for the Common Foreign and Security Policy of the European Union, Dr. Javier Solana, recently presented to his Iranian counterpart, Manucher Mottaki, the latest offer from the so-called group of six nations, consisting of the three European powers Great Britain, France and Germany, as well as China, Russia and the United States. The goal is international cooperation in determining the true purpose of Iran's nuclear program.

In the letter accompanying the offer, the alliance expressed its deepest respect for Iran as "one of the oldest civilizations in the world." The last of the signatures on the third page belonged to US Secretary of State Condoleezza Rice. Mottaki wanted to know whether it is her original signature, and not from a signature machine or a photocopy. Of course Ms. Rice personally signed the document, Solana assured him.

Mottaki gathered together his papers, called the assembled journalists and photographers into the room and began the transfer ceremony with apparent pride, as if to say: Here it is, mail from the Great Satan, and signed in person, no less.

On the other hand, the threats are growing increasingly frequent. Just 10 days ago, 100 Israeli planes flew 1,400 kilometers (870 miles) out over the Mediterranean as part of a military exercise. In the flight, they covered exactly the same distance they would have to cover in an attack on the Iranian uranium enrichment plant in Natanz.

Not long later, Israeli experts in the know began commenting publicly on potential links between the secretive nuclear programs of Iran, Syria and North Korea. The facility the Israelis bombed in Syria last September, they said, was believed to have been producing plutonium and passing the weapons-grade material on to Tehran. They further said there is a discrepancy between the amount of plutonium North Korea claims to have produced and the amount the country was in fact capable of producing -- and that the difference could suggest that some of the plutonium was going to Iran. The conclusion? Iran could very well be capable of making a bomb by 2010.

The message these experts have sought to convey is that unless this development is stopped, it won't be long before the next war breaks out in the Middle East.

But what is the alternative? Is there any chance that the talks Solana plans to conduct on behalf of the group of six will result in a breakthrough? Will international sanctions produce the desired effect? The government in Tehran is already paying a high price for its refusal to stop enriching uranium and negotiate.

The United States has maintained a trade embargo on Iran since 1979, and the United Nations Security Council, at the instigation of the group of six, has imposed further economic sanctions three times. Only last week, the Europeans froze Iranian assets and imposed travel prohibitions on Iranian politicians, scientists and military officials.

All of this amounts to a significant burden of sanctions. The question remains open, however, whether it will be enough to convince Iran -- which continues to claim its reactors are purely for civilian purposes -- to turn its back on its nuclear program.

Trade and financial embargos have rarely been successful, especially in the Middle East. After the first US war against Iraq in 1991, the United Nations imposed sanctions on the country for 13 years, and yet the regime of then dictator Saddam Hussein refused to yield. Nevertheless, the sanctions did significantly weaken Saddam.

According to former US National Security Advisor Brent Scowcraft, Saddam never managed to rebuild his army into a serious military threat after 1991 -- thanks to the trade embargo. Foreign policy experts from the administration of former US President Bill Clinton still believe that the sanctions kept Saddam sufficiently in check to prevent him from becoming a threat even to his neighbors. Saddam's Iraq had the same ambitions as Iran does today: to be the region's dominant power.

The best reason to tighten sanctions is the lack of any other realistic alternative. Even as the collateral damage from such trade embargos is immense, including harming those countries that impose them, the only other choice is war.

Still, the complaints have already begun pouring in. German Economics Minister Michael Glos has already received angry letters written in response to the EU's recent freezing of the assets of Iran's Bank Melli. "I was appalled," wrote Eginhard Vietz, the head of a company that produces equipment to build pipelines, "to find that the assets of Bank Melli Iran were frozen as a result of the EU sanctions imposed on Iran. This puts an end to our business dealings with Iran."

Contracts in Iran represent a very significant part of Vietz's business, partly because of the Nabucco pipeline, which is being built to supply Iranian natural gas to Europe beginning in 2013 and make the continent less dependent on Russian gas. "The restriction imposed on Bank Melli forces us to create jobs in Dubai or Kuwait, and then deliver our products to Iran through those countries," Vietz writes in his letter to Glos.

Bank Melli Iran, which is fully owned by the Iranian government, is the country's largest commercial bank, with about 45,000 employees and 3,000 branches worldwide, and total assets of €38 billion ($59 billion).

The bank handles transactions for much of the overall German trade with Iran. Despite the restrictions in Germany, however, the bank is not yet completely out of the picture. Bank Melli's Moscow branch continues to process transactions, including, as is rumored, those originating in Germany. Melli also has seven branches in the United Arab Emirates, the most popular alternative gateway for international business with Iran.

As recently as 2006 Germany, with exports worth $5.2 billion (€3.35 billion), was one of Iran's key trading partners. But the pressure exerted by the United States had already begun to take effect in recent years. In 2007, German exports to Iran declined to $5.0 billion ($3.23 billion).

CEOs of German banks were often forced -- sometimes in the context of one-on-one conversations with Deputy US Treasury Secretary Robert Kimmit -- to completely terminate their business dealings with Iran. If they refused, so went the threat, they would find themselves running into significant problems in the United States, especially with the Securities and Exchange Commission (SEC). Thus, for example, Deutsche Bank's name appeared on the SEC's list, published on the Internet, of companies doing business in states that sponsor terrorism.

The bankers were in a predicament. Either they violated German laws that forbid companies from observing sanctions imposed by another country, or they could look forward to heavy losses and restrictions in their US business. For Deutsche Bank and insurance giant Allianz, together with its subsidiary Dresdner Bank, the decision was quickly made in favor of the United States and against Iran. Commerzbank, another major German bank, also yielded to Washington's demands.

Can War Be Averted?

Mostly, though, it will continue to be the small and mid-sized businesses facing the greatest difficulties. For the last two years, there have been virtually no government safeguards against non-payment by Iranian companies. In response to pressure from the US, Berlin reduced its so-called Hermes debt guarantees for exports to Iran to almost zero in the past two years.

And Iran? The country seems determined to put up with the sanctions. For one, it is making up for lost business by making deals elsewhere and it is also continuing to behave as if the international community were incapable of harming it.

In response to a recent UN increase of sanctions, Iran said it "cannot and will not accept a requirement which is legally defective and politically coercive." During a recent visit to Berlin, Iranian Deputy Foreign Minister Mehdi Safari told Europe, "please, don't lose the market. If you don't supply some of the parts, we will substitute them and it will be very hard to come back."

Tehran reportedly took steps to offset the sanctions against Bank Melli by withdrawing its assets from Europe in time. Iranian experts report that Ahmadinejad instructed bank officials to withdraw $75 billion (€48 billion) in European deposits. The Iranians are now seeking to portray the act of withdrawing the funds as a tool in their arsenal. "When you withdraw billions of dollars from European banks," says Safari, "it will, of course, lead to a scarcity of money and will affect the global economy."

Iran has long since turned to trading partners in other parts of the world. Asian countries, in particular, have had no qualms about taking over the Europeans' business. According to data supplied by Germany's Federal Office for Foreign Trade, China has almost doubled its trade volume with Iran since 2005, from $10 billion (€6.5 billion) to $18.5 billion (€11.9 billion).

Pakistan and India have also expanded their economic relations with Tehran, and trade with the Arab nations across the Persian Gulf has increased considerably. In addition, many countries in Asia and Europe, but also the United States, have managed to get around the sanctions by working with middlemen, mostly in the Gulf region.

Still, despite the blustering from Iran and the efforts to circumvent the sanctions, they are in fact working as intended in some areas. Bank Melli's exclusion from doing business in Western Europe was a "serious blow," says Tehran economist Sayyid Leilos. One of the consequences, according to Leilos, is that imports have become "more complicated and expensive" and have pushed up inflation, currently estimated to be higher than 20 percent.

Probably the best-known Iranian company seriously affected by the sanctions is the national flag carrier Iran Air, which is running out of spare parts for its aircraft. Although the airline can get the parts it needs through middlemen, if the aircraft do not undergo regular maintenance by the manufacturers or authorized special repair shops, Iran Air could lose the license issued by the International Air Transport Association (IATA). Without this license, the airline would lose its clearance to land at major international airports. Iran Air has already cut some of its routes.

The sanctions have also seen some success in the energy sector. After years of trade limitations, Iranian oil production has begun to decline. Since the 1979 revolution, oil production in Iran, which has the world's third-largest oil reserves and second-largest natural gas reserves, has declined from 6 million to 3.9 million barrels a day. A study by Johns Hopkins University concludes that if domestic demand continues to rise, Iran will no longer be able to export any oil by 2015, unless billions are quickly invested in energy production. But securing funding for such large projects has become difficult now that major Western banks are no longer permitted to do business with Iranian companies.

The development of the vast South Pars natural gas field, which Iran shares with Qatar on the other side of the Gulf, is a case in point. While the Arabs have invested billions in the development and processing of the field's gas reserves, expansion has stalled on the Iranian side. Only last month, both the British-Dutch multinational Royal Dutch/Shell and the Spanish oil and gas company Repsol pulled out of the South Pars project.

Still, although the sanctions are causing problems for Iran, the leadership in Tehran seems to have accepted them as a necessary evil and continues to refuse to be deterred from pursuing its nuclear program. This attitude has led to growing impatience in the United States and Israel, where confidence in the embargo is already weak.

In Jerusalem, the discussion has long since moved from whether a strike on Iran's nuclear facilities will take place to when it will take place. "Israel will not tolerate the possibility of a nuclear Iran," Prime Minister Ehud Olmert promised his fellow Israelis several months ago. "Israel will not stand by idly while Iran builds a nuclear bomb. If necessary, we will use force," says retired Air Force General Isaac Ben-Israel.

But when? Those "who don't want war are playing for time now," says Middle East expert Flynt Leverett -- enough time for a new president to have moved into the White House. Richard Perle, an advisor to former US Defense Secretary Donald Rumsfeld and once a staunch advocate of America flexing its military muscles, holds a similar view. Nowadays Perle sounds more resigned than confident when he writes: "Seven and a half years after denouncing Iran's nuclear weapons program, a hapless president and his coalition can only look on while the Iranians rush to the finish line."

By Dieter Bednarz, Ralf Beste, Hans Hoyng, Cordula Meyer, Wolfgang Reuter and Christoph Schult

Translated from the German by Christopher Sultan