Why the U.S. Is Holding Back on Its Most Powerful Iran Sanction—for Now

Congressional leaders are pushing the White House to sanction Iran's central bank, which would devastate the country and, possibly, the world energy market

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Iran's Central Bank building in Tehran / Reuters

The Obama administration on Monday unveiled a sweeping new set of sanctions against Iran, but the White House held off on directly targeting Iran's central bank, a hard-hitting move that would damage Iran's economy but risk sending global oil prices skyrocketing and sparking potentially violent Iranian retaliation.

The administration has been steadily escalating its diplomatic and economic pressure on Iran in response to intelligence showing that Tehran has come closer to successfully building a nuclear weapon than ever before. The sanctions unveiled by Secretary of State Hillary Clinton and Treasury Secretary Timothy Geithner are designed to further tighten the screws on Tehran by making it virtually impossible for foreign companies to invest in Iran's oil sector or complete transactions with any components of Iran's financial system.

Britain and Canada announced similar measures, with England's finance minister announcing on Monday that all British financial institutions were now barred from doing business with Iranian banks. The move marked the first time in history that the British government cut off an entire country's banking sector from its own financial system.

The U.S. followed suit - with one key difference -- a few hours later. Geithner, speaking to reporters at the State Department on Monday evening, said the U.S. would designate Iran's entire financial sector - including its central bank -- as a "primary money laundering concern" under the Patriot Act. The move stops well short of sanctioning the bank, but it could set the stage for doing so in the future.

"No option is off the table, including the possibility of imposing additional sanctions on the central bank of Iran," Geithner said.

Despite the tough talk, it's not clear when - or if - the administration will actually take punitive measures against Iran's central bank. Sanctioning the bank could spark chaos in the world oil market and push prices higher, threatening the fragile economic recoveries underway in the U.S. and many European countries. But it is widely considered to be the most powerful weapon in the U.S. economic arsenal.

Proponents, including an array of leading lawmakers from both parties, believe that targeting Iran's Bank Markazi would prevent the country from processing payments for the roughly $90 billion worth of oil and natural gas that it sells each year. Petroleum is one of the country's most lucrative industries, so such measures would make it far more difficult for Tehran to fund its government, military, or security services.

"There is no question that it will have a real impact on Iran's ability to finance its illicit activities or even fund the normal operations of its government," said Matthew Levitt, a counterterrorism expert at the Washington Institute for Near East Policy. "If you did business with the Iranian central bank, you'd lose your ability to do any business whatsoever with American banks. It would have a tremendous impact on oil sales."

That's precisely what growing numbers of lawmakers from both parties are hoping for. In a joint letter last week, House Speaker John Boehner, R-Ohio, and House Minority Leader Nancy Pelosi, D-Calif., called on the White House to determine whether the bank was helping the Iranian government finance its nuclear effort or fund "terrorist activities" outside its borders. If so, the lawmakers said the U.S. should immediately sanction the bank.

"Sanctioning the central bank of Iran would impose powerful financial pressure on Iran to curb its dangerous and illegal activities," the lawmakers wrote.  "We also urge you to make the central bank of Iran's involvement in proliferation and terrorist activities the target of coordinated multilateral sanctions."

Sen. Mark Kirk, R-Ill., has drafted an amendment to the massive National Defense Authorization Bill that would impose such sanctions on Iran's central bank, and the provision is drawing increasing bipartisan support. He and other proponents believe targeting the bank was one of the last options left to the U.S. short of undertaking military strikes against the country's nuclear facilities.

The administration has said all options are on the table when it comes to preventing Iran from obtaining a nuclear weapon, and has at times signaled a willingness to act against the central bank. In October, David Cohen, the Treasury Department's undersecretary for terrorism and financial intelligence, told the Senate Banking Committee that his department was "actively" looking at whether to sanction the bank.

More than a month later, however, there are few signs that the administration plans to target the bank anytime soon. The inaction stems from fears about the economic and security implications of sanctioning the bank.

Iran has some of the world's largest proven reserves of oil and natural gas, and Washington and its allies fear that measures effectively cutting Iran off from the global oil market would send prices spiking higher, further straining weak Western economies.

Other U.S. officials and Middle East experts also fear that Tehran would view the measures as an act of war and retaliate by directly or indirectly striking Israel or other U.S. allies throughout the Middle East.

"If we do in fact cripple the entire Iranian economy, how do they respond to what they'd potentially see as an act of economic war?" asked Suzanne Maloney, an expert on the Iranian economy at the Brookings Institution. "The conundrum for the international community is that there is broad interest in ensuring that the Islamic Republic of Iran is treated as a pariah but real concern about doing that to a country with the second-biggest reserves of oil and natural gas in the world."

Still, Washington is running out of time to decide. The International Atomic Energy Agency has reported that Iran is making steady progress toward mastering the technological challenges of building a nuclear bomb, and Western intelligence agencies are tracking increasing amounts of activity at a suspected nuclear site southwest of Tehran. Iran has found ways of limiting the impact of previous Western sanctions and there's no guarantee the new measures will succeed in persuading Iran to drop its nuclear ambitions when so many earlier attempts have failed.