Sanctions Against Iran Should Focus On Powerful Revolutionary Guards

Since Hassan Rouhani’s election as the new president of Iran in June 2013, the Islamic Republic has been on a "charm offensive." Rouhani and his team captivated large segments of Western public opinion and decision-makers, no doubt thanks to their mild-mannered eloquence and polished personae.

But in their quest for a better international standing, they have also had an unlikely facilitator and enabler -- Iran’s Revolutionary Guards, or IRGC. Ostensibly a branch of the Iranian military, the Guards have a much deeper involvement in many aspects of Iranian society. At the end of the Iran-Iraq war, then-President Akbar Hashemi Rafsanjani and his predecessor -- now Supreme Leader -- Ayatollah Ali Khamenei encouraged the IRGC to plunge into Iran's economy and join in the reconstruction efforts. Since then, the IRGC -- much like other militaries in authoritarian societies -- have built their own economic empire.

Now in 2014, at every step of the way, the Guards have murmured, criticized and warned Rouhani for his overtures and apparent compromises with the West, thus creating the impression that a ‘battle’ of sorts is raging in Tehran between ‘hardliners’ and ‘moderates’. Predictably, this duel has elicited Western calls for more concessions to Rouhani as a way to ‘strengthen the moderates’. Indeed, the grumblings of a hardliner entity, the IRGC, against the serving president serves the purpose of enhancing Rouhani's allure in the West.

There is something to the notion that Rouhani and the IRGC are in a genuine tug of war – but then, it is not much, and it has to do more with who milks the state’s cow, and less with grand strategic questions about the nature of Islamic governance or the future of Iran’s nuclear program.

In truth, there has been little change in Iran’s policies – Rouhani’s human rights’ record is even worse than his predecessor, Mahmoud Ahmadinejad, and Iran’s long-term nuclear aspirations remain unchanged.

Whether the IRGC and Rouhani are locked up in a struggle over policy rather than [spoils] remains to be seen.

But let’s assume the Guards feel ‘threatened’ by the Iranian president’s new course. There is no guarantee that major concessions would help Rouhani contain the IRGC, given that the IRGC’s military might and its considerable clout over Iran’s economy are what makes the IRGC such an influential player.

A more prudent course of action would be to undermine the ‘hardliners’ without making premature concessions, by going after their economic power. The IRGC are, after all, under U.S. and European sanctions as the custodians of Iran’s nuclear and ballistic missile programs. Many of their companies have already been targeted due to their role in procuring technology for both programs. Increasing pressure on the IRGC is well within the purview of existing sanctions, which both the U.S. and the EU can enforce even as they implement the nuclear interim deal signed with Iran last November.

Targeting IRGC companies has an added value: it would reinforce the U.S. refrain, voiced since the interim deal was signed, according to which ‘Tehran is not open for business’. It is hard to imagine that the U.S. and Europe would wish sanctions’ relief to ultimately benefit those who are likeliest to oppose any nuclear compromise. It is even harder to fathom that the IRGC would not benefit from sanctions’ relief, given the extent of its economic influence.

Such influence is hard to quantify. Some of it comes from smuggling, black market monopolies, drug trafficking, and other opaque activities. Some of it comes from the ability to deliver government contracts to IRGC companies through political pressure. But there is a considerable area where IRGC economic presence can be accurately measured.

The IRGC is the main block-holder of Tehran’s Stock Exchange (TSE), Iran’s principal public trading platform.

At present, the IRGC’s fully controls 28 publicly- traded companies, including such key economic players as Telecommunication Company of Iran (TSE: MKBT1), Ansar Bank (TSE: BANS1), and Toosgostar Urban Development (TSE: TGOS1). The IRGC also has the lion’s share of key sectors such as metals and mining with significant stakes in zinc producer Calcimine (TSE: KSIM1), National Iran Lead and Zinc Company (TSE: SORB1), Iran Casting Industries (TSE: RIIR1), and Iran Aluminum Company (TSE: ALIR1); the Bahman Group (TSE: BHMN1) in the automotive industry; and Parsian Oil and Gas (TSE: PASN1), Pardis Petrochemicals (TSE: PRDZ1), and Shiraz Petrochemical Co. (TSE: PSHZ1) in the petrochemical sector, just to name a few.

The IRGC is also minority shareholder in many other publicly traded companies listed on the TSE. Technically, the IRGC does not control them; but its political power, its role as the regime’s main security apparatus and its access to the judiciary system give the Guards considerable leverage even as a minority shareholder.

IRGC investments in TSE boomed after the 2009 bloody repression that followed former president Ahmadinejad’s fraudulent re-election. The ability to seize some of the most important public companies was a reward for saving the regime from the Green Movement’s calls for democratization. Often, these companies were sold to the IRGC below their real value in a bogus privatization process. Many of these companies – and their shares – have performed poorly since their IRGC takeover, partly due to bad management and partly because the IRGC plundered their wealth for its own needs. In the most egregious cases – like the one of Sadra, Iran’s leading shipbuilder - – companies had to be delisted from the TSE.

Since Rouhani’s election, there has been some pushback against such malpractices. Under the rubric of anti-corruption policies, Rouhani has also sought to halt the transfer of more public companies to the IRGC and their proxies. But their influence remains considerable – as of December 2013, the IRGC controlled 21 percent of TSE’s market value.

Sanctioning their companies would prevent them from benefiting from the sanctions’ relief underway as a consequence of the nuclear interim deal, without violating the terms of the agreement. It would hurt IRGC revenues, reducing the regime’s worst proliferators’ access to financial resources they need for procurement abroad. And it would diminish their political influence and clout over the country, highlighting how investing in IRGC business is a liability.

It is doubtful that Rouhani will ultimately contradict the Guards on the strategic question of nuclear capability. But if a real power struggle is underway in Tehran between Rouhani and the Guards, the West can contribute to their weakening without jeopardizing its own position.

Emanuele Ottolenghi is a Senior Fellow at the Foundation for Defense of Democracies; Saeed Ghasseminejad is a Ph.D. candidate in finance at City University of New York.