Review 22.6
24 April - 10 May , 1997

"Together we must show zero tolerance for them. That means putting pressure on rogue states, not doing business with them. It is very difficult to do business by day with people who kill by night."

So pleaded President Bill Clinton to a joint sitting of the Australian Senate and House of Representatives last November as he encouraged the Australian Government to support US efforts to curtail its credit and business ties with Iran. It was a message reiterated last week by Genta Hawkins Holmes, the newly appointed US ambassador to Canberra, who urged Australia to withdraw credit arrangements with Iran.

Now, in what has become known as the Mykonos trial, a Berlin court has confirmed what Western intelligence agencies have known for many years. In the words of Salman Rushdie, himself still under an Iranian Islamic fatwa of death, "We all know that the Iranians have a terrorist network in place in every European country. We know that they are one of the most brutal regimes on the planet towards their own people, and yet all we seem to want to do is scold them a little while continuing to make millions of dollars. The question I would ask is what do they have to do before we stop selling and start noticing the fact that this is a terrorist and murderous state?"

The verdict from the Berlin trial, that Iran's leadership has sanctioned and approved international acts of terror, has shattered the "critical dialogue" and "constructive engagement" policies of appeasement towards Iran by the European Union and Australia. For years, Europe has engaged in "critical dialogue" with Iran. Similar to Australia's "constructive engagement", the policies advocate extensive economic investment and trade with the Islamic Republic of Iran, while simultaneously attempting to moderate the regime's excesses. In practice, it has meant the extension of diplomatic support and vast amounts of financial credit to Tehran and the turning of a blind eye to international acts of terrorism. Now, European nations face the burden of some $30 billion of rescheduled debt to Iran. Australia extends an, as yet unused, line of credit of $1.14 billion to Tehran - the largest credit offered by Australia to any nation and the largest credit received by Iran, followed only by Belgium with US$350 million.

Last year, then US Secretary of State Warren Christopher said, "Concessionary credits ... allow Iran to divert scarce resources to military programs and to sponsoring terrorism." While the sale of foodstuffs and agricultural produce to Tehran by Australia does not need to be curtailed, there is no doubt that taxpayer underwritten concessionary credit arrangements to countries of huge credit risk like Iran who are simultaneously engaged in international terrorism are highly dubious on economic and moral grounds.

Iran has also been responsible for the training, funding and supply of Hamas, Islamic Jihad, and Hezbollah terrorist groups based in the Middle East, as well as terrorist organisations in the Philippines and Thailand. Tehran has supplied Hezbollah with Katyusha rockets and other heavy weaponry, and given explicit orders to carry out terror attacks against Israel. US and Israeli intelligence agencies have linked Iran to the devastating 1996 suicide bombings carried out by Hamas and Islamic Jihad in Israel killing 60 people. According to Egyptian President Hosni Mubarak, Iran was responsible for a series of attempted assassinations on his life last year, while Palestinian leader Yasser Arafat has continually claimed that Iranian agents are attempting to kill him.

In February, European authorities seized containers carrying parts for a super-mortar aboard an Iranian freighter docked in Antwerp. The mortar, was intended for Iranian terror cells operating in Europe. Then US Secretary of State Warren Christopher and US Defence Secretary William Perry also warned of Iranian efforts to acquire nuclear weapons, and the dire consequences that could have for the Middle East, Europe and international terrorism.

United States, Canadian and Saudi Arabian investigators have also linked Tehran to the truck bombing of a US airforce base in Dhahran, Saudi Arabia last year. Evidence presented at the recent Canadian hearing of a key suspect, Al-Sayegh, pointed to Hezbollah/Iranian orchestration of the attack, setting the scene for a potential serious escalation of hostilities between Tehran and the US.

There is now overwhelming evidence of Iranian state sponsored terrorism, Tehran's efforts to undermine the Arab/Israeli peace process and its involvement in the proliferation of weapons of mass destruction.

Meanwhile, Iran's credit-ratings are plummeting. Financial institutions project that international loans to Iran are unlikely to be paid back. Tehran's prospects of receiving further loans on a solely commercial basis are virtually nonexistent. Yet, tens of billions of dollars are being given in Western credits to Iran at subsidised interest rates, while Tehran works methodically to build nuclear, chemical, and biological weapons capabilities and supports terrorist operations against Western interests in dozens of countries.

Australia, through the Export Finance and Insurance Corporation (EFIC), offers a $1.14 billion line of credit to Iran which is larger in total than that offered by all the G7 Nations combined. The existence of such a line of credit cannot do other than send a signal to Iran that Australia does not share America's concern at Iran's continued recourse to terrorism.

The problematic nature of this relationship for Australia lies in the high probability that it stands to lose substantially from this generosity. Looking at Tehran's record, analysts believe that it will be unable to meet payments on its international debt, now in excess of $30 billion. The World Bank has not lent to Iran since 1993. Iran has had to seek the rescheduling of $6 billion in debt to Germany, France and Japan. Given both the poor economic prospects of the Iranian economy, and the aggressive nature of its regime, Australia's trade credits to Iran, if taken up, are likely to be as much a write off as the $700 million lent to Iraq prior to its 1990 invasion of Kuwait.

This policy is unfortunate for two reasons. Firstly, given Iran's poor economic situation, these concessional loans, which amount to Western subsidies of the Iranian regime, provide the means for much of Tehran's policies of terrorism and conventional and non-conventional military build-up. And secondly, they lack financial prudence. Iran simply cannot pay back these loans, as many international observers have pointed out.

The most disturbing aspect of this relationship between Australia and Iran is that it potentially allows the cash-strapped Iranian economy to sustain high expenditure on programs for weapons of mass destruction, ballistic missiles, and diversion of funds to terrorist groups.

Given the principled stand Australia has adopted in support of the Chemical Weapons Convention and the Nuclear Non-Proliferation Treaty, the contradiction in its policy towards Iran embarrasses Australia in its relations with other countries, particularly the United States, which disturbingly has raised serious concerns over Australian concessionary credit arrangements.

The United States has tried to lead its allies away from this path. As Secretary of State Warren Christopher said on May 1, 1995, "Concessionary credits ... allow Iran to divert scarce resources to military programs and to sponsoring terrorism."

Within the past three years, Iran has fallen into arrears on $30 billion in debts to creditors in over 46 countries. Most Western governments rate Iran in their highest risk, least creditworthy category. For example, the government of France rates Iran at 4/4, Germany at 5/5, both the highest risk rating. The US General Accounting Office estimates the probability of default on a new loan to Iran to be 55%.

Iran's mountain of debt is the result of a pattern of generous commercial credits and lending by Western governments since the end of the Iran/Iraq War, mostly at concessionary below-market rates of 5-9%. Iran borrowed much more than it could handle, and when oil prices dropped in the early 1990s, Iran stopped making payments. By 1993, it was deep in a debt crisis. Frightened by the prospect of outright default, the creditor governments, led by Germany, began to reschedule Iran's debt in 1993 on even more favourable terms: interest at 5-7% per year, with two years of grace on amortisation of the principal. This occurred at a time when, according to the World Bank, free market commercial lenders were charging Iran a premium of 33%.

The creditors - led by Germany, Italy, Japan, and France - have been lending to Iran at rates below those charged to the most creditworthy borrowers, rather than charging the 12% risk premium that would, on strictly commercial grounds, normally be added above the prime rate for a borrower in Iran's credit risk group. Forgiveness of this 12% risk premium on more than $20 billion to be repaid over six years, plus the grace period on principal payments, means that Europe and Japan have in effect given to Iran a subsidy of at least $11.4 billion since 1993. While Iran benefits, taxpayers in the lending countries have been put at substantial risk by $20 billion in concessionary loans to a country with a history of delinquency and a substantial probability of default.

Iran has, in a very short time, shifted from a capital-importing country to one experiencing a very substantial net outflow. In the 1991-1992 Iranian financial year, massive credits from the West contributed a net inflow of $10 billion. By 1996-1997, debt service payments will exceed anticipated new credits by $5 billion, a net change of $15 billion from five years earlier.

Keeping Iran in a net capital outflow position is of enormous benefit to the West, as it reduces Tehran's ability to finance policies inimical to our vital interests. The economic crisis has already forced the regime to delay portions of its military modernisation effort, postponing several major arms agreements. According to the Washington Post, "Iran's deepening economic woes and a strict Western embargo on arms sales have forced the country to scale back... Billions of dollars in Iranian arms purchases - including many orders from Russia or North Korea - either have been put on hold or cancelled." This is seen by the regime in Tehran as a temporary situation, and plans to expand both conventional and non-conventional capabilities remain in effect, as does support for terrorist activities abroad.

Despite recent efforts by Tehran to pay off some of their arrears, including those to Australia, the situation for the future does not look good. There are already signs that Tehran is repeating its threats of the previous round of rescheduling, demanding more loans if the money already lent is to be repaid.

Despite this mountain of debt, Iran still has unused line of credit from many countries. The Australian EFIC line of credit of $1.14 billion is the largest unused line of credit still available to Iran in the world.

Surprisingly, EFIC's conditions are better for the Iranians than those offered by most other industrial country export guarantee funds. Apart from the export insurers who will not do business with Iran, such as France's COFACE, Italy's SACE, the Netherlands NCM, Norway's GIEK, Japan's EID, Turkey's TURKEXIM, Britain's ECGD, and the US EXIMBANK and FCIA, with a few exceptions, most other export insurers will insure only a smaller percentage of deal values than Australia, or set more stringent limits to the size of individual transaction or total annual commitments.

The most important exception is Germany (and even Germany's HERMES has transaction and commitment limits smaller than Australia). Yet Bonn is quite open about why she needs trade ties with Iran. Germany is trapped; if she fails to maintain trade and investment ties with Iran, she stands to lose the billions already lent to Tehran.

Germany's Chancellor Kohl told Israel's Knesset Foreign Affairs and Defence Committee on June 6, 1995 that Germany would not break trade ties with Iran since, as Tehran's largest creditor, Germany had to make sure Iran paid its debt.

However, Australia is not yet in this trap. Surely it would be wise to stay out of it by simply not lending to the Iranians and ensuring that Australia receives cash or provides short term limited credit for agricultural exports only. Indeed, there is a case for maintaining the export of only agricultural goods to Iran on condition of upfront immediate payment. As the Iranian debt crisis deepens, Australia would be a natural place for Iran to turn to for additional financing. This could indeed lead to a temporary windfall to Australian business should Iran begin to draw down the EFIC line of credit. Unfortunately, given the economic situation of Tehran, were Iran to do this, there is every chance that Australian taxpayers would end up having to bail out EFIC - again.

Moreover, if Iran were to make use of this easy credit from Australia, Australian taxpayers, charging only notional interest as compared to commercial loans, would in effect be subsidising Iranian-backed terrorism and its drive for nuclear, chemical and biological weapons. Australians would be helping to pay for those same weapons of mass destruction our foreign policy has worked so hard to contain and remove. It is inconceivable that Australia, with its long-standing commitments to human rights, a more open international order and the elimination of weapons of mass destruction, should not be undertaking every possible measure to impede the proliferation of non-conventional weapons.

The United States has already demonstrated a willingness to make considerable sacrifices in implementing a program of sanctions against Iran. The US ban on the handling of Iranian oil by American companies is costing over US$3 billion per year. A veto placed on the Conoco oil development scheme in Iran was worth a further billion.

In imposing the US embargo on Iran earlier this year, US Secretary of State Warren Christopher called on its allies to "undertake a comprehensive review of their economic ties to Iran," adding that "certainly they should end all of their concessionary credits, which allow Iran to divert scarce resources to military programs and to sponsoring terrorism."

The argument frequently made by opponents of sanctions is that if Iran is isolated, it will only promote even more extreme behaviour. Yet the facts at the moment are such that Iran has virtually no incentive to change its behaviour. Tehran can obtain all the Western technology, investment and trade it needs without giving up its drive for weapons of mass destruction, its support for global terrorism, or its attempts to intimidate its neighbours. Australia has two good reasons for reviewing her policy on Iran. One is that tolerating Iran is simply not conducive to the kind of world Australia wants to live in, nor is it compatible with notions of good international citizenship that Australia has long tried to promote, sometimes as a voice in the wilderness. Iran is acting in violation of international law, treaty obligations which Iran has voluntarily accepted, and minimum standards of behaviour which will allow other nations to live in conditions of mutual tolerance in the region.

With such a litany of terror, Iran has been branded and isolated as a terrorist pariah state. It is the subject of tough economic sanctions by the United States, and Europe is now considering what action it must take in light of the Berlin court verdict.

But the major problem over sanctions against Iran will remain the same as before Mykonos; not evidence but apathy. Too many states are simply unwilling to pay the economic price it would take to get Iran to alter its international behaviour. While everyone would doubtless like to see Iranian terrorism end, many states simply want someone else to do something about it.

Unless this changes, it bodes ill for any hopes of a more peaceful world order in the next century. Iran is not simply one of the many state sponsors of international terrorism, it is far and away the biggest and most dangerous. Tehran is not only responsible for the vast majority of state sponsored international terrorism in the world today, it has a hand in terrorist groups in virtually every corner of the globe. Worse still, today, according to all available evidence, Iran is at most a few years from developing nuclear weapons in violation of the Non-Proliferation Treaty, to which Tehran is a signatory.

If most states continue to be unwilling to pay even a small price to punish the most blatant violations of international law, to reduce the terrorism which costs the world economy billions each year, and are prepared to sit back and see international rogue states gain nuclear weapons, then the next few decades could be violent and unpleasant indeed. The tense and dangerous standoff of the Cold War could give way to an even more dangerous situation of nuclear chaosIn a sense, Iran is a test case for the question: Is a better international social order possible? Can we reduce war and violence and facilitate trade and economic growth through international co-operation? There is no doubt that the states of the world, including Iran, have common interests in doing so, but can they overcome their selfish interests and difference of opinion to actually do it?

The Mykonos case is an opportunity. The evidence is there. The crimes that have been committed are universally reviled and condemned. The nuclear danger is all too real, given Iran's past behaviour. Iran is not in a military or economic position to inflict major punishment on those who act against her, nor will any major state defend her. The world community now has a chance to take a basic stand which demands adherence to certain basic rules of behaviour of its members before they gain the benefits of in ternational trade, finance and investment.

Australia has a role to play here. The US already has a complete embargo on trade with Iran. Australia is not being asked to go so far. If Australia were to suspend existing long term credit arrangements with Tehran, and downgrade political contacts, exchanges and support, she would be making a contribution to a genuine international effort to curb the unacceptable behaviour of the Iranian regime. No agricultural exports would necessarily cease, yet this would be a clear signal that Australia believes she has a role to play in shaping the nature of the international system. The alternative is to turn Australian foreign policy effectively into trade policy.

If Australia and other medium sized international actors cannot act in the Iranian case, then it is difficult to imagine any further case in which the international community would act against a rogue state. And without some sense of community and basic international law, the international environment of the next century could be bleak indeed.