An Economic Squeeze Play

Is it diplomatic hardball, or a step down the road to war with Iran? The Bush administration insisted last week that its new sanctions against Iran's elite military force, its Defense Ministry, and some of its largest banks are meant to push Tehran to mend its ways—or, at least, to make it more difficult to continue doing business as usual. But the U.S. moves also touched off fresh international anxieties over the Iran stalemate, with crude oil notching up a new record above $92 a barrel.

Iranian Revolutionary Guard commanders chant slogans during a meeting with President Mahmoud Ahmadinejad.

The new penalties against Iran—the toughest to date—target its disputed nuclear programs as well as what the United States regards as crucial support for terrorist groups and Shiite militants in Iraq. U.S. officials describe the sanctions as putting teeth into diplomatic efforts to draw Iran to the negotiating table once it suspends nuclear work. But the action also serves as a warning to U.S. diplomatic partners in Europe and elsewhere to lean harder on Iran now or expect even harsher measures in the future.

Secretary of State Condoleezza Rice called the sanctions part of "a comprehensive policy to confront the threatening behavior of the Iranian government." They follow fresh warnings from President Bush that an Iranian nuclear weapon could lead to "World War III" and from Vice President Cheney that Iran faced "serious consequences" to bar it from attaining the bomb. Iran, which says it is not seeking one, dismissed the new steps as "doomed to fail as before."

Tension. The 125,000-strong Iranian Revolutionary Guard Corps and the Defense Ministry were designated as proliferators of weapons of mass destruction and ballistic missiles. That also applies to Bank Melli, Iran's largest, and Bank Mellat. The IRGC's Quds Force was named as a "specially designated global terrorist" group for its support of Hezbollah, Hamas, and Palestinian Islamic Jihad. Also cited: Bank Saderat, allegedly used to send funds to Hezbollah and others.

Administration officials plan to use the designations to accelerate an ongoing campaign to dissuade companies in other countries from doing business with Iran. That effort has succeeded in reducing European investment in and financing for Iranian companies, but the sweeping designations may generate tensions with some European governments. The spike in oil prices also shows that the economic pain can cut two ways.

The administration's actions touched off debate as to whether they bring the United States closer to military conflict with Iran or make such conflict less likely. "These kinds of targeted sanctions represent our best chance to influence Iran's action so as to be able to avoid military action," Sens. Joseph Lieberman and Jon Kyl said in a joint statement. Some analysts don't buy that. "The two countries are edging closer and closer to war," says Fawaz Gerges, a Middle East scholar at Sarah Lawrence College in New York. He predicted that Iran would view the designations as "basically an act of war" and would step up IRGC activities in Iraq, Lebanon, and elsewhere. "Those sanctions," he says, "will likely stiffen the resolve of the Iranian leadership."