Order Code RL32048
CRS Report for Congress
Received through the CRS Web
Iran: U.S. Concerns and
Policy Responses
Updated November 29, 2004
Kenneth Katzman
Specialist in Middle Eastern Affairs
Foreign Affairs, Defense, and Trade Division
Congressional Research Service ˜ The Library of Congress

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Iran: U.S. Concerns and Policy Responses
Summary
The Bush Administration has pursued several avenues to attempt to contain the
potential strategic threat posed by Iran, at times pursuing limited engagement with
Iran and at other times leaning toward attempting to change its regime. However,
some experts believe a potential crisis is looming over Iran’s nuclear program
because the Bush Administration is skeptical that efforts by several European allies
to prevent a nuclear breakout by Iran will succeed. U.S. sanctions currently in effect
ban or strictly limit U.S. trade, aid, and investment in Iran and penalize foreign firms
that invest in Iran’s energy sector, but unilateral U.S. sanctions do not appear to have
significantly slowed Iran’s WMD programs to date. Some advocate military action
against Iran’s nuclear infrastructure, but others believe that a combination of
diplomatic and economic rewards and punishment are the only viable options on the
nuclear issue.
Other major U.S. concerns include Iran’s policy in the Near East region,
particularly Iran’s material support to groups that use violence against the U.S.-led
Middle East peace process, including Hizballah in Lebanon and the Palestinian
groups Hamas and Palestinian Islamic Jihad. Some senior Al Qaeda activists are in
Iran as well, although Iran claims they are “in custody” and will be tried, and the 9/11
Commission has found that some officials in Iran might have facilitated or at least
tolerated travel through Iran by Al Qaeda operatives. Iran was quietly helpful in the
U.S. effort to oust Iraq’s Saddam Hussein, a longtime Tehran adversary, although
Iran reportedly is supporting some armed Shiite Islamic factions there. Iran is also
reported to be assisting pro-Iranian local leaders in Afghanistan, although that
support does not appear to be materially hindering the gradual stabilization and
development of Afghanistan.
Iran’s human rights practices and strict limits on democracy have been
consistently and harshly criticized by official U.S. reports, particularly for Iran’s
suppression of religious and ethnic minorities. However, Iran does hold elections for
some positions, including that of president, suggesting that there might be benefits
to engaging Iranian officials. According to this view, new sanctions or military
action could harden Iran’s positions without necessarily easing the potential threat
posed by Iran. Others believe that there will be little progress on democracy or on
the strategic and foreign policy threat posed by Iran unless and until the regime ruling
Iran is removed. Some believe that internal groups opposed to the regime are not
capable, even if given substantial U.S. aid, to accomplish that goal, and many believe
that a U.S. military effort to overthrow Tehran’s regime is unrealistic in light of the
commitment of U.S. forces in Iraq and elsewhere and in the face of likely opposition
to such a move by most Iranians.
For further information, see CRS Report RS21592, Iran’s Nuclear Program:
Recent Developments, and CRS Report RS21548, Iran’s Ballistic Missile
Capabilities. This report will be updated as warranted by developments.

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Contents
Threat Assessments and U.S. Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Political History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Regime Stability, Internal Politics, and Human Rights . . . . . . . . . . . . . . . . . 2
Khatemi and the Reformist Camp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
The Conservatives and the February 2004 Majles Elections . . . . . . . . . 3
Prominent Dissidents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Anti-Regime Groups: People’s Mojahedin Organization of
Iran (PMOI) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Pro-Shah Activists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Criticism of Iran’s Human Rights Record . . . . . . . . . . . . . . . . . . . . . . . 6
Iran’s Strategic Capabilities and Weapons of Mass Destruction Programs . . 7
Nuclear Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
Chemical and Biological Weapons . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Missiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
Foreign Policy and Support for Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . 13
Persian Gulf States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Supporting Anti-Peace Process Groups . . . . . . . . . . . . . . . . . . . . . . . . 16
Relations With Central Asia and the Caspian . . . . . . . . . . . . . . . . . . . 17
Afghanistan/Al Qaeda . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
U.S. Policy Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
Bush Administration Policy and Options . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Regime Change Policy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Engagement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Military Action? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
International Sanctions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
U.S. Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Terrorism/Foreign Aid Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Bam Earthquake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Proliferation Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
Counternarcotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
Trade Ban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
The Iran-Libya Sanctions Act (ILSA) . . . . . . . . . . . . . . . . . . . . . . . . . 28
Caspian/Central Asian Energy Routes Through Iran . . . . . . . . . . . . . . 29
Travel-Related Guidance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
U.S.-Iran Assets Disputes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Multilateral Policies Toward Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
Britain/France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Japan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Multilateral/International Lending to Iran . . . . . . . . . . . . . . . . . . . . . . 32
WTO Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33

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Iran: U.S. Concerns and
Policy Responses
Threat Assessments and U.S. Concerns
Part of the debate over U.S. policy toward Iran has centered on the nature of the
current regime. Some experts believe that Iran is a threat to U.S. interests because
hardliners in Iran’s regime continue to dominate and set a policy direction intended
to challenge U.S. influence and allies in the region. The elements of that challenge
include attempting to acquire weapons of mass destruction (WMD), supporting
terrorist groups, failing to extradite senior Al Qaeda leaders, and pressuring such
regional U.S. allies as the United Arab Emirates (UAE), Bahrain, Qatar, and
Azerbaijan. Others believe that common strategic interests in stability in Central
Asia and the Persian Gulf could drive Iran to become a potential ally of the United
States on at least some issues. In the view of some, Iran could support some U.S.
policy goals whether or not moderates prevail politically inside Iran. Still others
maintain that Iran will constitute a major threat to U.S. interests unless and until all
elements of the current regime are removed and replaced with a non-Islamic, pro-
Western government.
Political History
The United States was an ally of the late Shah of Iran, Mohammad Reza Pahlavi
(“the Shah”), who ruled from 1941 until his ouster in February 1979. The Shah
assumed the throne when Britain and Russia forced his father, Reza Shah Pahlavi
(Reza Shah), from power because of his perceived alignment with Germany in World
War II. Reza Shah had assumed power in 1921 when, as an officer in Iran’s only
military force, the Cossack Brigade, he launched a coup against the government of
the Qajar Dynasty.
The Shah was anti-Communist, and the United States viewed his government
as a bulwark against the expansion of Soviet influence in the Persian Gulf. In 1951,
he appointed a popular nationalist parliamentarian, Dr. Mohammad Mossadeq, as
Prime Minister. Mossadeq was widely considered left-leaning, and the United States
was wary of his policies, which included his drive for nationalization of the oil
industry. Mossadeq’s followers began an uprising in August 1953 when the Shah
tried to dismiss Mossadeq, and the Shah fled. The Shah was restored in a CIA-
supported coup that year, and Mossadeq was arrested.
The Shah tried to modernize Iran and orient it toward the West, but in so doing
he also tried to limit the influence and freedoms of Iran’s Shiite clergy. He exiled
Ayatollah Ruhollah Khomeini in 1964 because of Khomeini’s active opposition to

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the Shah, opposition based on the Shah’s anti-clerical policies and what Khomeini
alleged was the Shah’s forfeiture of Iran’s sovereignty to its patron, the United States.
Khomeini settled in and taught in Najaf, Iraq, before going to France in 1978,
from which he stoked the Islamic revolution. Mass demonstrations and guerrilla
activity by pro-Khomeini forces, allied with a broad array of anti-Shah activists,
caused the Shah’s government to collapse in February 1979. Khomeini returned
from France and, on February 11, 1979, declared an Islamic Republic of Iran. The
Islamic republic is characterized by direct participation in government by Shiite
Islamic theologians, a principle known as velayat-e-faqih (rule by a supreme Islamic
jurisprudent). Khomeini was strongly anti-West and particularly anti-U.S., and
relations between the United States and the Islamic Republic turned hostile even
before the November 4, 1979, seizure of the U.S. Embassy by pro-Khomeini radicals.
Regime Stability, Internal Politics, and Human Rights
After about a decade as leader of the revolution, Ayatollah Khomeini died on
June 3, 1989. His regime continues, now led by his clerical disciples. Upon
Khomeini’s death, one of those disciples, Ayatollah Ali Khamene’i, then serving as
president, was named Supreme Leader by an “Assembly of Experts.” The Assembly
chooses the person who will fill the position of Supreme Leader and can amend
Iran’s constitution. (The Assembly of Experts is an elected body.) Khamene’i had
served as elected president since 1981 (re-elected in 1985). Khamene’i lacks the
unquestioned spiritual and political authority of Khomeini, but Khamene’i appears
to face no direct threats to his position. An elected president, Mohammad Khatemi,
was re-elected on June 8, 2001 by a landslide 77% of the vote against nine more
conservative candidates. Khatemi remains popular by most accounts, but he is
politically subordinate to the Supreme Leader. Khatemi’s re-election victory was
larger than his 69% first win in May 1997. His supporters held about 70% of the
seats in the 2000-2004 Majles (parliament) after their victory in the February 18,
2000, elections.
The United States does not have a declared policy of changing Iran’s regime,
although some U.S. officials who favor a regime change policy point to growing
sentiment for reform by major segments of the population, including students. These
reform elements are critical of and have occasionally demonstrated against
“unelected” hardliners, including the Supreme Leader, Ayatollah Ali Khamene’i.
The Supreme Leader controls appointments to key institutions such as the armed
forces and the twelve-member Council of Guardians,1 a body that reviews legislation
to ensure it conforms to Islamic law. Another unelected body dominated by
conservatives is the “Expediency Council,” set up in 1988 to resolve legislative
disagreements between the Majles and the Council of Guardians. Even before the
February 2004 victory in Majles elections by conservatives, Khamene’i and his allies
had largely constrained the influence of the reformers.
1 The Council of Guardians consists of six Islamic jurists and six secular lawyers. The six
Islamic jurists are appointed by the Supreme Leader. The six lawyers on the Council are
selected by the Majles (parliament).

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Khatemi and the Reformist Camp. Khatemi is a mid-ranking cleric, one
rank below Ayatollah. He served as Minister of Culture and Islamic Guidance in the
early 1990s but was dismissed from that post in 1993 because of criticism that he was
allowing Western cultural material to receive wider distribution in Iran. From his
dismissal until his election in 1997, he was head of Iran’s national library. He
derives key political support from a reformist grouping called the Islamic Iran
Participation Front, headed by his brother, Mohammad Reza Khatemi, who was a
deputy speaker in the 2000-2004 Majles. Another group, the student-led Office for
Consolidation and Unity, is generally pro-Khatemi but has reportedly become
somewhat critical of him for failing to challenge the hardliners assertively. The depth
of dissatisfaction within the reform camp was exposed during major student
demonstrations on June 8, 2003, the fourth anniversary of the violent suppression of
students and others who were rioting in favor of faster reform. Some of the 2003
protesters called for Khatemi to resign for being ineffective in promoting reform.
President Bush issued statements in support of the demonstrators, although Secretary
of State Powell said the protests represented a “family fight” within Iran in which the
United States should not seek a role. Press reports say as many as four students
might have been killed by regime security forces during the days of protest.
A third major pro-Khatemi grouping is the Mojahedin of the Islamic Revolution
organization (MIR), composed mainly of left-leaning Iranian figures who, during the
1980s, sought greater state control of the economy and export of Iran’s Islamic
revolution to other countries in the region. A fourth grouping considered supportive
of Khatemi and the reformists is the Society of Combatant Clerics. A prominent
member of that grouping is Mehdi Karrubi, who was speaker of the 2000-2004
Majles.
On July 21, 2004, the Islamic Iran Participation Front sought to draft Mir
Hosein Musavi, who served as prime minister during 1981-89, to be the reformist
candidate for president in May 2005 elections. Musavi has refused, and the
reformists are seeking to center on an alternative candidate. Khatemi is
constitutionally barred from running for a third term.
Despite Khatemi’s popularity, the hardliners thwarted many of his programs and
initiatives. Since early 2000, hardliners in the judiciary have closed nearly 100
reformist newspapers, although many have tended to reopen under new names, and
imprisoned or questioned several editors and even some members of the Majles.
Press reports in November 2004 say Iran has also begun blocking hundreds of pro-
reform websites. Since mid-2002, Khatemi, partly in response to his reformist
critics, became more vocal in criticizing obstructions by hardliners, and in late
August 2002, he proposed new legislation that would strengthen the power of his
office; it was passed by the elected 290 seat Majles but blocked by the Council of
Guardians. The latest example of conservatives’ efforts to thwart Khatemi was an
early October 2004 vote by the Majles to oust Minister of Transportation Ahmad
Khorram. That removal led to the resignation of another Khatemi ally, Vice
President for Legal and Parliamentary Affairs Mohammad Ali Abtahi.
The Conservatives and the February 2004 Majles Elections. The
conservatives began gaining momentum against Khatemi in February 28, 2003 local
elections, with conservative candidates winning most of the seats from Tehran in a

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low turnout (14%) election that suggested reformist disillusionment at the slow pace
of reform. The power struggle between Khatemi and the conservatives caused a
crisis in the run-up to the February 20, 2004, Majles elections. The Council of
Guardians disqualified about 3,600 mostly reformist candidates, including 83
members of the current Majlis. Some were prominent, such as deputy speaker
Mohammad Reza Khatemi and Behzad Nabavi. Khatemi and Majles leaders
attempted to resolve the crisis through talks with Khamene’i, but the Council of
Guardians refused to follow Khamene’i’s urging to reinstate most candidates and
even increased the number of disqualified incumbents to 87. The Interior Ministry
(which ran the elections) and many reformists said the elections should have been
postponed in order to be free and fair, but Khatemi agreed to obey Khamene’i’s
directive to hold the elections on time.
Khatemi’s Islamic Iran Participation Front boycotted the elections and urged a
general boycott, but some reformist factions participated. As was widely predicted
before the election, conservatives fared well and won a majority — about 155 out of
the 290 Majles seats. Turnout was about 51%, according to the reformist-controlled
Interior Ministry, signaling that Iranians did not necessarily answer the call of some
reformists not to participate. (Conservative controlled media put the turnout at about
60%, while some reformists said turnout was only about 35%.) On May 3, 2004,
Khatemi issued a statement that reform of the system was “inevitable” and suggesting
that those blocking reforms were a minority who would eventually be compelled to
give way for reform.
Several governments, the United States and the European Union countries,
criticized the 2004 Majles election as unfair because of the widespread
disqualification of the reformists. Just before the elections, on February 12, 2004,
the Senate passed by unanimous consent S.Res. 304, expressing the sense of the
Senate that the United States should not support the elections and should advocate
“democratic government” in Iran. After the elections, on February 24, 2004,
President Bush said “I join many in Iran and around the world in condemning the
Iranian regime’s efforts to stifle freedom of speech. I am very disappointed.” A
reported CIA assessment said the election dealt a severe blow to the reformists and
that the election might deepen popular discontent with the clerical regime, but that
Iran’s foreign and defense policies would likely not change much because decisions
on these issues were already largely in the hands of the conservatives.2
As a result of the election-related maneuvering, a moderate-conservative
grouping called the “Builders of Islamic Iran,” led by former Labor Minister Ahmad
Tavakkoli, emerged as a key bloc in the new Majles. A new Majles speaker,
Gholem Ali Haded-Adel, was selected. The chairman of the Expediency Council,
former two-term president (1989-1997) Ali Akbar Hashemi-Rafsanjani, saw his
influence bolstered; he is considered the patron of many conservatives in the Majles.
One of his allies, the Secretary General of the Supreme National Security Council
Hassan Rouhani, a defense and foreign policy decision-making body and lead
negotiator with European governments on nuclear issues, is touted as a possible
2 Jehl, Douglas. CIA Says Election in Iran Dealt Blow to Reform. New York Times,
February 26, 2004.

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conservative candidate for president in 2005. Other conservatives mentioned as
candidates are split between traditional conservatives, such as former foreign minister
Ali Akbar Velayati and those closer to the more radical elements, such as state
broadcasting head Ali Larijani. There is also some discussion that Rafsanjani
himself might run, which would be constitutionally permitted, and that some
potential contenders are awaiting his decision before announcing their candidacies.
Prominent Dissidents. In addition to the reformist camp that seeks to
moderate the Islamic system of government from within the political structure,
several major dissidents seek more sweeping change. One dissident cleric, Ayatollah
Hossein Ali Montazeri, was released in January 2003 from several years of house
arrest. He had been Khomeini’s designated successor until 1989, when Khomeini
dismissed Montazeri for allegedly protecting liberal intellectuals and other
opponents of clerical rule. He has since remained under scrutiny by the regime, but
in September 2003, he criticized the seizure of the U.S. Embassy in 1979 as well as
the core principle of the revolution: direct participation in government by the clerics.
Other prominent dissidents include exiled theoretician Abd al-Karim Soroush, former
Interior Minister Abdollah Nuri, and political activist Hashem Aghajari (of the
Mojahedin of the Islamic Revolution), who was initially sentenced to death for
blasphemy but whose sentence was overturned; he has been released.
Anti-Regime Groups: People’s Mojahedin Organization of Iran
(PMOI). Some groups in exile seek the outright replacement of the current regime.
One such group is the People’s Mojahedin Organization of Iran (PMOI), which has
been criticized by the United States even though the PMOI is an opponent of Tehran.
Since the late 1980s, the State Department has refused contact with the PMOI and
its umbrella organization, the National Council of Resistance (NCR). The PMOI,
formed in the 1960s to try to overthrow the Shah of Iran, advocated Marxism blended
with Islamic tenets. It allied with pro-Khomeini forces during the Islamic revolution
but was later excluded from power and forced into exile and into the underground.
The State Department designated the PMOI as a foreign terrorist organization (FTO)
in October 1997 under the Anti-Terrorism and Effective Death Penalty Act of 1996,
and the NCR was named as an alias of the PMOI in the October 1999 re-
designations. The FTO designation was prompted by PMOI attacks in Iran that
sometimes killed or injured civilians, and its alleged killing of seven American
defense advisers to the former Shah in 1975-76. In November 2002, a letter signed
by about 150 House Members was released, asking the President to remove the
PMOI from the FTO list.
U.S. forces attacked PMOI military installations in Iraq during Operation Iraqi
Freedom and, after temporarily agreeing to a ceasefire with PMOI military elements
in Iraq, subsequently confined the approximately 4,000 PMOI fighters and activists
to their Ashraf camp near the border with Iran. Press reports in late May 2003 said
some Administration officials, particularly in the Defense Department, wanted the
group removed from the FTO list and a U.S. alliance with the group against the
Tehran regime.3 However, on August 14, 2003, the State Department designated the
3 Cloud, David. “U.S., Iran Hit Bumpy Terrain on Road to Rapprochement.” Wall Street
(continued...)

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NCR offices in the United States an alias of the PMOI and NCR and ordered those
facilities closed. National Security Adviser Condoleezza Rice said in mid-November
2003 that the United States is unambiguously treating the group as a terrorist
organization. That perception shifted again with the decision in late July 2004 to
grant the Ashraf detainees “protected persons” status under the 4th Geneva
Convention, meaning they will not be extradited to Tehran or forcibly expelled as
long as U.S. forces remain in Iraq. The PMOI has used this status determination to
argue that the group should no longer be designated as an FTO.
In other action against the group, on June 17, 2003, France arrested about 170
PMOI members, including its co-leader Maryam Rajavi (wife of PMOI founder
Masoud Rajavi, who is still based in Iraq.) She was subsequently released and
remains in France. For further information, see CRS Report RL31119, Terrorism:
Near Eastern Groups and State Sponsors, 2002.
Pro-Shah Activists. Some Iranian exiles, as well as some in Iran, want to
replace the regime with a constitutional monarchy presumably led by the U.S.-based
son of the late former Shah. On January 24, 2001, the Shah’s son, Reza Pahlavi, who
is about 50 years old, ended a long period of inactivity by giving a speech in
Washington calling for unity in opposition to the current regime as well as the
institution of a constitutional monarchy and genuine democracy in Iran. He has since
broadcast messages into Iran from Iranian exile-run stations in California, and press
reports say a growing number of Iranians inside Iran are listening to his broadcasts,
although he is not believed to have a large following there.4 Deputy Secretary of
State Armitage testified before the Senate Foreign Relations Committee on October
28, 2003, that following a request to the Cuban government, the jamming from Cuba
of Iranian exile and U.S. broadcasting to Iran had ceased; the jamming was carried
out by Iranians in Cuba, not the Cuban government, according to Armitage.
Criticism of Iran’s Human Rights Record. Recent U.S. Administrations,
including the State Department’s human rights report for 2003 released February 25,
2004, have harshly criticized Iran’s human rights record for its crackdowns against
dissidents and some minorities. U.S. policy has not generally considered Iran’s
human rights record as a strategic threat to U.S. interests or an obstacle to the
beginning of a U.S.-Iran dialogue. U.S. and U.N. human rights reports cite Iran for
widespread human rights abuses (especially of the Baha’i faith), including
assassinations and executions of regime opponents (Kurds, PMOI and others) in Iran
and abroad. These reports note that Khatemi’s efforts to promote rule of law have
met repeated challenges from hardliners. One major recent case was the apparent
beating death while in Iranian detention of a Canadian journalist of Iranian origin,
Zahra Kazemi. She had been detained in early July 2003 for filming outside
Tehran’s Evin prison. The trial of an intelligence agent who allegedly conducted the
beating resulted in an acquittal on July 25, 2004, prompting widespread accusations
that the investigation and trial were not fair.
3 (...continued)
Journal, May 12, 2003.
4 Kampeas, Ron. “Iran’s Crown Prince Plots Nonviolent Insurrection from Suburban
Washington.” Associated Press, August 26, 2002.

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Iran’s hardliners significantly downplayed the naming in October 2003 of
Iranian human rights/women’s rights lawyer Shirin Ebadi as winner of the Nobel
Peace prize. Reformist newspapers acknowledged and at least mildly praised her
award. In the 108th Congress, resolutions (S.Res. 82 and H.Res. 140) were
introduced on March 12, 2003, expressing concern over Iran’s human rights record,
particularly its treatment of women.
Religious Persecution. U.S. reports and officials continue to cite Iran for
religious persecution. Since March 1999, the State Department has named Iran as a
“Country of Particular Concern,” each year under the International Religious
Freedom Act, and little progress in Iran’s performance on this issue was noted in the
December 2003 International Religious Freedom Report. No sanctions have been
added because of this designation, on the grounds that Iran is already subject to
extensive U.S. sanctions.
Iran is repeatedly cited for repression of the Baha’i community, which Iran’s
Shiite Muslim clergy views as a heretical sect. Two Baha’is (Dhabihullah Mahrami
and Musa Talibi) were sentenced to death in 1996 for apostasy. On July 21, 1998,
Iran executed Ruhollah Ruhani, the first Bahai executed since 1992 (Bahman
Samandari). The United States condemned the execution. In February 2000, Iran’s
Supreme Court set aside the death sentences against three other Baha’is. On April
21, 1999, the Clinton Administration expressed concern about the sentencing to
prison of four Baha’is. Several congressional resolutions have condemned Iran’s
treatment of the Baha’is, including S.Con.Res. 57 (106th Congress), which passed the
Senate July 19, 2000, and H.Con.Res. 257, which passed the House on September
19, 2000. In the 108th Congress, H.Con.Res. 319 contains sense of Congress
language on the Baha’is similar to that in previous years.
Repression of Jews. Although the 30,000-member Jewish community (the
largest in the Middle East aside from Israel) enjoys more freedoms than Jewish
communities in several other Muslim states, during 1993-1998, Iran executed five
Jews allegedly spying for Israel. In June 1999, Iran arrested 13 Jews, who were
teachers, shopkeepers, and butchers, from the Shiraz area that it said were part of an
“espionage ring” for Israel. After an April - June 2000 trial, ten of the Jews and two
Muslims accomplices were convicted (July 1, 2000) and received sentences ranging
from four years to 13 years. Three Jews were acquitted. On September 21, 2000, a
three-judge appeals panel reduced the sentences slightly, now ranging from two to
nine years. On February 8, 2001, Iran’s Supreme Court let the new sentences stand.
Iran began releasing them in January 2001; the last five were freed in April 2003.
Iran’s Strategic Capabilities and Weapons of
Mass Destruction Programs
For the past two decades, the United States has sought to contain the strategic
threat posed by Iran’s WMD programs. Iran is not considered a major conventional
threat to the United States, but some of its weapons of mass destruction (WMD)
programs, particularly its nuclear and ballistic missile programs, have made
significant progress and could potentially put U.S. allies and forces at risk.

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CRS-8
Iran’s armed forces total about 550,000 personnel, including both the regular
military and the Revolutionary Guard. The latter is generally loyal to the hardliners
and, according to some recent press reports, becoming more assertive in political
decisions. Guard personnel recently closed part of a new airport in Tehran when the
government chose a foreign (Turkish) contractor to run the airport.
Iran’s ground forces are likely more than sufficient to deter or fend off
conventional threats from Iran’s relatively weak neighbors such as post-war Iraq,
Turkmenistan, Azerbaijan, and Afghanistan. Iran has tried to maintain good relations
with its more militarily capable neighbors such as Turkey and Pakistan. However,
according to the estimates of some U.S. military officers, Iran’s forces could probably
block the Strait of Hormuz at the entrance to the Persian Gulf, at least temporarily.
However, Iran is largely lacking in logistical ability to project power far beyond its
borders. No major military tensions are currently evident between Iran and U.S.
military forces in the Persian Gulf region, and U.S. military officials say that their
encounters with Iranian naval vessels in the Gulf have been more professional since
Khatemi took office.
Iran’s conventional capabilities have concerned successive U.S. Administrations
far less than have Iran’s attempts to acquire weapons of mass destruction (WMD).
Partly because of recent acceleration of some of Iran’s WMD programs, particularly
its nuclear program, President Bush, in his January 29, 2002 State of the Union
message, labeled Iran part of an “axis of evil” along with Iraq and North Korea.
Iran may see WMD, particularly the acquisition of a nuclear weapons capability,
as a means of ending its perceived historic vulnerability to U.S. domination, or as a
symbol of Iran’s perception of itself as a major nation. Some observers see Iran’s
WMD programs as an instrument for Iran to dominate the Persian Gulf region. There
are also fears Iran might transfer WMD to some of the extremist groups it supports,
such as Lebanese Hizbollah, although there is no evidence to date that Iran has taken
any steps in that direction. Iran’s programs continue to be assisted primarily by
entities in Russia, China, and North Korea. For further information, see CRS Report
RL30551, Iran: Arms and Weapons of Mass Destruction Suppliers.
Nuclear Program.5 Many observers believe that there is an emerging crisis
between Iran and the international community over Iran’s nuclear ambitions. As U.S.
and European concerns about the scope of Iran’s nuclear program have grown over
the past few years, U.S. and European policies have converged substantially on the
issue. The Bush Administration asserts that Iran is working toward a nuclear
weapons capability, that it has not upheld its obligations under the 1968 Nuclear
Non-Proliferation Treaty (NPT), and that Iran’s assertions that its nuclear program
is for peaceful purposes only are not credible. On June 18, 2003, President Bush
stated that the United States would “not tolerate construction” of a nuclear weapon
by Iran, and he told journalists on April 21, 2004, that Iran “will be dealt with,
starting through the United Nations,” if it does not fully cooperate with International
Atomic Energy Agency (IAEA) inspections. National Security Adviser Condoleeza
5 For further information, see CRS Report RS21592, Iran’s Nuclear Program: Recent
Developments.

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CRS-9
Rice said (August 8, 2004) the United States and its allies “cannot allow the Iranians
to develop a nuclear weapon.” A congressional resolution, H.Con.Res. 398, passed
the House on May 6, 2004, by a vote of 376-13; it calls for all parties to the NPT,
including the United States, to use “all appropriate means to deter, dissuade, and
prevent Iran from acquiring nuclear weapons, including ending all nuclear and other
cooperation with Iran....” The resolution calls on U.S. allies and others to cease
investing in Iran and to cooperate with IAEA investigations into foreign assistance
to Iran’s nuclear program.
At the same time, there is some disagreement over the urgency of the issue.
IAEA director Mohammad El Baradei said September 14, 2004, that the IAEA is not
“in a position to say” that Iran’s nuclear intentions are entirely peaceful, but there is
still no firm evidence that Iran is trying to develop a nuclear weapon. The IAEA has
also stopped short of stating that Iran is in outright violation of its NPT obligations.
The Central Intelligence Agency, in an unclassified report to Congress covering July
1, 2003 - December 31, 2003, says the “United States remains convinced that Tehran
has been pursuing a clandestine nuclear weapons program...”6 Western intelligence
services estimate that Iran could achieve a nuclear capability as soon as 2007.7 Some
reported Israeli estimates put Iran’s nuclear acquisition time frame as early as late
2005.8
U.S. and European suspicions of Iran’s intentions were heightened considerably
in December 2002 when Iran confirmed PMOI and other allegations that it was
building two additional facilities, at Arak and Natanz, that could be used to produce
fissile material that could be used for a nuclear weapon. (Natanz could produce
enriched uranium and the Arak facility reportedly is a heavy water production plant;
heavy water is used in a reactor that is considered ideal for the production of
plutonium.) Iran aggravated international concerns throughout most of 2003 by
refusing to sign the “Additional Protocol” to the NPT, which would allow for
enhanced inspections. Iran did modify its safeguards agreement to provide advanced
notice of new nuclear facilities construction.
Iran also became connected to allegations that the founder of Pakistan’s nuclear
weapons program, Abdul Qadeer (A.Q.) Khan, sold Iran and other countries (Libya,
North Korea) nuclear technology and designs. In late January 2004, Pakistan’s
government said its investigation concluded that at least two nuclear scientists,
including Khan, provided unauthorized assistance to Iran’s nuclear weapons program
during the 1980s.9 In February 2004, Khan publicly admitted selling such goods to
Iran, Libya, and North Korea.
6 This CIA report is entitled “Unclassified Report to Congress on the Acquisition of
Technology Relating to Weapons of Mass Destruction and Advanced Conventional
Munitions. It is updated every six months. The report cited here was posted in late
November 2004 [http://www.odci.gov].
7 Linzer, Dafna. “Iran a Nuclear Threat.” Washington Post, August 18, 2004.
8 Williams, Dan. “Israel Sees “Nuclear Capable” Iran by 2007.” Reuters, July 21, 2004.
9 Lancaster, John and Kamran Khan. “Pakistanis Say Nuclear Scientists Aided Iran.”
Washington Post, January 24, 2004.

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CRS-10
At the same time, Russia, despite its own growing concerns about Iran’s
intentions, has been working on a nuclear power plant at Bushehr, a project
implemented under a January 1995 contract with Iran. Russia’s Federal Atomic
Energy Agency said on October 15, 2004 that the reactor was completed, but that
operations would not start until Iran signs an agreement under which Russia would
reprocess the plant’s spent nuclear material.
European Diplomatic Efforts/Agreement One. Believing that
engagement might yield progress, beginning in 2003, the foreign ministers of
Germany, France, and Britain (the “EU-3") undertook diplomacy to limit Iran’s
nuclear program, with reported U.S. acquiescence. On October 21, 2003, the three
countries and Iran issued a joint statement in which Iran pledged, in return for
promises of future exports of peaceful nuclear technology, the following:
! to fully disclose to the IAEA all aspects of its past nuclear activities;
! to sign and ratify the Additional Protocol; and
! to temporarily suspend uranium enrichment activities.
U.S. officials, including President Bush, said the European-Iranian agreement
represented a “positive development,” but that Iran would ultimately be judged by its
implementation. On October 22, 2003, Iran handed over to the IAEA a file that it said
detailed all its nuclear activities. Some outside experts maintain that the joint
statement did not ensure that Iran could not use an alternate route to a nuclear
weapon, such as plutonium production.10 Khamene’i publicly backed the deal in
early November 2003, amid demonstrations against the deal by Iranian hardliners,
who called it a capitulation. Iran signed the Additional Protocol on December 18,
2003 and the IAEA says Iran is largely abiding by its provisions, although the Majles
has not yet ratified it.
The agreement began to deteriorate rapidly as it became clear that the
international community would maintain strict scrutiny of Iran’s program. In its
November 10, 2003, and February 24, 2004, reports, the IAEA said that Iran had
committed violations of its agreements, including unreported uranium enrichment,
over an 18-year period, and that Iran did not declare designs, found in Iran by the
IAEA in early 2004, of advanced uranium enrichment centrifuges, parts of which Iran
made itself. The latter report added that traces of both highly enriched and low-
enriched uranium had been found at two sites in Iran.11 The latter report added that
the Iranian military has been involved in manufacturing centrifuge equipment. IAEA
board resolutions adopted after these reports, as well as a board resolution on June
18, 2004, condemned Iran’s previous violations, prompting a breakdown of the
agreement with the EU-3. In July 2004, Iran broke the IAEA’s seals on some of its
nuclear centrifuges and announced it would resume work on centrifuge equipment,
although Iran stopped short of threatening to enrich uranium.
10 Milhollin, Gary. “The Mullahs and the Bomb.” New York Times, October 23, 2003.
11 Murphy, Francois. “U.N. Watchdog Accuses Iran of Unanswered Questions.” Reuters,
February 25, 2004.

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CRS-11
Subsequent revelations in mid-late 2004 caused additional concern about the
breakdown of the agreement. Press reports said Iran was negotiating to buy Russian
deuterium gas, which could be used to boost nuclear explosions.12 The United States
emphasized the negative aspects of a September 2004 IAEA board meeting, which
said that Iran had announcement that it was preparing to convert 40 tons of uranium
(“yellowcake”) as a step toward making enriched uranium. Nuclear experts say that
could, in theory, be sufficient to yield as many as five nuclear bombs. On the other
hand, the IAEA determined in August 2004 that traces of enriched uranium found in
Iran came on contaminated equipment, appearing to support Iran’s view that Iran
was not enriching uranium. On October 27, 2004, the PMOI asserted Iran was
nearing completion of a previously undisclosed uranium enrichment facility in central
Iran.
The breakdown of the October 2003 agreement caused the Bush Administration
to argue for referring the issue to the U.N. Security Council for the possible
imposition of international sanctions. The September 18, 2004, IAEA board meeting
called on Iran to adhere to the deal and to clarify outstanding issues by the November
25, 2004 IAEA meeting. The implicit threat was that the issue could be referred to
the U.N. Security Council for possible sanctions — although the IAEA board
resolution did not explicitly threaten that referral.
European Diplomatic Efforts/Deal Two. In the run-up to the November
25, 2004, IAEA board meeting, the EU-3 sought Bush Administration backing for
another diplomatic overture to Iran — a reported permanent agreement, a “grand
bargain” — in which Iran would meet international demands to substantially curb its
nuclear program (suspend uranium enrichment) in exchange for an end to the threat
of sanctions, broad diplomatic engagement with Iran (resumed talks on an Iran-EU
trade agreement, support for Iran’s entry into the World Trade Organization, WTO,
and counter-narcotics assistance), assistance to the purely peaceful aspects of Iran’s
nuclear program (heavy water reactor, nuclear fuel), and possible easing of some U.S.
sanctions.13 An October 15, 2004, U.S.-sponsored meeting of the G-8 group of
industrialized nations (including Russia) endorsed this approach. As an interim step,
Iran would need to suspend all uranium enrichment activity by the November 25
meeting, and if it did not, the G-8 countries would support U.N. sanctions against
Iran. The European countries presented the approach to Iran beginning in late
October, but a deal ran into difficulty over the duration and extent of a uranium
enrichment suspension by Iran.
On November 14, 2004, Iran appeared to meet most European demands by
agreeing to a rapid (as of November 22), verifiable suspension of uranium
enrichment, to remain in place until a broader permanent agreement is reached. The
IAEA subsequently incorporated the Iranian pledge into its new report, prepared for
the November 25 meeting, adding that all declared nuclear material in Iran was
accounted for. Negotiations on a permanent agreement were expected to last about
two years. However, both the Europeans and the Bush Administration reacted
12 “Agents Seek Russian Sale of Nuke-Boosting Gas.” Washington Times, July 29, 2004.
13 Weisman, Steven. “U.S. In Talks With Europeans on a Nuclear Deal With Iran.” New
York Times, October 12, 2004.

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CRS-12
cautiously to Iran’s pledge. Reinforcing their suspicions, the deal began to falter
when Iran requested that some 20 centrifuges not be sealed to permit “research work”
on them. The EU-3 refused to allow that exemption, and Iran, in a letter to the IAEA
on November 27, 2004, said it would allow camera monitoring of the research
centrifuges. The EU-3 accepted the compromise, and the IAEA board adopted a
resolution on November 28, 2004, that generally dropped the threat to refer the issue
to the Security Council. Bush Administration officials, in press interviews, made
note of Iran’s efforts to water down the deal as an indication that it might eventually
break down, as did the October 2003 agreement. Bush Administration officials also
noted that Iran had stepped up uranium enrichment work in the week prior to the
November 22 agreed suspension date.
Chemical and Biological Weapons. Official U.S. reports and testimony,
particularly the semi-annual CIA reports to Congress on WMD acquisitions
worldwide, state that Iran is seeking a self-sufficient chemical weapons
infrastructure, mainly from Chinese sources, and that it is stockpiling chemical
weapons, including blister, blood, and choking agents. This raises questions about
Iran’s compliance with its obligations under the Chemical Weapons Convention
(CWC), which Iran signed on January 13, 1993, and ratified on June 8, 1997. Recent
CIA reports to Congress say Iran may have some capability to produce biological
agents, but that its ability to make weapons from them is limited.14
Missiles. Largely with Russian help, Iran is making progress in its missile
program. Two of its first three tests of the 800-mile range Shahab-3 (July 1998, July
2000, and September 2000) reportedly were inconclusive or unsuccessful, but Iran
conducted an apparently successful series of tests in June 2003, subsequently calling
the missile operational and formally delivered several of them to the Revolutionary
Guard. Iran publicly displayed six Shahab-3 missiles in a parade on September 22,
2003. Despite Iran’s claims, U.S. experts say the missile is not completely reliable,
and Iran tested a “new” [purportedly more accurate] version of it on August 12, 2004.
Iran called the test successful, although some observers said Iran detonated the
missile in mid-flight, raising questions about the success of the test. Subsequent
reports said Iran was improving the missile’s warhead and extending its range.15 On
November 17, 2004, Secretary of State Powell said there is some information that
Iran might be working to adapt that missile to carry a nuclear warhead.16 On October
5, 2004, Iran announced it had succeeded in extending the range of the Shahab-3 to
1,200 miles, and it added in early November 2004 that it is capable of “mass
producing” the missile. If Iran has made this missile operational with the capabilities
Iran now claims, it would put virtually all of Iran’s potential regional adversaries,
including Israel, as well as substantial portions of Europe and U.S. bases in Turkey,
14 “Unclassified Report to Congress on the Acquisition of Technology Relating to Weapons
of Mass Destruction and Advanced Conventional Munitions, 1 July Through 31 December
2003” [http://www.cia.gov].
15 Schiff, Ze’ev. “Media Reports From Tehran: Latest Iranian Missile Has Upgraded
Warhead.” Tel Aviv, Ha’aretz, August 31, 2004.
16 Wright, Robin and Keith Richburg. Powell Says Iran is Pursuing Bomb. Washington
Post, November 18, 2004.

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CRS-13
within reach. Iran’s new claims would appear to represent an abrogation of its pledge
in November 7, 2003 to abandon development of a 1,200 mile range missile.
Iran’s asserted progress on missiles would appear to reinforce the concerns of
the U.S. intelligence community. In March 2002, an intelligence community official
upgraded the missile threat from Iran, testifying that the United States would “most
likely” face an intercontinental ballistic missile threat from Iran by 2015.17 On
September 6, 2002, Iran said it successfully tested a 200 mile range “Fateh 110"
missile, and Iran said in late September 2002 that it had begun production of the
missile.18 (For more information, see CRS Report RS21548, Iran’s Ballistic Missile
Capabilities.)
Foreign Policy and Support for Terrorism
Iran’s support for terrorist groups has long concerned U.S. Administrations,
particularly since it gives Tehran an opportunity to try to obstruct the U.S.-led Middle
East peace process. Tehran contends that the Arab-Israeli peace process is inherently
weighted toward Israel, a U.S. ally, and cannot result in a fair outcome for the
Palestinians. Iran’s continued support for anti-Israel terrorism contributed to
President Bush’s strong criticism of Iran in his 2002 State of the Union message.
The State Department report on international terrorism for 2003, released April 30,
2004, again stated, as it has for most of the past decade, that Iran “remained the most
active state sponsor of terrorism in 2002,” although the report attributes the terrorist
activity to two hardline institutions — the Revolutionary Guard and the Intelligence
Ministry.19 (See also CRS Report RL31119, Terrorism: Near Eastern Groups and
State Sponsors, 2002.)
Analysts see Iran’s support for terrorist groups as one element in a broader
foreign policy.20 Its policy is a product of the ideology of Iran’s Islamic revolution,
blended with and sometimes tempered by longstanding national interests that predate
the Islamic revolution. Iran has tried to establish relatively normal relations with
most of its neighbors, but, in its relations with some neighbors it has tried to actively
influence internal events by promoting minority or anti-establishment factions.
Persian Gulf States. During the 1980s and early 1990s, according to U.S.
officials and outside experts, Iran sponsored Shiite Muslim extremist groups opposed
to the monarchy states of the 6-member Gulf Cooperation Council (GCC; Saudi
Arabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates). These
activities appeared to represent an effort by Iran to structure the Gulf region to its
advantage by “exporting” its Islamic revolution. However, Iran’s efforts were
unsuccessful, and led the Gulf states to ally closely with the United States to confront
Iran. By the mid-1990s, Iran began to shift more away from confrontation with the
17 “Greater U.S. Concern About Iran Missile Capability.” Reuters, March 11, 2002.
18 “Iran: New Missile on the Assembly Line.” New York Times, September 26, 2002.
19 U.S. Department of State. Patterns of Global Terrorism:2002. Released April 2003
20 Kemp, Geoffrey. Forever Enemies? American Policy and the Islamic Republic of Iran.
Carnegie Endowment for International Peace, 1994. Pp. 82-88.

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CRS-14
Gulf states — a policy shift that accelerated after the election of Mohammad Khatemi
as president. Khatemi has largely succeeded in improving relations with the Gulf
states by reducing support for Shiite dissident movements there. (See CRS Report
RL31533, The Persian Gulf States: Issues for U.S. Policy, 2004.)
Many observers closely watch the relationship between Iran and Saudi Arabia
as an indicator of Iran’s overall posture in the Gulf. During the 1980s, Iran
sponsored disruptive demonstrations at annual Hajj pilgrimages in Mecca, some of
which were violent, and Iran sponsored Saudi Shiite dissident movements. Iran and
Saudi Arabia restored relations in December 1991 (after a four-year break), and
progressively higher level contacts have taken place since December 1997. In May
1999, Khatemi became the first senior Iranian leader to visit Saudi Arabia since the
Islamic revolution; he visited again on September 11, 2002. Supreme Leader
Khamene’i has been invited to visit the Kingdom as well but has not done so. The
exchanges suggest that Saudi Arabia has tried to move beyond the issue of the June
25, 1996, Khobar Towers housing complex bombing, which killed 19 U.S. airmen,
and was believed by some to have been orchestrated by Iranian agents.21 The June
21, 2001 federal grand jury indictments of 14 suspects (13 Saudis and a Lebanese
citizen) in the Khobar bombing indicate that Iranian agents may have been involved,
but no indictments of any Iranians were announced. In June 2002, Saudi Arabia
reportedly sentenced some of the eleven Saudi suspects held there. The 9/11
Commission final report asserts that Iran and Al Qaeda might have cooperated to an
extent in the Khobar Towers attacks.
The United Arab Emirates (UAE) has considered the Islamic regime of Iran
aggressive since April 1992, when Iran asserted complete control of the Persian Gulf
island of Abu Musa, which it and the UAE shared under a 1971 bilateral agreement.
(In 1971, Iran, then ruled by the U.S.-backed Shah, seized two other islands, Greater
and Lesser Tunb, from the emirate of Ras al-Khaymah, as well as part of Abu Musa
from the emirate of Sharjah.) The UAE wants to refer the dispute to the International
Court of Justice (ICJ), but Iran insists on resolving the issue bilaterally. In concert
with Iran’s reduction of support for Gulf dissident movements, UAE-Iran tensions
have eased substantially, but Iran maintains it has sovereignty over the islands. The
United States, which is concerned about Iran’s military control over the islands,
supports UAE proposals but takes no position on sovereignty.
Qatar is wary that Iran might seek to encroach on its large North Field (natural
gas), which it shares with Iran (the Iranian side is called South Pars). The North field
is in operation and produces natural gas for export; Iran’s side of the field is at an
earlier stage of exploitation. Qatar’s fears were heightened on April 26, 2004, when
Iran’s deputy Oil Minister said that Qatar is probably producing more gas than “her
right share” from the field and that Iran “will not allow” its wealth to be used by
others.
Iraq. The U.S. military ousting of Saddam Hussein appears to have benefitted
Iran strategically. Iran publicly opposed the major U.S. military offensive against
21 Walsh, Elsa. “Annals of Politics: Louis Freeh’s Last Case.” The New Yorker, May 14,
2001.

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Iraq on the grounds that it was not authorized by the United Nations, but many
observers believe Iran was relieved to see its erstwhile nemesis Saddam Hussein
removed and hoped his fall would bring to power pro-Iranian Shiite Muslim groups.22
Senior U.S. officials have, on several occasions since the fall of Saddam Hussein on
April 9, 2003, accused Iran of interfering in post-war Iraq by trying to establish a pro-
Iranian Islamic republic there and have strongly warned against such activity.
Although critical of Iran’s close ties to major Iraqi groups, the United States has
sought some Iranian help in stabilizing Iraq. Iran pledged some, mainly in-kind,
assistance for Iraq’s reconstruction at the October 23-24, 2003, donors conference in
Madrid. The Bush Administration says Iran has been invited to — and will attend
— a meeting in Egypt in late November 2004 to discuss new initiatives to promote
stability in Iraq. Secretary of State Powell said on November 9, 2004 that the
meeting opportunity to talk with Iranian diplomats about Iraq, but that he did not plan
to hold separate bilateral talks with Iran on other issues.
The main thrust of Iran’s strategy in Iraq has been to persuade all Shiite Islamist
factions in Iraq to work together to ensure Shiite Muslim dominance of post-Saddam
Iraq. Iran’s primary proteges in Iraq have been well organized Shiite Islamist parties
that Iran has supported since its 1979 Islamic revolution, ties that contribute to U.S.
fears that Iran seeks domination of post-Saddam Iraq. The most pro-Iranian of these
parties are the Supreme Council for the Islamic Revolution in Iraq (SCIRI), and, to
a lesser extent, the Da’wa (Islamic Call) party. SCIRI was headed by Ayatollah
Mohammad Baqr al-Hakim, the late Ayatollah Khomeini’s choice to head an Islamic
republic in Iraq, and who returned to Iraq on May 10, 2003. He was killed in a major
car bombing in Najaf on August 29, 2003, conducted by unknown assailants, and was
succeeded as SCIRI head by his younger brother, Abd al-Aziz al-Hakim. Since then,
Tehran has continued to expand ties to Grand Ayatollah Ali al-Sistani, the 75-year-
old Shiite cleric who is emerging as the leading Shiite political figure in Iraq. Sistani
was born in Iran, moving to Najaf, Iraq at the age of 21. Sistani is taking strong
stands on U.S. plans for political transition in Iraq, but Sistani has, throughout his
career, differed with Iran’s doctrine of direct clerical involvement in government.
Secretary of Defense Rumsfeld reiterated U.S. accusations of Iranian meddling
on September 8, 2004, claiming Iran is sending money and fighters to proteges in
Iran.23 In his press interview that day, he declined to contradict the open speculation
that Iran is also giving some backing (money and possibly arms and tactical military
advice) to radical Shiite cleric Moqtada al-Sadr, whose followers have staged two
major uprisings against U.S. and allied forces since April 2004.24 No Iranian
nationals suspected of assisting Sadr or any other Iraqi Shiite factions are known to
have been captured by coalition forces in Iraq. Sadr is viewed as a challenger to
Sistani and the other mainstream Shiite Islamist groups, and shifting Iran’s backing
to him might appear contrary to Tehran’s overall strategy for Iraq, and therefore is
22 “Iran’s Kharrazi Hopes for Shiite Role in Iraq.” Reuters, April 9, 2003.
23 Scarborough, Rowan. Rumsfeld: Iran Aids Rebels. Washington Times, September 8,
2004.
24 Wong, Edward. “Iran Is In Strong Position to Steer Iraq’s Political Future.” New York
Times, July 3, 2004.

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unlikely. It is more likely that Iranian leaders are trying to engage Sadr to bring him
into the broader Iraqi Shiite fold — and therefore boost Shiite Islamist strength in
planned January 2005 parliamentary elections in Iraq — or to ensure that Iran has
contact with him should he prevail in any internal Iraqi power struggle. Some Iranian
hardliners are said to prefer him as a more anti-U.S. Shiite alternative in Iraq. Iran
reportedly might be using its influence in Iraq to develop sources of information on
U.S. operations in Iraq. Press reports say Iraqi political leader Ahmad Chalabi gave
his Iranian contacts information on U.S. acquisition of Iranian intelligence codes.25
Chalabi has denied the allegations.
Recent Iranian conventional military moves at the border could reflect Iranian
nervousness about U.S.-led coalition operations in Iraq or possibly be part of the
broader attempt to bolster Iraqi Shiites politically. On June 21, 2004, Iran seized
eight British seamen on a mission in the waterway between Iran and southern Iraq.
Iran released the British personnel after a few days’ detention, although Britain says
Iran had steered the British personnel into Iranian waters.

Experts say that most Iraqi Shiites generally stayed loyal to the Iraqi regime
during the 1980-1988 Iran-Iraq war, which took nearly 1 million Iranian lives and
about half that many Iraqi battlefield deaths. Beginning in 1998, Saddam Hussein
had sought to improve relations with Iran to reduce Iraq’s regional isolation. Iran and
Iraq exchanged almost all remaining prisoners from the Iran-Iraq war. An October
2000 visit to Iraq by Iran’s Foreign Minister Kamal Kharrazi resulted in agreement
to abide by the waterway-sharing and other provisions of their 1975 Algiers Accords,
which Iraq had abrogated prior to its September 1980 invasion of Iran. In exchange
for a share of the proceeds, Iran’s naval forces sometimes cooperated with Iraq’s
illicit export of oil through the Gulf. Iran did not return the military and civilian
aircraft flown to Iran at the start of the 1991 Gulf war, and some post-Saddam Iraqi
politicians have said they want Tehran to return the aircraft now that Saddam is gone.
(For more information on Shiite and other contenders for power in Iraq, see CRS
Report RL31339, Iraq: U.S. Regime Change Efforts and Post-Saddam Governance.)
Supporting Anti-Peace Process Groups. Many of the U.S. concerns
about Iran’s support for terrorism center on its assistance to groups opposed to the
Arab-Israeli peace process, primarily Hamas, Palestinian Islamic Jihad (PIJ),
Hizballah, and the Popular Front for the Liberation of Palestine-General Command.
U.S. terrorism reports, including the State Department report on global terrorism for
2002, said that following the start of the September 2000 Palestinian uprising, Iran
increased its covert support for terrorism by encouraging coordination among
Palestinian terrorist groups. Iran also has sometimes openly incited anti-Israel
violence, including hosting conferences of anti-peace process organizations (April
24, 2001, and June 2-3, 2002). In January 2002, according to U.S. and Israeli
officials, Iran made a shipment, intercepted by Israel, of 50 tons of arms bought by
the Palestinian Authority (PA). This action surprised many observers because Iran
has traditionally had few ties to the non-Islamist Palestinian organizations, including
elements linked to the PA.
25 Risen, James and David Johnston. “Chalabi Reportedly Told Iran That U.S. Had Code.”
New York Times, June 2, 2004.

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On the other hand, there appear to be differences within Iran’s leadership on
Iran’s policy toward the peace process. Khamene’i has continued to call Israel a
“cancerous tumor” and make other statements suggesting that he seeks Israel’s
destruction. Khatemi, while publicly pledging support for the anti-peace process
groups, has sometimes tried to moderate Iran’s position somewhat. The position of
the Iranian Foreign Ministry, considered an institutional ally of Khatemi, is that Iran
would not seek to block any final, two-state Israeli-Palestinian settlement.
In January 2004, Iran said it was close to agreement to restore full diplomatic
ties with Egypt. Iran severed those ties to protest Egypt’s 1979 peace treaty with
Israel. Iran is in the process of meeting an Egyptian demand to rename a Tehran
street that is named after Khalid Islambouli, lead assassin of Anwar as-Sadat.
A small number (about 200) of Iranian Revolutionary Guards reportedly remain
in Lebanon to coordinate Iranian arms deliveries to Hizballah, which are offloaded
in Damascus and trucked into Lebanon.26 The reported shipments have included
Stingers obtained by Iran in Afghanistan, mortars that can reach the Israeli city of
Haifa if fired from southern Lebanon, and, in 2002, over 8,000 Katyusha rockets,
according to Israeli leaders.27 One recent report said Iran has supplied Hizballah with
the unmanned aerial vehicle (UAV) that Hizballah briefly flew over the border with
Israel on November 7, 2004;28 Hizballah maintains military forces along the border
and operates outside Lebanese government control. On the other hand, the Israel-
Lebanon border, with some occasional exceptions, has been relatively quiet since
Israel’s May 2000 withdrawal from southern Lebanon. On March 11, 2003, an
Argentinian judge issued arrest warrants for four Iranian diplomats, including former
Intelligence Minister Ali Fallahian, for alleged complicity in the July 18, 1994
bombing of a Jewish community center in Buenos Aires, which killed 85. Hizballah
is believed to have committed the act, as well as the March 17, 1992 bombing of
Israel’s embassy in that city.
Relations With Central Asia and the Caspian. Iran’s policy in Central
Asia has thus far emphasized economic cooperation over Islamic ideology, although
it has sometimes become assertive in the region, particularly against Azerbaijan.
(That country’s population, like Iran’s, is mostly Shiite Muslim.) In early 1992, Iran
led the drive to bring the Central Asian states and Azerbaijan into the Economic
Cooperation Organization (founded in 1985 by Iran, Pakistan, and Turkey, as a
successor to an organization founded by those states in 1964). Iran is hoping to
attract energy pipeline routes through it, rather than through other countries.
However, Iran does host at least one anti-Azerbaijan guerrilla leader (Hasan
Javadov). In July 2001, Iranian warships and combat aircraft threatened a British
Petroleum (BP) ship on contract to Azerbaijan out of an area of the Caspian Iran
considers its own. The United States called that action provocative, and it offered
26 Wright, Robin. “U.S. Blocks A Key Iran Arms Route to Mideast.” Los Angeles Times,
May 6, 2001.
27 “ Israel’s Peres Says Iran Arming Hizbollah.” Reuters, February 4, 2002.
28 Kahwaji, Riad and Barbara Opall-Rome. “Hizbollah’s UAV.” Defense News. November
15, 2004.

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new border security aid and increased political support to Azerbaijan. Iran and
Armenia, an adversary of Azerbaijan, agreed on expanded defense cooperation in
early March 2002. Iran-Azerbaijan tensions eased somewhat in conjunction with the
mid-May 2002 visit by Azerbaijan’s then President Heydar Aliyev, but there was
little evident progress on a bilateral division of their portions of the Caspian.
Afghanistan/Al Qaeda. Iran wants to exert influence over post-Taliban
Afghanistan, but the presence of some top Al Qaeda leaders in Iran suggests that Iran
might see that group as a potentially ally or source of leverage over the United States.
Iran long opposed the puritanical Sunni Muslim regime of the Taliban in Afghanistan
on the grounds that it oppressed Shiite Muslim and other Persian-speaking
minorities. Iran nearly launched a military attack against the Taliban in September
1998 after Taliban fighters captured and killed several Iranian diplomats based in
northern Afghanistan, and it provided military aid to the anti-Taliban Northern
Alliance coalition, made up of mostly Persian-speaking minority groups. Iran, along
with the United States, Russia, and the countries bordering Afghanistan, attended
U.N.-sponsored meetings in New York (the Six Plus Two group) to try to end the
internal conflict in Afghanistan. Iran and the United States also participated in a
U.N.-sponsored group in Geneva, which includes Italy and Germany.
Iran tacitly supported the U.S.-led war on the Taliban and Al Qaeda by offering
the United States search and rescue of any downed service-persons and the
transshipment to Afghanistan of humanitarian assistance. Iran has since moved to
restore Iran’s traditional sway in western, central, and northern Afghanistan where
Persian-speaking Afghans predominate. Iran is believed to be supporting local
Afghan strongmen, such as former Herat governor Ismail Khan, and others.
President Bush has warned Iran not to seek to exert influence over the new
government of Afghanistan. Apparently seeking to deflect the U.S. criticism, in
March 2002, Iran expelled Gulbuddin Hikmatyar, an opponent of the new Afghan
government. The expulsion followed a February 24, 2002, visit to Iran by Afghan
leader Hamid Karzai; the two countries agreed to broad cooperation. (See CRS
Report RL30588, Afghanistan: Post-War Governance, Security, and U.S. Policy.)
Although Iran is not necessarily a natural ally of Al Qaeda — largely on the
grounds that Al Qaeda is an orthodox Sunni Muslim organization — there have been
press reports and U.S. official statements since January 2002 that hardliners in Iran
have been harboring, or at least not aggressively moving to arrest, senior Al Qaeda
operatives who have fled Afghanistan.29 These figures are purported to include Al
Qaeda spokesman Sulayman Abu Ghaith, top operative Sayf Al Adl,30 and possibly
Osama bin Laden’s son, Saad. Some accounts say the operatives who are in Iran
have been able to contact associates outside Iran;31 assertions to this effect were
made by U.S. officials after the May 12, 2003 bombings in Riyadh, Saudi Arabia
29 Keto, Alex. “White House Reiterates Iran Is Harboring Al Qaeda.” Dow Jones
Newswires, May 19, 2003.
30 Gertz, Bill. “Al Qaeda Terrorists Being Held by Iran.” Washington Times, July 24, 2003.
31 Gertz, Bill. “CIA Points to Continuing Iran Tie to Al Qaeda.” Washington Times, July
23, 2004.

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CRS-19
against four expatriate housing complexes and believed perpetrated by Al Qaeda.
The 9/11 Commission says several of the September 11 hijackers and other plotters,
possibly with some official help, might have transited Iran, but the report does not
assert that the Iranian government cooperated with or knew about the plot. In
response to reports of the 9/11 Commission’s findings, President Bush said the
United States would continue to investigate possible ties between Iran and Al Qaeda.
Iran has tried to head off some of the criticism that it is tolerant of or even
cooperating with Al Qaeda. On July 23, 2003, Iranian officials, for the first time,
asserted Iran had “in custody” senior Al Qaeda figures. Iran said in late January 2004
that it would try the high-ranking Al Qaeda members in Iran, but U.S. officials called
on Iran to fulfill its “international obligations in the global war on terrorism” by
turning them over to their countries of origin for trial. Hardliners in Iran reportedly
want to support or protect Al Qaeda activists as leverage against the United States
and its allies. Some reports say Iran might want, in return for extraditing the Al
Qaeda suspects, a U.S. pledge to hand over to Iran those PMOI activists still in Iraq.
U.S. Policy Responses
The February 11, 1979, fall of the Shah of Iran, a key U.S. ally, opened a long
rift in U.S.-Iranian relations, but there have been several periods since 1997 when
a significant and sustained thawing appeared imminent. On November 4, 1979,
radical “students” seized the U.S. Embassy in Tehran and held its diplomats hostage
until minutes after President Reagan’s inauguration on January 20, 1981. The United
States broke relations with Iran on April 7, 1980, and the two countries had only
limited and mostly indirect official contact thereafter. An exception was the abortive
1985-86 clandestine arms supply relationship with Iran in exchange for some
American hostages held by Hizballah in Lebanon (the so-called “Iran-Contra
Affair”). Despite the Iran-Contra Affair, U.S. policy throughout most of the 1980s
featured a marked tilt toward Iraq in the 1980-88 Iran-Iraq war. The tilt included
U.S. diplomatic attempts to block conventional arms sales to Iran, providing
battlefield intelligence to Iraq,32 and, during 1987-88, direct skirmishes with Iranian
naval elements in the course of U.S. efforts to protect international oil shipments in
the Gulf from Iranian attacks.
The end of the Iran-Iraq war in August 1988 appeared to lay the groundwork for
a reduction in U.S.-Iran hostility. In his January 1989 inaugural speech, President
George H.W. Bush said that, in relations with Iran, “goodwill begets goodwill,”
holding out the prospect for better relations if Iran helped obtain the release of U.S.
hostages held by pro-Iranian groups such as Hizballah in Lebanon. Iran reportedly
did assist in obtaining the release of all U.S. and other Western hostages in Lebanon
by December 1991, but no substantial thaw followed, possibly because Iran
continued to back Hizballah and other groups opposed to the U.S.-sponsored Middle
East peace process. The George H.W. Bush Administration devoted substantial
32 Sciolino, Elaine. The Outlaw State: Saddam Hussein’s Quest for Power and the Gulf
Crisis. New York: John Wiley and Sons, 1991. P. 168.

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attention to that process, organizing the October 1991 Madrid Conference that
brought Israel to the table with Syria, Lebanon, Jordan, and the Palestinians.
Upon taking office in 1993, the Clinton Administration moved to further isolate
Iran as part of a strategy of “dual containment” of Iran and Iraq. In 1995 and 1996,
the Clinton Administration and Congress added sanctions on Iran in response to
growing concerns about Iran’s weapons of mass destruction, its support for terrorist
groups, and its efforts to subvert the Arab-Israeli peace process. (For more
information on economic sanctions against Iran, see below.) The election of Khatemi
in May 1997 precipitated a shift in U.S. policy toward engagement; the Clinton
Administration offered Iran official dialogue, with no substantive preconditions. In
January 1998, Khatemi publicly agreed to increase “people-to-people” exchanges
with the United States but ruled out direct talks.
In a June 1998 speech, then Secretary of State Albright stepped up the U.S.
outreach effort by calling for mutual confidence building measures that could lead
to a “road map” for normalization of relations. Encouraged by the reformist victory
in Iran’s March 2000 parliamentary elections, Secretary Albright gave another speech
on March 17, 2000, acknowledging past U.S. meddling in Iran, announcing an easing
of sanctions on some Iranian imports, and promising to work to resolve outstanding
claims disputes. Iran called the steps insufficient to warrant direct dialogue. In
September 2000 meetings at the United Nations in connection with the Millennium
Summit, Albright and President Clinton sent a positive signal to Iran by attending
Khatemi’s speeches.
Bush Administration Policy and Options
To date, the Bush Administration has continued the main thrust of Clinton
Administration efforts to engage Iran while at the same time trying to limit Iran’s
strategic capabilities through economic sanctions. However, the September 11, 2001
attacks highlighted the strategic threat of international terrorism and stimulated
occasional consideration within the Administration of new policy options toward
Iran, possibly including efforts to change Iran’s regime. President Bush named Iran
as part of an “axis of evil,” along with Iraq and North Korea, in his January 2002
State of the Union message, but policy has not since changed materially. Iran’s
nuclear challenges have stimulated discussion of a potential crisis on this issue and
has revived active discussion of whether to pressure Iran or act against it directly, as
well as the diplomatic options on nuclear issues discussed above.
Regime Change Policy? Some believe that only a change of regime would
reduce substantially the strategic threat from Iran, because the current regime harbors
ambitions fundamentally at odds with the United States and its values. Many
question the prospects of success for this option, short of all-out-U.S. military
invasion, because of the weakness of opposition groups committed to major change
of Iran’s regime. Providing overt or covert support to anti-regime organizations, in
the view of many experts, would not make them materially more viable or attractive
to Iranians. Others question whether regime change, even if achievable, could
succeed in time to prevent Iran’s acquiring a nuclear weapons capability.

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There has been occasional discussion of a regime change option for Iran for
many years. According to many observers, the United States did provide some
funding to anti-regime groups, mainly pro-monarchists, during the 1980s.33 After a
period of suspension of such assistance, in 1995, the Clinton Administration accepted
a House-Senate conference agreement to include $18-$20 million in funding
authority for covert operations against Iran in the FY1996 Intelligence Authorization
Act (H.R. 1655, P.L. 104-93), according to a Washington Post report of December
22, 1995. The Clinton Administration reportedly focused the covert aid on changing
the regime’s behavior, rather than its overthrow. The conference report on H.R. 2267
(H.Rept. 105-405), the FY1998 Commerce/State/ Justice appropriation, provided an
initial $4 million for a “Radio Free Iran,” to be run by Radio Free Europe/Radio
Liberty (RFE/RL). The radio, which the Administration called the Farsi service of
RFE/RL, began operations in Prague on October 31, 1998, and has become, as of
December 2002, Radio Farda (“Tomorrow” in Farsi), which broadcasts nearly around
the clock. A U.S.-sponsored TV broadcast service to Iran, run by the Voice of
America (VOA), began operations on July 3, 2003.
The Bush Administration has shown some attraction to this option since the
September 11, 2001 attacks, although this has not become U.S. policy. On July 12,
2002, President Bush issued a statement supporting those Iranians demonstrating for
reform and democracy, a message he reiterated on December 20, 2002, when he
inaugurated a new U.S. radio broadcast to Iran, Radio Farda (see above). The
statements appeared to signal a shift in U.S. policy from attempting to engage and
support Khatemi to publicly supporting Iranian reformers and activists, some of
whom believed Khatemi has made insufficient progress toward reform. These U.S.
moves were interpreted as steps toward a regime change policy for Iran. However,
the support within the Administration for a regime change policy appeared to
diminish somewhat in 2003, possibly because of the U.S. difficulty in stabilizing
Iraq, as well as Iran’s pledges in late 2003 to open its nuclear program to greater
international scrutiny. On October 28, 2003, Deputy Secretary of State Armitage
testified before the Senate Foreign Relations Committee that the United States “does
not have a regime change policy toward Iran.” Some believe this option might return
to the fore in light of Iran’s nuclear progress and, as discussed below, some in
Congress appear to be pressing for adoption of this policy option.
Democracy/Regime Change Legislation and Funding. Some in
Congress are openly expressing sentiment for a shift toward a regime change
strategy. Two resolutions introduced in late July 2002 (S.Res. 306 and H.Res. 504)
called for positive U.S. gestures toward “the people of Iran, and not political figures
whose survival depends upon preservation of the current regime.” A Senate bill, S.
1082, introduced May 19, 2003, by Senator Sam Brownback, has been widely
interpreted as urging support for ideas associated with the son of the late Shah (see
above); it calls for the use of some U.S. funds for the holding of an internationally-
monitored democratic referendum in Iran. A House bill (H.R. 2466), introduced by
Representative Brad Sherman, contains similar provisions and adds sections
reimposing import sanctions on luxury goods from Iran. Elements of these bills,
particularly a section calling on the Administration to try to block international
33 CRS conversations with U.S. officials responsible for Iran policy. 1980-1990.

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lending to Iran, were incorporated into the House-passed version of the FY2004
foreign relations authorization bill (H.R. 1950). On July 16, 2004, Senator Santorum
introduced S. 2681, expressing the sense of Congress that U.S. policy toward Iran
should be that of regime change, and authorizing $10 million in U.S. assistance to
pro-democracy groups opposed to Iran’s regime. Similar legislation (H.R. 5193) was
introduced by Representative Ros Lehtinen on September 30, 2004, although without
stipulating a specific level of U.S. assistance to pro-democracy groups in Iran. That
bill also contains provisions pertaining to the Iran-Libya Sanctions Act (see below).
Representative Ros Lehtinen released a statement in early November 2004 that she
would re-introduce that legislation in the 109th Congress.
Congressional sentiment for democracy promotion in Iran manifested in foreign
aid appropriations for FY2004 and 2005. The FY2004 foreign operations
appropriation provides (H.R. 2673, P.L. 108-199) provides “notwithstanding any
other provision of law” up to $1.5 million for “making grants to educational,
humanitarian and non-governmental organizations and individuals inside Iran to
support the advancement of democracy and human rights in Iran.” The State
Department has determined that the funds cannot be channeled through the Middle
East Partnership Initiative, because that program’s funds are Economic Support
Funds (ESF) and cannot be used in Iran. The $1.5 million “soft earmark” is being
used for Iran-related programs run through the National Endowment for Democracy
(NED), funded by the State Department’s Bureau of Democracy and Labor (DRL).
The House-passed FY2005 foreign operations appropriation (H.R. 4818), includes
$1.5 million in grants to non-governmental organizations “inside Iran and Syria” to
promote democracy in those two countries, through the NED. A provision of the
conference report on H.R. 4818, the FY2005 foreign aid appropriation, provides $3
million for similar efforts. The State Department interpretations of the restrictions
on use of U.S. funds for democracy promotion in Iran might also complicate Bush
Administration pledges, in October 2003, to consider, on a case-by-case basis,
providing funds to Iranian exile stations — presumably linked to pro-monarchy
activists — using funds from the Middle East Partnership Initiative.
The State Department report on U.S. efforts to promote democracy and human
rights abroad (2003-2004) implies that U.S. efforts to do so are somewhat limited by
lack of U.S. access to Iran, and it states that “Iran is currently ineligible for most
official programmatic assistance from the United States pursuant to U.S. law,” which
could imply that use of U.S. funds for groups operating inside Iran, as stated in the
FY2004 foreign operations law, might be difficult. Another issue is whether such
democracy promotion efforts would be interpreted within Iran as U.S. meddling —
a sensitive issue in Iran — and whether these programs would reach sufficient
numbers of Iranians to be effective.
Engagement? Some U.S. officials have long believed that a policy of
engagement would be more successful in curbing Iran’s nuclear program and support
for terrorist groups. The Bush Administration has pursued this option to some extent,
despite sometimes appearing to lean toward regime change. In May 2003 both
countries publicly acknowledged that they were conducting direct talks in Geneva on

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Afghanistan and Iraq.34 This marked the first confirmed direct dialogue. The United
States broke off the dialogue following the May 12, 2003, bombing in Riyadh that
some press reports say might have been planned by Al Qaeda activists in Iran.
On December 29, 2003, following U.S.-Iran contact to coordinate U.S. aid to
victims of the December 2003 earthquake in Bam, Iran, Secretary of State Powell
said that the United States is open to resuming dialogue with Iran. Subsequently,
major U.S. newspapers reported that the Administration asked Iran if it would
welcome a high-level delegation to Iran, headed by Senator Elizabeth Dole and a
Bush family member, to build on the apparent goodwill generated by U.S. earthquake
relief efforts. However, Iran rebuffed the offer of the Dole mission, and dialogue was
not restarted. A congressional resolution, H.Res. 526, passed March 2, 2004, by a
vote of 381-0, expressed sympathy for the Bam earthquake victims.
Further moves toward renewed engagement came in early 2004. Several
Members of Congress and congressional staff had dinner with visiting Iranian
Representative to the United Nations Mohammad Javad Zarif. At the dinner, U.S-
Iran relations were discussed, as was a trip to Iran by congressional staff.35 Following
public discussion of the proposed staff visit, Iran’s Foreign Minister Kharrazi said
such a visit is “not on our agenda” at this time.36
In mid-2004, U.S. concerns about Iran’s nuclear program stalled any movement
toward engagement. Suggesting that many experts still see merit in dialogue with
Iran, two recent research institute reports, one by the Council on Foreign Relations
and one by the Atlantic Council, have recommended further pursuit of an
engagement strategy with Iran, arguing that engagement could help promote regional
stability and progress on issues in which there is U.S.-Iran agreement.37 As noted
above, the Bush Administration has acceded to not only renewed dialogue with Iran
but also possible easing of some U.S. sanctions should the European initiative toward
Iran on nuclear issues succeed. Secretary of State Powell’s statements in November
2004 that he would talk with Iranian officials during the upcoming Cairo conference
on Iraq could be interpreted as a resumption of dialogue with Iran.
Some also saw an October 2004 visit by Librarian of Congress James Billington
as an indication that the Bush Administration — which was informed in advance by
the Librarian of his visit and said it viewed the visit as a cultural exchange consistent
with U.S. policy — wants to have some engagement with Iran. The main purpose of
his visit was to begin an exchange of materials with Iran’s national library and
included cultural meetings with Iranian film experts, poets, and architects.
34 Wright, Robin. “ U.S. In ‘Useful’ Talks With Iran.” Los Angeles Times, May 13, 2003.
35 Schweid, Barry. “U.S. Congressional Staffers to Visit Iran.” Associated Press, January
30, 2004. The CRS author of this report participated in the dinner.
36 Fox News, February 1, 2004.
37 For text of the Council on Foreign Relations study, see [http://www.cfr.org/pdf/Iran
_TF.pdf].

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CRS-24
Military Action? As concerns over Iran’s nuclear program have grown, public
discussion of a military option against Iran’s nuclear facilities has increased —
conducted either by the United States or another country, such as Israel. Among
outside experts, there has been speculation since the U.S.-led war against Iraq (begun
March 19, 2003) that the United States might undertake major military action against
other perceived threats such as Iran or Syria. However, all-out U.S. military action
to remove Iran’s regime appears to be unlikely and not under serious consideration
by the Administration. Most experts believe U.S. forces are likely spread too thin,
including about 140,000 deployed in Iraq, to undertake it at this time and that U.S.
forces would be greeted with hostility by most Iranians.
Some experts believe that the United States should focus first and foremost on
Iran’s nuclear capability, and that limited military action, such as air strikes against
suspected nuclear sites, could be a potentially useful option. Expressing particular
fear that Iran might achieve a nuclear weapons capability, some Israeli officials have
openly discussed the possibility that Israel might strike Iran’s nuclear infrastructure,
although Israel does not necessarily have the capabilities that the United States
possesses that could conceivably make such action effective. Some Israeli analysts
have concluded that this option could set back Iran’s nuclear program substantially,
although others believe that even a strike by the United States would not necessarily
set back Iran’s program permanently and could invite Iranian terrorism or other
retaliation.38 Among the concerns is that the United States might not be aware of all
relevant sites, and that Iran might have shielded some of its nuclear infrastructure
from a strike. On November 5, 2004, British Foreign Secretary Jack Straw said the
United Kingdom could not see a circumstance that would allow it to support such an
air strike by the United States, Israel, or any other force, on Iran at this time.
U.S. military analysts note that U.S. forces in the Gulf region could potentially
be used against Iran, if the President so decides. Related option, which might involve
U.S. naval forces in the Gulf, would be to institute searches of Iran-bound vessels
suspected of containing WMD-related technology, or placing nuclear-armed weapons
aboard U.S. ships operating in the Gulf. The Administration has discussed with its
allies some measures that could be used to block North Korea’s technology exports
and alleged drug smuggling,39 an initiative that has won allied support. In contrast,
some officials of allied governments, including Britain, have called for greater
cooperation with Iran to curb the movement of smugglers and terrorists across the
Persian Gulf.40
International Sanctions? Iran is not subject to U.N. sanctions. However,
if the November 2004 European-Iran agreement on nuclear issues breaks down or
fails to lead to a permanent agreement, the Bush Administration is likely to renew its
38 O’Sullivan, Arieh. “A Partial Attack Would Set Back Iran’s Nukes — Jaffee Center
Head. “Jerusalem Post, October 12, 2004; Clawson, Patrick, op-ed. “How to Rein In Iran
Without Bombing It.” Los Angeles Times, October 15, 2004.
39 Kralev, Thomas. “U.S. Asks Aid Barring Arms From Rogue States.” Washington Times,
June 5, 2003.
40 “British Commander Calls for More Cooperation With Iran in Persian Gulf.” BBC, May
3, 2004.

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push to refer Iran to the U.N. Security Council for consideration of international
sanctions. The Bush Administration is said to want to reach an understanding with
its European allies providing for automatic referral of Iran to the Security Council if
Iran fails to uphold any aspect of its new pledges, although no such language is
contained in the November 28, 2004, IAEA board resolution on Iran’s program.
If international sanctions are considered, some options that have been used or
considered in similar cases could be imposing an international ban or limitations on
purchases of Iranian oil or other trade, mandating reductions in diplomatic exchanges
with Iran or flight travel to and from Iran, and limiting further lending to Iran by
international financial institutions. It is not certain that the U.N. Security Council or
the boards of directors of international financial institutions would back such
proposals, and some reports say that the United States does not yet have sufficient
Security Council backing to impose U.N. sanctions. Versions of some of these
options have been sought by some recent U.S. Administrations and recent legislation,
but as discussed below, the United States has generally had difficulty imposing any
formal multilateral sanctions on Iran. The sections below analyze U.S. sanctions on
Iran, as well as past efforts to persuade U.S. allies and other countries to pressure Iran
economically.
U.S. Sanctions
Since the November 4, 1979 seizure of the U.S. hostages in Tehran, U.S.
economic sanctions have formed a major part of U.S. policy toward Iran. On
November 14, 1979, President Carter declared a national emergency with respect to
Iran, renewed every year since 1979. To date, few, if any, other countries have
followed the U.S. lead by imposing sanctions on Iran, and no U.N. sanctions exist on
that country. Some experts believe that U.S. sanctions have hindered Iran’s
economy, forcing it to curb spending on conventional arms purchases, but others
believe that sanctions have had only marginal effect, and that foreign investment has
flowed in despite U.S. sanctions.41 Those who take the latter view maintain that
Iran’s economic performance fluctuates according to the price of oil, and far less so
from other factors. Because oil prices remain relatively high, Iran’s economy grew
about 4% in 2003, and the economy is doing well in 2004 now that oil prices exceed
$50 per barrel. Iran’s per capita income is estimated to now exceed $2,000 per year,
up from about $1,700 in 2002. Most analysts seem to agree that sanctions would
have had a far greater effect on Iran if they were multilateral or international.
Terrorism/Foreign Aid Sanctions. In January 1984, following the October
1983 bombing of the U.S. Marine barracks in Lebanon, believed perpetrated by
Hizballah, Iran was added to the so-called “terrorism list.” The terrorism list was
established by Section 6(j) of the Export Administration Act of 1979, imposing
economic sanctions on countries determined to have provided repeated support for
acts of international terrorism. The designation bans direct U.S. financial assistance
and arms sales, restricts sales of U.S. dual use items, and requires the United States
to oppose multilateral lending to the designated countries. Separate from its position
on the terrorism list, successive foreign aid appropriations laws since the late 1980s
41 “The Fight Over Letting Foreigners Into Iran’s Oilfields.” The Economist, July 14, 2001.

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CRS-26
ban direct assistance to Iran (loans, credits, insurance, Eximbank credits) and indirect
assistance (U.S. contributions to international organizations that work in Iran).
Section 307 of the Foreign Assistance Act of 1961 (added in 1985) names Iran as
unable to benefit from U.S. contributions to international organizations, and require
proportionate cuts if these institutions work in Iran. Iran also has been designated
every year since 1997 as not cooperating with U.S. anti-terrorism efforts, under the
Anti-Terrorism and Effective Death Penalty Act (P.L. 104-132). That act penalizes
countries that assist or sell arms to terrorism list countries.
U.S. regulations do not bar disaster relief and the United States donated
$125,000, through relief agencies, to help victims of two earthquakes in Iran
(February and May 1997), and another $350,000 worth of aid to the victims of a June
22, 2002 earthquake. (The World Bank provided some earthquake related lending
as well, as discussed below.)
Bam Earthquake. The United States provided considerable assistance to the
victims of the December 2003 earthquake in Bam, Iran, which might have killed as
many as 50,000 people and destroyed 90% of Bam’s buildings. In response, the
United States flew in 68,000 kilograms of supplies to Bam, flown in by U.S. military
flights — the first U.S. military flights into Iran since the abortive “Iran-Contra
Affair” of 1985-1986. The United States also deployed to Iran an 81-member
Disaster Assistance Response Team (DART) composed of 7 USAID experts, 11
members of the Fairfax County (VA) urban search and rescue team, and 66 medical
experts from the Federal Emergency Management Agency (FEMA). Iranian-
American and other organizations are coordinating donations in the United States for
victims of the quake. On December 27, 2003, the Administration issued a 90-day
amendment to the Iranian Transaction Regulations to authorize U.S. persons to make
donations of funds for humanitarian relief for the earthquake victims. Under the
amendment, Iranian-owned banks could be used to effect the transfer of funds,
although no Iranian financing could be accessed.
Proliferation Sanctions. Several sanctions laws are unique to Iran. The
Iran-Iraq Arms Nonproliferation Act (P.L. 102-484) requires denial of license
applications for exports to Iran of dual use items, and imposes sanctions on foreign
countries that transfer to Iran “destabilizing numbers and types of conventional
weapons,” as well as WMD technology. The Iran Nonproliferation Act (P.L.
106-178) authorizes sanctions on foreign entities that assist Iran’s WMD programs.
It bans U.S. extraordinary payments to the Russian Aviation and Space Agency in
connection with the international space station unless the President can certify that
the agency or entities under the Agency’s control had not transferred any WMD or
missile-related technology to Iran within the year prior. The provision contains
certain exceptions to ensure the safety of astronauts who will use the international
space station and for certain space station hardware. Unless the Administration
determines that Russian entities are no longer violating the act, the provision could
complicate U.S. efforts to keep U.S. astronauts on the station beyond April 2006,
when Russia plans to start charging the United States for transporting them on its

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Soyuz spacecraft. The Administration, and NASA in particular, says it is looking for
ways, consistent with the act, to continue to access the international space station.42
During 2001-2003, a number of entities in North Korea, China, India, Armenia,
and Moldova were sanctioned under the Iran Non-Proliferation Act, the Iran-Iraq
Arms Non-Proliferation Act of 1992 (P.L. 102-484), and another law, the Chemical
and Biological Warfare Elimination Act of 1991, for sales to Iran. In late May 2003,
the Bush Administration sanctioned a major Chinese industrial entity, Norinco, for
allegedly selling missile technology to Iran. On July 4, 2003, an additional Chinese
entity, the Taiwan Foreign Trade General Corporation, was sanctioned under the Iran
Non-Proliferation Act. On September 17, 2003, the Administration imposed
sanctions on a leading Russian arms manufacturer, the Tula Instrument Design
Bureau, for allegedly selling laser-guided artillery shells to Iran. On April 7, 2004,
the Administration announced sanctions on 13 entities under the Iran Non-
Proliferation Act: Baranov Engine Building Association Overhaul Facility (Russia);
Beijing Institute of Opto-Electronic Technology (China); Belvneshpromservice
(Belarus); Blagoja Smakoski (Macedonia); Changgwang Sinyong Corp. (North
Korea); Norinco (China); China Precision Machinery Import/Export Corporation
(China); Elmstone Service and Trading (UAE); Goodly Industrial Co. (Taiwan);
Mikrosam (Macedonia); Oriental Scientific Instruments Corp. (China); Vadim
Vorobey (Russia); and Zibo Chemical Equipment Plant (China).
Both versions of the FY2005 foreign aid appropriation (H.R. 4818) would
punish the Russian Federation for assisting Iran. The bills would withhold 60% of
any U.S. assistance to the Russian Federation unless it terminates technical assistance
to Iran’s civilian nuclear and ballistic missiles programs. Similar sanctions against
the Russian government for assisting Iran have been enacted in previous years.
Counternarcotics. In February 1987, Iran was first designated as a state that
failed to cooperate with U.S. anti-drug efforts or take adequate steps to control
narcotics production or trafficking. U.S. and U.N. Drug Control Program (UNDCP)
assessments of drug production in Iran prompted the Clinton Administration, on
December 7, 1998, to remove Iran from the U.S. list of major drug producing
countries. The decision exempted Iran from the annual certification process that kept
drug-related U.S. sanctions in place on Iran. According to several governments and
independent observers, over the past few years Iran has augmented security on its
border with Afghanistan in part to prevent the flow of narcotics from that country
into Iran.
Trade Ban. On May 6, 1995, President Clinton issued Executive Order 12959
banning U.S. trade and investment in Iran, including the trading of Iranian oil
overseas by U.S. companies. This followed an earlier March 1995 executive order
barring U.S. investment in Iran’s energy sector. The trade ban was partly intended
to blunt criticism that U.S. trade with Iran made U.S. appeals for multilateral
containment of Iran less credible. Each March since 1995, most recently on March
13, 2003, the U.S. Administration has renewed a declaration of a state of emergency
that triggered the March 1995 investment ban. An August 1997 amendment to the
42 Gugliotta, Guy. “Long Arm of Foreign Policy.” Washington Post, August 25, 2004.

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trade ban (Executive Order 13059) prevented U.S. companies from knowingly
exporting goods to a third country for incorporation into products destined for Iran.
Some goods related to the safe operation of civilian aircraft can be licensed for export
to Iran, and in December 1999, the Clinton Administration allowed the repair of
engine mountings on seven Iran Air 747s (Boeing). Implementing regulations do not
permit U.S. firms to negotiate investment deals with Iran.
Following a 1998 application by a U.S. firm to sell Iran agricultural products,
and in the context of Clinton Administration and congressional reviews of U.S.
unilateral sanctions policies, the Clinton Administration announced in April 1999
that it would license, on a case-by-case basis, commercial sales of food and medical
products to certain countries on which unilateral U.S. trade bans are in place (Iran,
Libya, and Sudan). Under regulations issued in July 1999, private letters of credit
can be used to finance approved sales, but no U.S. government credit guarantees are
available and U.S. exporters are not permitted to deal directly with Iranian banks.
Iran says the lack of credit makes U.S. sales, particularly of wheat, uncompetitive.
The FY2001 agriculture appropriations (P.L. 106-387) contained a provision banning
the use of official credit guarantees for food and medical sales to Iran and other
countries on the U.S. terrorism list, except Cuba, although allowing for a presidential
waiver to permit such credit guarantees. Neither the Clinton Administration nor the
Bush Administration has provided the credit guarantees.
In the March 2000 speech mentioned above, the trade ban was eased to allow
U.S. importation of Iranian nuts, dried fruits, carpets, and caviar; regulations
governing the imports were issued in April 2000. The United States was the largest
market for Iranian carpets before the 1979 revolution, but U.S. anti-dumping tariffs
imposed on Iranian pistachio nut imports in 1986 (over 300%) dampened imports of
that product. In January 2003, the tariff on roasted pistachios was lowered to 22%
and on raw pistachios to 163%.
The Iran-Libya Sanctions Act (ILSA). The Iran-Libya Sanctions Act
(ILSA, H.R. 3107, P.L. 104-172, signed August 5, 1996) sanctions foreign
investment of more than $20 million in one year in Iran or Libya’s energy sector. It
was to sunset on August 5, 2001, but it was renewed for another five years (H.R.
1954, P.L. 107-24, signed August 3, 2001). The renewal law required an
Administration report on its effectiveness within 24-30 months. No sanctions have
been imposed under ILSA, although three companies involved in one project (South
Pars) were deemed in violation in September 1998; but sanctions were waived.
A number of other investments have remained “under review” for ILSA
sanctions since 1999. Those investment agreements are discussed in CRS Report
RS20871, The Iran-Libya Sanctions Act. Among the major new agreements is an
agreement signed between Iran and China’s Sinopec in October 2004. Under that
agreement, Sinopec will develop Iran’s Yadavaran oil field in return for 150,000
barrels per day of Iranian oil and 10 million tons per year of liquified natural gas
(LNG). On November 2, 2004, the state-owned Indian Oil Company agreed to
develop part of Iran’s South Pars gas field and build an LNG plant, a deal valued at
about $3 billion. That follows a deal in May 2004 for India’s Petronet to supply
India with LNG. Some new French energy investments in Iran are part of a wave of

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broader French investment in and sales of consumer products to Iran: French exports
to Iran have doubled over the past five years to about $2.5 billion per year.43
Iran is also signing agreements to sell gas to new customers. These
arrangements would not appear to constitute an “investment” in Iran’s energy sector.
On March 18, 2004, a Chinese state oil trading firm said it had signed a deal with
Iran to import more than 110 million tons of liquified natural gas from Iran over 25
years, a deal valued at $25 billion. In early August 2004, Iran said it expects to sign
a deal to sell natural gas to Bahrain by 2009, following on agreements by Iran to sell
gas to the UAE and Kuwait. Iran, India, and Pakistan are also discussing
construction of a natural gas pipeline that would enable Iran to sell gas to those
markets.
On October 20, 2003, Representative Ileana Ros-Lehtinen introduced the “ILSA
Enhancement and Compliance Act” (H.R. 3347) intended to make it more difficult
for the Administration to waive sanctions on companies determined to have violated
its provisions. The legislation would also repeal the sunset (expiration) provision of
ILSA. (ILSA sanctions with respect to Libya were terminated on April 23, 2004, on
the grounds that the President certified Libya had complied with U.N. Security
Council resolutions related to the December 21, 1988, bombing of Pan Am Flight
103.) Similar ILSA-related provisions are contained in another bill introduced by
Representative Ros-Lehtinen on September 30, 2004 (H.R. 5193). That bill also
contains provisions recommending new U.S. aid to pro-democracy groups in Iran, as
discussed above.
Caspian/Central Asian Energy Routes Through Iran. The U.S. trade
ban permits U.S. companies to apply for licenses to conduct “swaps” of Caspian Sea
oil with Iran, but, as part of a U.S. policy to route Central Asian energy around Iran
(and Russia), a Mobil Corporation application to do so was denied in April 1999.
The Bush Administration continues to oppose, and to threaten imposing ILSA
sanctions on, pipeline projects through Iran. U.S. policy has been to promote
construction of a pipeline that would cross the Caspian Sea and terminate in Ceyhan,
Turkey (Baku-Ceyhan pipeline); the policy appeared to bear fruit when four Caspian
nations (Turkey, Georgia, Azerbaijan, and Kazakhstan) signed an agreement
embracing Baku-Ceyhan on November 18, 1999. Regional and corporate support for
the project subsequently gained momentum, pipeline construction began, and the
pipeline is expected to begin operations in early-mid 2005. On the other hand,
despite U.S. pressure not to import Iranian gas, in December 2001 Turkey began
doing so through a new cross-border pipeline, under an August 1996 agreement.
In late April 2004, Iran began a major oil swap project with its neighbors, which
Iran asserted was a response to U.S. efforts to promote alternate routes. Under the
project, Iran imports 170,000 barrels of crude oil from Russia, Kazakhstan, and
Turkmenistan. In return, Iran export an equivalent amount of Iranian oil from its
Gulf ports on behalf of those producers.
43 Daragahi, Borzou. “France Steps Up Its Investments in Iran.” New York Times, June 23,
2004.

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Travel-Related Guidance. Use of U.S. passports for travel to Iran is
permitted, but a State Department travel warning, softened somewhat in April 1998,
asks that Americans “defer” travel to Iran. Iranians entering the United States are
required to be fingerprinted.
U.S.-Iran Assets Disputes. Iran views the issue of outstanding disputed
commercial claims and U.S.-blocked assets as an obstacle to improved relations. A
U.S.-Iran Claims Tribunal at the Hague is arbitrating cases resulting from the break
in relations and freezing of some of Iran’s assets following the Iranian revolution.
The major cases yet to be decided center on hundreds of Foreign Military Sales cases
between the United States and the Shah’s regime, which Iran claims it paid for but
were unfulfilled. About $400 million in proceeds from the resale of that equipment
is in a DOD account, and about $22 million in Iranian diplomatic property remains
blocked. The assets issue moved to the forefront following several U.S. court
judgments against Iran for past acts of terrorism against Americans, filed under the
Anti-Terrorism and Effective Death Penalty Act of 1996. For information on these
suits, see CRS Report RL31258, Suits Against Terrorism States by Victims of
Terrorism.
Regarding the mistaken U.S. shootdown on July 3,1988 of an Iranian Airbus
passenger jet, on February 22, 1996, the United States, responding to an Iranian case
before the International Court of Justice (ICJ), agreed to pay Iran up to $61.8 million
in compensation ($300,000 per wage earning victim, $150,000 per non wage earner)
for the 248 Iranians killed. The funds for this settlement came from a general
appropriation for judgments against the United States. The United States previously
paid $3 million in death benefits for 47 non-Iranians killed in the attack, but has not
compensated Iran for the airplane itself. A different case, pending before the ICJ,
involves an Iranian claim for damages to Iranian oil platforms during U.S. naval
clashes with Iran in October 1987 and April 1988.
Multilateral Policies Toward Iran
A cornerstone of the policies of successive U.S. administrations has been to
persuade U.S. allies to cooperate with the United States to contain Iran, including
imposing their own sanctions on that country. As noted, those U.S. efforts have
generally been unsuccessful, although some U.S. allies have, in the past, denied Iran
economic benefits as an expression of opposition to Iran’s policies. The involvement
of several European countries in trying to curb Iran’s nuclear program has been
analyzed above.
During 1992-1997, the European Union (EU) countries maintained a policy of
“critical dialogue” with Iran, asserting that dialogue and commerce with Iran could
moderate Iran’s behavior. The United States did not oppose those talks but
maintained that the EU’s dialogue would not change Iranian behavior. The dialogue
was suspended immediately following the April 1997 German terrorism trial
(“Mykonos trial”) that found high-level Iranian involvement in assassinating Iranian
dissidents in Germany. Alongside Khatemi’s accession and the associated U.S. shift
toward engagement, the EU-Iran dialogue formally resumed in May 1998, and U.S.-
allied differences on Iran narrowed. Khatemi undertook state visits to several
Western countries, including Italy (March 1999), France (October 1999), Germany

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(July 2000), and Japan (November 2000); the United States publicly welcomed these
visits.
On December 12, 2002, Iran and the EU began formal negotiations on a trade
pact that would lower the tariffs or increase quotas for Iranian exports to the EU
countries, with some linkage to Iran addressing EU concerns on Iran’s human rights
practices and terrorism sponsorship. However, revelations about Iran’s possible
nuclear weapons ambitions caused the EU to announce, in July 2003, suspension of
talks on a trade agreement. As noted above, the EU says resumption of the trade
talks is contingent on Iran’s full cooperation with the IAEA on nuclear issues.
Britain/France. The resolution of the “Rushdie affair” to Britain’s satisfaction
sparked improvement in its relations with Iran. Iran maintains that Ayatollah
Khomeini’s 1989 death sentence against author Salman Rushdie cannot be revoked
(his “Satanic Verses” novel was labeled blasphemous) because Khomeini is no
longer alive to revoke it. On September 24, 1998, Iran’s Foreign Minister pledged
to Britain that Iran would not seek to implement the sentence and opposed any
bounties offered for his death. Britain then upgraded relations with Iran to the
ambassadorial level. Some Iranian clerics (outside the formal government structure)
have said the death sentence stands, and the Iranian government has not required the
Fifteen Khordad foundation to withdraw its $2.8 million reward for Rushdie’s death.
Khatemi said on June 4, 2001 that he considers the issue closed. In October 2000,
Britain began extending longer term credit (two years or greater) for exports to Iran.
As noted above (ILSA section), French-Iranian economic relations have
burgeoned in recent years. French investment in Iran now goes well beyond the
energy sector into car production in Iran and other initiatives. Some of the major
French companies investing in Iran (outside the energy sector) include Renault,
Societe-Generale (banking), Peugeot, and Alcatel.
Japan. In August 1999, Japan continued a gradual improvement in relations
with Iran by announcing a resumption of Japan’s official development lending
program for Iran to construct a hydroelectric dam over the Karun River. However,
the $70 million increment announced was less than Iran had wanted, and Japan said
that this tranche would close out Japan’s involvement in the project. (In 1993, Japan
provided the first $400 million tranche of the overall $1.4 billion official
development loan program, but the lending was subsequently placed on hold as the
United States sought to persuade its allies to pressure Iran.) In late January 2000,
Japan agreed to resume medium- and long-term export credit insurance for exports
to Iran, suspended since 1994. Economic relations improved further during
Khatemi’s November 2000 visit to Tokyo, which resulted in Iran granting Japanese
firms the first right to negotiate to develop the large Azadegan field. A $2 billion
deal to develop that field, long delayed over Iran’s nuclear program, 44 was signed
on February 18, 2004. The consortium of Japanese firms includes Japan Petroleum
Exploration Company, Inpex Corp, and Tomen Corp. Partly at U.S. urging, Japan
has refused to extend to Iran new official loans.
44 “Japan Still in Iran Oil Talks, Despite U.S.” Reuters, June 30, 2003.

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Multilateral/International Lending to Iran. During 1994-1995, and over
U.S. objections at the time, Iran’s European and Japanese creditors rescheduled about
$16 billion in Iranian debt. These countries (governments and private creditors)
rescheduled the debt bilaterally, in spite of Paris Club rules that call for multilateral
rescheduling and International Monetary Fund (IMF) involvement. Iran has worked
its external debt down from $32 billion in 1997 to below $20 billion as of March
2004, according to Iran’s Central Bank. The improved debt picture has led most
European export credit agencies to restore insurance cover for exports to Iran. In July
2002, Iran tapped international capital markets for the first time since the Islamic
revolution, selling $500 million in bonds to European banks. At the urging of the
U.S. government, in May 2002 Moody’s stopped its credit ratings service for Iran’s
government bonds on the grounds that performing the credit ratings service might
violate the U.S. trade ban.
Section 1621 of the Anti-Terrorism and Effective Death Penalty Act of 1996
(P.L. 104-132) amended the Foreign Assistance Act to require the United States to
vote against international loans to countries on the U.S. terrorism list. Acting under
provisions of successive foreign aid laws, in 1993 the United States voted its 16.5%
share of the World Bank against loans to Iran of $460 million for electricity, health,
and irrigation projects. To signal opposition to international lending to Iran, the
FY1994 foreign aid appropriations (P.L. 103-87) cut the Administration’s request for
the U.S. contribution to the World Bank by the amount of those loans. That law, as
well as the foreign aid appropriations for FY1995 (P.L. 103-306) and FY1996 (P.L.
104-107), would have significantly reduced U.S. payments to the Bank if it had
provided new loans to Iran.
By 1999, Iran’s moderating image had led the World Bank to consider new
loans. In May 2000, the United States was unsuccessful in obtaining further delay
on a vote on new lending for Iran, and its allies outvoted the United States in
approving $232 million in loans for health and sewage projects. Twenty-one of the
Bank’s twenty four governors voted in favor, and France and Canada abstained.
Despite the required U.S. opposition, on May 10, 2001, the World Bank’s executive
directors voted to approve a two-year economic reform plan for Iran that envisions
$775 million in new Bank loans. In April 2003, the Bank approved $20 million in
loans for environmental management, and in June 2003, it approved a loan for $180
million for earthquake assistance. On October 29, 2003, a Treasury Department
official, Bill Schuerch, testified before the House Financial Services Committee that
the United States would continue to try to block new World Bank loans to Iran, but
that the United States has not been successful in blocking recent loans and could not
guarantee that outcome. In 1999-2000, Iran had asked the International Monetary
Fund for about $400 million in loans (its quota is about $2 billion) to help it deal
with its trade financing shortfalls. However, Iran balked at accepting IMF
conditionality, and there was no agreement.
A section of a bill in the 108th Congress, H.R. 2466, contains a provision similar
to that of these earlier laws — mandating cuts in U.S. contributions to international
financial institutions that lend to Iran. However, on July 15, 2004, a proposed
amendment to the House version of the FY2005 foreign aid appropriations (H.R.
4818) was defeated. The amendment would have cut U.S. funding to the World

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Bank by the $390 million that the Bank had approved in May 2004 in new lending
to Iran.
WTO Membership. The Bush Administration said in July 2001 that U.S.
opposition to Iran’s membership in the World Trade Organization (WTO) was
“under review.” On several occasions since then, the WTO, at U.S. urging, has
postponed discussion on whether to launch entry talks with Iran. On October 21,
2003, a U.S. delegate to the WTO again vetoed the start of entry talks between the
WTO and Iran, saying the United States was still “reviewing” whether Iran should
be admitted. The U.S. veto was the 15th time in the past three years that the United
States has blocked entry talks for Iran. As noted above, the European countries
negotiating with Iran on nuclear issues have put on offer support for Iran’s entry into
the body as part of an agreement that might be reached.
Conclusion
Mistrust between the United States and Iran’s Islamic regime has run deep for
over two decades. Many experts say that all factions in Iran are united on major
national security issues and that U.S.-Iran relations might not improve unless or until
the Islamic regime is removed or moderates substantially. Some believe that a crisis
is likely if Iran does not fully and unambiguously abandon any efforts toward
achieving a nuclear weapons capability.
Others say that, despite the victory of conservatives in 2004 parliamentary
elections, the United States and Iran have a common interest in stability in the
Persian Gulf and South Asia regions in the aftermath of the defeat of the Taliban and
the regime of Saddam Hussein. Those who take this view say that Iran is far more
secure now that the United States has removed these two regimes, and it might be
more willing than previously to accommodate U.S. interests in the Gulf. Others say
that the opposite is more likely, that Iran now feels more encircled than ever by pro-
U.S. regimes and U.S. forces guided by a policy of pre-emption, and Iran might
redouble its efforts to develop WMD and other capabilities to deter the United States.
Some believe that Iran has thus far refused to extradite Al Qaeda leaders in Iran
because Iran views these figures as leverage with the United States and perhaps as
a bargaining chip to persuade the United States to extradite to Iran oppositionists
based in Iraq.

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