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Order Code RL32048

Iran: U.S. Concerns and Policy Responses

Updated July 20, 2004

Kenneth KatzmanSpecialist in Middle Eastern Affairs

Foreign Affairs, Defense, and Trade Division

Iran: U.S. Concerns and Policy Responses

Summary

The Bush Administration has generally continued the Iran policies of previousadministrations by attempting to contain Iran while pursuing limited engagementwith it. At times, the Administration has appeared to favor a strategy of regimechange, although without taking concrete steps in that direction. During the previousAdministration, signs of moderation in Iran had stimulated the United States to tryto engage Iran in broad, official talks. Relations took a downturn after the September11, 2001, attacks on the United States when the issue of international terrorism tookcenter stage. President Bush singled out Iran, North Korea, and Iraq as part of an“axis of evil” in his January 29, 2002, State of the Union message. Since then,common interests in stability in post-conflict Afghanistan and post-Saddam Iraq haveled to occasional direct contact.

Iran’s alleged efforts to acquire weapons of mass destruction (WMD) anddelivery means, coupled with its support of terrorist groups, have long been key U.S.concerns. The Bush Administration and many in Congress are expressing strongsuspicions of Iran’s nuclear intentions; these concerns have been heightened byreported major strides in Iran’s nuclear program and halting and incompletecooperation with a strict program of International Atomic Energy Agency (IAEA)inspections and safeguards. Another U.S. concern has been Iran’s active oppositionto the U.S.-led Middle East peace process, including material support to Hizballahin Lebanon and such Palestinian groups as Hamas and Palestinian Islamic Jihad. Iranwas quietly helpful in the U.S. effort to oust Iraq’s Saddam Hussein, a longtimeTehran adversary, although Iran reportedly is supporting Shiite Islamic factions therethat do not espouse most Western values. Some senior Al Qaeda activists are in Iranas well, although Iran claims they are “in custody” and will be tried. Iran’s humanrights practices and limits on democracy are frequently criticized by U.S. officialsand Members.

The Bush Administration reportedly has been mulling a series of further policyoptions to curb Iran’s nuclear program and other aspects of Iranian policy it findsobjectionable. These options included the adoption of a regime change policy,military action against suspected nuclear facilities, and a push for internationalsanctions to supplement U.S. unilateral sanctions already in force. U.S. sanctionscurrently in effect ban or strictly limit U.S. trade, aid, and investment in Iran, andpenalize foreign firms that invest in Iran’s energy sector. Some believe that Iran haselements of democracy, including presidential elections, that could enable direct U.S.engagement with Iran to yield progress on the nuclear as well as other major issues.According to this view, new sanctions or military action could harden Iran’s positionswithout necessarily easing the potential threat posed by Iran.

For further information, see CRS Report RS21592, Iran’s Nuclear Program:Recent Developments, and CRS Report RS21548, Iran’s Ballistic MissileCapabilities. This report will be updated as warranted by developments.

Contents

Threat Assessments and U.S. Concerns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Political History . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1Regime Stability and Human Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2

2004 Political Crisis and February 2004 Majlis Elections . . . . . . . . . . . 3Major Dissidents and Anti-Regime Groups . . . . . . . . . . . . . . . . . . . . . . 4People’s Mojahedin Organization of Iran (PMOI) . . . . . . . . . . . . . . . . 5Pro-Shah Activists . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Human Rights Record . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Religious Persecution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6Trial of 13 Jews . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7

Iran’s Strategic Capabilities and Weapons of Mass Destruction Programs . . 7Nuclear Program . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8October 21, 2003, Joint Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9Chemical and Biological Weapons . . . . . . . . . . . . . . . . . . . . . . . . . . . 11Missiles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11

Foreign Policy and Support for Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . 12Persian Gulf States . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Iraq . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13Supporting Anti-Peace Process Groups . . . . . . . . . . . . . . . . . . . . . . . . 15Relations With Central Asia and the Caspian . . . . . . . . . . . . . . . . . . . 16Al Qaeda/Afghanistan/Pakistan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16

U.S. Policy Responses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18Bush Administration Policy . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19

Regime Change Policy? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19Engagement? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21Military Action? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22International Sanctions? . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23

U.S. Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Terrorism/Foreign Aid Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23Bam Earthquake . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Proliferation Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24Counternarcotics . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25Trade Ban . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25The Iran-Libya Sanctions Act (ILSA) . . . . . . . . . . . . . . . . . . . . . . . . . 26Caspian/Central Asian Energy Routes Through Iran . . . . . . . . . . . . . . 27

Allied Country Policies Toward Iran . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Britain/France . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27Japan-Iran Relations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28Multilateral/International Lending to Iran . . . . . . . . . . . . . . . . . . . . . . 28WTO Membership . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29Travel Sanctions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30Assets Disputes/Victims of Terrorism . . . . . . . . . . . . . . . . . . . . . . . . . 30

Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30

Iran: U.S. Concerns and Policy Responses

Threat Assessments and U.S. Concerns

Part of the debate over U.S. policy toward Iran centers on the nature of thecurrent regime. Some experts believe that Iran is a threat to U.S. interests becausehardliners in Iran’s regime continue to dominate and set a policy direction intendedto challenge the United States’ pre-eminent influence in the region. The elements ofthat challenge include attempting to acquire weapons of mass destruction (WMD),supporting terrorist groups, and, in some past cases, backing dissident movementsattempting to destabilize pro-U.S. regimes in the region. Others believe that commonstrategic interests in stability in Central Asia and the Persian Gulf could drive Iranto become a potential ally of the United States on at least some issues. In the viewof some, this process could occur whether or not moderates prevail politically insideIran. Still others maintain that Iran will constitute a major threat to U.S. interestsunless and until all elements of the current regime are removed and replaced with anon-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 Shahassumed the throne when Britain and Russia forced his father, Reza Shah Pahlavi(Reza Shah), from power because of his perceived alignment with Germany in WorldWar II. Reza Shah had assumed power in 1921 when, as an officer in Iran’s onlymilitary force, the Cossack Brigade, he launched a coup against the government ofthe Qajar Dynasty.

The Shah was anti-Communist, and the United States viewed his governmentas a bulwark against the expansion of Soviet influence in the Persian Gulf. In 1951,he appointed a popular nationalist parliamentarian, Dr. Mohammad Mossadeq, asPrime Minister. Mossadeq was widely considered left-leaning, and the United Stateswas wary of his policies, which included his drive for nationalization of the oilindustry. Mossadeq’s followers began an uprising in August 1953 when the Shahtried 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 doinghe also tried to limit the influence and freedoms of Iran’s Shiite clergy. He exiledAyatollah Ruhollah Khomeini in 1964 because of Khomeini’s active opposition tothe Shah, opposition based on the Shah’s anti-clerical policies and what Khomeinialleged was the Shah’s forfeiture of Iran’s sovereignty to its patron, the United States.

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Khomeini settled in and taught in Najaf, Iraq, before going to France in 1978,from which he stoked the Islamic revolution. Mass demonstrations and guerrillaactivity by pro-Khomeini forces, allied with a broad array of anti-Shah activists,caused the Shah’s government to collapse in February 1979. Khomeini returnedfrom France and, on February 11, 1979, declared an Islamic Republic of Iran. TheIslamic republic is characterized by direct participation in government by ShiiteIslamic theologians, a principle known as velayat-e-faqih (rule by a supreme Islamicjurisprudent). Khomeini was strongly anti-West and particularly anti-U.S., andrelations between the United States and the Islamic Republic turned hostile evenbefore the November 4, 1979, seizure of the U.S. Embassy by pro-Khomeini radicals.

Regime Stability and Human Rights

After about a decade as leader of the revolution, Ayatollah Khomeini died onJune 3, 1989. His regime continues, now led by his clerical disciples. UponKhomeini’s death, Ayatollah Ali Khamene’i, then serving as president, was namedSupreme Leader. Khamene’i had been elected president in 1981 and was re-electedin 1985. Khamene’i lacks the unquestioned spiritual and political authority ofKhomeini, but Khamene’i appears to face no direct threats to his position.

The United States does not have a declared policy of changing Iran’s regime,although some who favor a regime change policy point to a growing movement bypro-reform elements against the more conservative clerics that still dominate Iran’stop leadership. Since February 2002, Director of Central Intelligence (DCI) GeorgeTenet has been saying that Iran’s reform movement is “losing momentum” to the“unelected” hardliners, including the Supreme Leader, Ayatollah Ali Khamene’i(successor to Ayatollah Khomeini) who controls appointments to key institutionssuch as the twelve-member (six clerics and six lawyers) Council of Guardians andthe military. Khamene’i was not elected Supreme Leader upon Khomeini’s death,but was selected by an “Assembly of Experts” that chooses the person who will fillthat position and can amend Iran’s constitution. The Assembly of Experts is anelected body. Even before the February 2004 victory in parliamentary elections byconservatives, Khamene’i and his allies had largely constrained the influence of theelected President, Mohammad Khatemi, who was re-elected on June 8, 2001 by alandslide 77% of the vote against nine more conservative candidates. Khatemiremains popular, by most accounts. His reelection victory was larger than his 69%first win in May 1997. His supporters held about 70% of the seats in the 2000-2004Majlis after their victory in the February 18, 2000, elections.

Khatemi is a mid-ranking cleric, one rank below Ayatollah. He served asMinister of Culture and Islamic Guidance in the early 1990s. He was dismissed fromthat post in 1993 because of criticism that he was allowing Western cultural materialto 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 areformist grouping called the Islamic Iran Participation Front, headed by his brother,Mohammad Reza Khatemi, who was a deputy speaker in the 2000-2004 Majlis.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 challengethe hardliners assertively. A third major pro-Khatemi grouping is the Mojahedin ofthe Islamic Revolution organization (MIR), composed mainly of left-leaning Iranian

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figures who, during the 1980s, sought greater state control of the economy and exportof Iran’s Islamic revolution to other countries in the region. A fourth groupingconsidered supportive of Khatemi and the reformists is the Society of CombatantClerics. A prominent member of that grouping is Mehdi Karrubi, who was speakerof the 2000-2004 Majlis. Karrubi is a possible candidate to run for president in 2005elections; another possible reformist candidate is former Culture Minister AtaollahMohajerani.

Despite Khatemi’s popularity, the hardliners thwarted many of his programs andinitiatives. Since early 2000, hardliners in the judiciary have closed more than 70reformist newspapers, although many have tended to reopen under new names, andimprisoned or questioned several editors and even some members of the Majlis.Since mid-2002, Khatemi, partly in response to his reformist critics, became morevocal in criticizing obstructions by hardliners, and in late August 2002, he proposednew legislation that would strengthen the power of his office; it was passed by theelected 290 seat Majlis (parliament) but was blocked by the Council of Guardians.Khatemi suffered his first electoral setback in February 28, 2003 local elections, withhardliners winning most of the seats from Tehran in a low turnout (14%) election thatsuggested reformist disillusionment at the slow pace of reform.

Indications of popular dissatisfaction re-surfaced with major studentdemonstrations on June 8, 2003, the fourth anniversary of the violent suppression ofstudents and others who were rioting in favor of faster reform. Some of the 2003protesters called for Khatemi to resign for being ineffective in promoting reform.President Bush issued statements in support of the demonstrators, although Secretaryof State Powell said the protests represented a “family fight” within Iran in which theUnited States should not seek a role. Press reports say as many as four studentsmight have been killed by regime security forces during the days of protest.

2004 Political Crisis and February 2004 Majlis Elections. The powerstruggle caused a crisis in the run-up to the February 20, 2004, Majlis elections. Thehardliner-dominated Council of Guardians disqualified about 3,600 mostly reformistcandidates for the upcoming election, including 83 members of the current Majlis.(The disbarred incumbents included deputy speakers Mohammad Reza Khatemi andBehzad Nabavi.) Khatemi and Majlis leaders attempted to resolve the crisis in talkswith Khamene’i, but the Council of Guardians refused to strictly follow Khamene’i’surging to reinstate most candidates; the body restored eligibility for about 1,100disbarred candidates but increased the number of disqualified incumbents to 87. TheInterior Ministry (which ran the elections) and many reformists said the electionsshould have been postponed in order to be free and fair. However, Khatemi said hewould obey Khamene’i’s directive to hold the elections on time.

Khatemi’s party grouping (the Iran Participation Front) boycotted the electionsand urged a general boycott, but some reformist factions continued to participate. Aswas widely predicted before the election, conservatives fared well and won a majority — about 155 out of the 290 Majlis seats. Turnout was about 51%, according to thereformist-controlled Interior Ministry, signaling that Iranians did not necessarilyanswer the call of some reformists not to participate. Iran’s official media, controlledby conservatives, put the turnout at about 60%, while some reformists said turnoutwas only about 35%. On May 3, 2004, Khatemi issued a statement that reform of the

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1 Jehl, Douglas. CIA Says Election in Iran Dealt Blow to Reform. New York Times,February 26, 2004.

system was “inevitable” and suggesting that those blocking reforms were a minoritywho would eventually be compelled to give way for reform.

As a result of the election-related maneuvering, a moderate-conservativegrouping called the Builders of Islamic Iran, led by former Labor Minister AhmadTavakkoli, emerged as a key bloc in the new Majlis. The chairman of theExpediency Council, former two-term president (1989-1997) Ali Akbar Hashemi-Rafsanjani, has seen his influence bolstered; he is considered the patron of manyconservatives in the Majlis. One of his allies, the Secretary General of the SupremeNational Security Council Hassan Rouhani, a defense and foreign policydecisionmaking body, is touted as a possible candidate for president in 2005.

Several governments, the United States and the European Union countries,criticized the election as unfair because of the widespread disqualification of thereformists. Just before the elections, on February 12, 2004, the Senate passed byunanimous consent S.Res. 304, expressing the sense of the Senate that the UnitedStates should not support the elections (because of the exclusion of many reformistcandidates) and should advocate “democratic government” in Iran. After theelections, on February 24, 2004, President Bush said “I join many in Iran and aroundthe world in condemning the Iranian regime’s efforts to stifle freedom of speech. Iam very disappointed.” A reported CIA assessment said the election dealt a severeblow to the reformists and that the election might deepen popular discontent with theclerical regime, but that Iran’s foreign and defense policies would likely not changemuch because decisions on these issues were already largely in the hands ofKhamene’i and other conservatives.1

Major Dissidents and Anti-Regime Groups. In addition to the reformistcamp that seeks to moderate the Islamic system of government from within thepolitical structure, several major dissidents and opposition groups seek moresweeping change. One dissident cleric, Ayatollah Hossein Ali Montazeri, wasreleased in January 2003 from several years of house arrest. In September 2003, hecriticized the seizure of the U.S. Embassy in 1979 as well as the core principle of therevolution: direct participation in government by the clerics. He had beenKhomeini’s designated successor until 1989, when Khomeini dismissed Montazerifor allegedly protecting liberal intellectuals and other opponents of clerical rule. Heremains under scrutiny by the regime, according to several press reports. Otherprominent dissidents include exiled theoretician Abd al-Karim Soroush, formerInterior Minister Abdollah Nuri, and political activist Hashem Aghajari of the MIR,who was initially sentenced to death for blasphemy but whose sentence wasoverturned on review.

Some believe that the United States should support exiled opposition groups,which are banned inside Iran and seek the outright replacement rather than reform ofthe current regime. According to available information, no exile group is currentlyfunded by the United States. In 1995, the Clinton Administration accepted aHouse-Senate conference agreement to include $18-$20 million in funding authority

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2 Cloud, David. “U.S., Iran Hit Bumpy Terrain on Road to Rapprochement.” Wall StreetJournal, May 12, 2003.

for covert operations against Iran in the FY1996 intelligence authorization act (H.R.1655, P.L. 104-93), about $14 million more than requested, according to aWashington Post report of December 22, 1995. The Clinton Administrationreportedly focused the covert aid on changing the regime’s behavior, rather than itsoverthrow. The conference report on H.R. 2267 (H.Rept. 105-405), the FY1998Commerce/State/ Justice appropriation, provided an initial $4 million for a “RadioFree 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 inPrague on October 31, 1998, and has become, as of December 2002, Radio Farda(“Tomorrow” in Farsi), which broadcasts nearly around the clock. Another U.S.-sponsored TV broadcast service to Iran, under the auspices of the Voice of America,began operations on July 3, 2003.

People’s Mojahedin Organization of Iran (PMOI). One major exiledopposition group is the People’s Mojahedin Organization of Iran (PMOI). Since thelate 1980s, the State Department has refused contact with the PMOI and its umbrellaorganization, the National Council of Resistance (NCR). The PMOI, formed in the1960s to try to overthrow the Shah of Iran, advocated Marxism blended with Islamictenets. It allied with pro-Khomeini forces during the Islamic revolution but was laterexcluded from power and forced into exile and into the underground. The StateDepartment designated the PMOI as a foreign terrorist organization (FTO) inOctober 1997 under the Anti-Terrorism and Effective Death Penalty Act of 1996, andthe 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 killedor injured civilians, and its alleged killing of seven American defense advisers to theformer Shah in 1975-76. In November 2002, a letter signed by about 150 HouseMembers was released, asking the President to remove the PMOI from the FTO list.

U.S. forces attacked PMOI military installations in Iraq during Operation IraqiFreedom and, after temporarily agreeing to a ceasefire with PMOI military elementsin Iraq, subsequently confined them to their Ashraf camp near the border with Iran.Press reports in late May 2003 said some Administration officials, particularly in theDefense Department, want the group removed from the FTO list and a U.S. alliancewith the group against the Tehran regime.2 However, on August 14, 2003, the StateDepartment designated the NCR offices in the United States an alias of the PMOIand NCR and ordered those facilities closed. National Security Adviser CondoleezzaRice said in mid-November 2003 that the United States is unambiguously treating thegroup as a terrorist organization. In December 2003, Iraq’s Governing Council votedto expel members of the group from Iraq, although the Council was not sovereign inIraq and the fate of the PMOI detainees at the Ashraf camp might be subject tonegotiations between U.S. officials in Iraq and a new interim government that tookoffice on June 28, 2004.

In other action against the group, on June 17, 2003, France arrested about 170PMOI members, including its co-leader Maryam Rajavi (wife of PMOI founderMasoud Rajavi, who is still based in Iraq.) She was subsequently released. For

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3 Kampeas, Ron. “Iran’s Crown Prince Plots Nonviolent Insurrection from SuburbanWashington.” Associated Press, August 26, 2002.

further information, see CRS Report RL31119, Terrorism: Near Eastern Groups andState Sponsors, 2002.

Pro-Shah Activists. Some Iranians follow the U.S.-based son of the lateformer Shah. On January 24, 2001, the son, Reza Pahlavi, who is about 46 years old,ended a long period of inactivity by giving a speech in Washington calling for unityin opposition to the current regime as well as the institution of a constitutionalmonarchy and genuine democracy in Iran. He has since broadcast messages into Iranfrom Iranian exile-run stations in California, and press reports say a growing numberof Iranians inside Iran are listening to his broadcasts, although he is not believed tohave a major following there.3 Deputy Secretary of State Armitage testified beforethe Senate Foreign Relations Committee on October 28, 2003, that the United Statesmight consider, on a case-by-case basis, providing funds to Iranian exile stations,using funds from the broader Middle East Partnership Initiative. (That program isan effort to promote democracy in the Middle East, but the State Department hasdetermined that funds from this program, which are Economic Support Funds, cannotbe used in Iran.) He also testified that, following a request to the Cuban government,the jamming from Cuba of Iranian exile and U.S. broadcasting to Iran had ceased; thejamming was carried out by Iranians in Cuba, not the Cuban government, accordingto Armitage.

Human Rights Record. Recent U.S. Administrations, including the StateDepartment’s human rights report for 2003 released February 25, 2004, have harshlycriticized Iran’s human rights record. U.S. policy has not generally considered Iran’shuman rights record as a strategic threat to U.S. interests or an obstacle to thebeginning of a U.S.-Iran dialogue. U.S. and U.N. human rights reports cite Iran forwidespread human rights abuses (especially of the Baha’i faith), includingassassinations and executions of regime opponents (Kurds, People’s Mojahedin, andothers) in Iran and abroad. These reports note that Khatemi’s efforts to promote ruleof law have met repeated challenges from hardliners. One major recent case was theapparent beating death while in Iranian detention of a Canadian journalist of Iranianorigin, Zahra Kazemi. She had been detained in early July 2003 for filming outsideTehran’s Evin prison. The trial of an intelligence agent who allegedly conducted thebeating was abruptly suspended on July 18, 2004, pending a verdict.

Iran’s hardliners significantly downplayed the naming in October 2003 ofIranian human rights/women’s rights lawyer Shirin Ebadi as winner of the NobelPeace prize. Reformist newspapers acknowledged and at least mildly praised heraward. In the 108th Congress, resolutions (S.Res. 82 and H.Res. 140) wereintroduced on March 12, 2003, expressing concern over Iran’s human rights record,particularly its treatment of women.

Religious Persecution. By almost all accounts, religious persecutioncontinues, especially against the Baha’i community, because Iran’s Shiite Muslimclergy views the sect as heretical. Two Baha’is (Dhabihullah Mahrami and MusaTalibi) were sentenced to death in 1996 for apostasy. On July 21, 1998, Iran

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executed Ruhollah Ruhani, the first Bahai executed since 1992 (Bahman Samandari).The United States condemned the execution. In February 2000, Iran’s SupremeCourt 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 fourBaha’is. Several congressional resolutions have condemned Iran’s treatment of theBaha’is, including S.Con.Res. 57, which passed the Senate July 19, 2000, andH.Con.Res. 257, which passed the House on September 19, 2000. In the 108th

Congress, H.Con.Res. 319 contained sense of Congress language on the Baha’issimilar to that in previous years. Since March 1999, the State Department has eachyear named Iran as a “Country of Particular Concern,” under the InternationalReligious Freedom Act, and little progress in Iran’s performance on this issue wasnoted in the December 2003 international religious freedom report. No sanctionshave been added because of this designation, on the grounds that Iran is alreadysubject to extensive U.S. sanctions.

Trial of 13 Jews. Although the 30,000-member Jewish community (thelargest in the Middle East aside from Israel) enjoys more freedoms than Jewishcommunities in several other Muslim states, during 1993-1998, Iran executed fiveJews allegedly spying for Israel. In June 1999, Iran arrested 13 Jews, who wereteachers, 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 twoMuslims accomplices were convicted (July 1, 2000) and received sentences rangingfrom 4 years to 13 years. Three Jews were acquitted. On September 21, 2000, athree-judge appeals panel reduced the sentences slightly, now ranging from two tonine years. On February 8, 2001, Iran’s Supreme Court let the revised sentencesstand. In March 2001, Iran released one of the Jews on the grounds that his sentenceincluded time served; another was released on January 16, 2002; and three more weregiven early release in October 2002. Iran said on April 24, 2003, that the remainingfive had been released.

Iran’s Strategic Capabilities and Weapons of Mass Destruction Programs

For the past two decades, the United States has sought to contain the strategicthreat posed by Iran’s WMD programs. Iran is not considered a major conventionalthreat to the United States, but some of its weapons of mass destruction (WMD)programs, particularly its nuclear and ballistic missile programs, have madesignificant progress and could potentially put U.S. allies and forces at risk.

Iran’s armed forces total about 550,000 personnel, including both the regularmilitary and the Revolutionary Guard. The latter is generally loyal to the hardlinersand, according to some recent press reports, becoming more assertive in politicaldecisions. Guard personnel recently closed part of a new airport in Tehran when thegovernment chose a foreign contractor to run the airport.

Iran’s ground forces are likely more than sufficient to deter or fend offconventional threats from Iran’s relatively weak neighbors such as post-war Iraq,Turkmenistan, Azerbaijan, and Afghanistan. Iran has tried to maintain good relationswith its more militarily capable neighbors such as Turkey and Pakistan. According

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4 For further information, see CRS Report RS21592, Iran’s Nuclear Program: RecentDevelopments. 5 “U.S. Wants Iran Breaches Reported to U.N. Council.” Reuters, June 18, 2004.

to U.S. military officials, Iran’s forces could block the Strait of Hormuz at theentrance to the Persian Gulf, at least temporarily. However, Iran is largely lackingin logistical ability to project power far beyond its borders. No military tensions arecurrently 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 theGulf have been more professional since Khatemi took office.

Iran’s conventional capabilities have concerned successive U.S. Administrationsfar 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, particularlyits nuclear program, President Bush, in his January 29, 2002 State of the Unionmessage, 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 asymbol of Iran’s perception of itself as a major nation. Some observers see Iran’sWMD programs as an instrument for Iran to dominate the Persian Gulf region. Thereare 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 takenany steps in that direction. Iran’s programs continue to be assisted primarily byentities in Russia, China, and North Korea. For further information, see CRS ReportRL30551, Iran: Arms and Weapons of Mass Destruction Suppliers.

Nuclear Program.4 U.S. and European concerns about the scope of Iran’snuclear program have grown over the past few years, and U.S. and European policieshave largely converged on the issue. The Bush Administration asserts that Iran isworking toward a nuclear weapons capability, that it has violated its obligationsunder the 1968 Nuclear Non-Proliferation Treaty (NPT), and that Iran’s assertionsthat 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 “willbe dealt with, starting through the United Nations,” if it does not fully cooperate withInternational Atomic Energy Agency (IAEA) inspections. No specific consequenceshave been threatened to date, but the Bush Administration, unsatisfied with progresson curbing Iran’s nuclear program, appears to want to begin discussing with U.S.allies and others the possible imposition of international economic sanctions.5 Incontrast to the U.S. position, IAEA director Mohammad El Baradei has said that the“jury is still out” on whether Iran is trying to develop a nuclear weapon. IAEADirector General Mohammad Baradei met with President Bush on March 17, 2004,and Iran was reportedly a focus of their discussions; Baradei said after the meetingthat U.S.-Iran talks could be a key to resolving outstanding nuclear issues.

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

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6 Iran’s Mushrooming Threat. Washington Times editorial. June 16, 2004. 7 Isachenkov, Vladimir. “Russia to Ship Nuclear Fuel to Iran Even Without Stricter U.N.Monitoring.” Associated Press, June 2003.

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 tocooperate with IAEA investigations into foreign assistance to Iran’s nuclear program.

After years of public and governmental assessments of Iran’s nuclear program — assessments that acknowledged substantial uncertainty about the quality andamount of firm information — U.S. and European suspicions were heightenedconsiderably in December 2002 when Iran confirmed PMOI and other allegationsthat it was building two additional facilities, at Arak and Natanz, that could be usedto produce fissile material that could be used for a nuclear weapon. Natanz couldproduce enriched uranium by 2005, and the Arak facility reportedly is a heavy waterproduction plant. Heavy water is used in a reactor that is considered ideal for theproduction of plutonium. These revelations, coupled with other information that hasbeen produced from recent IAEA visits to Iran, has caused some observers toestimate that by some time in 2005, Iran’s nuclear program will have advanced to thepoint at which it cannot be curbed.6

Despite the stepped up international attention and European and other supportfor the U.S. position, throughout most of 2003 Iran still refused to sign the“Additional Protocol” to the NPT, which would allow for enhanced inspections. Irandid modify its safeguards agreement to provide advanced notice of new nuclearfacilities construction. On September 12, 2003, the IAEA Board of Governorsadopted a statement giving Iran until the end of October 2003 to provide additionalinformation that would prove that it is not working on a nuclear weapon. The settingof the deadline came amid IAEA reports that it had found some highly enricheduranium at two sites in Iran, (Natanz and the Kalaye Electrical Company).

At the same time, Russia, despite its own growing concerns about Iran’sintentions, has been working to complete a nuclear power plant at Bushehr, a projectimplemented under a January 1995 contract with Iran. Iran said in October 2003 itwould sign an agreement under which Russia would reprocess the plant’s spentnuclear material, but no firm agreement has been signed to date. Russian officialssay the accord is ready for signature and might be signed in the fall of 2004 duringa planned visit by the head of Russia’s nuclear agency. The recent new revelationsabout Iran’s nuclear program have apparently made Russia more skeptical of Iran’spromises, and work on Bushehr was halted temporarily during 2003, and the plantis not expected to become operational until some time in 2005.7 Russian PresidentVladimir Putin, after meeting with President Bush on September 27, 2003, said theBushehr project would resume but that Russia would contribute to the internationaleffort to ensure that Iran does not develop a nuclear weapon. IAEA Director Baradeisaid in June 2004 that the Bushehr project itself is not a cause for internationalconcern as accelerating an Iranian nuclear program.

October 21, 2003, Joint Statement. With pressure growing on Iran tomeet the October deadline for full disclosure, the foreign ministers of Germany,

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8 Milhollin, Gary. “The Mullahs and the Bomb.” New York Times, October 23, 2003. 9 Murphy, Francois. U.N. Watchdog Accuses Iran of Unanswered Questions. Reuters,February 25, 2004.

France, and Britain accepted an invitation from Iran to visit. On October 21, thethree countries and Iran issued a joint statement in which Iran pledged, in return forpromises 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.

On October 22, Iran handed over to the IAEA a thick file that it said detailed allits nuclear activities. U.S. officials, including President Bush, said the European-Iranian agreement represented progress and a “positive development,” but that Iranwould ultimately be judged by its implementation. Some outside experts maintainthat the joint statement did not ensure that Iran could not use an alternate route, suchas plutonium production, to develop nuclear weapons.8 Khamene’i publicly backedthe deal in early November 2003, amid demonstrations against the deal by Iranianhardliners. Iran signed the Additional Protocol on December 18, 2003 and says itwill abide by its provisions, although the Majlis has not yet ratified it.

In its November 10, 2003 and February 24, 2004 reports, the IAEA said that Iranhad committed violations of its agreements, including unreported uraniumenrichment, over an 18-year period, and that Iran did not declare designs, found inIran by the IAEA in early 2004, of advanced uranium enrichment centrifuges, partsof which Iran made itself. The latter report added that traces of both highly enrichedand low-enriched uranium had been found at two sites in Iran.9 The latter reportadded that the Iranian military has been involved in manufacturing centrifugeequipment. IAEA board resolutions adopted after these reports condemned Iran’sprevious violations and said Iran had not resolved outstanding issues, but welcomedwhat cooperation Iran has been providing.

The IAEA last visited Iran in mid-April 2004 to verify Iran’s pledge that it hadstopped manufacturing centrifuges for uranium enrichment. The IAEA issuedanother report on May 31, 2004, which said Iran is continuing to make parts andmaterials that could be used in a nuclear weapons program. On June 18, 2004, amidreports Iran had bulldozed or altered suspected nuclear sites, the IAEA adoptedanother resolution rebuking Iran for failing to clear up questions about highlyenriched uranium found in Iran and Iran’s efforts to build or acquire enrichmentcentrifuge equipment. The United States said after the adoption of the resolution thatIran’s lack of full compliance should be reported to the United Nations SecurityCouncil, which would have the power to impose economic sanctions. After therebuke, Iran said it would resume building centrifuges for uranium enrichment,although it said it remained committed to suspending actual enrichment activity.

Iran has become connected to allegations that the founder of Pakistan’s nuclearweapons program, Abdul Qadeer (A.Q.) Khan, sold Iran and other countries (Libya,North Korea) nuclear technology and designs. In late January 2004, Pakistan’s

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10 Lancaster, John and Kamran Khan. Pakistanis Say Nuclear Scientists Aided Iran.Washington Post, January 24, 2004. 11 “Unclassified Report to Congress on the Acquisition of Technology Relating to Weaponsof Mass Destruction and Advanced Conventional Munitions, 1 January Through 30 June2002” [http://www.cia.gov/cia/reports/721_reports/jan_jun2002.html].12 “Greater U.S. Concern About Iran Missile Capability.” Reuters, March 11, 2002. 13 “Iran: New Missile on the Assembly Line.” New York Times, September 26, 2002.

government said its investigation concluded that at least two nuclear scientists,including Khan, provided unauthorized assistance to Iran’s nuclear weapons programduring the 1980s.10 In February 2004, Khan publicly admitted selling such goods toIran, Libya, and North Korea.

Chemical and Biological Weapons. Official U.S. reports and testimony,particularly the semi-annual CIA reports to Congress on WMD acquisitionsworldwide, state that Iran is seeking a self-sufficient chemical weaponsinfrastructure, mainly from Chinese sources, and that it is stockpiling chemicalweapons, including blister, blood, and choking agents. This raises questions aboutIran’s compliance with its obligations under the Chemical Weapons Convention(CWC), which Iran signed on January 13, 1993, and ratified on June 8, 1997. RecentCIA reports to Congress say Iran may have some capability to produce biologicalagents, but that its ability to make weapons from them is limited.11

Missiles. Largely with Russian help, Iran is making progress in its missileprogram. Two of its first three tests of the 800-mile range Shahab-3 (July 1998, July2000, and September 2000) reportedly were inconclusive or unsuccessful, but Iranconducted an apparently successful series of final tests in June 2003, subsequentlycalling the missile operational and formally delivered several of them to theRevolutionary Guard. Iran publicly displayed six Shahab-3 missiles in a parade onSeptember 22, 2003. If the missile is operational with the capabilities Iran claims,that would put virtually all of Iran’s potential regional adversaries, including Israel,as well as U.S. bases in Turkey, within reach. Iran is also trying to make a 1,200mile range Shahab-4, but U.S. officials told journalists in late October 2002 that anIranian test of an extended-range Shahab had failed. Other press reports in August2003 said Iran is in talks with North Korea to procure copies of that country’s“Taepodong 2” missile, which would enable Iran to strike Europe and East Asia. OnNovember 7, possibly as a confidence-building measure to coincide with its nuclearagreement with the European foreign ministers, Iran said it would abandondevelopment of the Shahab-4.

In March 2002, an intelligence community official upgraded the missile threatfrom Iran, testifying that the United States would “most likely” face anintercontinental ballistic missile threat from Iran by 2015.12 On September 6, 2002,Iran said it successfully tested a 200 mile range “Fateh 110” missile, and Iran said inlate September 2002 that it had begun production of the missile.13 (For moreinformation, see CRS Report RS21548, Iran’s Ballistic Missile Capabilities.)

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14 U.S. Department of State. Patterns of Global Terrorism:2002. Released April 2003 15 Kemp, Geoffrey. Forever Enemies? American Policy and the Islamic Republic of Iran.Carnegie Endowment for International Peace, 1994. Pp. 82-88.

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 MiddleEast peace process. Tehran contends that the Arab-Israeli peace process is inherentlyweighted toward Israel, a U.S. ally, and cannot result in a fair outcome for thePalestinians. Iran’s continued support for anti-Israel terrorism contributed toPresident 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 mostactive state sponsor of terrorism in 2002,” although the report attributes the terroristactivity to two hardline institutions — the Revolutionary Guard and the IntelligenceMinistry.14 (See also CRS Report RL31119, Terrorism: Near Eastern Groups andState Sponsors, 2002.)

Analysts see Iran’s support for terrorist groups as one element in a broaderforeign policy.15 Its policy is a product of the ideology of Iran’s Islamic revolution,blended with and sometimes tempered by longstanding national interests that predatethe Islamic revolution. Iran has tried to establish relatively normal relations withmost of its neighbors, but, in its relations with some neighbors it has tried to activelyinfluence 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 opposedto the monarchy states of the 6-member Gulf Cooperation Council (GCC; SaudiArabia, Kuwait, Bahrain, Qatar, Oman, and the United Arab Emirates). Theseactivities appeared to represent an effort by Iran to structure the Gulf region to itsadvantage by “exporting” its Islamic revolution. However, Iran’s efforts wereunsuccessful, and led the Gulf states to ally closely with the United States to confrontIran. By the mid-1990s, Iran began to shift more away from confrontation with theGulf states — a policy shift that accelerated after the election of MohammadKhatemi as president. Khatemi has largely succeeded in improving relations with theGulf states by reducing support for Shiite dissident movements there. (See CRSReport RL31533, Persian Gulf States: Post-War Issues for U.S. Policy, 2003.)

Many observers closely watch the relationship between Iran and Saudi Arabiaas an indicator of Iran’s overall posture in the Gulf. During the 1980s, Iransponsored disruptive demonstrations at annual Hajj pilgrimages in Mecca, some ofwhich were violent, and Iran sponsored Saudi Shiite dissident movements. Iran andSaudi Arabia restored relations in December 1991 (after a four-year break), andprogressively higher level contacts have taken place since December 1997. In May1999, Khatemi became the first senior Iranian leader to visit Saudi Arabia since theIslamic revolution; he visited again on September 11, 2002. Supreme LeaderKhamene’i has been invited to visit the Kingdom as well but has not done so. Theexchanges suggest that Saudi Arabia has tried to move beyond the issue of the June

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16 Walsh, Elsa. “Annals of Politics: Louis Freeh’s Last Case.” The New Yorker, May 14,2001.17 “Iran’s Kharrazi Hopes for Shiite Role in Iraq.” Reuters, April 9, 2003.

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.16

On June 21, 2001, a federal grand jury in the United States indicted 14 suspects,13 Saudis and a Lebanese citizen, for that bombing. The indictment indicated thatIranian agents may have been involved, but no indictments of any Iranians wereannounced. In June 2002, Saudi Arabia reportedly sentenced some of the elevenSaudi suspects held there. On December 18, 2003, former FBI Director Louis Freehtestified in a civil trial on behalf of American victims of the Khobar bombing, sayingthat there was “overwhelming evidence” that senior Iranian officials directed andfinanced that bombing. (See CRS Issue Brief IB93113, Saudi Arabia: PostwarIssues and U.S. Relations.)

Relations between Iran and the United Arab Emirates (UAE) have been strainedsince April 1992, when Iran asserted complete control of the Persian Gulf island ofAbu 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 andLesser Tunb, from the emirate of Ras al-Khaymah, as well as part of Abu Musa fromthe emirate of Sharjah.) The UAE wants to refer the dispute to the InternationalCourt of Justice (ICJ), but Iran insists on resolving the issue bilaterally. In concertwith Iran’s reduction of support for Gulf dissident movements, UAE-Iran tensionshave eased substantially, but Iran maintains it has sovereignty over the islands. TheUnited 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 (naturalgas), which it shares with Iran (the Iranian side is called South Pars). The North fieldis in operation and produces natural gas for export; Iran’s side of the field is at anearlier stage of exploitation. Qatar’s fears were heightened on April 26, 2004, whenIran’s deputy Oil Minister said that Qatar is probably producing more gas than “herright share” from the field and that Iran “will not allow” its wealth to be used byothers.

Iraq. Senior U.S. officials have, on several occasions since the fall of SaddamHussein on April 9, 2003, warned Iran not to interfere in post-war Iraq by trying toestablish a pro-Iranian Islamic republic there. U.S. officials, including DefenseSecretary Donald Rumsfeld, have said they will not accept an Iran-style Islamicrepublic in post-Saddam Iraq. Iran publicly opposed the major U.S. militaryoffensive against Iraq on the grounds that it was not authorized by the UnitedNations, but many observers believe Iran was relieved to see its erstwhile nemesisSaddam Hussein removed and hoped his fall would bring to power pro-Iranian ShiiteMuslim groups.17 Iran welcomed Iraq’s Governing Council as a legitimate authoritywhen it was appointed in July 2003, and it pledged some, mainly in-kind, assistancefor Iraq’s reconstruction at the October 23-24, 2003, donors conference in Madrid.

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18 Wong, Edward. “Iran Is In Strong Position to Steer Iraq’s Political Future.” New YorkTimes, July 3, 2004. 19 Risen, James and David Johnston. “Chalabi Reportedly Told Iran That U.S. Had Code.”New York Times, June 2, 2004.

Recently, as violence in Iraq has escalated, Iran has criticized the U.S. presence inIraq as repressive of the Iraqi people while failing to stabilize Iraq.

The main thrust of Iran’s strategy in Iraq appears to be to persuade all ShiiteIslamist factions in Iraq to work together to ensure Shiite Muslim dominance of post-Saddam Iraq. Iran’s primary proteges in Iraq are Shiite Islamist groups based insouthern Iraq, groups that Iran has supported since its 1979 Islamic revolution. Themost pro-Iranian of these parties is the Supreme Council for the Islamic Revolutionin Iraq (SCIRI), followed closely by the Da’wa (Islamic Call) party. SCIRI washeaded by Ayatollah Mohammad Baqr al-Hakim, the late Ayatollah Khomeini’schoice 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 byunknown assailants, and was succeeded as SCIRI head by his younger brother, Abdal-Aziz al-Hakim. Since then, Tehran has continued to expand ties to GrandAyatollah Ali al-Sistani, the 75-year-old Shiite cleric who is emerging as the leadingShiite political figure in Iraq. He was born in Iran, moving to Najaf, Iraq at the ageof 21. Sistani is taking strong stands on U.S. plans for political transition in Iraq, butSistani has, throughout his career, differed with Iran’s doctrine of direct clericalinvolvement in government.

Some reports allege that Iran is backing radical Shiite cleric Moqtada al-Sadr,whose followers have staged an uprising against U.S. and allied forces in Iraq sinceearly April 2004.18 However, Sadr is viewed as a challenger to Sistani and the othermainstream Shiite Islamist groups, and backing him might appear contrary toTehran’s overall strategy for Iraq, and therefore unlikely. On the other hand, it ispossible that some in Iran might want to engage Sadr to bring him into the broaderIraqi Shiite fold or to ensure that Iran has contact with him should he prevail in anyinternal Iraqi power struggle.

Iran reportedly might have used its influence in Iraq to develop sources ofinformation on U.S. operations in Iraq. Press reports say Iraqi political leader AhmadChalabi gave his Iranian contacts information on U.S. acquisition of Iranianintelligence codes.19 Chalabi has denied the allegations. Some experts say that mostIraqi Shiites generally stayed loyal to the Iraqi regime during the 1980-1988 Iran-Iraqwar and oppose any extensive Iranian influence over post-Saddam Iraq. (For moreinformation on Shiite and other contenders for power in Iraq, see CRS ReportRL31339, Iraq: U.S. Regime Change Efforts and Post-Saddam Governance.)

On June 21, 2004, Iran seized eight British seamen on a mission in the waterwaybetween Iran and southern Iraq. Iran released the British personnel after a few days’detention, although Britain says Iran had steered the British personnel into Iranianwaters. The seizure could be related to a reported Iranian buildup of military forcein areas near the border with Iraq, and other reports of Iranian attempts to move theIranian border slightly into territory that now belongs to Iraq. The Iranian

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conventional military moves at the border could reflect Iranian nervousness aboutU.S.-led coalition operations in Iraq or possibly be part of the broader attempt tobolster Iraqi Shiites politically.

Beginning in 1998, Saddam Hussein had sought to improve relations with Iranto reduce Iraq’s regional isolation. Iran and Iraq exchanged almost all remainingprisoners from the Iran-Iraq war. An October 2000 visit to Iraq by Iran’s ForeignMinister Kamal Kharrazi resulted in agreement to abide by the waterway-sharing andother provisions of their 1975 Algiers Accords, which Iraq had abrogated prior to itsSeptember 1980 invasion of Iran. In exchange for a share of the proceeds, Iran’snaval 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 the1991 Gulf war, and some post-Saddam Iraqi politicians have said they want Tehranto return the aircraft now that Saddam is gone.

Supporting Anti-Peace Process Groups. Many of the U.S. concernsabout Iran’s support for terrorism center on its assistance to groups opposed to theArab-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 for2002, said that following the start of the September 2000 Palestinian uprising, Iranincreased its covert support for terrorism by encouraging coordination amongPalestinian terrorist groups. Iran also has sometimes openly incited anti-Israelviolence, including hosting conferences of anti-peace process organizations (April24, 2001, and June 2-3, 2002). In early January 2002, according to U.S. and Israeliofficials, Iran made a shipment, intercepted by Israel, of 50 tons of arms bought bythe Palestinian Authority (PA). This action surprised many observers because Iranhas traditionally had few ties to the non-Islamist Palestinian organizations, includingelements linked to the PA, that have conducted some of the day-to-day violenceagainst Israel in the current uprising.

On the other hand, there appear to be differences within Iran’s leadership onIran’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’sdestruction. Khatemi, while publicly pledging support for the anti-peace processgroups, has sometimes tried to moderate Iran’s position somewhat. On October 15,2002, the Iranian Foreign Ministry, considered an institutional ally of Khatemi, saidIran would not seek to block any final, two-state Israeli-Palestinian settlement.

In early January 2004, Iran said it was close to agreement to restore fulldiplomatic ties with Egypt. Iran severed those ties to protest Egypt’s 1979 peacetreaty with Israel. Iran is in the process of meeting an Egyptian demand to renamea Tehran street that is named after Khalid Islambouli, lead assassin of Anwar as-Sadat.

A small number (about 200) of Iranian Revolutionary Guards reportedly remainin Lebanon to coordinate Iranian arms deliveries to Hizballah, which are offloaded

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20 Wright, Robin. “U.S. Blocks A Key Iran Arms Route to Mideast.” Los Angeles Times,May 6, 2001. 21 “ Israel’s Peres Says Iran Arming Hizbollah.” Reuters, February 4, 2002.

in Damascus and trucked into Lebanon.20 The shipments have included Stingersobtained by Iran in Afghanistan, mortars that can reach the Israeli city of Haifa iffired from southern Lebanon, and, in 2002, over 8,000 Katyusha rockets, accordingto Israeli leaders.21 In mid-April 2002, Foreign Minister Kharrazi visited Lebanonand urged Hizballah to exercise restraint on the Israeli-Lebanese border at a time ofheightened tensions between Israel and the Palestinians. However, Hizballah isbelieved by some experts to take its cues from harder line Iranian elements. In May2003, Khatemi made the first top level Iranian visit to Lebanon since the 1979revolution. On March 11, 2003, an Argentinian judge issued arrest warrants for fourIranian diplomats, including former Intelligence Minister Ali Fallahian, for allegedcomplicity in the July 18, 1994 bombing of a Jewish community center in BuenosAires, which killed 85. Hizballah is believed to have committed the act, as well asthe March 17, 1992 bombing of Israel’s embassy in that city.

Relations With Central Asia and the Caspian. Iran’s policy in CentralAsia has thus far emphasized economic cooperation over Islamic ideology. Iran hasbecome increasingly assertive in its relations with Azerbaijan, even though thatcountry’s population, like Iran’s, adheres to Shiite Islam. In early 1992, Iran led thedrive to bring the Central Asian states and Azerbaijan into the Economic CooperationOrganization (founded in 1985 by Iran, Pakistan, and Turkey, as a successor to anorganization founded by those states in 1964). Iran is hoping to attract energypipeline routes through it, rather than through other countries. However, Iran doeshost at least one anti-Azerbaijan guerrilla leader (Hasan Javadov), and it allegedlyharbors leaders of the Islamic Movement of Uzbekistan (IMU), including founderTahir Yuldashev.

Tensions with Azerbaijan flared in late July 2001 over energy exploration rightsin the Caspian; Iranian warships and combat aircraft threatened a British Petroleum(BP) ship on contract to Azerbaijan out of an area of the Caspian Iran considers itsown. The United States called that action provocative, and it offered new bordersecurity aid and increased political support to Azerbaijan. Iran and Armenia, anadversary of Azerbaijan, agreed on expanded defense cooperation in early March2002. Iran-Azerbaijan tensions eased somewhat in conjunction with the mid-May2002 visit of Azerbaijan’s President Heydar Aliyev to Iran, although there was littleevident progress on a bilateral division of their portions of the Caspian.

Al Qaeda/Afghanistan/Pakistan. Iran long opposed the puritanical SunniMuslim regime of the Taliban in Afghanistan on the grounds that it oppressed ShiiteMuslim and other Persian-speaking minorities. Iran nearly launched a military attackagainst the Taliban in September 1998 after Taliban fighters captured and killedseveral Iranian diplomats based in northern Afghanistan, and it provided military aidto the anti-Taliban Northern Alliance coalition, made up of mostly Persian-speakingminority groups. Iran, along with the United States, Russia, and the countriesbordering Afghanistan, attended U.N.-sponsored meetings in New York (the SixPlus Two group) to try to end the internal conflict in Afghanistan. Iran and the

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22 Keto, Alex. “White House Reiterates Iran Is Harboring Al Qaeda.” Dow JonesNewswires, May 19, 2003. 23 Iran General Helped 9/11 Plotters’ Transit-Report. Reuters, July 19, 2004. 24 Gertz, Bill. “Al Qaeda Terrorists Being Held by Iran.” Washington Times, July 24, 2003.

United States also participated in a U.N.-sponsored group in Geneva, which includesItaly and Germany.

Iran tacitly supported the U.S.-led war on the Taliban and Al Qaeda by offeringthe United States search and rescue of any downed service-persons and thetransshipment to Afghanistan of humanitarian assistance. However, some of Iran’ssubsequent activities in Afghanistan reflect official suspicion of the United Statesand the influence of hardliners in Iran’s regime. Iran is said to fear the pro-U.S. tiltof the new government of Afghanistan and it is moving to restore Iran’s traditionalsway in western, central, and northern Afghanistan where Persian-speaking Afghanspredominate. There have been press reports and U.S. official statements sinceJanuary 2002 that hardliners in Iran have been harboring, or at least not aggressivelymoving to arrest, senior Al Qaeda operatives who have fled Afghanistan.22 U.S.charges on this issue were renewed after the May 12, 2003 bombings in Riyadh,Saudi Arabia, believed conducted by Al Qaeda, against four expatriate housingcomplexes. Recent findings of the U.S. bipartisan commission looking into theSeptember 11, 2001 attacks assert that Iran and Al Qaeda might have cooperated toan extent in the Khobar Towers attacks and that several of the September 11hijackers might have transited Iran. On the latter issue, the September 11commission reportedly will not assert that the Iranian government cooperated withor necessarily knew about the September 11 plot, although a Middle Eastern pressreport (Sharq al-Awsat) on July 19, 2004, said a senior Iranian revolutionary guardofficer assisted their passage.23 In response to reports of the September 11commission’s upcoming findings, President Bush said the United States wouldcontinue 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 evencooperating with Al Qaeda. On July 23, 2003, Iranian officials, for the first time,asserted Iran had “in custody” senior Al Qaeda figures, purported to include AlQaeda spokesman Sulayman Abu Ghaith, top operative Sayf Al Adl,24 and possiblyalso Osama bin Laden’s son, Saad, and Ansar al-Islam (a faction based in Iraq)operative Abu Musab al-Zarqawi. Iran said in late January 2004 that it would try thehigh-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 totheir countries of origin for trial. Hardliners in Iran reportedly want to support orprotect Al Qaeda activists as leverage against the United States and its allies. Somereports 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 (see above informationon the PMOI).

Other press reports say Iran is arming local Afghan strongmen including Heratgovernor Ismail Khan, Mazar-e-Sharif governor Abdul Rashid Dostam, and others,and President Bush has warned Iran not to seek to exert influence over the new

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25 Sciolino, Elaine. The Outlaw State: Saddam Hussein’s Quest for Power and the GulfCrisis. New York: John Wiley and Sons, 1991. P. 168.

government of Afghanistan. Apparently seeking to deflect the U.S. criticism, inMarch 2002 Iran expelled Gulbuddin Hikmatyar, an opponent of the new Afghangovernment. The expulsion followed a February 24, 2002, visit to Iran by Afghanleader Hamid Karzai; the two countries agreed to broad cooperation. (See CRSReport RL30588, Afghanistan: Current Issues and U.S. Policy Concerns.)

U.S. Policy Responses

The February 11, 1979, fall of the Shah of Iran, a key U.S. ally, opened a longrift in U.S.-Iranian relations, but there have been several periods since 1997 whena significant and sustained thawing appeared imminent. On November 4, 1979,radical “students” seized the U.S. Embassy in Tehran and held its diplomats hostageuntil minutes after President Reagan’s inauguration on January 20, 1981. The UnitedStates broke relations with Iran on April 7, 1980, and the two countries had onlylimited and mostly indirect official contact thereafter. An exception was the abortive1985-86 clandestine arms supply relationship with Iran in exchange for someAmerican hostages held by Hizballah in Lebanon (the so-called “Iran-ContraAffair”). Despite the Iran-Contra Affair, U.S. policy throughout most of the 1980sfeatured a marked tilt toward Iraq in the 1980-88 Iran-Iraq war. The tilt includedU.S. diplomatic attempts to block conventional arms sales to Iran, providingbattlefield intelligence to Iraq,25 and, during 1987-88, direct skirmishes with Iraniannaval elements in the course of U.S. efforts to protect international oil shipments inthe Gulf from Iranian attacks.

The end of the Iran-Iraq war in August 1988 appeared to lay the groundwork fora reduction in U.S.-Iran hostility. In his January 1989 inaugural speech, PresidentGeorge 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 reportedlydid assist in obtaining the release of all U.S. and other Western hostages in Lebanonby December 1991, but no substantial thaw followed, possibly because Irancontinued to back Hizballah and other groups opposed to the U.S.-sponsored MiddleEast peace process. The George H.W. Bush Administration devoted substantialattention to that process, organizing the October 1991 Madrid Conference thatbrought Israel to the table with Syria, Lebanon, Jordan, and the Palestinians.

Upon taking office in 1993, the Clinton Administration moved to further isolateIran 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 togrowing concerns about Iran’s weapons of mass destruction, its support for terroristgroups, and its efforts to subvert the Arab-Israeli peace process. (For moreinformation on economic sanctions against Iran, see below.) The election of Khatemiin May 1997 precipitated a shift in U.S. policy toward engagement; the ClintonAdministration offered Iran official dialogue, with no substantive preconditions. In

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January 1998, Khatemi publicly agreed to increase “people-to-people” exchangeswith 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 leadto a “road map” for normalization of relations. Encouraged by the reformist victoryin Iran’s March 2000 parliamentary elections, Secretary Albright gave another speechon March 17, 2000, acknowledging past U.S. meddling in Iran, announcing an easingof sanctions on some Iranian imports, and promising to work to resolve outstandingclaims disputes. Iran called the steps insufficient to warrant direct dialogue. InSeptember 2000 meetings at the United Nations in connection with the MillenniumSummit, Albright and President Clinton sent a positive signal to Iran by attendingKhatemi’s speeches.

Bush Administration Policy

Until early 2002, the Bush Administration appeared to be continuing the ClintonAdministration efforts to establish formal ties to Iran by building on the cooperationbetween the two countries in Afghanistan. The Administration’s November 13, 2001continuation of the 1979 national emergency on Iran said that U.S. “relations withIran have not yet returned to normal,” a far softer statement than previousjustifications sighting a continued threat from Iran. However, because of Iran’s longsponsorship of terrorist groups, the September 11, 2001 attacks stimulated discussionof new policy options toward Iran, some of which were intended to isolate andpressure Iran rather than engage it. As an example of continuing tensions betweenthe United States and Iran, in late June 2004 the United States expelled two Iranianguards at Iran’s mission to the United Nations in New York for filming sensitive sitesin New York.

Regime Change Policy? Some believe that only a change of regime wouldreduce substantially the strategic threat from Iran because the current regime harborsambitions fundamentally at odds with the United States and its values. Manyquestion the prospects of success for this option because of the weakness ofopposition groups committed to major change of Iran’s regime, as well as the historyof anti-Americanism on the part of some Iranian opposition groups. Others questionwhether regime change, even if achievable, could succeed in time to prevent Iran’sacquiring a nuclear weapons capability.

The Bush Administration has shown some inclination for this option since U.S.-Iran relations worsened in January 2002 over allegations of Iran’s sale of arms to thePalestinian Authority and reputed meddling in Afghanistan. President Bush namedIran as part of an “axis of evil,” along with Iraq and North Korea, in his January2002 State of the Union message. On July 12, 2002, President Bush issued astatement supporting those Iranians demonstrating for reform and democracy, amessage he reiterated on December 20, 2002, when he inaugurated a new U.S. radiobroadcast to Iran, Radio Farda (“Tomorrow” in Farsi). The statements appeared tosignal a shift in U.S. policy from attempting to engage and support Khatemi topublicly supporting Iranian reformers and activists, some of whom believed Khatemihas made insufficient progress toward reform. These U.S. moves were interpretedas steps toward a regime change policy for Iran.

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The apparent shift toward a regime change strategy was mirrored in legislation.Two resolutions introduced in late July 2002 (S.Res. 306 and H.Res. 504) called forpositive U.S. gestures toward “the people of Iran, and not political figures whosesurvival depends upon preservation of the current regime.” A Senate bill, S. 1082,introduced May 19, 2003, by Senator Sam Brownback, has been widely interpretedas urging support for ideas associated with the son of the late Shah (see above); itcalls for the use of some U.S. funds for the holding of an internationally-monitoreddemocratic referendum in Iran. A House bill (H.R. 2466), introduced byRepresentative Brad Sherman, contains similar provisions and adds sectionsreimposing import sanctions on luxury goods from Iran. Elements of these bills,particularly a section calling on the Administration to try to block internationallending to Iran, were incorporated into the House-passed version of the FY2004foreign relations authorization bill (H.R. 1950). On July 16, 2004, Senator Santorumintroduced S. 2681, expressing the sense of Congress that U.S. policy toward Iranshould be that of regime change, and authorizing $10 million in U.S. assistance topro-democracy groups opposed to Iran’s regime. A July 19, 2004 New York Timesreport says Senator Brownback plans to introduce legislation that will contain regimechange provisions with respect to Iran that are similar to those applied to Iraq in a1998 bill — the Iraq Liberation Act (P.L. 105-338). That bill authorized drawdownsof U.S. military assistance to anti-Saddam groups.

Congressional sentiment for democracy promotion in Iran manifested in foreignaid appropriations for FY2004. The FY2004 foreign operations appropriationprovides (H.R. 2673, P.L. 108-199) provides “notwithstanding any other provisionof law” up to $1.5 million for “making grants to educational, humanitarian and non-governmental organizations and individuals inside Iran to support the advancementof democracy and human rights in Iran.” The State Department has determined thatthe funds cannot be channeled through the Middle East Partnership Initiative,because that program’s funds are Economic Support Funds (ESF) and cannot be usedin Iran. The $1.5 million “soft earmark” is being used for Iran-related programs runthrough the National Endowment for Democracy (NED), funded by the StateDepartment’s Bureau of Democracy and Labor (DRL). The State Department reporton U.S. efforts to promote democracy and human rights abroad (2003-2004) impliesthat U.S. efforts to do so are somewhat limited by lack of U.S. access to Iran, and itstates that “Iran is currently ineligible for most official programmatic assistance fromthe United States pursuant to U.S. law,” which could imply that use of U.S. funds forgroups operating inside Iran, as stated in the FY2004 foreign operations law, mightbe difficult. Another issue is whether such democracy promotion efforts would beinterpreted within Iran as U.S. meddling — a sensitive issue in Iran — and whetherthese programs would reach sufficient numbers of Iranians to be effective.

Toward the end of 2003, the forces within the Bush Administration advocatingregime change policy appeared to diminish. On October 28, 2003, Deputy Secretaryof State Armitage testified before the Senate Foreign Relations Committee that theUnited States “does not have a regime change policy toward Iran.” The waning talkof a regime change policy might have reflected the U.S. difficulty in stabilizing Iraq,as well as Iran’s pledges in late 2003 to open its nuclear program to greaterinternational scrutiny.

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26 Wright, Robin. “ U.S. In ‘Useful’ Talks With Iran.” Los Angeles Times, May 13, 2003.27 Dinmore, Guy. US Split Over Iranian Bid to Renew Relations. London Financial Times,March 17, 2004. 28 Kessler, Glenn. “Jordan’s King Sees Hope for Iran Talks.” Washington Post, September18, 2003. 29 Schweid, Barry. “U.S. Congressional Staffers to Visit Iran.” Associated Press, January30, 2004. The CRS author of this report participated in the dinner.

Engagement? Some U.S. officials have long believed that a policy ofengagement would be more successful in curbing Iran’s nuclear program and supportfor terrorist groups. The Bush Administration has pursued this option to some extent,despite sometimes appearing to lean toward regime change. In May 2003 bothcountries publicly acknowledged that they were conducting direct talks in Geneva onAfghanistan and Iraq.26 This marked the first confirmed direct dialogue. However,Iran said the talks did not indicate that the two countries were on the verge ofrestoring diplomatic relations. One press report says that, in May 2003, Iranproposed to the United States a roadmap to normalized relations, but the offerreceived no response because of opposition from those in the Administration who donot believe extensive engagement would yield sufficient benefits.27 The UnitedStates broke off the dialogue, at least temporarily, following the May 12, 2003,bombing in Riyadh that some press reports say might have been planned by Al Qaedaactivists located in Iran. In the context of increasing U.S. and international pressureon Iran for its suspected efforts to acquire a nuclear weapons capability, Jordan’sKing Abdullah, after visiting Iran in mid-September 2003, reportedly told the BushAdministration that he sensed that Iran wanted to resume dialogue with the UnitedStates on Iraq and Afghanistan issues.28 In his October 28, 2003, testimony,discussed above, Deputy Secretary of State Armitage said the United States isprepared to resume that dialogue, although Iran has not yet assented to resume thosetalks.

On December 29, 2003, following U.S.-Iran contact to coordinate U.S. aid tovictims of the December 2003 earthquake in Bam, Iran, Secretary of State Powellsaid that the United States is open to resuming dialogue with Iran. Subsequently,major U.S. newspapers reported that the Administration asked Iran if it wouldwelcome a high-level delegation to Iran, headed by Senator Elizabeth Dole and aBush family member, to build on the apparent goodwill generated by U.S. earthquakerelief efforts. However, Iran rebuffed the offer of the Dole mission, at least for thepresent time, and some Iranian leaders, including Khatemi, said that the cooperationon earthquake relief would not translate into a major thaw in U.S.-Iran relations. Acongressional resolution, H.Res. 526, passed March 2, 2004, by a vote of 381-0,expressed sympathy for the Bam earthquake victims.

Further indications of possible engagement came in early 2004. SeveralMembers of Congress and congressional staff had dinner with visiting IranianRepresentative 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.29 Following

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30 Fox News, February 1, 2004. 31 Wright, Robin. U.S. Faces a Crossroads on Iran Policy. Washington Post, July 19, 2004.32 Kralev, Thomas. “U.S. Asks Aid Barring Arms From Rogue States.” Washington Times,June 5, 2003.

public discussion of the proposed staff visit, Iran’s Foreign Minister Kharrazi saidsuch a visit is “not on our agenda” at this time.30

On the other hand, revelations since February 2004 that Iran has not beendisclosing all aspects of its nuclear program, as promised — coupled with theFebruary 2004 “Majlis elections crisis” (see above) — have stalled any movementtoward further U.S.-Iran engagement. Although Iran’s conservatives are open todialogue with the United States, the Bush Administration has strongly criticized Iranon both fronts. Two forthcoming research institute reports — one by the Councilon Foreign Relations and one by the Atlantic Council — are expected to recommendfurther pursuit of an engagement strategy with Iran, arguing that engagement couldhelp promote regional stability and progress on issues in which there is U.S.-Iranagreement.31

Military Action? Even before the October 21, 2003, joint nuclear statementwith the European countries, there was little evidence of any discussion within theAdministration of major U.S. military action to remove Iran’s regime. Amongoutside experts, there has been speculation since the U.S.-led war against Iraq (begunMarch 19, 2003) that the United States might undertake major military action againstother perceived threats such as Iran or Syria. Some believe that military actionagainst Iran should be taken if it is demonstrated that Iran has had operationallinkages to Al Qaeda or had prior knowledge of the September 11, 2001 attacks onthe United States. Some supporters of military action against Iran say that U.S.forces are likely spread too thin, including about 140,000 deployed in Iraq, toundertake it at this time. Opponents of such action say that U.S. forces would begreeted with hostility by most Iranians and that Iran already has elements ofdemocracy that could be promoted without the U.S. use of force.

Some experts believe that the United States should focus first and foremost onIran’s nuclear capability, and that limited military action, such as air strikes againstsuspected nuclear sites, could be a potentially useful option. Expressing particularfear that Iran might achieve a nuclear weapons capability, some Israeli officials haveopenly discussed the possibility that Israel might strike Iran’s nuclear infrastructure,although Israel does not necessarily have the capabilities that the United Statespossesses that could conceivably make such action effective. U.S. military analystsnote that U.S. forces in the Gulf region could potentially be used against Iran, if thePresident so decides. A related option, which might involve U.S. naval forces in theGulf, would be to institute searches of Iran-bound vessels suspected of containingWMD-related technology. The Administration has discussed with its allies a similarmeasure that could be used to block North Korea’s technology exports and allegeddrug smuggling,32 an initiative that has won allied support. In contrast, some officials

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33 “British Commander Calls for More Cooperation With Iran in Persian Gulf.” BBC, May3, 2004. 34 “The Fight Over Letting Foreigners Into Iran’s Oilfields.” The Economist, July 14, 2001.

of allied governments, including Britain, have called for greater cooperation with Iranto curb the movement of smugglers and terrorists across the Persian Gulf.33

International Sanctions? Iran is not subject to U.N. sanctions. However,the Bush Administration is now seeking referral of Iran’s lack of full compliance onnuclear issues to the U.N. Security Council for consideration of internationalsanctions. If international sanctions are considered, some options that have beenused or considered in similar cases could be imposing an international ban orlimitations on purchases of Iranian oil or other trade, mandating reductions indiplomatic exchanges with Iran or flight travel to and from Iran, and limiting furtherlending to Iran by international financial institutions. It is not certain that the U.N.Security Council or the boards of directors of international financial institutionswould back such proposals. Versions of some of these options have been sought bysome recent U.S. Administrations and recent legislation, but as discussed below, theUnited States has generally had difficulty imposing any formal multilateral sanctionson Iran. The sections below analyze U.S. sanctions on Iran, as well as past efforts topersuade 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. OnNovember 14, 1979, President Carter declared a national emergency with respect toIran, renewed every year since 1979. To date, few, if any, other countries havefollowed the U.S. lead by imposing sanctions on Iran, and no U.N. sanctions exist onthat country. Some experts believe that U.S. sanctions have hindered Iran’seconomy, forcing it to curb spending on conventional arms purchases, but othersbelieve that sanctions have had only marginal effect, and that foreign investment hasflowed in despite U.S. sanctions.34 Those who take the latter view maintain thatIran’s economic performance fluctuates according to the price of oil, and far less sofrom other factors. Because oil prices remain relatively high, Iran’s economy isexpected to grow about 4% in 2003. Most analysts seem to agree that sanctionswould have had a far greater effect on Iran if they were multilateral or international.

Terrorism/Foreign Aid Sanctions. In January 1984, following the October1983 bombing of the U.S. Marine barracks in Lebanon, believed perpetrated byHizballah, Iran was added to the so-called “terrorism list.” The terrorism list wasestablished by Section 6(j) of the Export Administration Act of 1979, imposingeconomic sanctions on countries determined to have provided repeated support foracts of international terrorism. The designation bans direct U.S. financial assistanceand arms sales, restricts sales of U.S. dual use items, and requires the United Statesto oppose multilateral lending to the designated countries. Separate from its positionon the terrorism list, successive foreign aid appropriations laws since the late 1980sban direct assistance to Iran (loans, credits, insurance, Eximbank credits) and indirectassistance (U.S. contributions to international organizations that work in Iran).

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Section 307 of the Foreign Assistance Act of 1961 (added in 1985) names Iran asunable to benefit from U.S. contributions to international organizations, and requireproportionate cuts if these institutions work in Iran. Iran also has been designatedevery year since 1997 as not cooperating with U.S. anti-terrorism efforts, under theAnti-Terrorism and Effective Death Penalty Act (P.L. 104-132). That act penalizescountries 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 June22, 2002 earthquake. (The World Bank is providing some earthquake related lendingas well, as discussed below.)

Bam Earthquake. The United States provided considerable assistance to thevictims of the December 2003 earthquake in Bam, Iran, which might have killed asmany as 50,000 people and destroyed 90% of Bam’s buildings. In response, theUnited States flew in 68,000 kilograms of supplies to Bam, flown in by U.S. militaryflights — the first U.S. military flights into Iran since the abortive “Iran-ContraAffair” of 1985-1986. The United States also deployed to Iran an 81-memberDisaster Assistance Response Team (DART) composed of 7 USAID experts, 11members of the Fairfax County (VA) urban search and rescue team, and 66 medicalexperts from the Federal Emergency Management Agency (FEMA). Iranian-American and other organizations are coordinating donations in the United States forvictims of the quake. On December 27, 2003, the Administration issued a 90-dayamendment to the Iranian Transaction Regulations to authorize U.S. persons to makedonations of funds for humanitarian relief for the earthquake victims. Under theamendment, Iranian-owned banks can be used to effect the transfer of funds, althoughno Iranian financing can be accessed.

Proliferation Sanctions. Several sanctions laws are unique to Iran. TheIran-Iraq Arms Nonproliferation Act (P.L. 102-484) requires denial of licenseapplications for exports to Iran of dual use items, and imposes sanctions on foreigncountries that transfer to Iran “destabilizing numbers and types of conventionalweapons,” 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 inconnection with the international space station unless the President can certify thatthe agency or entities under the Agency’s control had not transferred any WMD ormissile-related technology to Iran within the year prior. The provision containscertain exceptions to ensure the safety of astronauts who will use the space stationand for certain space station hardware.

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-IraqArms Non-Proliferation Act of 1992 (P.L. 102-484), and another law, the Chemicaland Biological Warfare Elimination Act of 1991, for sales to Iran. In late May 2003,the Bush Administration sanctioned a major Chinese industrial entity, Norinco, forallegedly selling missile technology to Iran. On July 4, 2003, an additional Chineseentity, the Taiwan Foreign Trade General Corporation, was sanctioned under the IranNon-Proliferation Act. On September 17, 2003, the Administration imposed

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sanctions on a leading Russian arms manufacturer, the Tula Instrument DesignBureau, 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. (NorthKorea); 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); VadimVorobey (Russia); and Zibo Chemical Equipment Plant (China).

Counternarcotics. In February 1987, Iran was first designated as a state thatfailed to cooperate with U.S. anti-drug efforts or take adequate steps to controlnarcotics production or trafficking. U.S. and U.N. Drug Control Program (UNDCP)assessments of drug production in Iran prompted the Clinton Administration, onDecember 7, 1998, to remove Iran from the U.S. list of major drug producingcountries. The decision exempts Iran from the annual certification process that keptdrug-related U.S. sanctions in place on Iran. According to several governments andindependent observers, over the past few years Iran has augmented security on itsborder with Afghanistan in part to prevent the flow of narcotics from that countryinto Iran.

Trade Ban. On May 6, 1995, President Clinton issued Executive Order 12959banning U.S. trade and investment in Iran, including the trading of Iranian oiloverseas by U.S. companies. This followed an earlier March 1995 executive orderbarring U.S. investment in Iran’s energy sector. The trade ban was partly intendedto blunt criticism that U.S. trade with Iran made U.S. appeals for multilateralcontainment of Iran less credible. Each March since 1995, most recently on March13, 2003, the U.S. Administration has renewed a declaration of a state of emergencythat triggered the March 1995 investment ban. An August 1997 amendment to thetrade ban (Executive Order 13059) prevented U.S. companies from knowinglyexporting 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 exportto Iran, and in December 1999, the Clinton Administration allowed the repair ofengine mountings on seven Iran Air 747s (Boeing). Implementing regulations do notpermit 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 1999that it would license, on a case-by-case basis, commercial sales of food and medicalproducts 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 creditcan be used to finance approved sales, but no U.S. government credit guarantees areavailable 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 provisionbanning the use of official credit guarantees for food and medical sales to Iran andother countries on the U.S. terrorism list, except Cuba, although allowing for a

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35 Daragahi, Borzou. “France Steps Up Its Investments in Iran.” New York Times, June 23,2004.

presidential waiver to permit such credit guarantees. Neither the ClintonAdministration nor the Bush Administration has provided the credit guarantees.

In the March 2000 speech mentioned above, the trade ban was eased to allowU.S. importation of Iranian nuts, dried fruits, carpets, and caviar; regulationsgoverning the imports were issued in April 2000. The United States was the largestmarket for Iranian carpets before the 1979 revolution, but U.S. anti-dumping tariffsimposed on Iranian pistachio nut imports in 1986 (over 300%) dampened imports ofthat 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 foreigninvestment of more than $20 million in one year in Iran or Libya’s energy sector. Itwas 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 requires anAdministration report on its effectiveness within 24-30 months (as early as August2003). No sanctions have been imposed under ILSA, although three companiesinvolved in one project (South Pars) were deemed in violation in September 1998;but sanctions were waived. Total and Petronas have formed a $2 billion joint venturewith an Iranian oil company to produce liquified natural gas from South Pars. Thisinvestment is part of a wave of new French investment in and sales of consumerproducts to Iran: French exports to Iran have doubled over the past five years toabout $2.5 billion per year.35

A number of other investments have remained “under review” for ILSAsanctions since 1999. In October 2002, Norway’s Statoil agreed to invest $300million to develop phases six, seven, and eight of the South Pars gas field. As notedbelow, Japanese firms have reached agreement with Iran to develop the Azadeganfield, and the outcome of a competition between BP and Totalfina Elf to develop theBangestan field (about $2 billion) is expected. On March 18, 2004, a Chinese stateoil trading firm said it had signed a deal with Iran to import more than 110 milliontons of liquified natural gas from Iran over 25 years, a deal valued at $25 billion,although this arrangement would not appear to constitute an “investment” in Iran’senergy sector. Foreign firms have invested about $15 billion in Iran’s energy sectorsince Iran opened it to investment. See CRS Report RS20871, The Iran-LibyaSanctions Act (ILSA).

On October 20, 2003, Representative Ileana Ros-Lehtinen introduced the “ILSAEnhancement and Compliance Act” (H.R. 3347) intended to make it more difficultfor the Administration to waive sanctions on companies determined to have violatedits provisions. The legislation would also repeal the sunset (expiration) provision ofILSA. (ILSA sanctions with respect to Libya were terminated on April 23, 2004, onthe grounds that the President certified Libya had complied with U.N. SecurityCouncil resolutions related to the December 21, 1988, bombing of Pan Am Flight103.)

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Caspian/Central Asian Energy Routes Through Iran. The U.S. tradeban permits U.S. companies to apply for licenses to conduct “swaps” of Caspian Seaoil 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 ILSAsanctions on, pipeline projects through Iran. U.S. policy has been to promoteconstruction 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 Caspiannations (Turkey, Georgia, Azerbaijan, and Kazakhstan) signed an agreementembracing Baku-Ceyhan on November 18, 1999. Regional and corporate support forthe project subsequently gained momentum and pipeline construction has begun. Onthe other hand, despite U.S. pressure not to import Iranian gas, in December 2001Turkey began doing so through a new cross-border pipeline, under an August 1996agreement.

In late April 2004, Iran began a major oil swap project with its neighbors, whichIran asserted was a response to U.S. efforts to promote alternate routes. Under theproject, Iran imports 170,000 barrels of crude oil from Russia, Kazakhstan, andTurkmenistan. In return, Iran export an equivalent amount of Iranian oil from itsGulf ports on behalf of those producers.

Allied Country Policies Toward Iran

A cornerstone of the policies of successive U.S. administrations has been topersuade U.S. allies to cooperate with the United States to contain Iran. During1992-1997, the European Union (EU) countries maintained a policy of “criticaldialogue” with Iran, asserting that dialogue and commerce with Iran could moderateIran’s behavior . The United States did not oppose those talks but maintained thatthe EU’s dialogue would not change Iranian behavior. The dialogue was suspendedimmediately following the April 1997 German terrorism trial (“Mykonos trial”) thatfound high-level Iranian involvement in assassinating Iranian dissidents in Germany.Alongside Khatemi’s accession and the associated U.S. shift toward engagement, theEU-Iran dialogue formally resumed in May 1998, and U.S.-allied differences on Irannarrowed. Khatemi undertook state visits to several Western countries, includingItaly (March 1999), France (October 1999), Germany (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 tradepact that would lower the tariffs or increase quotas for Iranian exports to the EUcountries, with some linkage to Iran addressing EU concerns on Iran’s human rightspractices and terrorism sponsorship. However, revelations about Iran’s possiblenuclear weapons ambitions caused the EU to announce, in July 2003, suspension oftalks on a trade agreement. The EU says resumption of the trade talks is contingenton Iran’s full cooperation with the IAEA on nuclear issues. The EU countries havealso said their policies toward Iran have been colored by the conservatives’ banningof reformist candidates in the February 2004 elections, and by other Iranian humanrights abuses.

Britain/France. The resolution of the “Rushdie affair” to Britain’s satisfactionsparked improvement in its relations with Iran. Iran maintains that Ayatollah

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36 “Japan Still in Iran Oil Talks, Despite U.S.” Reuters, June 30, 2003.

Khomeini’s 1989 death sentence against author Salman Rushdie cannot be revoked(his “Satanic Verses” novel was labeled blasphemous) because Khomeini is nolonger alive to revoke it. On September 24, 1998, Iran’s Foreign Minister pledgedto Britain that Iran would not seek to implement the sentence and opposed anybounties offered for his death. Britain then upgraded relations with Iran to theambassadorial level, and their foreign ministers routinely exchange visits. In October2000, Britain began extending longer term credit (two years or greater) for exportsto Iran. Some Iranian clerics (outside the formal government structure) have said thedeath sentence stands, and the Iranian government has not required the FifteenKhordad foundation to withdraw its $2.8 million reward for Rushdie’s death.Khatemi said on June 4, 2001 that he considers the issue closed.

As noted above (ILSA section), French-Iranian economic relations haveburgeoned in recent years. French investment in Iran now goes well beyond theenergy sector into car production in Iran and other initiatives. Some of the majorFrench companies investing in Iran (outside the energy sector) include Renault,Societe-Generale (banking), Peugeot, and Alcatel.

Japan-Iran Relations. In August 1999, Japan continued a gradualimprovement in relations with Iran by announcing a resumption of Japan’s officialdevelopment lending program for Iran to construct a hydroelectric dam over theKarun River. However, the $70 million increment announced was less than Iran hadwanted, and Japan said that this tranche would close out Japan’s involvement in theproject. (In 1993, Japan provided the first $400 million tranche of the overall $1.4billion official development loan program, but the lending was subsequently placedon hold as the United States sought to persuade its allies to pressure Iran.) In lateJanuary 2000, Japan agreed to resume medium- and long-term export creditinsurance for exports to Iran, suspended since 1994. Economic relations improvedfurther during Khatemi’s November 2000 visit to Tokyo, which resulted in Irangranting Japanese firms the first right to negotiate to develop the large Azadeganfield. A $2 billion deal to develop that field was expected by June 30, 2003 butJapan’s firms did not reach an agreement by that deadline, partly in protest of Iran’snuclear program.36 However, possibly because of Iran’s pledges of cooperation withnuclear inspections, the consortium of Japanese firms — Japan PetroleumExploration Company, Inpex Corp, and Tomen Corp — signed the Azadegan dealon February 18, 2004. Partly at U.S. urging, Japan has refused to extend to Iran newofficial loans.

Multilateral/International Lending to Iran. During 1994-1995, and overU.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 multilateralrescheduling and International Monetary Fund (IMF) involvement. Iran has workedits external debt down from $32 billion in 1997 to below $20 billion as of March2004, according to Iran’s Central Bank. The improved debt picture has led mostEuropean export credit agencies to restore insurance cover for exports to Iran. In July2002, Iran tapped international capital markets for the first time since the Islamic

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revolution, selling $500 million in bonds to European banks. At the urging of theU.S. government, in May 2002 Moody’s stopped its credit ratings service for Iran’sgovernment bonds on the grounds that performing the credit ratings service mightviolate 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 tovote against international loans to countries on the U.S. terrorism list. Acting underprovisions 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, theFY1994 foreign aid appropriations (P.L. 103-87) cut the Administration’s request forthe U.S. contribution to the World Bank by the amount of those loans. That law, aswell as the foreign aid appropriations for FY1995 (P.L. 103-326) and FY1996 (P.L.104-107), would have significantly reduced U.S. payments to the Bank if it hadprovided new loans to Iran.

By 1999, Iran’s moderating image had led the World Bank to consider newloans. In May 2000, the United States was unsuccessful in obtaining further delayon a vote on new lending for Iran, and its allies outvoted the United States inapproving $232 million in loans for health and sewage projects. Twenty one of theBank’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 executivedirectors 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 inloans for environmental management, and in June 2003, it approved a loan for $180million for earthquake assistance. On October 29, 2003, a Treasury Departmentofficial, Bill Schuerch, testified before the House Financial Services Committee thatthe United States would continue to try to block new World Bank loans to Iran, butthat the United States has not been successful in blocking recent loans and could notguarantee that outcome. In 1999-2000, Iran had asked the International MonetaryFund for about $400 million in loans (its quota is about $2 billion) to help it dealwith its trade financing shortfalls. However, Iran balked at accepting IMFconditionality, and there was no agreement.

A section of a bill in the 108th Congress, H.R. 2466, contains a provision similarto that of these earlier laws — mandating cuts in U.S. contributions to internationalfinancial institutions that lend to Iran. However, on July 15, 2004, a proposedamendment to the House version of the FY2005 foreign aid appropriations (H.R.4818) was defeated. The amendment would cut U.S. funding to the World Bank bythe $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, haspostponed 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 theWTO and Iran, saying the United States was still “reviewing” whether Iran shouldbe admitted. The U.S. veto was the 15th time in the past three years that the UnitedStates has blocked entry talks for Iran.

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Travel Sanctions. Use of U.S. passports for travel to Iran is permitted, buta State Department travel warning, softened somewhat in April 1998, asks thatAmericans “defer” travel to Iran. Iranians entering the United States are required tobe fingerprinted.

Assets Disputes/Victims of Terrorism. Iran views the issue of disputedclaims and blocked assets as an obstacle to improved relations. A U.S.-Iran ClaimsTribunal, at the Hague, is arbitrating cases resulting from the break in relations andfreezing of some of Iran’s assets following the Iranian revolution. The major casesyet to be decided center on hundreds of Foreign Military Sales cases between theUnited States and the Shah’s regime, which Iran claims it paid for but wereunfulfilled. About $400 million in proceeds from the resale of that equipment is ina DOD account, and about $22 million in diplomatic property remains blocked. Theassets issue moved to the forefront following several U.S. court judgements againstIran for past acts of terrorism against Americans, filed under the Anti-Terrorism andEffective Death Penalty Act of 1996. For information on suits against Iran that havebeen filed, their outcomes, and legislation regarding these suits, see CRS ReportRL31258, Suits Against Terrorism States by Victims of Terrorism.

Regarding the mistaken U.S. shootdown on July 3,1988 of an Iranian Airbuspassenger jet, on February 22, 1996, the United States, responding to an Iranian casebefore the International Court of Justice (ICJ), agreed to pay Iran up to $61.8 millionin 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 generalappropriation for judgments against the United States. The United States previouslypaid $3 million in death benefits for 47 non-Iranians killed in the attack, but has notcompensated 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. navalclashes with Iran in October 1987 and April 1988.

Conclusion

Mistrust between the United States and Iran’s Islamic regime has run deep forover two decades. Many experts say that all factions in Iran are united on majornational security issues and that U.S.-Iran relations might not improve unless or untilthe Islamic regime is removed or moderates substantially. Some believe relations arelikely to worsen if Iran does not fully and unambiguously abandon any efforts towardachieving a nuclear weapons capability. Others believe that U.S.-Iran relations mightbe determined by whether Iran extradites suspected Al Qaeda leaders believed to bein Iran.

Others say that, despite the victory of conservatives in 2004 parliamentaryelections, the United States and Iran have a common interest in stability in thePersian Gulf and South Asia regions in the aftermath of the defeat of the Taliban andthe regime of Saddam Hussein. Those who take this view say that Iran is far moresecure now that the United States has removed these two regimes, and it might bemore willing than previously to accommodate U.S. interests in the Gulf. Others saythat the opposite is more likely, that Iran now feels more encircled than ever by pro-

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U.S. regimes and U.S. forces guided by a policy of pre-emption, and Iran mightredouble 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 Iranbecause Iran views these figures as leverage with the United States and perhaps asa bargaining chip to persuade the United States to extradite to Iran oppositionistsbased in Iraq.