The U.S. And Iran: First An Import Thaw, Then Investment?

Are 20 years of antagonism between the U.S. and Iran coming to an end? It is certainly true that following the recent victory by reformers in parliamentary elections, the Clinton Administration has sought to open a dialogue with Tehran. Clinton has praised Iran as "one of the most wonderful places in all of human history." Now the Administration plans to lift import bans on some Iranian goods, including pistachios, carpets, and caviar. And in what could prove a more important move, World Bank President James D. Wolfensohn says the agency's board, which does little without U.S. approval, will consider $230 million in loans for Iranian projects--the first since 1994.

The U.S. isn't just trying to be nice. It is recognizing reality. Under President Mohammad Khatami, Iran is mending fences with Europe and becoming a key player in the Gulf region. No longer a pariah state, it is a country that neighboring Arab nations are watching for clues to reforming their own authoritarian systems. That's true despite such troubles as the recent shooting of a Khatami aide in Tehran.

The latest indication of the change in Iran's status has been Saudi Arabia's approach to the oil-supply crunch. Instead of giving in to U.S. pressure and agreeing to a production increase, the Saudis have insisted on forging a consensus with the Iranians. That has left the U.S. in the uncomfortable position of relying on a deal with Iran to ease high oil prices. With sanctions on most forms of trade with Iran and American investment in the Islamic republic banned, the U.S. has little leverage over Iran. In fact, by banning American oil companies from working in Iran, the U.S. has been trying to curb Iranian oil production. That has contributed to the current market tightness.

Whether the entry of rugs and pistachios to the U.S. and help from the World Bank are the quid pro quo for Iran's cooperation remains to be seen. What seems likely is that there will be a gradual thaw between Washington and Tehran, with economic matters playing a key role. Although high oil prices will give Iran a respite, the country's struggling economy badly needs additional capital and knowhow. And U.S. business is attracted to Iran's market of 70 million consumers, as well as its oil and gas reserves, which are among the world's largest. There have already been private sales of corn, and Iran could become a major importer of U.S. wheat.

The biggest deals are likely to be in oil. With their existing fields aging, the Iranians are increasingly seeking foreign investment to boost their production. France's TotalFina has two projects under way in Iran, and Royal Dutch Shell recently signed an $800 million deal. Most other European oil companies have representatives in Tehran.

OIL RUB. It's hard to see how Washington will be able to keep U.S. companies out of Iran for much longer. For political reasons, U.S. oil companies cannot invest in the world's most promising oil regions, including Iran, Iraq, and Libya. This threatens to damage the U.S. industry, and American executives are seething. The Iranians say they would welcome U.S. investment in the oil sector because it would make bidding on projects more competitive.

Don't expect a huge breakthrough before the U.S. Presidential election. The Administration probably wants to avoid having Iran become an issue that could hurt Vice-President Al Gore. The Iranians, too, have their bugaboos about dealing with the U.S. But the lame-duck period between the election and the inauguration of the new President could provide a window, notes Vahan Zanoyan, president of Petroleum Finance Co., a Washington-based consultant. Both sides have a growing interest in ending the 20-year deep freeze.

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