Iran Diary: A Thawing with the U.S.?

Editor's note: BusinessWeek London Bureau Chief Stanley Reed is traveling and reporting in Iran this week. This is the first in a series of dispatches about the country and its complex relationship with the outside world.

Just about everyone I have talked to so far in Iran—with the exception of an immigration officer at the airport who fingerprinted me, as has been unpleasantly required for some years now—is optimistic about the chances for better relations with the U.S. and in favor of such a change.

The main reason for the optimism is, of course, the change of Administrations in Washington, and, more specifically, President Obama's recent appeal to Iran on the occasion of the Iranian New Year, or Nowruz. See, for instance, this excerpt from the White House transcript of Obama's videotaped talk:

"So in this season of new beginnings, I would like to speak clearly to Iran's leaders. We have serious differences that have grown over time. My Administration is committed to diplomacy that addresses the full range of issues before us, and to pursuing constructive ties among the U.S., Iran, and the international community. This process will not be advanced by threats. We seek instead engagement that is honest and grounded in mutual respect."

More Conciliatory

The tone and substance were a sea change from what Iranians became accustomed to hearing from George W. Bush, who notoriously included the Islamic Republic among his "Axis of Evil" nations. The answer to Obama from Iran's Supreme Leader, Ayatollah Ali Khamenei, who will be the key decision-maker on this issue, was not especially gracious but also not as negative as portrayed in the media.

In fact, many Iranians interpreted the leader's Mar. 21 remarks in Mashed as offering a dialogue with the U.S. Essentially, Khamenei said that Iran will look for deeds, not words, from the U.S. and even pointed toward steps that might help thaw the ice, such as easing of sanctions or the release of some of the Iranian assets that have been held in escrow in the U.S. for almost 30 years. Even hard-line President Mahmoud Ahmadinejad has sounded more conciliatory of late.

Sayed Laylaz, an Iranian analyst, said there were small but important gestures that Obama could make, such as lifting sanctions on civil aircraft spare parts. Some Iranians consider their air fleet unsafe because of its reliance on ancient aircraft and the difficulty in obtaining spare parts.

Aside from the prospect of a safer air fleet, there are several reasons Iranians would welcome a warming of relations with the U.S. First, U.S. sanctions are hurting the Iranian economy. They are preventing the oil industry, which is struggling to maintain production, from purchasing the state-of-the art equipment it needs to modernize oil fields and move into technologies such as liquefied natural gas. The rules also discourage investment by Western oil companies—although Iran's difficult terms may be an even bigger factor. Hossein Noghrehkar Shirazi, Iran's Deputy Oil Minister for International Affairs, recently said investment by U.S. oil companies would be welcome.

Tired of All the Strain

Sanctions also hobble Iran in information technology, and U.S. pressure on the financial-services industry means that the big European banks have pretty much stopped dealing with Iran. This forces the country to use lower-tier banks and pay higher rates for the financing of imports, analysts say.

But above all, people are tired of the situation, which has damaged both countries, but especially Iran, over the past three decades. Iranian businesses think they could be a much bigger factor in the world economy if there were no stigma attached to doing business with them, and if they had access to better technology and, above all, management skills. It's almost a clichÉ to say that Iran with its big, youthful population of 74 million and fairly serious industrial base could be a huge opportunity for American companies—and, indeed, many others.

None of this, of course, means that a thaw will happen soon. While the Obama Administration and some in the Iranian leadership see the benefits of change, hostility between the two nations is ingrained in the internal politics of both. Iran, in particular, is deeply suspicious of the U.S. Iranians recite a long list of grievances dating back to the CIA-aided coup of 1953 that ousted Iran's elected Prime Minister Mohammed Mossadeq and led to the restoration of the Shah. More recently, the Iranian leadership believes that it has received the back of America's hand after being helpful to the U.S. in the invasions of both Iraq and Afghanistan earlier in this decade.

Need to Think Hard Again

Warming relations with the U.S. might be disorienting for some Iranian politicians, and the topic could become a big issue in what could be a highly charged June presidential vote, when Ahmadinejad will be challenged by one or more candidates from the so-called reform camp. As one businessman remarked to me with some exaggeration, roughly 60% of the content of political speeches in Iran is criticism of the U.S., so with normal relations, that 60% would need to be replaced with something else.

The tensions in Iran between different factions and uncertainty over how to respond to Obama mean that the Islamic Republic is likely to continue doing things that are deeply disturbing to the U.S. Only two days ago, Ahmadinejad opened a nuclear fuel plant, proclaiming that Iran was pushing ahead with its energy program. The Iranians have thrown an Iranian American freelance journalist, Roxana Saberi, in jail, charging her with being a spy for Washington.

But a patient approach by Obama might gradually produce some results. As one person said, Obama is in some ways making things tougher for the Iranian leadership, which did not have to think very hard about how to deal with Bush. By being respectful and reaching out, Obama is putting pressure on the Iranian leadership to justify continued hostility toward the U.S.

Before it's here, it's on the Bloomberg Terminal.