For perhaps the first time since Iran and the U.S. broke ties in 1980, there are real prospects for fundamental change. The new U.S. president, Barack Obama, stated willingness to talk unconditionally. Iran’s Supreme Leader, Ayatollah Khamenei, implicitly blessed dialogue, and presidential candidates are vying to prove they would be the most effective interlocutor. Yet, while U.S. objectives and tactics are relatively familiar, little is known of Iran’s thinking, even as much is assumed. Western interaction with its opaque political system and decision-making has both shrivelled and been narrowly focused on the nuclear file. Understanding Iran’s perspective is critical if engagement is to succeed. This briefing, based on meetings with officials and analysts, seeks to shed light on what Tehran thinks about dialogue, its goals and visions of a future relationship. It concludes that while full normalisation might be out of reach for now, there is a chance to achieve a more realistic objective: the start of a long-term dialogue that minimises risks of confrontation and advances areas of mutual interest.

Mutual expressions of a desire for a new relationship aside, there are sound reasons for the two countries to turn the page. Among the Bush administration’s unintended legacies is Iran’s strengthened posture and demonstration of the shortcomings of a policy exclusively based on isolation. Washington has much to gain by Iranian cooperation in its two Middle Eastern battlefields, Iraq and Afghanistan – and as much to lose by Iranian hostility. Years of sanctions, international pressure and threats have not slowed Iran’s uranium enrichment. Other aspects of U.S policy have enhanced Tehran’s influence among regional public opinion and strengthened its ties to Syria, Hamas and Hizbollah. This policy did not merely fail; it roundly backfired.

The Isla­mic Republic may feel vin­dicated, but its situation is far from rosy. There is no assurance its regional influence will con­tinue to grow; it faces mounting resentment from Arab regimes; and sanctions, while wholly ineffective in producing policy shifts, have been quite effective in exacting a heavy economic price. Even its more conservative leaders likely see value in consolidating gains through some arrangement with the U.S. There is also an apparent convergence of interests on important regional questions – Iraq’s territorial integrity and stability; keeping the Taliban at bay in Afghanistan; stopping the flow of narcotics across the Afghan border. Although all this means dialogue is possible and potentially fruitful, none of it means it will be easy. The U.S. and Iran must overcome three decades of estrangement punctuated by seminal events that further deepened the chasm.

During his campaign, President Obama openly embraced engagement with what formerly were known as rogue states, most notably Syria and Iran. Four months into his presidency, the broad outlines of his Iran policy are coming into focus: unconditional U.S. participation in multilateral nuclear talks; initiation at some point of wider-ranging bilateral dialogue; maintenance of sanctions as an instrument of leverage; and intensive regional as well as wider international diplomacy to increase pressure should engagement fail to produce demanded policy changes.

But what is Iran thinking? Understanding the Islamic Republic’s power structure and decision-making is difficult, and one needs modesty in reaching conclusions. The regime has reasons – some justified, many contrived – for suspecting outside researchers, who thus face significant obstacles. The Iranians interviewed – officials, analysts with often close ties to the regime and heads of influential research centres – cannot be said to offer an exact view of the leadership’s thoughts. This briefing should be read and filtered with these limitations in mind.

That said, during the course of several weeks of interviews in Tehran, Crisis Group found remarkable consistency of views regarding how the regime contemplates renewed dialogue, what it fears and how far it believes an improved relationship can go. To relate these is to neither endorse nor dismiss them; rather, they should be taken into account as the Obama administration embarks on one of its most important Middle Eastern undertakings – and one of its most daunting. The most notable conclusions are:

• Tehran’s most oft-repeated demand also is its most abstract and thus the most readily (albeit misguidedly) dismissed: that the U.S. change the way it sees and treats Iran, its regional role and aspirations. It is central to the thinking of a leadership convinced that Washington has variously sought to topple, weaken or contain it. It has practical implications: insistence that the U.S. forsake any effort to change Iran’s regime; respect for its territorial integrity; and acknowledgment of the necessity and legitimacy of its regional role.
   
• Tehran will be highly suspicious of an approach imposing preliminary “tests” – progress on the nuclear file; cooperation in Iraq and Afghanistan – rather than first seeking to redefine the relationship and its parameters as a whole. A policy predicated on marrying engagement with pressure – while understandable from a U.S. perspective – risks triggering a negative Iranian reaction. U.S. officials present diplomatic efforts to build an Arab-Israeli coalition against Iran or forge an international alliance willing to tighten sanctions as creating leverage needed for successful negotiations. Iranians perceive them as a disingenuous ploy to produce a broad consensus for toughened containment measures under the expectation negotiations will fail.
   
• Tehran will regard U.S. handling of the nuclear file as a litmus test. Its red line is the right to enrich on its soil; anything less will be viewed as unacceptable.
   
• Officials contemplate dialogue occurring against the backdrop of enduring regional rivalry, particularly regarding Israel. Iran at this point does not intend to stop backing Hamas or Hizbollah or opposing Israel. Its conception of a future U.S. relationship comprises three distinct levels: wide-ranging dialogue covering both bilateral and regional issues; targeted cooperation on specific regional files, especially Iraq and Afghanistan; and the persistent reality of deep-seated differences and an overall strategic competition.
   
• Sanctions are taking their toll, and Iran faces a serious economic predicament. But this is highly unlikely to produce meaningful policy shifts. Iran’s decision-making on core strategic issues is only marginally affected by economic considerations.
   
• For all its benefits, normalisation with Washington would entail serious political costs for the regime. Hostility toward the U.S. is one of its ideological pillars; economic adversity can be blamed on sanctions, while technological success – notably in the nuclear field – can be hailed as a powerful symbol of resistance against Western powers. The greater tensions are with Washington, the easier it is for the regime to rally supporters, suppress dissent and invoke national unity against a common enemy. Likewise, internal competition between various factions will complicate engagement. U.S. officials already express frustration at the difficulty of opening channels to Iran. It is a taste of things to come.

This is not the first effort at improving ties, but it is the most promising. If it fails, all could pay a heavy price.

Tehran/Brussels, 2 June 2009