Global Policy Forum

Flynt Leverett

As the world watches the political maneuvering over restarting nuclear talks with Iran — this time with American participation — few are paying attention to a broader strategic competition that has started between the United States, Russia and China. Ultimately, this competition will decide not only the direction of Iran's nuclear activities but also its economic, political and military role in the Middle East and beyond. The outcome hinges on which countries will assume dominance in developing Iran's enormous oil and natural gas reserves.

Unfortunately, by refusing to consider a "grand bargain" with Iran — that is, resolution of Washington's concerns about Tehran's weapons of mass destruction and support for terrorism in return for American security guarantees, an end to sanctions and normalization of diplomatic relations — the Bush administration is courting failure in its nuclear diplomacy and paving the way for Russia and China to win the larger strategic contest.

Iran has the world's second-largest proven reserves of conventional crude oil, after Saudi Arabia, and the second-largest reserves of natural gas, after Russia. Its relatively low production levels make it one of the few states with the potential to greatly increase its exports of both oil and gas over the next two decades.

As the world economy during this period will rely increasingly on the Middle East and the former Soviet Union for its energy needs, Iran's putative status as a hydrocarbon superpower will take on ever greater strategic importance. Add in its location, its population of nearly 70 million (the largest in the Middle East) and its ambitions to regional leadership, and the significance of Iran's future international role is undeniable.

However, to expand its energy exports, Iran needs a great deal of capital and advanced technology from outside — at least $160 billion over the next quarter century according to the International Energy Agency. Washington of course does all it can to block exactly such investment — barring American energy companies from seeking business in Iran and threatening European and Japanese companies with fines and cutoffs of American components.

These measures — along with repressive Iranian policies that scare off foreign investors — have had an impact: since the Islamic Republic opened its oil and gas sectors to foreign energy companies in the early 1990's, it has attracted only $15 billion to $20 billion in European and Japanese investment. And as the nuclear issue has heated up, prospects for substantial increases in Western investment have virtually evaporated.

A senior Iranian diplomat told me this month that Iran can no longer "wait for the West," and Tehran is now looking for alternative investors. In recent years, China has emerged as a potential large-scale partner. But while China can provide capital, its state-owned energy companies are not much more technically capable right now than Iran's. It will be a decade at least before China can fill all Iran's technical gaps. This is where Russia comes in. Although Russian energy companies could not offer quite the same level of expertise as Western firms in the complexities of managing Iran's older oil reservoirs, they could in the next several years help the Islamic Republic develop its newer oil finds and, more significantly, realize its huge potential as a gas exporter.

In fact, the two countries have already held talks on possible "coordination" of Iranian gas exports with Gazprom, Russia's state-owned gas and oil behemoth. Iranian officials have told me that their government does not think Gazprom would be the ideal partner, compared with Western companies, but it deems such a deal preferable to continued stagnation.

From a Russian perspective, such a deal would have many benefits. Many industry experts feel that within just a few years, the amounts of gas that Gazprom is contracted to provide may exceed what the company on its own can bring to market. It has been trying to close the gap by purchasing additional gas from Central Asian states that rely on Russian pipelines to export their oil and gas. But at the same time, the United States is trying to help those ex-Soviet states build oil and gas pipelines that are outside of Moscow's control — an effort the Kremlin interprets as a deliberate attempt to isolate and weaken Russia. Russian officials and commentators have complained to me in recent weeks about a new "double standard" in American policy — one that criticizes the centralization of power in Russia but overlooks authoritarian abuses in Azerbaijan, Kazakhstan and Turkmenistan. The involvement of Russian energy companies in Iran would not only support Moscow's external energy strategy but would push back against perceived American efforts to undermine Russia's influence in Central Asia.

Together, Russia and Iran control almost half of the world's proven reserves of natural gas. If they coordinated their production and marketing decisions, these two countries could be twice as dominant in international gas markets as Saudi Arabia is in the global oil market.

And as China looks to deepen its own involvement in Iran, there would be opportunities for Chinese-Russian cooperation in developing Iranian resources, and collaborating against what both Beijing and Moscow see as excessive United States unilateralism in world affairs. By working together, Russia and China would further establish themselves as rising players in the Persian Gulf, where America has grown used to something like hegemonic status.

Against this backdrop, the Bush administration's approach to nuclear diplomacy with Iran is strategically shallow. The decision to encourage direct talks with Tehran generated many headlines but was really only a limited tactical adjustment to forestall an embarrassing collapse in coordination with America's key international partners.

By continuing to reject a grand bargain with Tehran, the Bush administration has done nothing to increase the chances that Iran will accept meaningful long-term restraints on its nuclear activities. It has also done nothing to ensure that the United States wins the longer-term struggle for Iran. Such a grand bargain is precisely what is required, not only to forestall Iran's effective nuclearization in the next three to five years, but also to position the United States for continued leadership in the Middle East for the next decade and beyond.