Where Oil Is the Best Defense

It's hot in Tehran—not nuclear hot but summer hot. Every weekend, the road north from Iran's capital is crowded with picnickers and vacationers winding their way up through the Alborz Mountains to the Caspian Sea. This year the traffic jams are far worse than last, in part because they're clogged with many more luxury cars. Whereas Iran imported some 15,000 BMWs, Mercedes-Benzes, Toyota Supras and other top brands two years ago, it tripled that number to about 40,000 last year, according to government customs data. Traffic has slowed to a crawl in Tehran, too, where flower shops and Hermès handbag knockoffs still abound and the price of a deluxe apartment hovers at Manhattan-level prices—about $10,000 a square meter.

This is the country that some in the Bush administration had hoped would be on its knees about now, ready to forswear its nuclear program after nearly two years of harsh U.N. sanctions and a U.S. campaign to choke off Iran's banks. It's just not happening. Despite the fact that Iran has all but given up trading in dollars because of pressure from Washington, the squeeze is hurting the population only on the margins, as a 5 to 6 percent cost of doing business. There's one main reason: oil. Iran is the world's fourth largest producer of crude, and at $130 to $140 a barrel, Tehran can handily withstand whatever the West throws at it. Iran's government stands to earn more than $100 billion from oil exports this year, up from about $75 billion in 2007, which was itself a record year. And because the Europeans have not yet cut off trade in the powerful euro—among the top five exporters to Iran last year were Germany and Switzerland—the Iranian goods trade remains vibrant as well. "I actually expect Iran's imports to continue to increase this year," says Masoud Daneshmand, a board member of the Iran Chamber of Commerce.

Javier Solana, the European Union minister who acts as chief negotiator for Europe and America, recently traveled to Tehran to deliver the West's latest bunch of carrots. This offer is even more enticing than the one extended in 2006; it promises support for a state-of-the-art civilian nuclear program, including R&D, if Tehran stops enriching uranium. But no one, not least Solana, expects much out of these long-stalemated talks. U.S. officials continue to pray for a tipping point. "Yes, the high price of oil gives the Iranians an important revenue stream," says a senior Treasury official. "But their mismanagement of their economy, combined with [our] financial pressure, is still providing us leverage."

There's some truth to that. Inflation is high in Iran—official figures have it at 22.5 percent—and President Mahmoud Ahmadinejad is unpopular, considered at best a 50-50 bet to win re-election in 2009. Yet his government has other reasons to snub Solana. Tehran knows that in six short months, Barack Obama could be the U.S. president. And Obama has made plain he may open broad-based talks without first requiring Tehran to halt enrichment. "We're not going to require them to capitulate to our negotiating position prior to diplomacy," says Greg Craig, a top Obama foreign-policy adviser. "That's Bush's approach, and it hasn't worked."

The question is whether Iran's resilience is raising the risk of military action. Some remaining hawks in the U.S. administration have suggested that such action could occur between the November election and Bush's Jan. 20, 2009, departure from office, according to a European diplomat who met recently with U.S. officials but would only speak anonymously because of political sensitivities. Most experts think a U.S. attack is still very un-likely, but Israel, which regards Iran as an existential threat, has begun making threatening noises as well.

The West's strategy of economic isolation could bite more sharply. Financial experts agree that if the Europeans start limiting Iran's access to the euro, life inside Iran would get harder. Already Iran, in response to the threat of possible asset freezes, has started shifting its money from European banks to Asian ones. U.S. officials say they are working on that pressure point. And Ahmadinejad's position is more tenuous than his brazen rhetoric makes it seem. "The great paradox is that while [Iran] is projecting tremendous external power, there's internal rot," says Karim Sadjadpour of the Carnegie Endowment in Washington. "It's the only major-oil-producer country whose citizens complain that things have gotten worse over the last few years. "

Many officials think the greatest hope for a deal is new leadership. America's European allies "see themselves stuck between a lame duck in Washington and an incorrigible fanatic in Tehran," says Sadjadpour. "The Europeans are holding out for a new U.S. president in January 2009 and a new Iranian president in June 2009." But there's no guarantee the Americans—or the Israelis—can wait that long.