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QUESTION: You are hosting the leaders of both France and Germany this week. That probably wasn't going to happen four or five years ago.

SECRETARY RICE: Yes.

QUESTION: What is it that you all hope to get out of these meetings?

SECRETARY RICE: Well, out of the French meeting it was great. First of all, Sarkozy is great to be around. I think France and the United States have essentially the same core interests: fighting terrorism, seeing the spread of democratic values, seeing the continued construction of Europe. All of these issues were on the table -- Iran. We talked a great deal about Iran. Afghanistan, Iraq. And the fact is that there was very little on which we didn't see really eye-to-eye.

I've always thought, and I've said many times, that I think U.S.-French relations are better in practice than in theory. And I think that was true with the last French President as well, who -- with whom we had an outstanding success, we believe, in getting Syrian forces out of Lebanon, for instance. Middle East peace is another area that we talked a lot about. So -- and I think we'll do the same with Germany.

So you know, it's a -- the relationships were strained by disagreement about whether or not it was time to finally deal with Saddam Hussein, but that's way in the past and people are trying to deal with the current challenges.

QUESTION: If I can follow up, though. You know, the Germans in particular have not been rushing out to embrace economic pressure on Iran, and there has -- an analyst I was speaking with yesterday said, well, his reading was he thought that Germany was, in fact, waiting out this administration to end, that they wanted to -- they didn't like the choice between economics -- an economic policy trying to (inaudible) or perhaps military policy (inaudible). The point is, Germany -- what is it that you think you can do to get Germany to go with us on a full-blown diplomatic effort using economic tools, all that, to get Iran to do what we want Iran to do?

SECRETARY RICE: Well, I'm not sure I agree with your characterization of Germany. It has been -- for instance, German export credits have declined, declined last year 40 percent. That's a government decision. And those export credits are going to come down even again for Iran.

The Germans have supported the kind of activities that we've been undertaking that frankly are leading to decisions by private entities, whether it's private banks or private enterprises, not to deal with Iran -- not because the government tells them not to, but because of the investment and reputational risk of dealing with a country that is under a Chapter VII resolution and where there is a U.S. sanction against them. So I think if you actually look at German economic activity with Iran, it is coming down.

Now, the big question is going to be what does the EU do? France and Britain have been more out front on that issue. But I think the Germans are waiting, as we all are, to see what the word is going to be from the two diplomatic or two political tracks. One is the work with the IAEA, the other is the work with the -- Solana, the EU representative. And at least with Solana, it's not gone very well, so I think we'll be back looking for a sanctions resolution and I think Germany will be supportive of that.

QUESTION: (Inaudible) no doubt that you think Germany will support that?

SECRETARY RICE: No, I have no doubt that I think Germany will support that. I think Germany has been -- Germany knows that this is an issue where you don't want to be faced with unpalatable choices because you didn't act in time on Iran.

QUESTION: You are a Russia expert, and it looked like about ten years ago --

SECRETARY RICE: I used to be. (Laughter.)

QUESTION: Well, it looked like about ten years ago that that was an obsolete profession, but now it's come -- Russia has come roaring back with Putin and the price of oil. Can you sketch out for us what you foresee over the next few years, the challenges that Russia is going to pose to U.S. foreign policy, with particular emphasis on Russia's growing closeness to China and other oil -- and oil-producing states that aren't democracies.

SECRETARY RICE: I actually probably I see less potential for some kind of China-Russia axis than sometimes is (inaudible). China and Russia have a number of their own problems among them -- between them. And so -- but there's no doubt that Russia poses certain challenges.

And I would make three points. The first is on global issues. We actually do relatively well with Russia, whether it's global terrorism or the work we've done on global nuclear threats, or whether it is the work that we've done on North Korea, and even Iran frankly where, with Iran you've got -- we and the Russians may disagree from time to time about tactically how fast or how deep sanctions ought to be, but the Russians have signed on to the two-track, negotiate and still keep the UN track open -- and that's why we've had two unanimous resolutions. And so I think even on something like that where there may be some differences tactically, I think we and the Russians are essentially in the same place.

Now, where it becomes more difficult is when you're dealing with issues that are associated somehow with the territory that used to be part of the Soviet Union, so -- or part of the Warsaw Pact, where I think there is still Russian sensitivity that tends to see things more in a zero-sum way with NATO enlargement or with our efforts in Central Asia. There, I think we do tend to get into some conflicts that have to do with Russia in a sense re- -- or determining again what its interests are in that region. There was a period of kind of freefall in terms of Russian interests back in the '90s where it wasn't really clear how Russia thought of itself.

Then you've got questions of Russian internal politics and some of the aspects of the state control of oil and gas resources that is linked up with the concentration of power in the Kremlin in a way that I think is troubling. And there, it's not just the United States. It's Europe that has really significant concerns about how that is playing out.

And that probably is going to be the biggest challenge. I think you can work issues of where missile defense capabilities are deployed or we can work issues of how fast you get a -- you know, an Iran resolution this time or -- because I don't have any doubts about Russian concern about the Iranian behavior at this point. I have no doubts about their concerns about it and their desire to do something about it.

But when it comes to the domestic landscape and the use of oil and gas for political purposes, that's going to be very hard. And in many ways, it's harder for Europe, which is increasing -- more dependent on those sources of energy than we will ever be.

I was recently -- when I was recently in Russia, I met with a lot of young people and it was really quite interesting. I mentioned how television -- I was a graduate student in Russia in '79 and I mentioned how the television looked a little bit familiar to me from another time. And their reaction was, who watches television?

They're on the internet. And so the ability to control information and resources I think is somewhat more limited than the Russian Government may realize. The hottest thing that they have in Moscow is a 30-year mortgage. (Laughter.) And that's a group of people that are going to have certain political interests with this growing entrepreneurial and business class and so forth. Right now, I think Russians are just grateful for economic and greater political stability given that the '90s were pretty rough.

But I don't rule out significant pressures from below on a political system that I think is going in the opposite direction of where the population will ultimately end up. But yeah, it's going to be a challenge.

QUESTION: Putin made clear just a couple of weeks ago that he's more than willing to put more on the table with Iran, engage with them directly, negotiate a way and regards trade and oil and gas as a basis for negotiating with Iran. Vice President Cheney was here last week. He talked about other things still being on the table; namely, the military option. Which one of those options is more likely to bear fruit, in your opinion? And can you talk a little bit more about what else is on the table?

SECRETARY RICE: Well, the President is committed and everybody's committed to a diplomatic option. Now, there's sometimes a sense -- I mean, I -- sometimes it's even a caricature, that there are those people who want to do harsh measures with Iran and those who want to negotiate with Iran. I'll tell you right now the seal of the United States of America, that eagle, has arrows in one talon and an olive branch in the other talon, and that's the right way to think about this. You'd better have ways of making it -- holding Iran accountable and having consequences for Iran if you aren't able to get the forward movement.

And so I see the -- yeah, the President never takes his options off the table. But if you look at what we're doing on the economic front, it would fall into the category of coercive. It would not fall into the category of just kind of talking and negotiating. When you start sanctioning the IRGC and the Qods Force and making it impossible for them to use their banks, that's coercive.

And I'm really glad -- as a matter of fact, I think it was in part my idea. Because if I ever have to walk into a room with the Iranians, I'd sure like to have some way to demonstrate to them that there will be consequences for not agreeing. And when you're going to negotiate with an adversary -- and not with the Chinese or the Russians (inaudible) -- when you're going to negotiate with an adversary, you need to have some means by which to show that there is a penalty for not negotiating. And that's why the financial measures that we have been pursuing, that's why the kind of thing we were talking about with private entities leaving, is important because you're trying to impress upon the Iranian regime that if they continue down the path that they're on, they're going to end up more isolated, they're going to end up in a situation where they can't use the international financial system, and that's going to be very tough.

Now, you also need to show the other path, which is what I think Putin is trying to do. And by the way, it's very much in line with the package that the six parties -- the United States, Russia, China and the three European countries -- put before the Iranians back in July of '06. Yeah, '06. And that was a package of economic, trade, energy. For instance, much has been made of the Russians saying that Iran should have a civil nuclear program. We agree with that. And we agree with how the Russians would like to provide it, which is provide the civil nuclear plant, enrich the fuel but take the fuel back, or enrich outside -- really, actually, enrich outside the country, deliver the fuel, and then take the fuel rods back. Because then you don't have a proliferation risk.

So this is very much in line with what we've been saying. In May of '06, I said that the United States of America would drop 28 years of policy and I would meet my counterpart anyplace, anywhere, anytime, if they would just suspend their program -- even temporarily. Because from my point of view, there may be a negotiated solution. But I don't want to sit at the table with the Iranians talking and talking and talking and talking while they continue to learn the technology that can lead to a nuclear weapon. So suspend, and then we can talk.

So in the final analysis, the question isn't why won't we talk to them. The question is why won't they talk to us. Given that nobody denies that they could have a civil nuclear program, nobody denies that there could be trade and economic benefits, nobody denies that if they suspend we could come to the table and talk about whatever they like. So I think that what we've succeeded in doing is the onus is on the Iranians, and that's been always the purpose of this policy.

QUESTION: But aren't they going to continue getting this technology developed while you're in this period where we won't talk to them until they suspend?

SECRETARY RICE: Well, the problem is, unless they suspend, you'll be talking to them while they do it anyway. So at least this way, you hold out the prospect that continued building of pressure will lead them to take another course.

Now, nobody is looking to embarrass the Iranian regime. If the Iranian regime says, all right, we'll suspend, nobody's going to jump up and down and say, all right, that's because of pressure. The purpose is to see whether or not they actually want to negotiate or whether or not they want to continue down this path and gain certain technologies. But it will be at a high cost.

QUESTION: But are you concerned that as the sanctions deepen, Iran's isolation deepens, its ability to sell its oil on international markets becomes more difficult, and oil prices continue to rise, pressure on Europe continues to rise, they get more and more thirsty for some source of oil that the European kind of solidarity with the United States is going to start to erode?

SECRETARY RICE: No, I think it's going the other way. I think that nobody believes that a Middle East with an Iranian nuclear weapon is going to be a stable environment for oil prices or anything else. And what I see is a -- starting in '05. I'll tell you a story. In February of '05 I went to Europe for the first time as Secretary, and my first press conference was in England with -- in London with Jack Straw. And I was expecting questions about Iraq. I was stunned because they were almost all about Iran. And somehow it seemed that the United States had gotten itself into a position where people thought we were the problem with Iran and that somehow Europe needed to mediate between the United States and Iran.

And I came back and talked with the President and said, "How did we get into this position?" And so that's when we, in effect, did make a shift to say that under certain circumstances we would join the negotiations. We did some small things like removing our objection to an application to the WTO, allowing some spare parts to (inaudible). Because it was ludicrous to my mind that somehow people thought we were the problem. I no longer think anybody thinks the United States is the problem. The Russians don't think we're the problem. Nobody thinks we're the problem.

The question is how do you get the Iranians to actually respond to what is a very, frankly, generous offer to them if they will stop enrichment and reprocessing. I would encourage you to look sometimes at the actual program that has been proposed to them from the six. It's very generous. And it has fueled suspicions then that they must want these technologies for nefarious purposes.

I do think some of the pressure has worked in the following way. Every time it gets close to a Security Council resolution, the Iranians run to the IAEA and say, all right, now we're ready to cooperate. So you're starting to see that. Or they make the incredible tour of the world, try to go and convince everybody that they want to cooperate. But nobody believes they want to cooperate, and that's a problem. That's a problem.

QUESTION: So what happens economic sanctions go into place and they don't work?

SECRETARY RICE: Well, we've got quite a ways to go yet before we've fully leveraged the -- and we have sanctions in the Security Council resolutions, but I'd draw a distinction for you. What is happening outside of the Security Council is a little different. What happens is the United States designates Iranian banks for holding accounts or dealing with accounts of the IRGC and the Qods Force for associations with proliferation and with terrorism. So that's the process, the Treasury process.

That then means that any bank worldwide that deals with those assets has a problem with American law. In effect, that makes people have to kind of choose between their American business and their Iranian business, and that usually isn't very much of a choice.

People are also concerned -- and Hank Paulson and his people have been terrific in going out and explaining to people that the Iranians use multiple front companies and ways to disguise assets that, in fact, are proliferation and terrorist tainted. And that then leads private concerns to make decisions about whether or not they want to take the risk that they may not be dealing with clean assets. And so it's not preventing them from selling their product; it's preventing them from monetizing their product.

And we have some experience with this with North Korea. You may remember the saga when we tried to give the North Koreans their $25 million dollars back. We couldn't find anybody to take it because even though, you know, the United States was saying, no, really, it's all right, you can take it, it's not a problem, people just weren't going to take that risk.

And so there are other entities that we look at -- and by the way, we do it not as a political matter. We do it as a regulatory matter, because they shouldn't be able to use the international financial system to move around ill-gotten gains. So I think there is more to do.

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