QUESTION: So this is on the record and -- please, do you want to start?

SECRETARY RICE: I do.

QUESTION: All right. I wonder if you'd talk a little bit about Iran and particularly what the strategy of the Administration is regarding both the nuclear program and the internal dynamics inside Iran. Because at least from our vantage point, it does seem that you're sending mixed signals, seeking a negotiation -- seeking negotiation efforts on the one hand and sending ships to send a signal and then Vice President Cheney out on the other hand, negotiating over Iraq and a day later, they take hostages and you have to issue a tough statement.

What is the strategy?

SECRETARY RICE: Well, the -- first is to recognize that Iran is a concerned force, strategic concern on multiple levels and on -- for multiple parts of our policy. But let me speak first to the question of, is this coherent or are you talking about mixed signals. I used to teach these courses and we called it course of diplomacy or diplomacy back up with a set of disincentives for bad behavior.

And I'm often struck that there's a sense that you can't both have interaction -- let me not call it negotiation, because we're not negotiating about Iraq. We are having a set of discussions about Iraq and about the inconsistency in Iran's policies with what they say their stated goals are on Iraq. And we're having those in part because the Iraqis themselves would like to see the development of the framework in which their neighbors are more helpful to them than harmful. And you have to understand it in that context, just understand the Neighbors Conference in that context too.

At the same time, we have, on the nuclear side, two paths that Iran can follow. They can choose to negotiate, suspend their program, and there are a number of benefits to doing that. And on the other hand, we can continue down the path of Chapter 7 resolutions in the Security Council. I'll say a bit more about that. And all of this has to be seen in a context of saying to the Iranians something that perhaps several months ago, I think they had tended to forget, which is, we will defend our interest and those of our allies in the Gulf.

And so I see it as quite coherent and whenever you -- unless you are determined that there is no other way out but conflict with a power, I think you want to always have a route out, a route that would be a non-conflict way to resolve your differences, but at the same time, putting that on the table only in the context of some demonstration of strength or willingness to use more than persuasion to -- whether it's sanctions or a demonstration of U.S. will through what we're doing in the Persian Gulf; so quite coherent from my point of view. I have been party to all of those decisions and have never seen them in conflict. And let me say right now, for the record, the notion that somehow, therefore, there are those in the Administration who believe in putting carriers in the Gulf and those in the Administration who believe in sitting down with the Iranians across the table -- we actually believe in doing both.

As long as those discussions are limited to very specific subjects -- and I want to draw another distinction here. There is a lot of talk about grand bargains out there and I don't see either of these discussions as trying to lead to a grand bargain, because that assumes, I think, a level of potential common interest with Iran that I don't see, given the nature of the Iranian regime, given the nature of Iranian policies, and the way that Iran is carrying out its interests. But might you find some areas of cooperation despite the overall rather zero-sum nature of our relationship? I think so.

QUESTION: When the President was here about four months ago, he said that he didn't see the opportunity right now to talk with Iran because he said we don't -- there's nothing that they want that we can give them -- what they want, we can't give them. What has changed in the last four, five months that Iran would sit down, we're going to have discussions?

SECRETARY RICE: Well, again, on a very limited basis. You know, we were always willing to sit down with them on the nuclear issue if certain conditions were met. That's been on the table for more than a year now and those conditions haven't yet been met, so we haven't sat down with them, and that's the one that has the more -- the broader framework -- potential for a broader framework.

But on the Iraqi side, I do think the fact that we have gone after some of their disruptive operatives, the fact that we did send a signal both to them and to our allies in the Gulf that we'll defend our interest in kind of classic ways with the carrier strike groups, I think the fact that we reinforced our forces in Iraq when a lot of people thought we wouldn't do it, and the fact that we are kind of borrowing from the other side, got the Chapter 7 resolution when the Iranians clearly thought the Russians were going to prevent that did put us in a stronger position for Ryan to sit down and have these rather more limited discussions, because then you're saying to Iran there's a cost for policies that are leading to destabilization of Iraq and endangering our soldiers. And that was the message that we probably -- that I think we had to establish first, that there was a cost to that before you were going to get anywhere even -- and I'm not sure we will, but if you were going to get anywhere by talking about Iraq, you had to send that message first.

QUESTION: Where does the nuclear discussion now go? Where do you see that going?

SECRETARY RICE: Javier Solana, I think, would tell you that the talks were civil but not fruitful, the way that I would characterize them.

QUESTION: Civil but not fruitful?

SECRETARY RICE: Yeah.

QUESTION: So nobody threw anything?

SECRETARY RICE: Nobody threw anything. (Laughter.) No, I think they have a -- he and Larijani have a pretty professional relationship. I suspect we're headed back to the Security Council. I don't see anything that suggests we're not. I think the choice that is out there is, are we going to continue down the road of strengthening the categories of sanctions that we've already adopted or are we going to start to open new categories. And that's a choice.

It's not a choice that, frankly, I'm prepared to make or talk to until we've had some consultations, because there are two things that have really helped us in the Security Council resolutions. One is the Chapter 7. Secondly, they've been unanimous. And you may -- there may come a time when the character of what's in the resolution is more important than the unanimity, but I think it's something that we just have to keep assessing. Because what we're getting right now is pretty significant collateral effects from the Chapter 7 resolution that private entities making investment and -- or making decisions considering investment and reputational risk based on the fact that Iran is in a Chapter 7 status.

And I think there's more that we can do with that outside of the Council. By its very nature, the Council is going to move more slowly and it is going to be -- the resolutions are probably going to be less robust than the United States would have if we were doing them alone, by the very nature of the Security Council. So while pursuing that path, we are always -- also continuing to pursue the collateral effects of having a Chapter 7 resolution as well as the collateral effects of what we do in sanctioning Iranian entities, which then makes it difficult for financial institutions to deal with the --

QUESTION: Can you tell us about the status of the Helms-Burton legislation and --

SECRETARY RICE: Cuba, the Cuban legislation?

QUESTION: No, the Iran-Libya Sanctions Act of 1996 --

SECRETARY RICE: Oh, ILSA -- the ILSA Act?

QUESTION: Iran version of Helms-Burton.

SECRETARY RICE: Yeah, the Iran version. You mean tertiary sanctions?

QUESTION: Yeah.

SECRETARY RICE: Look, it's there as a tool. We haven't had to really do much with it because to this point, people are making what I would consider wise and well-considered decisions about dealing with a country under Chapter 7. Now when we sanction one of their banks, banks stay away from those accounts in droves. You just don't have people trying to -- well, SEPA got actually sanctioned under Chapter 7, but even a bank like Saderat that we sanctioned unilaterally, you're really confronting people with a choice between their Iranian business and their American business and you know where they're going to go.

QUESTION: Are we confronting enough people with that choice?

SECRETARY RICE: I think there is more that we can do and one of the things that I think we're going to want to consider with some of our allies, particularly as I think we need to accelerate some of the pressure if this negotiated trend doesn't go anywhere, we should be looking to what the EU could do more and others. And you know, the EU did a set of sanctions outside of the Chapter 7. I think we ought to look at what more could be done there.

QUESTION: A couple years ago, unfortunately, the NIE was leaked that gave Iran a sort of 10-year window before it -- you know, developed nuclear arms. Now they have -- they're approaching 3,000 centrifuges and we have 8,000 and the window is suddenly looking a lot nearer. Does that change your calculation in the way you're conducting diplomacy? Because you know, right now, we're on a track where every three months, every six months, some new set of sanctions is imposed. But the window is much smaller before we're at the stage where the Iranians are given a position to develop these weapons. How does that change your thinking?

SECRETARY RICE: Well, let me come back to the window. But in terms of the rhythm of the Security Council, it's why I think we don't want to be dependent simply on what goes on inside the Security Council. You want to use the umbrella of what's going on in the Security Council to persuade people to make different kinds of choices about what they're doing with Iran. It's why you're seeing -- you know, nothing in the Security Council resolution says that German export credits to Iran had to drop 40 percent, but they did. Nothing said that four or five major banks had to pull out of Iran, but they did.

And so we can probably and I'm sure that there are measures to strengthen and accelerate those kinds of efforts because I think the Security Council, I've come to learn, has a kind of -- you can only push it so fast and so far. It just doesn't work very quickly, except when the North Koreans test a nuclear weapon, then it worked very quickly, but even that took a week. So it isn't something that we're going to be able to accelerate I think that much in the Council and work toward unanimity. But there's an awful lot that you can do outside the Council.

Now, as to the window, that's why I found ElBaradei's comments frankly disturbing because in fact you don't want to confront people with the choice between using military force or let them have a nuclear weapon. And I actually don't happen to think that's where we are. And I thought that the notion that you have to give up on suspension because they have might have run one successful experiment and maybe they did -- and maybe they don't, I don't know -- just doesn't really give a full picture of how -- what it takes to move from the ability to enrich and reprocess all the way out to the ability to create nuclear material and crate nuclear material that is enriched enough to actually build a bomb.

And so the suspension option still makes sense because it's an engineering problem to run these centrifuges, run them long enough, run them fast enough, introduce material in a systematic way. And so you can still deny them the ability to know how to do that, even if they've done one little piece of it one time. And so -- or even if they've increased the number of centrifuges. So the suspension option still makes sense. And you know that we've talked to the IAEA about not trying to determine the course of the diplomacy, but to remain an organization that reports on what's actually going on in Iran. So I don't really know how to assess how far along they are. My general view of this is do it -- assume that you have to work with a sense of urgency and -- because you're going to get all kinds of assessments about how far along they are.

QUESTION: What is your assessment currently of conditions inside Iran? I ask because, as you said earlier, we're doing things that impose costs and it can either be a severe cost or a cost they would say, no big deal -- we can get by absorbing this and they seem to have been willing to do that up to now. But what are the internal political conditions there that you think or economic?

SECRETARY RICE: I think it's a very opaque place and it's a political system I don't understand very well. There seem to be, you know, all these different countries of power that compete and argue actually pretty openly in their own media, criticism of each other. And yet, you have a supreme leader who I assume is the final decision-making authority, but nobody actually receives him, so that's -- it's a very complicated system to understand.

And I'll just say one thing, one of the downsides of not having been in Iran in -- for 27 years as a government is that we don't really have people who know Iran inside our own system. You know, it matters if you served in Moscow. It matters if you served in, you know, Venezuela. And not having had really the last generation of Foreign Service officers who served in Iran are now retired. So that's a problem for us and we've tried to improve our capability to understand the system a little bit by putting a kind of group in Dubai and a little bit the successor to the Riga station that looked at Moscow before we had diplomatic relations. We don't have Farsi speakers any longer in the service. I mean, we really are not well positioned. We're --

QUESTION: (Inaudible) end up for long on secondary sources.

SECRETARY RICE: Yeah. And on people who are there and it's a problem. Now, one thing that we do have is we have a lot of people who go back and forth, Iran is not North Korea; people do go back and forth. But I just say that because when I say to you it's a very opaque system, it's hard to understand. We're also operating from something of a disadvantage in that we don't really have very good veracity or a feel for the place.

The one thing that I do think is happening is that the increasing international isolation and the disastrous policies of Ahmadi-Nejad in the economy are having an effect. I was reading some of the stories about the refining capacity, which is essentially non-existent, and you know, they decided at the time that they could have had a refinery. They decided not to do it. And now people don't really want to build refineries there because of investment risk. And as a result, they're having to now ration gasoline and that I think will start to have an effect, but I can't tell you exactly when.

QUESTION: The arrests of the American -- Iranian Americans, do you have -- I mean, you've stated your opposition to that. But what do you think they were trying to (inaudible) up to with that, occurring so soon after you've had the discussions? And I mean, what are we prepared to do about it?

SECRETARY RICE: Well, I think it started before. And it's entirely possible that it's unrelated to the course of what we're doing there. I don't want to speculate because I think these people are -- I don't want to make conditions worse for them. They clearly weren't doing anything. They are innocent people. Some of them were just there visiting family. Is it about tensions in Iran itself, I don't know. Is it supposed to be a message to us, I don't know. But whatever it is, it needs to stop and they're not doing themselves any good by dealing with these people in this way. It's getting -- it's gotten international condemnation and just, you know, makes it somewhat easier frankly to make the case that this is not a normal regime with which you can just do normal business.

You have to go back a couple of years to the way Iran was actually viewed in the international system, not by us where for 27 years, it's been viewed as a regime on the outlaw side of international politics. But this was a country for which Japan was the largest trading partner; Italy was the second-largest trading partner, diplomatic relations across the board. When Khatami was in power, people believing that there was some possibility of Iran bargain there. Iranians traveling back and forth, being received in capitals. I mean, it was operating much as a normal regime. It's now under a couple Chapter 7 resolutions. The travel advisories against some of their people. It has because of the way that it behaved also with the British, has soured relations with the British. I think that you would find that they have poisonous relations with any number of states now and you have Ahmadi-Nejad running around the world, talking about having punched the button for the destruction of Israel. They're not -- this is not a respected -- to the degree it ever was and I think one could argue that except for us, it was sort of being treated as a quasi-normal state. That has eroded for them in international politics where Russia was a strong partner, Bushehr was well under way to now that they have a fuel dispute about Bushehr. And a lot has turned against Iran in recent years. And when they do things like they do with taking these Americans or when they took the British sailors, it really reinforces that this is a state that is an outlaw state. And the more that becomes the view of Iran, I think the easier it's going to be to impress upon people that this is not a good place to do business and not a good place to have relationships.

QUESTION: Do you -- I mean, you hear a lot of talk in foreign policy circles that if Iran does acquire a nuclear weapon, well, we'll contain it just the way we contained other possible nuclear powers. Do you accept that analysis and do you still take the view that it's absolutely unacceptable for Iran to have a nuclear weapon under any condition?

SECRETARY RICE: I absolutely think that it would be a mistake to start trying to accommodate the notion of an Iranian nuclear weapon. Not only is it bad to think about a nuclear -- forget weapon, latent technology for nuclear weapons in the hand of what is clearly an irresponsible state sponsor of terror that has a really irresponsible President who says things that if he believes them -- if he doesn't believe them, then he's cynical. And -- but stirring up trouble in the region. And if he does believe them, he's really scared.

QUESTION: Do you think he believes them?

SECRETARY RICE: I have no idea. I've never met the man, haven't talked to him. I just take him at face value, you know, take him at his word. And that is not a state that you can even conceive of having that kind of technology. What is more, the effect on the region of Iran with a nuclear weapon. I can assure you that it will set off in the region everybody else trying to secure themselves by acquiring the same. And so it doesn't mean that you don't do things that, for instance, plan against their ballistic missile threat. You know, the Russians have made this argument to us, well, there isn't an Iranian long-range nuclear threat -- missile threat yet. And others say, well, if you put in missile defenses, that must mean you think you're going to face an Iranian nuclear weapon. And my view is you plan for any emerging capability, but it doesn't mean that you accept that you can allow it to happen.

. . .