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Lord Phillips of Sudbury: My Lords, before the noble Lord sits down, it was not my intention to say—I do not believe that I did say it—that Iran needed more oil investment. I absolutely agree with the point that the noble Lord made about over-dependence—90 per cent of Iran's GDP is in that one element. Therefore, to set the record straight, that was not my proposition.

Lord Howell of Guildford: My Lords, I fully accept that. I am glad that the noble Lord was urging not more but less oil dependence to achieve some balanced development. I accept that.

10.42 p.m.

Baroness Crawley: My Lords, tonight we have had a short but very expert and useful debate about a key aspect of our foreign policy. I thank noble Lords for their encouragement for Her Majesty's Government's approach to Iran.

The noble Lord, Lord Hannay, raises an important and timely Question. This is certainly the right moment to debate Iran, and who better to open that debate than the noble Lord with all his experience in these matters?

Iran's decisions about how it deals with the rest of the world have an impact that goes far beyond its borders. As noble Lords have said, Iran sits at the centre of one of the most volatile regions of the world. Its size alone—its population is larger than Iraq, Saudi Arabia and the Gulf countries combined—gives it a leading role and influence. How Iran chooses to use that influence—in Iraq and Afghanistan, for example—can affect the security of countries well beyond the Middle East and South Asia.

As the noble Lord, Lord Wallace of Saltaire, said, the UK's own relations with Iran have not always been straightforward. That has not been by our choice: the past few months have been made difficult by extradition proceedings against Mr Hadi Soleimanpour, a former Iranian ambassador in Buenos Aires now resident in the UK. I understand that the case against Mr Soleimanpour has today been discharged. I hope that any difficulties resulting from that may now be behind us.

The Government's overall approach towards Iran is one of constructive, but critical and conditional, engagement. In answer to the noble Lords, Lord

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Phillips and Lord Hannay, we recognise and welcome President Khatami's vision of a democratic, Islamic civil society, based on the rule of law. We seek to support reform in Iran. We co-operate successfully with Iran in a number of areas. We are, for example, the largest supporter of assistance to Iran to counter the drugs trade, and we have worked well together on the reconstruction of Afghanistan.

At the same time we fully share the view of our European Union partners that the development of relations with Iran, which we want to see, must be on the basis of Iranian willingness to address areas of political concern. Those include Iran's nuclear programme and approach to terrorism, human rights and, as the noble Lord, Lord Howell, mentioned, the Middle East peace process.

The noble Lord, Lord Hannay, asked how the Government see the first of those, Iran's nuclear programme. We start from a simple premise. We do not question the right of any country to generate electricity by nuclear power, provided—this is an important condition—that it complies fully with its international obligations on the subject. The joint statement in Tehran last month by the Foreign Secretary and his French and German counterparts, to which the noble Lord referred, stated that clearly.

However, under the non-proliferation treaty it is unacceptable for non-nuclear weapon states to seek to acquire nuclear weapons. In the Middle East it could seriously destabilise international peace and security. Recent reports by the International Atomic Energy Agency (IAEA) have given reasons to suspect that Iran has not been fully transparent with the agency or fully compliant with its safeguards obligations under the non-proliferation treaty.

Those suspicions cannot be dismissed as part of a western scheme against the Islamic Republic. They are shared by the entire international community, as the noble Lord, Lord Howell, stated. We saw that clearly in September when the IAEA board of governors passed its resolution by consensus. That resolution is intended to exercise a constructive influence. It requires Iran to take measures that would enable it to resolve the outstanding issues of concern identified by the IAEA in its reports.

As the House is aware, the Foreign Secretary and his French and German counterparts visited Tehran last month. The aim was to bring home to Iran the seriousness and urgency of international concerns and the need to act decisively to address them. Following that visit, Iran has undertaken to sign, ratify and implement an additional protocol to its safeguards agreement. That will allow for short-notice visits by IAEA inspectors to a wider variety of nuclear sites. Iran has also undertaken to act right away as if such a protocol were already in force. It has said it will co-operate in full with the IAEA and be fully transparent with the agency about its nuclear activity. It has undertaken to suspend all uranium enrichment and reprocessing activity as defined by the agency. Those are welcome promises and reflect the main points in the IAEA board resolution. They are, indeed, a step in the right direction.

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The key is Iran's willingness to turn them into reality. In our view Iran could create an atmosphere of increased trust quickly and easily. The onus is on Iran to take action. Iran has already taken some welcome steps in the past three weeks. It has supplied the agency with further details of past nuclear activity. It has sent the IAEA a formal letter signalling its intention to sign an additional protocol and announced a halt to enrichment and reprocessing activities. We recognise that those have been significant steps. We also believe that they are in Iran's interest.

The next step will be discussion at the IAEA board of governors' meeting on 20th November and although noble Lords have referred to it, I hope that they will understand that it would be imprudent of me to speculate today on the outcome of that meeting. The agency's director-general, Dr Mohammed El-Baradei, submitted his latest report on Monday. It needs careful reading and analysis.

The Government's view is that the board should work to maintain the credibility of the IAEA and of the non-proliferation regime. It would be damaging if the agency were to accept less than full co-operation and transparency from a member state or, having set out the requirements in its September resolution, were now to accept less than full compliance.

I am confident that the agency will likewise be clear in reporting Iran's past failures to disclose information or breaches of its safeguards obligations. Iran should not see this as a negative step. It is one that can be used to build trust and help address the long-running challenge, which is to establish international confidence that the intentions of Iran's nuclear programme are solely peaceful.

The nuclear programme is not, of course, the only security question on which we are now engaging Iranian leaders. We have regular exchanges with them on efforts to reconstruct two countries on Iran's borders, Iraq and Afghanistan. We recognise that Iran has legitimate interests in the future of both. In recent years, for instance, Iran has played host to more than 2.5 million refugees from the conflict in those two countries. As the noble Lord, Lord Wallace, said, we should recognise, and we do recognise, the concerns felt by many in Iran towards the Shia population in Iraq, and the wish of Iranian pilgrims to have easier access to holy sites in Karbala and Najaf.

Like noble Lords, we welcome Iranian support for the Iraqi Governing Council and the formation of a broad-based government in Afghanistan. In the case of both Iraq and Afghanistan, we hope that Iran will see that its interest lies in promoting the most rapid transition possible to stable and functioning democracy. As the noble Lord, Lord Hannay, described, the defeat of Saddam Hussein has also created new opportunities for regional security structures. To be effective, those probably need to originate with initiatives from players within the region. However, any structures that can deliver greater peace and stability would be warmly welcomed and certainly have our support.

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Sunday's bombing of an Arab residential compound in Riyadh brought home once again that security challenges in the region do not originate only from states but also from terrorists. President Khatami has stated Iran's principled condemnation of all terrorism, and his government were quick to condemn the latest attack. As the noble Lord, Lord Hannay, rightly states, Iran is an important potential partner in the fight against terrorism. We have called on Iran to exert all possible efforts and to ensure that terrorists receive no refuge or assistance from within its borders. As the EU has made clear, positive action against terrorism is a precondition for further developing relations.

As noble Lords have said, another area that Iran must address if relations with the EU are to develop is human rights. We indeed recognise that there has been some progress since the election of President Khatami in 1997, but we and other EU partners continue to have many concerns in areas such as freedom of expression, torture and the rights of religious and ethnic minorities, as the noble Lord, Lord Howell of Guildford, reminded us.

Noble Lords asked one or two specific questions. Several noble Lords—the noble Lords, Lord Hannay, Lord Phillips and Lord Wallace of Saltaire—referred to the issue of US contact with Iran. I would say to noble Lords that renewed contact between the US and Iran is a matter for those two countries. However, our US partners are very aware of our own position. I would add that, on 28th October, deputy US Secretary of State Richard Armitage told the Senate Foreign Relations Committee:

    "We are prepared to engage in limited discussions with the government of Iran about areas of mutual interest as appropriate. We have not, however, entered into any broad dialogue with the aim of normalising relations".

The noble Lord, Lord Howell, talked about the Baha'is and about religious persecution. The Government fully share his concern about religious persecution in Iran, including that of the Baha'is. We raise these concerns regularly with Iran's leaders, including through the EU-Iran Human Rights Dialogue.

I began by saying that Iran's choices about its relations with the rest of the world have an impact well beyond its borders. On all these issues, with our partners in the EU, we are involved in the process of political dialogue with Iran. As the Foreign Secretary's recent visit shows—and again I thank noble Lords for their encouragement for the Foreign Secretary—we are committed to this policy of engagement. In any dialogue, and any international relationship, there will be points of difference. But I think that his visit showed that the strategy of engagement enables us to resolve those differences and encourage Iran to make choices that will contribute positively to the peace and security in the region.

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