Everyone expected fireworks would mark the 30th anniversary of the Islamic Revolution and yesterday we saw the biggest rocket yet as Iran launched its first satellite into space.

With the issue of Iran’s nuclear programme having been off the front pages recently, the launch will serve as a visible reminder of how peaceful civilian technology could be adapted for military purposes.

While it illustrates that Iran is continuing to develop its missile capacity, the launch itself is not quite as technically significant as other recent activities such as the launch of a solid fuel missile in November, which could provide a more mobile platform if Iran were to develop a nuclear weapon.

The power was more in its eye-catching appeal for a domestic audience, from a president who has his eyes firmly fixed on this summer’s election.

Interestingly, at the time of writing this piece, there had been no official reaction from the US. While the BBC made it one of their top stories online, and the French government expressed their concern, there was no immediate official reaction from the State Department. Most US broadcasters were focussed elsewhere.

The decision by the US government not to make a major issue of the launch (the Bush administration issued a stark warning when a similar launch happened last August) is illustrative of a less combative approach and the wholesale review of Iran policy that is going on within the new administration.

President Obama has said that Iran will be offered an extended hand from the US on the condition that Iran “unclenches its fist”. But don’t believe the hype that he will be shaking hands with Ahmadinejad any time soon.

The challenge will be how to develop Obama’s vision of an engagement policy, while the US maintains its aim of halting Iran’s nuclear programme and its support for militant groups in the region. As if that were not tricky enough, the US will need to consider how far engagement can be pushed while keeping Israel on a tight enough leash to prevent her taking unilateral action. One critical test will be who the Obama administration decides to make the new envoy with responsibility for Iran. Speculation that the veteran Dennis Ross will emerge as the result of a White House-State Department turf war, will go some way to reassure the Israelis, but the overall strategy still needs to be fleshed out in detail.

Diplomats from the so-called P5+1 will meet later this week to discuss their next moves. Ideas on the table could include Washington ending its demand for an Iranian freeze on nuclear enrichment as a pre-condition for talks. Perhaps more likely is the so-called freeze-freeze option where Iran could suspend its enrichment in return for a suspension of sanctions. The latter option would seem to go some way to fulfil Obama’s ‘unclenched fist’ test and build confidence on both sides.

But this would require a change of heart from Ahmadinejad, which might seem remote in the run up to the elections. So far his response to Obama’s overtures has been to call on the US to apologise for past crimes against Iran and withdraw its troops from around the world. Iran may calculate that its current policy of doing enough to prevent a military strike while filibustering and obfuscating on the key issues is still in its best interest.

In terms of a grand US strategy, not much may change, bar the tone of the administration’s voice. As Mark Fitzpatrick, a former US diplomat and non-proliferation expert has said, “a dual policy of engagement and sanctions, with containment strategies targeted at limiting Iranian access to sensitive technologies and materials, is still the best way to test possibilities for Iranian cooperation while maintaining vigilance and controls to limit the nuclear-proliferation threat.”

A number of creative options will need to come from the US, however – perhaps opening the first mission in Tehran, sending the new envoy to visit the country and a new encouragement of cultural ties between the two countries.

Another option is to build a more coherent policy amongst Iran’s regional neighbours. Countries like Egypt and Saudi Arabia have much to fear from an Iranian nuclear weapon. If Obama can convince the Muslim world that the US has really changed, Iran’s isolation in the region may force its hand.

The Americans may also gamble on a new Iranian government. And with rumours rife that former president Khatami may enter the race on a united reformist ticket, it could well be the most keenly fought election since November. Though America delayed a decision to engage when the Iranians had offered a grand bargain in 2003. The result of the delay was that Ahmadinejad came to power just two years later.

Now could be the time for both sides to grasp the nettle.

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