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involving violence and the "greater jihad" that focuses on eliminating poverty and helping the needy.

(U) Although September 11 highlighted the challenges that India-Pakistan relations pose for US policy, the attack on the Indian parliament on December 13 was even more destabilizing resulting as it did in new calls for military action against Pakistan, and subsequent mobilization on both sides. The chance of war between these two nuclear-armed states is higher than at any point since 1971. If India were to conduct large scale offensive operations into Pakistani Kashmir, Pakistan might retaliate with strikes of its own in the belief that its nuclear deterrent would limit the scope of an Indian counterattack.

• Both India and Pakistan are publicly downplaying the risks of nuclear conflict in the current crisis. We are deeply concerned, however, that a conventional war-once begun-could escalate into a nuclear confrontation.

(U) Let me turn now to Iraq. Saddam has responded to our progress in Afghanistan with a political and diplomatic charm offensive to make it appear that Baghdad is becoming more flexible on UN sanctions and inspections issues. Last month he sent Deputy Prime Minister Tariq Aziz to Moscow and Beijing to profess Iraq's new openness to meet its UN obligations and to seek their support.

(U) Baghdad's international isolation is also decreasing as support for the sanctions regime erodes among other states in the region. Saddam has carefully cultivated neighboring states, drawing them into economically dependent relationships in hopes of further undermining their support for the sanctions. The profits he gains from these relationships provide him the means to reward key supporters and, more importantly, to fund his pursuit of WMD. His calculus is never about bettering or helping the Iraqi people.

(U) Let me be clear: Saddam remains a threat. He is determined to thwart UN sanctions, press ahead with weapons of

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mass destruction, and resurrect the military force he had before the Gulf war. Today, he maintains his vise grip on the levers of power through a pervasive intelligence and security apparatus, and even his reduced military force-which is less than half its pre-war size remains capable of defeating more poorly armed internal opposition groups and threatening Iraq's neighbors.

(U) As I said earlier, we continue to watch Iraq's involvement in terrorist activities. Baghdad has a long history of supporting terrorism, altering its targets to reflect changing priorities and goals. It has also had contacts with al-Qa'ida. Their ties may be limited by divergent ideologies, but the two sides' mutual antipathy toward the United States and the Saudi royal family suggests that tactical cooperation between them is possible even though Saddam is well aware that such activity would carry serious consequences.

(U) In Iran, we are concerned that the reform movement may be losing its momentum. For almost five years, President Khatami and his reformist supporters have been stymied by Supreme Leader Khamenei and the hardliners.

• The hardliners have systematically used the unelected institutions they control-the security forces, the judiciary, and the Guardian's Council-to block reforms that challenge their entrenched interests. They have closed newspapers, forced members of Khatami's cabinet from office, and arrested those who have dared to speak out against their tactics.

• Discontent with the current domestic situation is widespread and cuts across the social spectrum. Complaints focus on the lack of pluralism and government accountability, social restrictions, and poor economic performance. Frustrations are growing as the populace sees elected institutions such as the Majles and the Presidency unable to break the hardliners' hold on power.

(U) The hardline regime appears secure for now because security forces have easily contained dissenters and arrested potential

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is

opposition leaders. No one has emerged to rally reformers into a forceful movement for change, and the Iranian public appears to prefer gradual reform to another revolution. But the equilibrium fragile and could be upset by a miscalculation by either the reformers or the hardline clerics.

(U) For all of this, reform is not dead. We must remember that the people of Iran have demonstrated in four national elections since 1997 that they want change and have grown disillusioned with the promises of the revolution. Social, intellectual, and political developments are proceeding, civil institutions are growing, and new newspapers open as others are closed.

(U) The initial signs of Tehran's cooperation and common cause with us in Afghanistan are being eclipsed by Iranian efforts to undermine US influence there. While Iran's officials express a shared interest in a stable government in Afghanistan, its security forces appear bent on countering the US presence. This seeming contradiction in behavior reflects deep-seated suspicions among Tehran's clerics that the United States is committed to encircling and overthrowing them-a fear that could quickly erupt in attacks against our interests.

• We have seen little sign of a reduction in Iran's support for terrorism in the past year. Its participation in the attempt to transfer arms to the Palestinian Authority via the Karine-A probably was intended to escalate the violence of the intifada and strengthen the position of Palestinian elements that prefer armed conflict with Israel.

(U) The current conflict between Israel and the Palestinians has been raging for almost a year and a half, and it continues to deteriorate. The violence has hardened the public's positions on both sides and increased the longstanding animosity between Israeli Prime Minister Sharon and Palestinian leader Arafat. Although many Israelis and Palestinians say they believe that ultimately the conflict can only be resolved through negotiations, the absence of any

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meaningful security cooperation between Israel and the Palestinian Authority-and the escalating and uncontrolled activities of the Palestine Islamic Jihad and HAMAS make any progress cxtremely difficult.

• We are concerned that this environment creates opportunities for any number of players-most notably Iran-to take steps that will result in further escalation of violence by radical Palestinian groups.

• At the same time, the continued violence threatens to weaken the political center in the Arab world, and increases the challenge for our Arab allies to balance their support for us against the demands of their publics.

PROLIFERATION

(U) I turn now to the subject of proliferation. I would like to start by drawing your attention to several disturbing trends in this important area. WMD programs are becoming more advanced and effective as they mature, and as countries of concern become more aggressive in pursuing them. This is exacerbated by the diffusion of technology over time-which enables proliferators to draw on the experience of others and to develop more advanced weapons more quickly than they could otherwise. Proliferators are also becoming more self-sufficient. And they are taking advantage of the dual-use nature of WMD- and missile-related technologies to establish advanced production capabilities and to conduct WMD- and missilerelated research under the guise of legitimate commercial or scientific activity.

(U) Let me address in turn the primary categories of WMD proliferation, starting with chemical and biological weapons. The CBW threat continues to grow for a variety of reasons, and to present us with monitoring challenges. The dual-use nature of many CW and BW agents complicates our assessment of offensive programs. Many CW and BW production capabilities are hidden in plants that

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are virtually indistinguishable from genuine commercial facilities. And the technology behind CW and BW agents is spreading. We assess there is a significant risk within the next few years that we could confront an adversary—either terrorists or a rogue state-who possesses them.

(U) On the nuclear side, we are concerned about the possibility of significant nuclear technology transfers going undetected. This reinforces our need to more closely examine emerging nuclear programs for sudden leaps in capability. Factors working against us include the difficulty of monitoring and controlling technology transfers, the emergence of new suppliers to covert nuclear weapons programs, and the possibility of illicitly acquiring fissile material. All

of these can shorten timelines and increase the chances of proliferation surprise.

(U) On the missile side, the proliferation of ICBM and cruise missile designs and technology has raised the threat to the US from WMD delivery systems to a critical threshold. As outlined in our recent National Intelligence Estimate on the subject, most Intelligence Community agencies project that by 2015 the US most likely will face ICBM threats from North Korea and Iran, and possibly from Iraq. This is in addition to the longstanding missile forces of Russia and China. Short- and medium-range ballistic missiles pose a significant threat now.

• Several countries of concern are also increasingly interested in acquiring a land-attack cruise missile (LACM) capability. By the end of the decade, LACMs could pose a serious threat to not only our deployed forces, but possibly even the US mainland.

(U) Russian entities continue to provide other countries with technology and expertise applicable to CW, BW, nuclear, and ballistic and cruise missile projects. Russia appears to be the first choice of proliferant states seeking the most advanced technology and training. These sales are a major source of funds for Russian commercial and defense industries and military R&D.

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