BACKGROUND: In the aftermath of the Soviet Union\'s collapse, Iran confronted the appearance of new states on its northern borders with concern. Iran launched unprecedented diplomatic activity to protect its national security interests and to prevent undesirable geopolitical developments. Specifically, Iran initiated the signing of a plethora of bilateral and multilateral agreements to induce cooperation between the Caspian littoral states. Following the signing of the \"Contract of the Century\" with Western oil giants in Baku in September 1994, and Azerbaijan\'s rejection under U.S. pressure to award Iran the promised five percent of this contract, Tehran sharply changed its Caspian policy. Although Iran subsequently was granted shares in two other Azerbaijani oil development contracts as compensation, the incident induced animosity in Iran toward Azerbaijan, which continues to date. After this event, the Western presence in terms of investment, technology and political activity in the Caspian Sea region became the target of severe Iranian criticism. Tehran and its adepts in the West began to conduct an aggressive campaign arguing the Caspian lacked significant oil reserves, stressing the \"ineffectiveness\" of signed contracts, and the \"unsuitability\" of the selected routes for oil pipelines. The Iranian Minister of Foreign Affairs sent a letter to the UN Secretary General complaining of Azerbaijan\'s economic behavior in the Caspian offshore. Tehran allied with Moscow\'s attempts to create obstacles to Western companies\' activities in the Caspian region. In recent years, Tehran also adopted a staunch position in negotiations regarding the legal status of the Caspian Sea. After September 1994, Iran abandoned its support for the Azerbaijani national sector proposal and aligned with the Russian-proposed condominium principle. Like Moscow, Tehran began to insist that the legal status of the Caspian Sea be based on the agreements made between Russia/USSR and Iran in 1921 and 1940. Iran ignored the essential fact that these agreements did not include a provision on mineral resources. Furthermore, it disregarded that there was an Astara - Hassangulu line between these two countries during the Soviet period. The Soviet experience in the sectoral division of the Caspian was overlooked as well. However, lately, Tehran has shifted its position in the light of Russian agreements (first with Kazakhstan and then with Azerbaijan) on the division of the Caspian seabed based on the median line principle. Rather than the condominium principle, Iran began to advocate the principle of equal division, in order to attain 20 percent instead of the 13-14 percent it would receive with the median line principle. Meanwhile, aware of Russia\'s uncontested naval power in the Caspian, Iran began supporting the proposal on the demilitarization of the Caspian, thus further distancing itself from Russia on Caspian issues. Normally considered strategic allies, the relationship between Iran and Russia ran into trouble as the Caspian was concerned. IMPLICATIONS: In order to derail Azerbaijan\'s oil strategy, Tehran found it necessary to use force in June 2001. Iranian vessels forced an Azerbaijani ship researching the seismologic situation in prospective oil fields to abandon their efforts in an area considered by Azerbaijan to be within its national sector. A few days following the incident, Iranian jets repeatedly violated Azerbaijan\'s airspace. In response, Turkish military jets made a show flight over Baku, and the U.S. State Department issued a statement condemning Tehran\'s provocative actions. While Iran\'s aggression ceased as a result of the Turkish and American reaction, research activities in the Alov-Sharq oilfields have been suspended until a final determination of the legal status of the Caspian Sea is reached. After many unsuccessful attempts to reach a common position on the legal status of the Caspian Sea at negotiations including all five littoral states, the direction of the negotiations has shifted in past months toward bilateral talks between Azerbaijan and Iran. Until now, there have been 9 rounds of talks between ad hoc groups of the two countries. Both sides have stated that there have been a rapprochement over the issue. A hope was even expressed by Azerbaijani officials that this development could result in the signing of an agreement during the Iranian president\'s visit to Baku in March. In the meantime, the dead-end in the Tehran\'s Caspian policy caused sharp criticism within Iran. Dissatisfaction with the Iranian foreign ministry\'s policy toward the Caspian Sea is rising. In addition to the MFA committee on the Caspian Sea, another one was established in the Iranian Parliament. Deputies\' criticism of the MFA in the last few months increased. For example, Ms. Elaheh Koulaie, citing the development of a new reality in the Caspian an noting especially the change of Russia\'s position, argued that the current policy \"does not meet the historic interests of Iran.\" Another member of the national security and foreign policy commission of the parliament, Ali Tajernia, called the performance of Iran\'s foreign ministry on the Caspian Sea legal regime \"defendable.\" The most rigorous criticism, however, came from the former Deputy Minister of Foreign Affairs Abbas Maleki, who alleged that \"The Foreign Ministry and specifically Kamal Kharrazi do not even fully comprehend the Caspian issue.\" The latter was forced repeatedly and publicly to respond to these and other condemnations, explaining that should the Caspian divide, Iran would not relinquish the 20% it has demanded. The discussions are going on also outside the Majlis and government. As the Iranian academic Shahla Bageri noted, the MFA must pursue the issue through careful negotiations. Yunes Moulavi, Head of the Department of International Relations at Tehran University, has been critical, stating that the path pursued by Iran\'s officials has caused the country to forfeit its chance at a 20% share. CONCLUSION: Iran has to make a decision on the Caspian Sea status. Presumably, in the forthcoming weeks, the final Iranian decision will become visible. Iran simply has to make a choice between realistic and mulish policies. Iran\'s position on the legal status of the Caspian Sea has resulted in strained relationships with neighboring countries and negatively affected oil business in the Caspian Sea region. However, Iran ultimately cannot counter the strong geo-economic and geopolitical processes going on in the Caspian. If Iran follows the example of Putin\'s Russia, it will not lose what can still be saved. Therefore, it is in Iran\'s best interest to face this reality with compromise rather than force. AUTHOR BIO: Dr. Nasib Nassibli is presently Fulbright Visiting Scholar at the Central Asia-Caucasus Institute of Johns Hopkins University-SAIS. His permanent position is President of the Foundation of Azerbaijani Studies, and he is also Professor and Chair, DIRPS, Khazar University, Baku.