The following is a transcribed excerpt from 'Fox News Sunday,' May 30, 2004. 

CHRIS WALLACE, FOX NEWS: With so much happening on the political and military fronts in Iraq this week, we turn now to Senator Richard Lugar, chairman of the Foreign Relations Committee and one of the leading Republicans in Congress when it comes to foreign policy. Senator Lugar joins us from Indianapolis.

And, Senator, welcome. Good to have you with us today.


WALLACE: Let's start, if we can, not with Iraq, but with the terrorist attack in Saudi Arabia. What do you know about the situation there? And what is the significance if terrorists start targeting foreign workers?

LUGAR: Well, the terrorists started targeting last November with a very serious attack. This is the second apparently of that kind, this one on Khobar, where a large complex involving foreign workers, many Americans, is located. Apparently attributed to Al Qaida people or those associated with them who have an intent of breaking up the Saudi oil relationship with the United States.

And this is serious for the Saudis. Prince Bandar has indicated very severe measures. Last November the Saudis indicated it was not going to be business as usual, that they were taking a strong look at the Al Qaida, perhaps in ways they had not before.

But fundamentally, the problem still is the Saudi government that funds the madrassa schools. Now, out of these schools come young Saudis who join these militant organizations and who have very little regard for the American-Saudi relationship.

WALLACE: How devastating could it be to the Saudi economy if foreign workers become frightened, become threatened by these attacks and pull out?

LUGAR: Well, 6 million ex-patriots essentially run that industry. This is an oil industry that is based upon foreign workers at all levels — executive down to the most menial task. So as a result, when there are calls by some governments — and already some are sounding the alarm for their nationalists to get out of Saudi Arabia — this could be very severe.

But it's not just the Saudis. We have to remember, even while we were preoccupied with Iraq and various other issues, that the oil issue — that is, the supply to the rest of the world, and therefore fundamentally the price of oil — really governs the potential prosperity we have, and likewise, recovery in Western Europe and in Asia.

WALLACE: Let's move on, if we can, sir, to Iraq. Iyad Allawi was chosen this week as the interim prime minister when the Iraqi government takes power on June 30th. What do you know about Allawi, and what do you think of him?

LUGAR: Well, Allawi was an ex-patriot, but be suffered grievously under Saddam. Reports in the news have indicated that he has cooperated with our CIA. Some see this as a good attribute, some a detriment — that is, that he might be too closely associated with the United States.

He was on, apparently, a short list of a few candidates that Ambassador Brahimi of the U.N. was considering. And his selection came to some, even in our government, as a surprise.

But nevertheless, a very experienced Iraqi politician. And the question will be whether Iraqis see him likewise, as an Iraqi, as a person who is prepared really to accept sovereignty and use it.

WALLACE: Senator, you made quite a critical speech about Bush foreign policy at a graduation ceremony last weekend. Let's take a look at a clip from it.


LUGAR: We are worried about terrorism, but the evolution of national security policy has not kept up with threat. We've relied heavily on military options and unilateral approaches that's weakened our alliances.


WALLACE: Since then, the president on Monday laid out his plan for Iraq, and there has been some good news this week from Iraq on both the political and military front.

Has any of that served to ease your concern, sir?

LUGAR: Well, of course, because the president has given an explicit five-point plan and promised to fill in even more details and nuances as the time goes on.

But the criticism I offered was one that really stretches back over the Clinton administration, as well as the Bush administration. From the time that the Soviet Union fell, we have felt not only that we should downsize our own forces, which we did for a while and then reversed that, but likewise, our diplomatic resources.

So as a result, we are not prepared. Even now in this particular year in which we have war, we are still downgrading our State Deparment resources — that is, the State Department asks for more money; the Congress cuts it.

We are in a situation where we have to understand that our resources are finite. And even though we are the most powerful, ultimately we will need other nations, many other nations — their money, their resources, their people, their goodwill. So that's the point I'm making.

I think the president has scored some points this week with a good speech, with one that clearly says sovereignty passes to the Iraqis, and others have reiterated it.

That means that the Iraqis have will to make a very tough choice, and that is, do they want our armed forces to provide security, to give them time to build their armed forces, to give them time for reconstruction of the country, to give time for other nations, if they are so inclined — and NATO is about to meet in Istanbul — to come in to help?

The answers to that are going to require very careful diplomacy. And diplomacy will be of the essence here so that Iraqis feel comfortable in taking sovereignty and also taking on the security which the United States armed forces and our allies can provide.

WALLACE: I want to pick up on precisely that point, Senator, because one of the things you said, one of the main messages of your speech was that the U.S. needs to tend better to its alliances.

The Americans and the British went to the U.N. this week with a resolution, and there are some sticking points precisely on the security issue. So let me ask you about them.

Some countries say that the Iraqi government should have control over at least Iraqi forces and some say even over U.S. military operations. What do you think of that?

LUGAR: Well, essentially, that is the kind of nuance that is going to have to be worked out, pragmatically. Now, it is being worked out with some applauding and some criticizing. I was surprised a couple weeks ago when, in Fallujah, suddenly an Iraqi general shows up with former Iraqi armed forces, and they are providing security. And the Marines are in the outskirts.

And I had a call from Jerry Bremer, our commander over there, and I asked him, "Who gave the order? How did this come about?" And he said, well, essentially, we consulted with imams — that is, clergymen — an Iraqi face was required, we're trying it out for size. It is not necessarily a model. But then the first we saw this week in Najaf and the Shiite part of the country that, essentially, a similar type of truce is being applied with the young Sadr.

We are working our way carefully with Iraqis. Now, some say, well, this is simply going to create different deals with Sunnis, with Shiites, perhaps with Kurds, to keep everybody happy, to get Iraqis involved, but that is probably the situation we are in.

We are not an overwhelming force. We have not been accepted by the Iraqis.

LUGAR: The acceptance is coming, through these careful negotiations with specific people who are now providing security, knowing that America provides a very large protective shield for the whole country and for the economy.

WALLACE: Well, Senator, I'd like to get your opinion. Do you see those arrangements that have been worked out with the Sunnis in Fallujah and with Muqtada al-Sadr — supposedly his army is going to lay down its arms, but they haven't agreed to disband — do you see those as reasonable compromises? Or do you see those as leaving too much power in the hands of various militias?

LUGAR: Well, clearly, a lot of power is left there, but we're in process of trying to transfer power. We're trying to get Iraqis to take on their own security, to give it an Iraqi face.

Now, we're not going to have it all ways. People who argue with this at the same time would indicate that the United States ought to be setting times for withdrawal, we ought to be sending ultimatums of these sort.

This is not the way that success is going to be found. It may be more limited success, but I believe — and I think the president has tried to outline — that a stable Iraq, moving toward elections, moving toward democracy, at least of a limited variety, trying out for size how you get a religious regime and a secular and a democratic regime together, how you keep Kurds together, how you keep Iraq together without civil war — this is very tough-going, and it is going to require something other than perhaps the more extravagant ideas of a shining city on the hill, a beacon of hope for everybody demanding freedom.

There's going to be some freedom here, a lot more than anybody ever thought, I think, before, under Saddam, but at the same time a lot of compromises.

WALLACE: Senator Lugar, we're going to have to leave it there. We want to thank you so much for joining us this holiday weekend.

LUGAR: Thank you, Chris.