Iran will test U.S.-China ties

by Michael Richardson

SINGAPORE — Relations between the United States and China — already under serious strain over trade and economic issues, human rights and, most recently, the Yellow Sea and the South China Sea — are about to be tested anew over Iran’s controversial nuclear program.

Armed with what it says are extended international and national sanctions to squeeze Iran’s banking, foreign trade, energy, and air and sea transport sectors, the U.S. is sending senior officials to Asia, the Middle East and South America this month to try to rally more government and corporate support.

The appeal is backed by a threat: costly penalties for companies, whether state-owned or private, that defy the sanctions. The penalties could include being banned from operations in the U.S., barred from access to the U.S. financial system and loss of U.S. government contracts.

The United Nations Security Council imposed a fourth set of limited sanctions on Iran in June for failing to halt sensitive uranium enrichment activity. Tehran says the enrichment is only for peaceful purposes. But without full U.N. checks, it could produce fissile material for nuclear weapons.

Since then the U.S., the European Union, Canada, Australia and Japan have announced their own additional sanctions on Iran or said they plan to impose them soon. Although they assert that these measures complement the recent U.N. steps, the U.S. and EU restrictions in particular appear to go well beyond them and two of the five permanent members of the Security Council, China and Russia, have objected. So, too, has India. South Korea also appears reluctant to fall in line over Iran.

The U.S. and EU sanctions include bans on dealing with Iranian banks and insurance companies as well as actions to prevent investment in Iran’s potentially vast oil and gas sector. It is here that China finds itself in the firing line, torn between its energy supply needs and growing international pressure to help stop Iran from destabilizing the Middle East and undermining efforts to prevent the further spread of nuclear weapons.

As many Western companies and some Asian firms that once did business with Iran cease to do so as sanctions bite, China’s role in Iran’s trade and investment is coming under the spotlight.

“We want China to be a responsible stakeholder in the international system,” said Robert Einhorn, the U.S. State Department’s special adviser for nonproliferation and arms control, on a visit to South Korea recently. “That means cooperating with the U.N. Security Council resolutions and it means not taking advantage of the responsible self-restraint of other countries.”

China is the world’s second biggest energy consumer, after the U.S., and has to import at least half the oil it needs to keep its road transport, planes and ships running, and its economy and foreign trade growing. Iran is the fourth-largest producer of crude oil and China’s number three supplier, after Saudi Arabia and Angola.

Beijing has long insisted that energy and general trade with Iran should not be sanctioned. In 2009, China became Iran’s top trading partner, with bilateral trade worth just over $21 billion, about double the level five years earlier. Much of this trade is energy-related.

Iran looms large as a future energy supplier to China. It has the world’s third biggest oil reserves and the second largest natural gas reserves. But it needs investment and technology to develop them. China has promised around $40 billion to develop Iranian oil and gas fields, and upgrade refineries that produce gasoline, diesel, jet fuel and other oil-based products.

Yet this is a key area that the U.S. and its allies say they will target with sanctions. The energy sector is seen as the Achilles’ heel of the Iranian economy, providing an opening to put real pressure on the regime in Tehran to resume negotiations on an internationally acceptable nuclear deal.

The Iranian government gets at least 50 percent of its revenue from the energy sector. Iran’s oil sales account for 80 percent of the country’s export earnings and nearly 25 percent of its gross domestic product. Yet cheap gasoline subsidies and mismanagement mean that Iran must import about 30 percent of its gasoline.

However, although Chinese companies — including China National Petroleum Company, Sinopec, and Zhuhai Zhenrong Corporation, all state-owned — are prominent in supplying fuel to Iran and investing in its ramshackle energy sector, they are not the only companies doing so.

The Foundation for Defense of Democracies in Washington recently published a list of 18 firms from China and 13 other countries that it said had “substantial operations” in Iran’s energy supply and development. Apart from China, the listed companies were from seven countries that are allies of the U.S. — Australia, Denmark, Germany, Japan, the Netherlands, South Korea and Turkey — as well as India, Malaysia, Norway, Russia, Switzerland and Venezuela.

The Japanese entity on the foundation’s list is the oil exploration and production firm, Inpex Corporation, which has a 10 percent stake in Iran’s giant Azadegan oil field. The foundation said its list was “far from exhaustive.”

Earlier this year, the U.S. Government Accountability Office, an investigative arm of Congress, published a longer list of 41 non-U.S. companies from an even wider range of countries that were reported to be active in the Iranian oil, gas or petrochemical sectors. At least four of the companies subsequently notified the GAO that they were pulling out of Iran to avoid sanctions or protect their reputations.

Still, extended sanctions are drawing the U.S. deeper into murky waters. If China feels it is singled out for unfair treatment, Washington’s hopes for a firmer partnership with Beijing to prevent Iran from further developing its nuclear and ballistic missile programs are unlikely to be realized.

Michael Richardson is a visiting senior research fellow at the Institute of South East Asian Studies in Singapore.