China Renders Iran Sanctions Toothless

By Andres Cala, ET European correspondent
Posted on Apr. 21, 2010

The reactor building of Iran's Bushehr Nuclear Power Plant: AP

The reactor building of Iran’s Bushehr Nuclear Power Plant: AP

Western diplomats have failed to convince China to support the “crippling” sanctions on Iran the US wanted, or even ones “with teeth,” as demanded by Israel.

Washington has held several meetings this month with veto-holding members in the UN Security Council to gain their support for a draft proposal on the third batch of sanctions against Tehran over its defiant uranium-enrichment program.

The new proposed measures would target Iran’s elite Revolutionary Guards, increase pressure on the country’s financial and shipping sectors, impose a full embargo on arms and equipment that could be used in its nuclear program, and ban new investments in the oil and gas sector.

And that is where Beijing drew the line: energy. China has long objected the kind of sanctions the West wants, but vague comments from top officials in Beijing suggested more willingness to join world powers in pressuring Iran ahead of the nuclear summit hosted by President Barack Obama.

While China signaled it will support a new set of sanctions, it is clear negotiation could take weeks, perhaps months. More importantly, the new measures are almost surely going to be a diluted version of Washington’s proposal.

China’s change of heart follows Tehran’s announcement that it has successfully enriched uranium up to 20 percent and has installed new centrifuges 10 times more powerful than earlier versions. Both moves signal significant advances in Iran’s nuclear program. The White House appears to have already budged to China’s position, at least provisionally. Secretary of Defense Robert Gates said in a statement that the exact content of the resolution was less important than the fact that it would further isolate Iran from the rest of the world, signaling the U.S. was willing to accept the toothless resolution China wants.

Gates also said the new measures would serve as a “launching pad for more specific sanctions by individual countries and cooperating nations” such as the European Union, indicating Washington is going to seek increased pressure, but outside the UN Security Council.

China is also backing its diplomatic stance with action. Different reports suggest China has shipped 850,000 barrels of gasoline to Iran in the past few days, even as China’s President Hu Jintao was meeting with Obama, according to Washington-based intelligence firm Stratfor.

The shipments signal China’s willingness to defy Western pressure, not so much over the volumes shipped, but because it breaks the string of successes Washington has had in pressuring some of Iran’s biggest gasoline suppliers to suspend their shipments, even before a new set of sanctions. Those include Russia’s Lukoil, Shell, Glencore, Vitol, Trafigura, Daimler, BP, Reliance, and Malaysia’s Petronas. (French Total has refused to stop shipments until it is required by law.)

Given China’s opposition in the Security Council, Washington’s strategy now is to pressure companies unilaterally, with the support of Europe and other allies. But China will not budge, at least for now.

In practical terms, China’s decision is more symbolic. Iran has said it could increase indigenous production within a year to meet any shortfall in gasoline imports, which currently amount to about 107,000 barrels a day, or 26 percent of its demand.

The recently released Iranian gasoline import and demand data mirrors the one available in the Energy Information Administration, putting average gasoline imports in 2009 at 130,000 b/d, or 32.5 percent of total demand, in contrast to the commonly quoted 40 percent shortfall. The difference is likely attributable to Iran’s increased gasoline imports last year that it stashed away in case of sanctions. Together with increased gasoline production, achieved in part with the help of Chinese firms, it illustrates how Iran has long been gearing to confront Western pressure.

In fact, refinery expansion currently underway should make Iran a gasoline exporter by 2013.

China is not alone in the Security Council. Russia, Brazil, Turkey, and Lebanon have already said they don’t support Washington’s resolution. India, which is not a Security Council member, but like China is a close business partner, has also resisted Obama’s pressure, a position publically supported by most Iran’s Gulf neighbors, including Saudi Arabia.

The difference is that no country has waged as much in Iran as China, not even Russia or Turkey, which are both major investors and are in talks for another series of deals. China has signed deals worth around $8.7 billion since sanctions were set in place and is negotiating investments in several projects worth at least $22.1 billion, according to a Reuters summary of foreign investments in Iran.

The relationship is mutually beneficial. China needs to secure future oil and gas supplies and its proximity to Iran and even its heavy oil refinery specifications make it a top choice. China also needs a market for its surplus refinery output, especially as global demand flounders.

For Tehran, Chinese ties to its energy interests translate into financial muscle to further develop its industry and to a geopolitical shield in the Security Council.

Western diplomatic pressure will also surely run into further opposition, especially from Russia. Moscow has signed several deals with Tehran in its arms and nuclear industry and it’s very unlikely it will undermine its own economic or geopolitical interests. Both Russia and China strongly oppose Iran becoming a nuclear-armed state, but neither is worried that that will happen any time soon. Moscow recently said it will bring Iran’s first nuclear power plant on stream in August. The Kremlin is also negotiating major arms deals, including for advanced anti-aircraft systems. It is also happy to see the US bogged down with Iran, rather than meddle in its own sphere of influence.

The standoff with Tehran began in 2002 when its secret nuclear program was revealed. After years of negotiations, the Security Council imposed the first set of sanctions in December 2006 targeting transfer of nuclear and ballistic missile technology. Within months, a second set of sanctions was imposed over Iran’s refusal to halt enrichment. Ever since, Western companies slowly started winding down their presence in Iran, especially energy related ones, including Shell, BP, StatoilHydro, to name a few. Most American companies pulled out of Iran a long time ago, with perhaps the notable exception of Halliburton, the old company of former Vice President Dick Cheney, which waited until 2007.

Asian companies moved in to replace European interests that were put on hold or scrapped, including Malaysian, South Korean, and Indian companies. But Chinese state-owned companies have been the most aggressive by far. Through upstream or downstream investments in the country, as contractors or as commodity suppliers, Beijing capitalized on the vacuum left by the West.


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