Op-ed Commentary: Nicholas Clement
Jun. 21 – Iran has commonly been labeled as a rogue state by Western powers with the country’s pursuit of nuclear power being deemed a threat to global society, and something that must be addressed immediately. While Tehran insists that the development of its nuclear capacity is only for peaceful purposes, the U.S. and its allies fear that Iran is developing nuclear weaponry. Thus the United States and the European Union have drawn up sanctions (currently scheduled to come into full force at the end of this month) that aim to pressure Iran into curtailing its nuclear development. Under the U.S. sanctions, foreign financial institutions that are doing business with Iran’s central bank to purchase energy will be barred from U.S. financial markets. The EU has similarly drafted sanctions that will ban shipments of Iranian crude.
By restricting Iran’s main source of income, the United States and the European Union hope to disrupt Iran’s nuclear development and force it to the negotiation table.
“By reducing Iran’s oil sales, we are sending a decisive message to Iran’s leaders: until they take concrete actions to satisfy the concerns of the international community, they will continue to face increasing isolation and pressure,” U.S. Secretary of State Hillary Clinton said in a statement.
This strategy has reportedly already seen results. Many nations have quickly reduced Iranian crude imports to avoid the strict sanctions, which have seen a reduction in Iranian oil exports from 2.5 million barrels per day in 2011, to 1.2 to 1.8 million barrels per day.
There have been, however, two large obstacles that have disrupted Western efforts to reprimand Iran: China and India. They are not only the largest importers of Iranian energy, but also oppose unilateral sanctions. If China and India continue to provide Iran steady revenue through their purchase of energy, they will effectively be acting to prop up the regime, and fund its nuclear program.
China and Iran have had a long and prosperous relationship. Two countries are strategically compatible due to their complimentary economies: China is the largest hydrocarbon importer in the world, while Iran has the second largest natural gas reserves, and the fourth largest proven oil reserves. Such compatibility is seen in their economic relationship, where Iran is China’s third largest supplier of oil, and China is Iran’s most important economic partner. In the past, China has received over 20 percent of Iran’s total oil exports, with it being estimated that Iran has provided roughly 12 percent of China’s total annual foreign crude. In energy terms, this makes Iran as significant for China as Saudi Arabia is for the United States. Furthermore, sources reveal that China has invested US$40-US$100 billion into Iran’s energy and transport sectors, dwarfing the total of all other countries that interact with Iran.
Together with China’s historical animosity towards international intervention and unilateral sanctions, Western moves to strangle Iranian oil exports are very frustrating for China. While China has condemned any Iranian efforts to develop nuclear weaponry, Beijing has continued to emphasize that its economic relations with Iran are separate from any diplomatic concerns.
“China imports oil from Iran through normal channels, which are transparent and do not violate U.N. resolutions and do not hurt other countries’ interests,” Chinese Foreign Ministry Spokesman Liu Weimin stated last week.
With seven new nations recently exempted from the U.S. sanctions (including India), China is now the remaining major importer of Iranian oil. Whether the U.S. will follow through with sanctions on China is yet to be seen, but there are increasing signs that China is beginning to divorce itself from Iran. Throughout the beginning of 2012, Chinese importation of Iranian crude dropped more than 30 percent, with importation of oil from Saudi Arabia, Russia and Angola rising.
However, attributing this to Western pressure may not be an entirely accurate assumption. Chinese imports of Iranian oil were reduced largely due to a contract dispute between Sinopec and the National Iranian Oil Co., and not explicitly because of Western sanctions. It is unsurprising that since Sinopec signed a new agreement with the National Iranian Oil Co. at the end of March that China’s crude imports from Iran began to rise again. It is also important to note that global oil demand has been faltering, with global supply now exceeding demand by about 1.5 million barrels per day. China’s implied oil demand in April dropped to a six-month low, with its first yearly decline in at least three years.
Therefore, as an anonymous Chinese oil trader has said, “the timing is good to allow Chinese oil firms to cope with the EU sanctions.”
China has thus been placed between U.S. economic pressure and its interests within Iran. China’s relationship with the United States is its most important bilateral relationship, and it does not want to allow Iran to become a major source of tension. However, China is always the opportunistic dragon. By keeping the United States focused on a nuclear Iran, it is given more room to pursue its interests in the Asia Pacific, and delay the U.S. Asian pivot. By condemning any attempt by Iran to develop nuclear weaponry, yet supplying it with a steady source of income by purchasing its oil, China is able to provide just enough support to Iran to keep the United States strategically and logistically tied down in the region.
India’s situation is comparable to that of China, rejecting the threat of sanctions and vowing that it will follow its own national interests. While it is important that India maintains good relations with the United States, India partially relies on Iran to fulfill its energy demands. Similar to China, India has enjoyed cordial bilateral relations with Iran despite numerous disruptions in their domestic political environment. Trade relations have historically been strong, with bilateral trade reaching US$13.7 billion in 2010-2011.
India has not been afraid to promote energy security as the key reason for why it has continued importing Iranian oil – the country has been dependent on Iran for 10-12 percent of its oil imports. India’s Oil Minister Jaipal Reddy has requested that the U.S. and EU take into account India’s energy needs when determining the nature of their sanctions.
“We continue to receive representations from the U.S. and other countries. With respect to their sentiments, we have requested to appreciate our needs,” he said.
In the face of U.S. sanctions, India has developed ways through which it is able to continue importing oil from Iran. For example, Iran has accepted payment for 45 percent of oil sales to India in rupees, much of which is then used to buy Indian exports, including rice, sugar and soybeans.
The fact remains, however, that Indian importation of Iranian oil has dramatically decreased in the past few months. India’s Iranian crude imports were about 35 percent less in April than during the previous month, and 38 percent less in May compared to a year ago. Reports speculate that the Indian government has privately asked its oil refiners to cut imports. As a result of this, last week India was exempted from U.S. sanctions. So why then is India publicly opposed to unilateral sanctions against Iran, yet privately complying with their purpose?
Indian politicians do not want to appear to be doing the bidding of the United States, as it would be domestically disastrous and contradicts India’s tendency to oppose unilateral sanctions. While Iran has been a main supplier of crude for the country, India certainly has other sources of energy it can access. With the global supply of oil currently exceeding demand, especially from Saudi suppliers, India has no overwhelming need to disadvantage itself by trying to bypass complicated sanctions. Thus India has stated that it is simply following its self-interest and is therefore able to remove itself from the current sticky-state of Iranian oil politics, while securing its own energy security.
“It is natural for us to try and diversify our imports of oil and gas to meet the objective of energy security,” said External Affairs Minister S.M. Krishna.
Ultimately, what can be observed is a geopolitical quagmire of intersecting interests. China and India do not want to be seen buckling to U.S. pressure, yet their relations with Iran are increasingly strained by economic sanctions. It currently seems that India has decided to slowly detach itself from reliance on Iranian crude, and remove itself from a potentially sticky situation. The diminishment of U.S.-Indo relations and the complication with having to subvert international sanctions are just too high a price to pay when there are ready sources of energy available elsewhere. On the other hand, China has been much more resistant. While propping up the Iranian regime through its energy purchases, yet hedging against future complications by increasingly diversifying its oil imports, China is able to ensure that the United States finds further impediments to a total re-alignment towards the Asia Pacific. The next phase in this situation will likely be revealed when U.S. and EU sanctions come into full force at the end of this month.
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Great article, I thought you made some really great connections of the rationals of all the respective agents involved.
Thanks Will, your comments noted and appreciated by my colleague Nicholas Clement, who wrote it. – Cheers Chris
Yes, thanks for the positive comments Will!