Features | Security | East Asia

Will Asia Nix Iran Sanctions?

The US is keen for Asia to follow tougher EU sanctions over Iran’s nuclear programme. Expect China to drive a hard bargain.

Last week, two senior US officials visited South Korea and Japan to rally support for applying additional sanctions against Iran for Tehran’s continuing defiance of UN Security Council resolutions over its nuclear programme.

In Seoul and Tokyo, Robert Einhorn, the US State Department's special adviser for non-proliferation and arms control, and Deputy Assistant Secretary of the Treasury for Terrorist Financing and Financial Crimes Daniel Glaser lobbied their hosts to strengthen their enforcement of existing multinational sanctions and to adopt additional measures that exceed the limited Security Council measures.

This likely won’t be the last time such a joint team is in Asia—although European allies appear to be on board with the additional measures, the United States is concerned that some Asian states might be tempted to free ride on the unilateral economic sanctions they’ve adopted in recent months.

The US Government Accountability Office has already identified Malaysia, Singapore and the United Arab Emirates as the main third-party countries through which US military and dual-use goods (civilian goods with potential military applications) reach Iran. More importantly, however, Japan, South Korea and China in particular have substantial economic dealings with Iran—all are major producers of industrial machinery and machine-making tools that Iran needs to develop its energy industry.

The problem is that some of these goods also have military uses, including in the production of nuclear weapons and ballistic missiles. The US hopes that by decreasing such ties, further pressure will be placed on Tehran to make concessions on the nuclear issue. Yet, Chinese and other Asian business managers are eager to exploit Iran’s isolation from international markets for their own economic benefit.

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Before leaving Washington, Einhorn told a hearing of the US House Oversight and Government Reform Committee that he saw the sanctions recently enacted by the EU as setting ‘some very high standards for sanctions,’ and that he ‘wanted to see if Japan and South Korea could come up to that mark.’

But Asian governments have a quite different set of calculations than European nations. After all, unlike NATO countries, whose governments can identify a plausible military threat from an Iran that possessed nuclear warheads and long-range ballistic missiles, Asian countries consider an attack from Iran a remote contingency and are more concerned with the nuclear rogue in their back garden, namely North Korea.

This leaves Asian governments with an awkward calculation to make—how much can they afford to antagonize US policymakers and endanger their economic interests in the United States if Washington sanctions their firms for engaging in commerce with Iran. Connected to this is the fear that ties with Iran will endanger Asian firms’ reputations, prove unprofitable without access to Western technology and financing and entangle their foreign operations in the extensive network of secondary sanctions that the Bush and now Obama administrations have been building to entrap entities with ties to Iran’s illicit nuclear activities.

However, such concerns don’t appear to have tamped down the enthusiasm of Chinese firms to take the place of the departing Western companies. In late July, Iran’s deputy oil minister, Hossein Noghrekar, said that Chinese companies had already invested $40 billion in Iran’s energy sector and that Chinese and Iranian representatives were discussing the construction of seven refineries in Iran, which would enormously expand Iran’s capacity to refine its oil into gasoline. The Chinese delegation, meanwhile, refused to support the fourth Security Council sanctions resolution until wording that prohibited foreign investment in Iran's energy sector was removed from the draft text. 

In addition, Chinese government representatives have criticized the enactment of the latest US and EU sanctions as excessively harsh and counterproductive and have instead endorsed holding additional negotiations and dialogue aimed at resolving the Iranian nuclear issue without further sanctions or the use of force. Such moves have prompted US lawmakers including Rep. Howard L. Berman, chairman of the House Foreign Affairs Committee and a leading advocate of stringent sanctions, to warn over possible ‘backfilling’ of withdrawing Western businesses.

This point has not been lost on opponents of sanctions in Asia (and elsewhere) who have argued that the US measures simply enhance the international competitiveness of foreign companies whose governments decline to adopt or enforce sanctions. This was a point taken up by the South Koreans, who Einhorn said had relayed just such a message to him. These concerns are compounded by the fact that Chinese officials have proved reluctant even to comply with the UN sanctions on North Korea, which China voted for in the Security Council, by sharing data about China-North Korean business contacts.

In addition to Chinese investors in Iran simply ‘backfilling’ for the departing Western firms, US officials also worry that Chinese dealers will circumvent trade sanctions by expanding their use of intermediaries to sell gasoline and other sanctioned products to Iran. Figures for the volume of trade between Iran and China vary depending on whether they include the enormous number of Chinese goods that enter Iran via the United Arab Emirates and other third parties. But by some estimates, the total level of trade had a value of around $36.5 billion in 2009, exceeding the volume of EU-Iran trade that year. Chinese companies have also invested large sums in the Iranian economy, with more than 100 Chinese firms now operating in Iran. 

But the volume of Chinese-Iranian commerce isn’t the only factor discouraging Chinese adherence to unilateral US and EU sanctions. The fact is that many Chinese firms with large economic stakes in Iran just don’t have many (if any) business ties with the United States or the European Union and so aren’t intimidated by the prospect of losing access to Western markets.

US officials have responded to the challenge by trying to link China’s non-proliferation policies to Beijing’s concern for its reputation for meeting its international obligations. At a Seoul news conference, for example, Einhorn told reporters that, ‘We want China to be a responsible stakeholder in the international system and that means co-operating with UN Security Council resolutions.’ Einhorn added that meeting such obligations above all ‘means not backfilling, not taking advantage of the responsible self-restraint of other countries’ (in its defence, China’s Foreign Ministry spokeswoman said her country’s trade with Iran was just normal commercial relations that didn’t harm the interests of other countries or the international community).

The US hopes that the sanctions will shift the cost-benefit analysis of Chinese investors, making them worry about their ability to implement their projects without access to sophisticated Western technology or repatriate the profits sufficiently to discourage many of them from engaging in extensive commerce with Iran.

If this approach is to work, an early indicator could well be the enormous South Pars gas field located beneath the Persian Gulf. The increasing range of sanctions, negative publicity and frustrations at dealing with the Iranian bureaucracy have recently prompted Royal Dutch Shell, Repsol, OMV, Total and other major Western energy firms to end their projects there. The China National Petroleum Corporation remains the largest foreign investor, but it’s unclear whether CNPC has the technology and expertise to extract the natural gas and ideally convert it into liquefied natural gas. 

And Washington isn’t only appealing to Chinese commercial considerations. China’s leaders presumably wish to avoid a major confrontation with Washington over the Iran issue and have shied from appearing too close to its controversial president, Mahmoud Ahmadinejad (officials declined to meet him when he visited the Shanghai Expo). 

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South Korea, meanwhile, has also come under pressure to curtail its economic dealings with Iran, which amounted to approximately $10 billion in 2009. Iran provided South Korea with 8.7 percent of its crude oil last year, making Iran the country’s fourth-largest source of imported oil.

Retaining access to these energy imports is an important consideration for a country almost totally dependent on foreign energy sources as well as nuclear power, while Iranians purchase many South Korean industrial goods in return. Two dozen business conglomerates as well as about 2000 small and mid-sized South Korean companies operate in Iran, and South Korean political and business leaders see long-term business opportunities in Iran’s petrochemical, construction and plant export industries. They worry that if they don’t exploit these sectors, the Chinese will.

The United States hopes to coax Seoul into abandoning its longstanding approach on the Iranian nuclear issues of only doing what’s required of it. But this won’t be easy with South Korean businesses already suffering losses from the sanctions—an August 8 survey found that over half of the South Korean small and medium-sized companies engaged in business in Iran reported suffering financial losses following the adoption of the latest US economic sanctions. Almost a third of the small companies had stopped shipping goods to Iran entirely due to an inability to gain financial credit, collect export payments from Iran, or other reasons. 

Kim Ik-ju, director of the South Korean Finance Ministry's International Finance Bureau, said his August 3 meeting with Einhorn was less a consultation or mutual exchange of views than a briefing of what the United States has done and now wants from South Korea. ‘They gave me a very detailed explanation about the sanctions on Iran, about their legitimacy and about how they are going to be implemented,’ he told the Korea Times. ‘So I replied “thank you.”’

Iran though hasn’t been sitting idly by while all this is going on. Its government has been heavily lobbying South Korean officials not to apply additional sanctions, with the Iranian ambassador to Seoul quoted as telling the South Korean Joong Ang Ilbo that South Korea would only hurt itself by applying additional sanctions on its commerce with Iran.

‘Whoever is exerting or applying any sanction on Iran, first of all they are depriving themselves of good potential business opportunity…and the huge Iranian market that exists there and is open to everybody to enjoy the benefits of it,’ he said, adding that additional sanctions could threaten the ‘solid friendship’ between the two countries and could jeopardize 150,000 South Korean jobs and adversely affect some 2000 South Korean companies. 

Tugged from both sides, the South Korean government has sought to straddle the two. ‘Our efforts are aimed at maintaining a cooperative relationship with the US, while at the same time sustaining our good economic ties with Iran,’ Foreign Ministry spokesman Kim Young-sun said.

And what about Japan? On August 3, a day before the arrival of the Einhorn-Glaser team, the Japanese government prudently applied the new sanctions mandated under UNSCR 1929 to all Japanese dealings with Iran. Chief Cabinet Secretary Yoshito Sengoku also stated that the government, following further study, intended to announce additional unilateral measures against Iran later that month.

The following day, at a press conference at the US Embassy in Tokyo, Einhorn stated that the Obama administration wanted the Japanese government to send ‘strong, clear signals to Iran’ by adopting additional national sanctions against Tehran that exceeded the country’s minimal obligations under UNSCR 1929. He publicly appealed to Japanese officials to uphold their reputation ‘as a leader of the global non-proliferation regime and a close ally of the United States’ and ‘play a strong role in this effort.’ 

Japan is perhaps even more dependent on foreign energy sources than South Korea—it’s the largest oil importer in the world, with Iran supplying a large share of these imports. In 2007, the Japanese purchased $12.75 billion worth of oil from Iran, or about 12 percent of all the crude oil Japan imported that year.

In fact, Japan purchases little else from Iran aside from oil—in 2007, crude oil comprised 96 percent of all of Japan’s imports from Iran that year.  Yet, Japan also depends on its alliance with the United States for its defence, and the volume of commerce between Japan and the United States is considerably greater than that between Japan and Iran.

And, aside from the US consideration, the Japanese government is anyway strongly committed to nuclear non-proliferation and has criticized Iran’s failure to abide by UN Security Council decisions mandating a halt to its uranium enrichment programme. Meanwhile, the election of Yukiya Amano, a career Japanese diplomat, to succeed Mohamed Elbaradei as director general of the International Atomic Energy Agency could make the Iranian nuclear issue more prominent in Japan.

In Tokyo, Einhorn said the US was asking Japan to take measures that ‘wouldn’t interfere in any way with Japan's energy security and its imports of oil from Iran,’ and he urged the Japanese to follow the example of the European Union, which recently adopted comprehensive sanctions to supplement those found in the latest Security Council resolution.

So will Japan fall in line? Again China looms large, with Japanese officials privately complaining to their US colleagues about the Chinese simply replacing any Japanese companies that disengage from the Iranian market.

With such concerns in mind, Einhorn and Glaser plan to visit China later this month to press Chinese officials directly on the sanctions issue. But, as was the case with US lobbying for support from China over the wars in Iraq in 1990 and 2003, China can be expected to drive a very hard bargain.