Could China, Russia Rescue Iran?

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Could China, Russia Rescue Iran?

Iran’s leadership may be hoping that Beijing and Moscow will step in and help it with the West. But it’s not in their interests to do so.

Vladimir Putin has returned to the Russian presidential office. And, if his previous record as president is anything to go by, he’s likely to take a tough line against the U.S. over Iran.

This comes at a time when U.S. relations with China have been tense. Indeed, U.S. Defense Secretary Leon Panetta used a recent visit to Vietnam to underscore how the United States intends to back its allies in the Asia-Pacific region and help them enforce their rights in the South China Sea, an area that Beijing claims much of. Such sentiments are unlikely to have been well received by China’s leaders.

Against this backdrop, China and Russia are both veto wielding members of the U.N. Security Council, as well as members of the P5+1 group, which is negotiating with Iran over its nuclear program. The Iranian government could therefore be forgiven for seeing a diplomatic opportunity on the horizon, and Tehran can be expected to attempt to seize the moment by trying to create a rift between the rest of the P5+1 and Russia and China.

Indeed, Iranian President Mahmoud Ahmadinejad will likely have used his meetings with Putin and senior Chinese officials on the sidelines of this week’s Shanghai Cooperation Organization summit for this very purpose. The question that should be asked, though, is this: how much mileage can Tehran get from such discord?

The likely answer is: not much.

Of course, Putin can be expected to crank up the rhetoric in challenging U.S. policies, especially those tied to new sanctions against Iran. In concrete terms, though, he’ll be treading much more carefully. Putin may want to sound tough with the United States, but he’s also aware that it’s unwise to vigorously challenge current U.S. and EU oil sanctions against Iran’s oil industry because they also serve his government’s interests.

Iran is a Russian competitor in the global energy market, and the less oil Iran is allowed to sell, the more scope there will be for Russia to step in. In the long run, Russia may even be able to poach some of Iran’s long standing oil customers. In addition, the current tensions over Iran, and its absence from the oil markets, could help keep oil prices higher, a reality that will be welcome for a Russian administration that’s determined to eliminate Russia’s budget deficit by 2015. Doing so depends on oil prices averaging around $100 per barrel, by some estimates.

The Chinese government’s enthusiasm for helping the Iranian government, meanwhile, is also likely to be limited.

The most important reason is China’s slowing economy. Taking the U.S. on over Iran now is the kind of distraction that policy makers in Beijing can do without, and that’s not to mention the penalties for business interests that might follow open defiance of U.S.-backed sanctions. In addition, getting too close to Iran could place an unnecessary strain on China’s key business relationship with Saudi Arabia, as well as with other members of the Gulf Cooperation Council wanting to see the Iranian government isolated.

In addition, as much as the current oil sanctions hurt some of China’s business interests, Iran’s current isolation isn’t without its benefits for China. Three years ago, for example, Iran signed a deal with China under which rather than paying Iran for its oil, China keeps Iran’s money and uses it as a substitute to Letters of Credit to guarantee payments for Chinese products purchased by Iran.

According to the Iran-based Baztab publication, believed to have close links with former Iranian Revolutionary Guard chief Mohsen Rezai, despite keeping Iran’s oil money as a guarantee for payment for Chinese goods, the Chinese government charges a 4 percent insurance fee on its exports to Iran. According to PBS, the amount involved could be more than $25 billion.

According to Baztab, it’s quite possible that the insurance rate could now double, while any losses will come out of the pocket of the Iranian government, despite the fact that the money is being managed by the Chinese government. The terms of this deal have been deemed as so humiliating to Iran that it has been likened to the Turkmanchai treaty of 1828, which forced Persia to cede part of Persian Armenia to Russia and to grant extraterritorial rights. Baztab, which first broke the story three months ago, is said to have so upset the government with the revelation that its website was temporarily blocked.

One of the biggest reasons why China was able to extract such favorable terms for the deal was simply that it could see how isolated the Iranian government is. With Tehran now in even more dire straits than when the deal was struck, Beijing can be expected to ratchet up the costs for Iran still further. Meanwhile, China is also reportedly able to use Iran as a dumping ground for some of its lowest quality products, an allegation that has raised the ire of many Iranians, including the country’s media.

China and Russia under Putin undoubtedly have their respective issues with the United States. But even if they mend fences with each other to balance U.S. power, it’s unlikely that this will prompt them to completely break ranks with the position of the P5+1 in negotiations, or completely defy U.S. and EU sanctions against Iran. The costs of doing so would be higher than anything Iran could compensate them for.

Both Beijing and Moscow have learned to exploit Iran’s isolation to their advantage, meaning backing the U.S. and EU sanctions against Iran isn’t as costly for them as it used to be, diplomatically or otherwise. Indeed, in some respects, they are actually better off with an isolated and sanctioned Iran.