Iran Sanctions: The Asian Outliers

2012-11-26 by Richard Weitz

Most European governments are firmly aligned with Washington on the Iran sanctions issue, but serious gaps in coverage exist elsewhere.

China, India, and Russia are the main challenges, but even major U.S. allies such as Japan and South Korea present challenges as well.

These countries are major producers of the industrial machinery and machine-making tools that Iran needs to develop its energy industry further. Some of these goods have potential dual uses for both civilian and military purposes.

The latter include making nuclear weapons and ballistic missiles.

Decreasing these ties would further pressure Tehran to make concessions on the nuclear issue to escape international sanctions.

Yet, some Russian and Asian business managers exploit Iran’s isolation from international markets, which the sanctions will deepen, for their own economic benefit.

Under intense U.S. pressure, South Korea, Japan, and India are seeking to reduce their economic ties with Iran. But they have made clear that they are not in a position to end oil imports from Iran altogether anytime soon. Credit: Bigstock 

These non-Western countries face a different set of calculations than the United States, Israel, and many European and Persian Gulf governments. While the latter group can identify a plausible military threat from an Iran that possesses nuclear warheads and long-range ballistic missiles, India, China, Russia, and many other non-Western countries consider an Iranian attack on themselves a remote contingency.

Indeed, they more plausibly see North Korea and Pakistan as dangerous nuclear rogues.

For governments that do not perceive Iran as a major problem, a key consideration is how much they value maintaining trade and other ties with Tehran versus what costs they might suffer if they antagonize U.S. policy makers, who are leading the drive for global sanctions against Iran.

In particular, they could lose business in the United States if Washington sanctions their firms for engaging in commerce with Iran. They also calculate what level of interaction with Iran will risk excessive costs in their ties with Israel, Saudi Arabia, and other Iranian adversaries.

South Korean Policy

South Korea’s longstanding approach toward Iranian nuclear issues is to do the minimal required but no more. It has traditionally only applied those sanctions against Iran that have been mandated by the UN Security Council.

But in recent years the Republic of Korea (ROK) 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 that year, making Iran the ROK’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.  Iranians purchase many ROK industrial goods in return.

Two dozen business conglomerates as well as approximately 2,000 small and mid-sized ROK companies operate in Iran.  Prominent South Korean companies have signed billion-dollar contract  with Iran, including include LG, Hyundai, Samsung Electronics, Hanjin Heavy industries and Daewoo Shipbuilding.  ROK political and business leaders see long-term business opportunities in Iran’s petrochemical, construction, and plant export industries, and worry that if they do not exploit these sectors, the Chinese will.

South Korean businesses are suffering losses from the sanctions even without imposing additional ROK sanctions. The U.S. Treasury has applied sanctions against Iran’s Bank Mellat, which is heavily involved in financing trade between Iran and South Korea.  A 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 U.S. 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.

Japanese Policy

The Japanese are perhaps even more dependent on foreign energy sources than South Korea. Japan is the largest oil importer in the world, and Iran supplies a large share of these imports. In 2007, the Japanese purchased $12.75 billion worth of oil from Iran, or approximately 12 percent of all the crude oil Japan imported that year. Besides oil, Japan purchases little else from Iran. 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 defense, and the volume of commerce between Japan and the United States is considerably greater than that between Japan and Iran. Furthermore, the Japanese government is also strongly committed to nuclear nonproliferation and has criticized Iran’s failure to abide by UN Security Council decisions mandating a halt to its uranium enrichment program.

Indian Policy

The Indian government has opposed adopting additional sanctions on Iran and favored continuing dialogue and negotiations with Tehran to resolve the dispute over the Iranian nuclear issue without further sanctions.

The Indian government is also balancing competing U.S., Israeli, and other Western concerns that Indian firms will undercut international sanctions by “backfilling” for their companies departing Iran.

From New Delhi’s perspective, an Iran with nuclear weapons would pale as a threat to India compared with China’s growing military power and even more with Pakistan, whose strategists try to terrorize India’s population behind Islamabad’s nuclear shield. Indians share with Americans and their allies fears of nuclear terrorism, but they see this danger as emanating from Pakistan’s militants rather than Iran’s Revolutionary Guards.

Indian officials strongly oppose even the threat of military action since that raises the costs of their oil imports. An actual war could wreck the Indian economy if it deprived India of oil from Saudi Arabia and other Middle Easter countries as well as Iran. But they have sided with the United States and its pro-sanctions partners at some meetings of the IAEA Board of Governors and the UN and sanctioned Tehran. Unlike Chinese or Russian officials, Indian government representatives have refrained from overtly criticizing the latest U.S. and EU sanctions as excessively harsh and counterproductive.

Ties between New Delhi and Tel Aviv have improved markedly since the end of the Cold War and the decline of India’s commitment to nonalignment.

The two countries share unease about being surrounded by a bevy of Muslim nations sympathizing with their Islamic adversaries. Israel has become a major supplier of weapons, intelligence, and high technology to India—though unfortunately for Israel and India alike not of oil.

The main factor leading some of India’s largest companies to forego commercial opportunities in Iran is the fear that these ties will endanger their business reputations, engage them in projects that will prove unprofitable due to constrained access to Western technology and financing, and entangle their foreign operations in the extensive network of secondary sanctions that the United States has constructed to entrap all entities that have any ties with Iran’s illicit nuclear activities.

Yet, some Indian business managers are eager to exploit Iran’s isolation from international markets, which the sanctions will deepen, for their own profit. This is particularly true of small businesses that do not have commercial ties with the United States, Europe, or Western companies. But even some larger Indian firms seem to hope that they can conceal their business ties with Iran and slip below the U.S. Treasury’s monitors.

Indian officials want to increase Indian exports to Iran to reduce their massive bilateral trade imbalance, which now runs at $14-to-$3 billion annually in Tehran’s favor.  Federal Commerce Secretary Rahul Khullar, citing Iran’s isolation from other markets, has described what he sees as “huge opportunities” for Indian sales of textiles, pharmaceuticals, food products, infrastructure equipment.

Meanwhile, Iran is India’s second largest oil supplier after Saudi Arabia, providing around 12 per cent of its hydrocarbon requirements, worth an estimated $12 billion. Saudi Arabia has offered to sell India more oil in return for a cut in India’s ties with Iran, but Indian energy managers insist they have no choice but to continue to import Iranian oil. Indian-Saudi ties also remain strained due to Riyadh’s close ties to Pakistan and association with Islamic fundamentalism.

One way Tehran has countered Riyadh is by offering various discounts and other concessions to its oil clients. In the case of India, Iran has recently agreed that India could pay for 45 percent of oil imports from Iran in rupees instead of dollars, which is an easier-to-convert hard currency.  And Iran benefits from having a small but determinedly vocal Shia minority lobbying on its behalf.

In addition to Indian investors in Iran simply “backfilling” for the departing Western firms, U.S. officials worry that Indian dealers will circumvent trade sanctions by expanding their use of intermediaries to sell gasoline and other sanctioned products to Iran. Chinese traders for example often conduct more unofficial commerce with Iran than the total volume of officially recorded Iran-China transactions.

But Indians turn these arguments around by pointing out that Chinese traders and investors will simply fill any business opportunities foregone by India. They also subtly remind Americans that, in contesting Chinese influence in Iran, New Delhi is helping serve its role of tacit balancer of Beijing in southern Eurasia.

Conclusion

Under intense U.S. pressure, South Korea, Japan, and India are seeking to reduce their economic ties with Iran. But they have made clear that they are not in a position to end oil imports from Iran altogether anytime soon.

There is no easy answer to these sanctions dilemmas.

A long-term solution will require a change in Iran’s nuclear policies and possibly its regime, or an alternative arrangement in which India has found alternative energy sources outside the Middle East, or alternative sources of energy, perhaps in renewable fuels or more likely in nuclear power.

 

"If everyone is thinking alike, someone isn’t thinking."

—General George Patton Jr.

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