Global economic challenges to new Iranian sanctions

As Iran’s Minister of Petroleum, Masoud Mirkazemi faces mounting sanctions from the West, a decline in the price of crude oil, and an aging energy infrastructure that threatens Iran’s production levels. In view of these challenges, Mirkazemi is asking foreign investors to supply $200 billion in capital to renovate Iran’s oil, gas, and refining capacities. In a press conference held on the eve of a meeting of the Organization of Petroleum Exporting Countries (OPEC), he addressed the threat of new sanctions, stating: “It’s about 31 years since Iran got independence and some countries do not like it. These kind of sanctions will not have any effect on [investment].”

The alarming thing about Mirkazemi’s brazen dismissal of new sanctions is that he is largely correct. Even if Western countries were to make good on their promises to withdraw investment from Iran’s energy sector, China’s energy-hungry economy will step in to fill the gap. Currently the People’s Republic relies on Iran for 15 percent of its energy needs, a figure that will only grow as China develops an economically viable middle class. China has further solidified the relationship by becoming the Islamic Republic’s largest foreign trading partner, overtaking the European Union for the first time this year.

It is doubtful that China will want to risk a $36 billion trading relationship over the West’s threat of sanctions (thankfully, US trade with China is double this figure). If China’s foreign direct investment in Africa is any model, the Chinese will continue to invest in industries that will support its long-term economic growth and will do so under the radar so as to avoid global criticism. China’s relationship with Sudan is a perfect example, where – much to the chagrin of human rights activists – Beijing is continuing its cozy relationship with Sudanese President Omar al Bashir.

In return for its exports of oil and gas, Tehran is receiving consumer goods and weapons. In the days of the Cold War, the United States supplied Iran with a heavy dose of military aid. Uncle Sam saw the Shah as the West’s best bet against a Soviet takeover of the Middle East. Now that Tehran’s US hardware is aging (much of it is leftover from the Korea and Vietnam wars), Iran is turning to China and Russia to modernize their military.

Thus far, the Russians have stalled their sale of the Almaz-Antei S-300 surface-to-air missile defense system to the Ahmadinejad regime. With the S-300, Tehran would have an additional line of defense against an Israeli or American bombardment of its nuclear program. The Russians have temporarily halted the deal because of US and European opposition, but this does not necessarily mean the deal is off. The Russians aided the Iranians in the R&D of their third indigenous fighter attack aircraft called the Shafagh – the identically match older prototype aircraft from Moscow’s Mikoyan Design Bureau (producers of MiG aircraft).

The Iranians have also been successful in procuring Chinese military technology. Nestled in the hills of the Zagros Mountains, dozens of Chinese-variety anti-ship cruise missiles are positioned to attack naval assets just south of their position in the Strait of Hormuz. At the naval port in Bandar Abbas, Iran’s Islamic Revolutionary Guard Corps maintain Chinese-made Houdong fast missile boats capable of swarming oil tankers or pestering America’s 5th Fleet stationed in Bahrain. Using both of these weapons systems in tandem, the Islamic Republic could shut down the Strait of Hormuz in a matter of days, chocking off 25% of the world’s oil supply.

Iran’s political, economic, and military relationship with Russia and China makes it resilient in the face of American and European economic coercion. Regardless of what actions Presidents Obama, Sarkozy, and Merkel take on the international stage, the Russians and Chinese are unlikely to jeopardize their own current cash flow from Iran.

The collapse of the Greek economy, the weakening of the euro, and the massive amounts of US debt held in Chinese reserves make matters even more complicated. The global financial crisis has also caused OPEC to reconsider if it should continue to sell crude oil in US dollars. The Iranians (and ironically, many of the West’s Persian Gulf allies) are on board for pegging the sale of oil to a currency basket, which would include gold, euros, yuan, and yen. Shrewd observers of the proposed currency basket observe that the US dollar is not being included.

Like Iran, Russia is also in a good bargaining position because it supplies most of the European Union with natural gas. Currently the EU imports roughly 40% of its natural gas from Russia and over 45% of its oil from the Persian Gulf. Considering these statistics, the Europeans cannot afford to alienate both the Russians and Iranians in one fell swoop, especially if sanctions would further unite Ahmadinejad and Putin.

All and all, the United States and its European allies are in a bind. Time is of the essence, especially if the US wants UNSC approval of these new sanctions. Until 2011 Lebanon is a voting, non-permanent member of the Security Council. Because Lebanon is a client state to Iran, any move to push further sanctions through the Security Council will prove difficult. A possible strategy for the Obama administration is to build on Russia’s growing impatience with Iran’s dithering over the IAEA fuel-swap deal. The Russians are currently willing to enrich Iran’s uranium and ship it back to Tehran for the Iranian nuclear reactor. Iran’s dithering is costing the Russians money and international credibility.

With regard to the Chinese, the situation is more difficult. Any US move to compromise China’s trade and foreign direct investment in Iran will anger Beijing. Obama would be wise to drop all rhetoric of a ‘trade war’ with China and move to increase free trade between both nations. A stronger US dollar and a push for the Chinese to stop strategically undervaluing their currency would also help. The $70 billion trading relationship between the US and China (one-third of the Chinese economy) is more valuable to both parties than any perceived gains or setbacks with Tehran.

As the world economy continues to evolve, the United States and Europe must take the proper steps to ensure that the dollar and euro are the essential currencies of global exchange and that both continents are critical to a healthy global economy. These moves will also help convince Russia and China that Iranian oil and trade are not such valuable commodities since they can only be obtained at the risk of alienating larger economic opportunities.

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