Page 2 of
2 Who will
Iran sanctions really
cripple? By Peter
Lee
South Korea has announced it will
accept no Iranian cargoes; Japan has announced it
will sovereign insure; China will come up with
some, as yet unannounced mechanism that will
probably sluice profits into the hands of some
lucky state insurers; and India is floundering but
simply has to come up with something.
In
any event, the European insurance industry can
regard the loss of income - and the state-mediated
creation of a competing maritime insurance
infrastructure in Asia - as simply the cost of
doing business in the free world, 21st-century
style.
The only major Iran energy import
outlier, of course, is China. China's number was
supposed to be up on June 28. However, on
that day the Obama
administration cleared China and Singapore from
possible US economic penalties, citing their sharp
cuts in imports of Iranian oil, and announced a
six-month exception for them to continue buying
Iranian crude at lower levels.
Earlier,
the United States had held out hopes that China's
unapologetic support for Iran (and its energy)
could be finessed. Secretary of State Hillary
Clinton professed to seeing signs of progress in
Chinese reductions. [4]
Unfortunately,
this is all just a desert mirage, created by a
pricing and delivery spat between China and Iran
that may have had a lot to do with Iran wanting to
get paid at least partly in gold, and not all in
yuan. The net effect was to collapse purchases in
the first quarter, so that subsequent imports at
China's normal level of over 500,000 barrels per
day would, on an annualized basis, add up to a cut
in imports that approaches, if does not meet, the
coveted 20% level. [5]
Would the United
States pull the trigger on China? It
doesn't seem likely that the US would tip
relations with China (and perhaps the world
economy along with it) into the abyss in the
service of its Iran policy.
In any case,
China has saved the United States the
embarrassment by making sure it has no vulnerable
bank to sanction.
Since 2006, China has
denominated its trade with Iran in euros, placing
a significant degree of separation between itself
and US sanctions, which rely on the nominal
clearing of international dollar transactions
through the Fed in the United States to enable
implementation.
Now, with the euro route
foreclosed by the cutoff of Iranian banks from the
European financial system, China's trade with
Iran, including its energy business has migrated
to a barter, yuan, and/or gold basis. [6]
Western commentators who have noted this
situation persist in regarding this as a big loser
for Iran, which has to hold cruddy yuan instead of
wonderful dollars or somewhat less than wonderful
euros.
Indeed, the dollar shortage is
causing the rial to crater against the dollar in
forex trading. [7]
However, the bottom
line is that, by necessity, two way Sino-Iranian
trade and integration between the two economies
has exploded with the cutoff of Iran from the West
and forcing Iran to denominate its trade in yuan
will simply accelerate this trend.
As an
investigative report in the South China Morning
Post put it: "Sanctions against Iran drive up
China trade tenfold in decade".
According
to the SCMP, bilateral Sino-Iranian trade grew
from $2.5 billion in 2000 to $29.3 billion in
2010, and is expected to reach $50 billion by
2015. [8]
Iran's current trade surplus
with China runs to $7 billion per annum, a sizable
amount of which is probably sequestered as yuan in
some Chinese bank yielding zero interest, a less
than desirable state of affairs than holding
dollars.
Nevertheless, Iran has few
options and will presumably start figuring out
creative ways to spend it, thereby further
tightening the economic ties between Tehran and
Beijing.
Iran can also draw some
consolation that the yuan is a preferred currency
holding for people who can get their hands on it,
since the yuan is acknowledged to be undervalued
and Iran can look forward to a healthy gain on its
holdings if and when the yuan is allowed to
appreciate.
It is also not inconceivable
that Iran will be able to convert some of its yuan
holdings to Russian rubles, Indian rupees or
Brazilian pesos through Chinese good offices,
thereby easing some more of its foreign-trade
related headaches and the sanctions-related
heartaches of its trading partners. [9]
So
there might not be anything in China in the way of
a US-linked financial institution for the United
States to sanction, and significant options for
the Iranian regime to improve its economic
outlook.
Of course, since waivers are
issued strictly at the discretion of the Secretary
of State (without even the semblance of due
process that attended the administrative findings
of FinCEN in the matter of BDA), the United States
is free to do whatever it sees fit, facts,
evidence, and evasions be damned.
Given
the sizable economic risks and limited
geopolitical rewards of sanctioning China,
however, the smart money feels that the waiver
will be granted-unless the US government decides
to prolong the agony instead under the "more data
collection is needed" pretext.
The bigger
story, of course, is that pushing Iran into the
arms of China is not a particularly good thing for
the almighty US dollar.
One of the most
precious advantages of the United States is that
only the United States offers enough currency
liquidity to absorb the trade surpluses of the
energy-exporting countries. A switch from
US-denominated energy sales is never seen as a
good thing. If more oil and gas revenues disappear
into bilateral trade, such as Iran's China swap,
that's less dollars to buy nice things - not just
iPods and Nikes, but things like the US government
debt that keeps the US government and its massive
deficit afloat.
The bad news for the
United States is that China is not denominating
its foreign trade in yuan just to deal with the
Iran situation and threats of US sanctions.
China has concluded swap agreements with
Brazil, Australia, Turkey, and the United Arab
Emirates that enable them to conduct significant
chunks of their bilateral trade in their local
currencies without reference to the US dollar.
Russia-China trade is already normalized on a
ruble to yuan basis. Japan is considering a swap
agreement with China. Hong Kong & Shanghai
Bank estimates that China will soon be settling
half of its international trade in non-US
currencies, making the yuan the number three
international currency in the world. [10]
China's master plan for internationalizing
its currency involves setting up bilateral swap
arrangements with its major trading partners.
Faced with the reality of a dollar hobbled
by an overextended and gridlocked federal
government, and the opportunities offered by a
yuan whose undervaluation may be a significant
geostrategic as well as economic asset, even US
allies have entered into swap agreements with
China.
At least for the time being, China
is shunning the responsibilities and headaches, as
well as the advantages of emerging as an authentic
global reserve currency. It is apparently happy to
cede that role to the United States.
In
sum, sidelining Iran from dollar transactions
plays into the hands of China, which is looking to
reduce its dollar exposure and fortuitously
discovers a significant trading partner, Iran,
which has no choice but to start denominating a
significant amount of its energy exports in yuan.
Therefore, the US sanctions, in addition
to granting China preferential access to the
Iranian economy, are also facilitating the gradual
displacement of the US dollar from the absolute
center of the world financial system and
compromising a critical weapon in the American
soft power arsenal.
It remains to be seen
if this will be remembered as the finest hour of
US geopolitical strategy.
This state of
affairs also begs the question of why China should
support efforts to resolve the Iranian crisis, if
prolonging it simply allows Beijing to entrench
its advantage which, in addition to the trade and
financial factors described above, enables China
to stockpile Iranian oil at firesale prices?
Taking it a step further, perhaps Russia
and China have a continued interest in propping up
the regime of Bashar al-Assad not because they
still hold optimistic views on the positive
outcome of the Syrian crisis, but simply because
denying Damascus to a new, hostile, and pro-Gulf
and pro-Western government may make it less likely
that Iran will decide on a strategic capitulation
on the nuclear issue that will enable EU and
Japanese states and corporations to return to the
economic hunt in Iran in competition with Moscow
and Beijing.
Perhaps US geopolitical
thinkers are looking beyond their success in
sowing misery among the regimes and citizens of
Iran and Syria and are asking themselves what
happens if their half-measures fail to crush these
states and replace them with new outfits eager to
turn their loyalties and resources to the West?
The simplest answer is not the prettiest:
recognizing that sanctions, in the most important
cases of Iraq, Libya, Cuba, North Korea, and Iran
have yet to destroy an anti-Western regime unless
followed up by decisive military action.
For the sake of the people of Syria and
Iran, maybe we should hope that America's military
planners are as smug and blind as - with my
sincerest regrets and apologies - Nicholas
Kristof.
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