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International Sanctions and the Asian-Iranian Economic Dialogue (Part 1/2)360°ANALYSIS

Economic relations between Iran and its Asian partners might be limited, but are never completely cut. This is the first of a two part series.

There are no doubts that international economic sanctions imposed on Iran remain one of the main factors shaping Tehran’s dialogue with the rest of the world. Nevertheless, their influence on Iranian economic cooperation with leading Asian countries such as China, Japan, South Korea and India cannot be considered as either negative or positive. It is more accurate to speak about diverse implications which the international punitive measures have on the development of the economic dialogue between Tehran and the Asians.

Economic Cooperation With Asian Countries 

The sanctions of 2006-2012, adopted by the US and EU, became a serious blow to the Iranian economy. As stated by US experts: “$50 to $60 billion in Iranian oil and gas development projects have been terminated or put on hold in recent years, primarily by European companies, as a result of the threat of sanctions.” The amount of losses could probably be considered irrecoverable, unless Asian countries — first of all, China and South Korea – stepped in.

Up until now, the People’s Republic of China has provided Iran with a number of opportunities, either to bypass the American and European sanctions of 2010-2012 or to mitigate their negative impact. First of all, by 2012, China was the main supplier of petrol to Iran. Moreover, by mid-2012, Chinese companies such as Zhuhai Zhenrong, Unipec, Chinaoil and Sinochem, not only supplied Tehran with fuel, but sold Iranian oil to third countries. After the US government adopted the 2010 sanctions, Asian companies continued their attempts to increase their presence in Iran’s energy sector. Thus, in July 2010, Sinopec with Malaysian SKS Ventures launched talks with their Iranian counterparts concerning their possible involvement in projects previously abandoned by other companies under the pressure of American sanctions.

The Chinese banking system is mostly open to Iranians. Theoretically, this allows them to make financial transactions not only with China, but also with other countries. Although Iranian businessmen dealing with China still faced obstacles, these problems are not crucial. As stated by some Iranian businessmen, in October 2010, the Bank of China stopped opening credit lines for Iranians. The bank authorities explained this decision as having been at the behest of the US-based investors. However, these services were also immediately provided by other Chinese banks. Although banking sanctions indeed created certain problems for international financial transfers with Iran, they were easily handled: A substantial part of Iranian trade operations with India, China, Japan and South Korea was either carried out as barter deals or with the usage of local currencies (i.e. rupees, yuans, yens and wons). 

In certain cases, the support of Asian countries played an even more important role than a mere replacement of runaway companies in development projects. Existing difficulties with Iran’s access to the international financial system, tangibly limited the number of food exporters to the country. For instance, during January-February 2012, some companies suspended wheat, palm oil and rice shipments to Iran. All of these companies had one reason for this decision: They feared not to receive payments from the Islamic Republic.

As stated by experts at the FAO, by 2012, Iran was “the world’s fifth largest importer of wheat and rice, sixth largest importer of maize, and it makes the top 10 in barley and the top 20 in oil crops and oil products.” In this situation, a decrease in imports of this produce was capable of destabilizing the Iranian domestic food market. However, Iranian authorities attempted to compensate the instability of external sources of food supply by signing barter contracts with remaining buyers of Iranian oil. These agreements implied that a country importing hydrocarbons from Tehran will pay back by food produce. In 2012, for example, such a contract was signed by the Iranians with the Indian government (oil was offered in exchange for wheat, tea, and rice).

New Opportunities

However, each cloud has its silver lining and Asian countries also use the withdrawal of EU companies from Tehran’s energy sector for their own benefit. The flight of Western companies from Iran created a vacuum in the country’s investment market, which was swiftly filled by the Asians who faced no rivals. Thus, while during the period of 2006-2012, European companies halted their participation in investment projects in the Islamic Republic of Iran (IRI), and China signed contracts supporting the modernization of the “Arak” refinery and the development of such oil and gas fields as Northern Azadegan, Yadavaran, Garmsar, and phase 11 of the South Pars (previously assigned to the French company Total). In 2012, the Chinese government allegedly took a decision to launch large-scale investments in approximately 20 petrochemical projects in the IRI.

Cooperation With South Korea

South Korea also preferred not to cut economic relations with Tehran. It is significant that Seoul officially voiced its support of the UN sanctions imposed on Iran in 2010 and, on September 8, 2010, even adopted its own punitive measures against 102 Iranian entities and 24 individuals. However, the Korean authorities made an important reservation in their position on sanctions. As their officials stated, Seoul is ready to interact with the UN Security Council and the United States on the issue of Tehran’s nuclear program. Nevertheless, it is determined to minimize the negative effect of the sanctions in all spheres of economic cooperation with Tehran that are not related to nuclear research.

Given that during recent years, economic cooperation between the Republic of Korea and the IRI enjoyed gradual growth, and that Tehran supplied 15% of all oil imported by Seoul, the South Korean government preferred not to support the official American opinion that Iran’s economy works solely on the nuclear program. Thus, despite US pressure, on August 25, 2010, the Korean government declared that it would help all Korean companies dealing with the IRI which would suffer from the American sanctions. Furthermore, starting on October 1, 2010, Korea started using its own currency, the won, instead of dollars in financial transactions with the IRI in order to compensate for the negative impact of American sanctions on the financial interactions between the two countries. The right to perform these operations was granted to the Industrial Bank of Korea and Woori Bank.

On the Iranian side, the won accounts were supposed to be opened in Iran’s Central Bank. Additionally, the Korean government allowed Iranians to keep financial resources earned from the export of oil to the Republic of Korea in accounts in the above-mentioned banks. It was supposed that this money could later be used for buying Korean products and importing them to the IRI. These decisions by the Iranian and Korean authorities led to the establishment of direct links between the countries and excluded the unnecessary foreign exchange operations in dollars that could have been affected by the US sanctions of 2010-2012. Measures adopted by Seoul encouraged Korean companies that had been on the verge of leaving the Iranian market.

It is notable that, as in the case of China, the US government has limited its possible retaliatory measures. First of all, Seoul is its loyal ally on the issue of Pyongyang’s nuclear program. Moreover, nominally, South Korea has adopted its own set of sanctions against the IRI. In this situation, US authorities could do nothing but praise the Korean activities that, in fact, create loopholes in the sanctions against Iran. Thus, the above mentioned decision of the Korean government to allow Iranians to keep their oil money in the accounts of the Industrial Bank of Korea and Woori Bank, was considered by the Americans as a move to make financial transactions between Seoul and Tehran more transparent.

China and South Korea Set an Example

Meanwhile, the independent behaviour of China and South Korea set an example for Iran’s other trading partners. For instance, India started reviving its trade relations with the IRI in 2011, which had been harmed by the sanctions of 2010. Thus, from March 2011 on, the Central Bank of India began making overdue payments to the National Iranian Oil Company for shipments of crude oil. It was the first time since transactions were halted in December 2010 under the pressure of punitive American measures. Additionally, in March 2012, Iranian Parsian bank signed a cooperation agreement with Indian UCO bank in order to ease financial transactions between the countries. It is notable that, although the Indian government tried to follow sanctions requirements in certain fields, it immediately compensated this by increasing cooperation with the IRI in other areas. Thus, the decision of New Delhi to suspend its participation in the construction of the gas pipeline between Iran, Pakistan and India was partly balanced by signing the agreement on importing electricity from Iran on March 4, 2012.   

By 2013, even the main US ally in East Asia – Japan — declared its decision to maintain a certain level of economic ties with Iran. In 2012, the Japanese authorities periodically repeated that they are not going to halt trade relations with Iran. Moreover, in summer 2012, Tokyo took a decision to allocate $7.6 billion to the needs of companies providing insurance coverage for tankers carrying Iranian oil to Japan. Subsequently, the Japanese authorities not only compensated the rejection of European firms to provide this service, but set an example immediately followed by India and China.     

Growing Troubles

However, the international punitive measures created not only opportunities for the development of Asian-Iranian economic ties, but also obstacles. By 2012, the effectiveness of sanctions adopted by the US, EU and their allies against Iran had presumably reached its climax. The maintaining of the pre-2012 level of relations with Iran appeared to be hardly possible for Asian countries due to political (US pressure), economic (punishment measures implied by sanctions) or technical (the cut of Iran from the SWIFT system, refusals of European companies to ensure tankers carrying Iranian oil, and etc) issues. Under these circumstances, negative consequences for Iran’s economic dialogue with Asian countries were inevitable.

First of all, China, India, Japan and South Korea tangibly decreased the volumes of oil imports from the Islamic republic. Thus, in 2012 China reduced its hydrocarbon purchases from the IRI by 21% (to 440 thousand bpd), South Korea by 36% (to 153 thousand bpd) and India by 2.4% as compared to 2011. In certain months of spring-summer 2012, the dropdown in oil imports from Iran was more than 30-40%. Apart from that, the governments of above mentioned Asian states are compelled to comply with the requirements of UN resolutions and to limit some exports to Iran (first of all, those related to arms deals) or to conduct it illegally.

*[Note: Read the final part on August 29.]

The views expressed in this article are the author's own and do not necessarily reflect Fair Observer’s editorial policy.

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