If you get your news from the mainstream media, you probably think that China – in spite of repeatedly opposing the Western sanctions on Iran – has effectively joined the sanctions effort by cutting oil orders with the Iranians.
In the context of Beijing’s deep involvement in the Iranian oil and gas industry, however, this media narrative is not just invalid, it’s wildly, grotesquely invalid. China is investing heavily not just in oil and gas, but in other industries in Iran, including arms manufacturing and railway development. The investment in the oil and gas industry is robust by itself, however. It is also geographically interesting, and financially interesting.
All aboard for evading the sanctions
The point to begin with is that China is continuing at this moment to buy large quantities of oil from Iran and have it shipped to China. An equally salient point is that the explanation for the cut in orders in the first month of 2012 was provided by the Wall Street Journal on 6 January: China and Iran have been negotiating a pricing dispute. In dealing with the state oil and gas companies of China and Russia, clients and partners run into this problem all the time. Russia has become particularly famous for stalling on purchases and deliveries during negotiations, but China does it too. If you want to understand how prices and deliveries will be negotiated in a world ruled by the oligarchs of the Asian powers, watch how they deal today with their global partners in the oil and gas industry.
But it’s not just that China is not on board with the sanctions against Iran. Russia, China, and India are all continuing to trade with Iran in various lines of commerce, including oil and gas, and are settling their accounts in currencies other than the US dollar (see here as well). They are simply avoiding the mechanisms – e.g., correspondent banks – through which the US and the EU are levying sanctions. Japan and South Korea, other major crude oil customers, have been noncommittal on sanctions; industry analysts predict they will make symbolic cuts in their orders from Iran, on the order of 10-15%, but will not cease buying entirely.
This is much bigger than the usual evasion shenanigans that come with economic sanctions. Frankly, Western political leaders are deceiving themselves if they believe Iran’s oil industry can be set on its heels with sanctions so porous. It is entirely possible that Iran will not have to sell any less crude than she has to offer. Instead of going to the EU, the oil would simply go to Asian nations.
The disadvantage for Iran in this arrangement is that negotiating non-dollar purchases with Russia and China will be a freighted political activity, as opposed to a simple marketplace transaction. This is an important, game-changing disadvantage. The “customer” will hold the upper hand in Iran’s economic-survival transactions. However Iran deals with that, it will change Asia for the foreseeable future, and begin to affect conditions at Asia’s juncture with Europe and Africa sooner than we imagine. The political consequences of that shift in power relationships will be uniformly disadvantageous to the US and our allies.
Meanwhile, however, Iranian natural gas continues to flow. Turkey, like China, is taking advantage of Iran’s precarious position to negotiate a price reduction on Iranian gas. But Pakistan is moving ahead with Iran on a gas pipeline project that is intended to eventually transport gas to India as well. And although the EU has sworn off Iranian crude, BP reportedly believes that natural gas from a Caspian Sea field in which Iran has a 10% interest will be exempt from the sanctions. Iran’s gas exports will continue to be a source of hard currency – whatever hard currency now means.
The pivot-point of change
The quiescent global regime of hard currency and the effective national independence it bolsters – for anyone who can generate robust, honest trade – are already in the process of breaking down. Trying to isolate Iran from that regime is undermining the regime itself, because Russia, China, and India are all willing to operate outside of it in dealing with Iran. This is a reflection not only of their resistance to the US policy on Iran, but of their assessment of the West’s prospects for stability. The perception of safety in the US dollar and the US security regime is no longer the governing “cost” factor. The Asian giants are willing to accept the cost of what is essentially a system of politics-based barter, because their higher priority is doing things their way from a geopolitical standpoint.
At some point, other nations will probably face a choice between making tacit agreements with the Asian giants, or sticking by the heroic gestures of Washington and Brussels – whose own monetary soundness is daily less unassailable. A quick resolution of the Iran problem would avert that choice, but such a resolution is all but impossible, even if miracles can never be assumed away entirely. The sanctions on Iran will either be lifted without achieving their goal, or – one way or another – they will fundamentally transform the geopolitical environment of Asia. The latter is more likely at this point.
China’s move to occupy a central position
Russia has a significant advantage in doing business with Iran: their shared sea-link through the Caspian Sea. But China has been laboring to arrange for advantages of her own, and, through the oil industry, has managed to establish herself – in something of a Napoleonic move – in a central position on one of the most important borders in the region: the southern border between Iran and Iraq.
On 22 January, Michael Ledeen highlighted a little-noticed report on an agreement recently concluded between Beijing and Tehran, which will allow China to develop oilfields in western Iran. Besides outlining the areas where the Chinese will set up infrastructure, the report claims that the agreement provides for China to give military protection to the oilfields. This may or may not mean that the Chinese presence will include such weapon systems as anti-air missiles, but it undoubtedly covers oilfield security detachments that could be manned by the Chinese army.
China has taken little trouble to disguise her deployment of troops into the province of Gilgit-Baltistan, in northern Pakistan – it is not by any means unthinkable for her to put troops in Iran, if she can arrange to. The location of the areas where China will operate is equally interesting. In addition to the Persian Gulf coast – reportedly out to 8 km (5 statute miles/4 nautical miles) seaward – the Chinese will be in an area running from Ilam province up to Marivan along the border with Iraq (see map). There is an additional concession in northwestern Iran on the Caspian Sea coast.
China is already developing oil and gas resources on the Iraqi side of the border, across from Ilam province (see map). In late December, China National Petroleum Corporation (CNPC) shipped the first oil to market from the Al-Ahdab field in Iraq’s Wasit province. CNPC is also developing the Halfaya oilfield, southwest of Al-Ahdab in Maysan province (and is a participant in oilfield development in Rumaila, in Iraq’s southern tip).
Iran’s oil and gas deposits are located almost entirely on her western border. But Iraq’s are more geographically diverse, and China’s choice in Iraq was to pursue oilfields near the southern border with Iran. The oilfields where China operates – if Rumaila is included – lie on either side of the Iraqi approach through Basra province to the Shatt-al-Arab, where the Tigris-Euphrates empties into the Persian Gulf. With positions commanding the Iran-Iraq border and the long-disputed Shatt-al-Arab, China could hardly have selected a more geopolitically significant area in which to establish a presence – and have a plausible reason to transship lots of huge things in big containers. Meanwhile, of course, she gets oil out of it as well.
It would be wrong to think of this move as a precursor to conducting offensive war. That is not Beijing’s objective. What the Chinese have in mind is establishing an influence with both Iraq and Iran that would ensure China’s participation in resolving disputes, making new accords, and agreeing on principles for regional order. China doesn’t want to fight the United States in the Persian Gulf, but she hopes to deter the US and NATO by claiming a Chinese stake in the targets we might have to attack, and the arrangements we might seek to undo.
What, after all, will we do about oil shipments from Iran to China? If they are contracted by China and handled by, say, a Liberian-flagged tanker owned by an Asian or Middle Eastern nation, will we go beyond issuing warnings to actually attacking oil tankers, or punishing nations with which we have good relations? We could ask similar questions about offshore oil rigs in Iranian waters being defended by detachments of Chinese soldiers.
The naval component
China isn’t leaving the balance of naval power in the Persian Gulf region to chance: in December 2011, the Chinese were “considering” a basing offer from the Seychelles, in the Indian Ocean east of Africa, which would allow Beijing’s navy to improve infrastructure there and keep a larger naval force deployed continuously. The Chinese have developed basing facilities at Djibouti, on the Red Sea, as well as having built the Pakistani port of Gwadar, immediately outside the Persian Gulf (and having conducted an intensifying series of live military exercises with Pakistan over the past 12 months). The Chinese navy has conducted a number of port visits in Oman as well, since starting its antipiracy/shipping escort patrols in the Gulf of Aden and Arabian Sea in 2008. The naval basing options to which China can have access have multiplied significantly in the last 3 years.
Russia too is negotiating a naval services agreement with the Seychelles, and has more naval force forward deployed right now than she has at any time since 1991. Besides the Admiral Kuznetsov carrier task force in the Mediterranean, the Russian navy is keeping its antipiracy/escort task force in the Gulf of Aden – except when the Pacific fleet task force en route the antipiracy mission is conducting a maritime exercise with India.
It remains to be seen if either Russia or China will be able to deploy forces like reconnaissance or land-based bomber aircraft, which require the use of regional airfields. They may or may not have the cooperation of South Asian nations in that regard. But they will both have the Seychelles, for at least some purposes.
Again, neither nation wants to get into a fight with the US or NATO. What they want to do is discourage the West from acting summarily on its own initiative, by putting a deterrent presence of their own in the region. The Western nations would not have a free hand in that case, and all calculations would be different.
A watershed test of Western will
An example of what Russia and China want to be able to enforce was observed earlier this month in the Mediterranean. Sanctions, including a prohibition on arms imports, are being enforced on Syria while the bloody Assad regime continues to slaughter its people. With the Russian carrier task force on station – the largest aggregation of deployed naval power in the Med at the moment – Moscow conducted a significant test of the will of the US and EU. The result was that a cargo ship carrying Russian arms was allowed to proceed to Syria, in violation of the sanctions, after giving Cypriot authorities a false assurance that its destination would not be Syria. NATO made no attempt to intercept the arms delivery to Assad.
Russia is justified in supposing that this passivity from NATO was a result of the presence of Russian naval power. Perhaps the decisive factor was actually the indifference of Western governments, but with this little episode, the Russians have established at the very least that naval power reinforces indifference. That, at any rate, is the lesson they will take from it. A similar principle can be applied in the Persian Gulf.
Western media took little notice of the Russian arms shipment to Syria, which was followed immediately by the announcement of a Russian military aircraft sale to Syria. The Atlantic West failed this test of will, and Russia is likely to grow bolder in propping up the Assad regime. (Note: although Russia’s behavior is in one sense clearly immoral, it is understandable from the standpoint of Russia’s security. The Russians cannot accept an outcome in which Turkey gets to effectively choose the new leadership of a post-Assad Syria. Yet that is precisely the result the Obama administration is fostering. If it is true that Erdogan is dying of cancer, Moscow will hope to keep a clamp on the status quo at least until the situation in Turkey changes.)
What about that pipeline?
Meanwhile, one other interesting development – or rather, lack of development – rounds out the evolving conditions of the post-American world. There has long been hope for the oil pipeline being built across Oman to link the Persian Gulf and Arabian Sea while bypassing the Strait of Hormuz. The pipeline was begun in early 2009; January 2012 would seem to be just the time to inaugurate it, to the acclaim of a relieved world. The UAE – from whose Persian Gulf coast the pipeline originates – has been promising for nearly a year that oil would start flowing through the pipeline soon.
In early January, however, unnamed sources disclosed that inauguration of the pipeline would be delayed until at least mid-2012 (see here as well). All shareholders in the pipeline corporation reportedly declined to comment to the media – including the construction contractor for the pipeline, a subsidiary of China’s CNPC.
Why would China want to delay making the pipeline operational? Perhaps because relief from the pressure of the Strait of Hormuz crisis would be an advantage for the US-led status quo – whereas keeping the pressure on, in the current conditions, creates incentives for the Gulf nations to seek new patronage. Certainly China can negotiate better deals with an Iran under the gun. Meanwhile, China’s central position as the pipeline’s contractor means that if the Hormuz crisis does come to a head, China can bargain hard with the nations under economic stress demanding to have its flow turned on. It is not clear what’s behind the pipeline delay, but it is clear who derives advantage from it.
Americans and Europeans might recoil from an analysis like this – but readers from Vietnam or Japan probably won’t, nor will many others from the Asian-Pacific region. This is the model of geopolitical pressure, maneuver, and intimidation on which China does business. Russia does too, for that matter, but China has a greater advantage in stealth vis-à-vis Western knowledge and expectations.
The drama playing out across the Middle East gives us an excellent glimpse of what the world will be like without a governing hand from American power. And if the Western nations can no longer justify using power to preserve and foster our trademark conditions of quiescent safety for national borders, commerce, travel, and intellectual exchange – instead deprecating and apologizing for any condition that has to be enforced – the world will have little use for Western leadership. If the fate of other peoples is to be condemned to negotiate bad deals with Chinese oligarchs, from various positions of weakness, there is no advantage in being lectured by Barack Obama, Hillary Clinton, or a parade of irritable Europeans as the iron gates swing shut.