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China's Oil Cutbacks may be only Temporary
July 9, 2012 | 10:47am
Erica Downs
On June 28, the United States reported that China cut its imports of Iranian oil by 25 percent to avoid U.S. sanctions. What impact will the cutback have on China-Iran relations, both economically and politically?
Politically, the exemption from the Obama administration is not necessarily that damaging for China-Iran relations. While China’s relationship with the United States is Beijing’s most important bilateral relationship, the Chinese government would also like to preserve a good working relationship with Tehran. The fact that the Chinese government did not publicly promise to reduce oil imports from Iran to secure an exemption from U.S. sanctions gives Beijing some room to maneuver.
Beijing can tell Tehran that it opposes the sanctions--and that the U.S. exemption does not reflect China’s support for U.S. sanctions. It can note that the reduction is due instead to a contract dispute earlier this year between Sinopec, the largest Chinese importer of Iranian crude, and the National Iranian Oil Company. As a result of this contract dispute, China’s oil imports from Iran fell by more than one-third in the first quarter of 2012.
Economically, China’s cutbacks are having an impact on the Iranian economy, as are reductions made by other countries. Iran’s crude oil exports have fallen from 2.5 million barrels per day (bpd) in 2011 to 1.5 million bpd, which implies revenue losses of $8 billion per quarter, according to the International Energy Agency.
Moreover, unilateral sanctions by the United States, the European Union, Japan and other countries in 2010 have constrained China’s national oil companies in Iran. Since these sanctions were imposed, Washington repeatedly warned Beijing that it opposed Chinese companies taking over oil and natural gas projects abandoned by European and Japanese companies. China’s companies have not taken over any of these projects.
What will China’s cutback mean for Iran’s economy? Can China find alternative oil imports on a long-term basis?
China can find alternative oil imports. Earlier this year, for example, Sinopec was not buying from Iran due to its contract dispute with National Iranian Oil company. So China it bought more oil from Russia and Vietnam. Going forward, China should be able to continue to find oil supplies to replace future reductions in its imports from Iran. Saudi Arabia has increased its output; Libya is back on-line; and oil production is growing in Iraq and the United States. The decline in U.S. imports of light crudes from Africa due to increased domestic production, in theory, frees these crudes for sale to China.
The U.S. waiver of sanctions on China is good for only 180 days. China must cut back even further on its Iran oil imports to continue to get the U.S. waiver in six months. Is Beijing likely to comply? Why or why not?
It will probably be more challenging for China to secure another exemption in six months. The reduction in China’s imports of Iranian crude during the first five months of this year were due largely if not entirely to the contract dispute between Sinopec and National Iranian Oil Company. The contract dispute, which began in late 2011, was resolved in March 2012. As a result, China’s oil imports from Iran began to rise in April, and by May, China’s oil imports from Iran were back to 2011 levels of more than 500,000 bpd.
Sinopec has said it plans to buy 16 to 20 percent less from Iran in 2012. But most of those reductions have already occurred. If China continues to buy at 2011 levels this year, then China is unlikely to satisfy the U.S. criteria of “significant reduction in Iranian crude oil purchases” for another 180-day sanctions exemption.
China is the largest importer of Iranian crude oil. China accounted for 22 percent of Iran’s oil exports in the first half of 2011, averaging 543,000 bpd. How much Iranian oil can China cut back realistically without hurting its own economic growth?
China has reduced its Iranian oil imports by 25 percent from January to May 2012 without any adverse effects to its economy. There are other sources of supply, which could replace future reductions in China’s oil purchases from Iran. Sinopec may be reluctant to change the mix of crudes in its refineries, but it would not be that difficult for Sinopec to do so.
Erica Downs is a fellow at the Brookings Institution’s John L. Thornton China Center.
The following is a link to her latest paper on Iran and China.
U.S. Condemns Iran's Anti-Semitic Remarks
July 3, 2012 | 3:11pm
On July 3, the State Department issued the following statement condemning comments by Iran's vice president.
We strongly condemn Iranian First Vice-President Mohammad Reza Rahimi’s vile anti-Semitic and racist comments on June 26 at the International Day Against Drug Abuse conference in Tehran. The United Nations Office on Drugs and Crime (UNODC) has confirmed that the conference was not held under UN auspices, nor did officials in attendance have any idea that Rahimi would level such offensive charges. Both UN Secretary-General Ban-Ki Moon and UNODC Executive Director Yury Fedotov registered their dismay and serious concern over Rahimi's anti-Semitic speech and issued a statement July 3 calling on Iranian officials to refrain from these kinds of anti-Semitic statements.
The United States supports meetings that address the very real crisis of drug abuse and drug trafficking around the world. We trust that parties interested in combating the scourge of drug abuse and drug trafficking will focus their efforts on legitimate international meetings, and will join us in condemning such attempts to take advantage of them to promote hateful, racist speech.
U.S. Heralds European Sanctions on Iran
July 2, 2012 | 10:17am
On July 1, the White House press secretary issued the following statement on the European Union’s new sanctions on Iranian oil, as they went into effect.
Statement by the Press Secretary on European Union Actions on Iranian Oil
The United States welcomes the European Union’s prohibition of all Iranian crude oil imports and other sanctions on Iran's oil industry, which go into full effect today. This collective decision of the 27 countries of the European Union represents a substantial additional commitment on the part of our European allies and partners to seek a peaceful resolution that addresses the international community’s concerns about Iran’s nuclear program. The United States and the European Union are committed to holding Iran accountable for failing to meet its international obligations. With this decision, our partners in the EU have underscored the seriousness with which the international community views the challenge of Iran’s nuclear ambitions.
This action is an essential part of our concerted diplomatic efforts to present Iran with a clear choice between isolation or meetings its obligations. Iran has an opportunity to pursue substantive negotiations, beginning with expert level talks this week in Istanbul, and must take concrete steps toward a comprehensive resolution of the international community’s concerns with Iran’s nuclear activities.
White House Briefing on New U.S. Sanctions
June 28, 2012 | 6:12pm
On June 28, three senior Obama administration officials gave a briefing on the growing impact of international sanctions on Iran and the new U.S. sanctions on countries that import oil from the Islamic Republic. The following are key excerpts, with factual assessments in bold:
Senior administration official # 1: Today marks two important milestones in our continued international effort to apply pressure on Iran to meet its international obligations with respect to its nuclear program. We’ve obviously been building a very robust and comprehensive sanctions regime for some time now, and we took another very important step forward today in that effort.
First, as of today, and as a result of the President’s determinations on March 30th -- June 11th on the availability of non-Iranian supplies of oil, any foreign financial institution based in an economy that has not been excepted from our sanctions, and knowingly conducts a significant transaction with the central bank of Iran for the sale or purchase of petroleum or petroleum products to or from Iran, is subject to U.S. sanctions…
Second…both China and Singapore have each significantly reduced the volume of crude oil purchases from Iran. So as a result, China and Singapore are excepted from the NDAA sanctions for the next 180 days. China and Singapore obviously join a list of countries that have received exceptions from the United States over the course of the last several weeks. This decision further represents the success of our sanctions policy, and our effort to build an international coalition to reduce Iran’s oil exports, thereby applying significant pressure on Iran.
We’ve seen that the sanctions on Iran’s central bank and oil sector are having a significant effect on the Iranian government and its economy. Just yesterday you saw an Iranian official admit that sanctions have led, according to their own estimates, to a 20 to 30 percent reduction in sales. According to the International Energy Agency, Iran’s crude oil exports in 2011 were approximately 2.5 million barrels per day, and have dropped to roughly 1.5 million barrels per day this year -- a reduction that has and will continue to cost the Iranian government billions of dollars, again, thereby having a significant impact on the revenue that the government can draw from.
We will continue to implement these sanctions fully to achieve additional reductions, as well as to continue to work with other oil producers to encourage increased production and development of their capacity so as to, again, maximize the impact on the Iranian government -- deny the increase in oil prices that could allow them to make up for lost revenue.
While we will continue to monitor closely the developments in the oil markets, including supply, demand, inventories and spare capacity, to assure that the market can continue to accommodate a reduction in purchases from Iran, we have every intention of maintaining these sanctions on the Iranian government, keeping in mind, of course, for instance, that we have the EU oil embargo that is coming fully online here, a process that will continue in the coming days, on July 1.
So the Iranian regime’s choice here has been to flout its international obligations, but they are paying an increasingly high price for that choice. And with these steps today and the steps we’re prepared to take going forward, the costs are only going to rise further for Iran. So it’s in their interest -- the Iranian interest -- to take concrete steps to address the international community’s concerns and to abide by their international obligations. They have an opportunity to do so through the P5-plus-1 negotiations. They have not yet done that. But we will continue to reiterate to the Iranian government that we need to see concrete actions by them to come in line with their obligations, or else we are going to continue to ratchet up these sanctions…
China has made clear that it is opposed to Iran developing and possessing nuclear weapons, and it supports our dual-track approach of diplomacy and pressure as well…Just with regard to the exception today, on June 27th, an authoritative statement was published on a China energy website, and I’d draw your attention to it -- it’s www.china5e.com. In this statement, the Chinese site indicated that there has been a structural change in China’s crude oil imports due to the downward pressure on the economy. These changes include a 25 percent year-on-year reduction between January and May of crude oil imports from Iran to China. The statement on this website noted that there would be a significant reduction in crude oil imports from Iran for 2012 relative to last year as well…
China has taken these actions for its own commercial and energy security reasons. Still, these actions very much align with our shared global interests and allow us to move forward with the exception we’re moving forward with today, and again, it is a part of efforts that have been undertaken by the international community to send a clear message to Iran that they need to come in line with their international obligations.
Senior administration official #2: Sanctions that the U.S. and its international partners have imposed on Iran are having a severe and growing impact…Iran’s energy sector is taking a very hard hit. It was just pointed out by my colleague that decisions by all the major importers of Iranian crude oil to significantly reduce their purchases will mean a sharp drop in Iran’s crude oil exports. This will cost Iran at least $8 billion in lost revenues each quarter, according to the IEA. Reductions in Iran’s oil exports andoil revenues can be expected to increase as the oil sanctions continue to take effect.
Sanctions against investments and the provision of goods and services for Iran’s oil and gas developmental activities have also had a significant impact. All major European and Japanese energy companies have pulled out of Iran’s energy sector. Iran’s inability to gain access to capital and technology has led to a steady decline in its oil production, which is devastating in the long run for an economy so dependent on oil revenues.
Sanctions have also had a crippling effect on Iran’s transportation sectors. Most European and Asian jet fuel providers have cut off supplies to Iran Air, which has provided support to Iran’s proliferation activities. As a result, a majority of airports previously serving Iran Air now refuse to do so. Major shipping lines such as Maersk have stopped calling on Iranian ports due to U.S. and multilateral sanctions. Reputable providers of flagging, insurance and classification services have stopped providing such services to Iran’s main shipping line.
Major indicators of economic activity are bringing more bad news to Iran. Inflation is well above 20 percent. Some estimates go much higher. Iran’s currency, the rial, has lost about 40 percent of its value since November 2011. Unemployment figures are increasing.
Senior administration official #3: We have already imposed very substantial sanctions on 24 of Iran’s largest banks. And those banks, as a result, are largely cut off from the international financial system. In addition, due to steps that the Europeans have taken, those banks are additionally cut off globally from the SWIFT messaging system, which makes it extremely difficult for them to transact business anywhere in the world.
Whereas just a couple of years ago, Iran was doing business on a fairly regular basis in Europe and Asia and the Middle East, all of these major international financial sectors are closing off to Iran, and now with the sanctions that come into effect today, these same restrictions are going to start kicking in with respect to the central bank of Iran.
So what we’re seeing -- what we are seeing and continue to see increasingly as it moves forward is it become increasingly difficult for Iran to support the rial…Since September, the rial has lost 40 percent of its value. It’s going to become increasingly difficult for Iran to finance its trade.
Back in January of this year when we designated Bank Tejerat, that was the remaining large Iranian bank that was accounting for a significant portion of Iran’s trade; with Bank Tejerat now designated and with the central bank of Iran increasingly unavailable to the Iranians to finance its trade, it’s going to become very difficult for Iran to finance its trade. It’s going to become increasingly difficult for Iran to access its foreign reserves and to generally manage its economy.
And if you look at the Iranian economy compared to similar economies of other oil-exporting nations, you can see that the Iranian economy is significantly underperforming to say the least. And I think the numbers on that speak for themselves.
China Cuts Back Iran Oil Imports
June 28, 2012 | 2:56pm
On June 28, Secretary of State Hillary Clinton issued a waiver on China and Singapore from facing U.S. sanctions because both have now significantly cut back on their imports of Iranian oil. The following is her statement.
Today I have made the determination that two additional countries, China and Singapore, have significantly reduced their volume of crude oil purchases from Iran. As a result, I will report to the Congress that sanctions pursuant to Section 1245(d)(1) of the National Defense Authorization Act (NDAA) for Fiscal Year 2012 will not apply to their financial institutions for a potentially renewable period of 180 days.
A total of 20 world economies have now qualified for such an exception. Their cumulative actions are a clear demonstration to Iran’s government that Iran’s continued violation of its international nuclear obligations carries an enormous economic cost. According to the International Energy Agency (IEA), Iran’s crude oil exports in 2011 were approximately 2.5 million barrels per day, and have dropped to roughly 1.5 million barrels per day, which in real terms means almost $8 billion in lost revenues every quarter. When the European Union oil embargo goes into effect July 1, Iran’s leaders will understand even more fully the urgency of the choice they face and the unity of the international community.
Today marks an important milestone in the implementation of the NDAA and U.S. sanctions toward Iran. Following the President’s determinations on March 30 and June 11 on the availability of non-Iranian supplies of oil, as of today, any foreign financial institution based in a country that has not received an NDAA exception is subject to U.S. sanctions if it knowingly conducts a significant transaction with the Central Bank of Iran for the sale or purchase of petroleum or petroleum products to or from Iran.
We have been clear all along that there is a path for Iran to fully re-join the global economy. Iran’s leaders have the opportunity to address international concerns by engaging seriously and substantively in negotiations with the P5+1. I urge Iran to demonstrate its willingness to take concrete steps toward resolving the nuclear issue during the expert-level talks scheduled in Istanbul on July 3. Failure to do so will result in continuing pressure and isolation from the international community.
The Islamists Are Coming
The Islamists Are Coming, edited by Robin Wright, surveys the rise of Islamist groups in the wake of the Arab Spring. Often lumped together, the more than 50 Islamist parties with millions of followers now constitute a whole new spectrum—separate from either militants or secular parties. They will shape the new order in the world’s most volatile region more than any other political bloc. Yet they have diverse goals and different constituencies. Sometimes they are even rivals.
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