Saturday, June 30, 2012

Who will Iran sanctions really cripple?

Who will Iran sanctions really cripple?
By Peter Lee

Collective punishment is alive and well in the 21st century. Iran, North Korea, Syria, the Gaza Strip and Cuba labor under stringent economic sanctions imposed by Western leaders too young to remember the miseries that World War II inflicted on the well-being, prosperity, and dignity of their civilian citizenry.

Apparently in an attempt to put a human face on the "crippling" sanctions imposed on Iran for jet-setting Western elites that find the minor personal affronts of the Transportation Safety Administration at US airports unendurable, the Tehran regime invited New York Times pundit-in-chief Nicholas Kristof to undertake a largely untrammeled and unsupervised 1,700-mile (2,735-kilometer) tour of Iran.

If the regime hoped that Kristof's squishy liberal core would be touched by what he saw, they were undoubtedly disappointed. His humanitarian impulses safely in check, on June 17 Kristof wrote:

"The economy is breaking people's backs," a young woman told me in western Iran.

I regret this suffering, and let's be clear that sanctions are hurting ordinary Iranians more than senior officials. …

Yet, with apologies to the many wonderful Iranians who showered me with hospitality, I favor sanctions because I don't see any other way to pressure the regime on the nuclear issue or ease its grip on power. My takeaway is that sanctions are working pretty well. [1]
"Regret" and "apologies" aside, Kristof's message was the same as fellow Times columnist Thomas Friedman's infamous advice to Iraqis terminally discommoded by the US-led invasion:

Well, Suck. On. This.

If Friedman's journalistic lodestar is the cabbie who drives him from the airport, Kristof sets his reportorial compass by the local Apple store.

Of course, in Tehran, it's not the official Apple store. It's the local shop selling smuggled iPads and iPods.

Kristof uses his experience at the store to highlight the sophisticated character of the Iranian urbanite, yearning to be part of the cosmopolite international elite plugged into the Western system - and disenchanted with the obstinate theocracy whose independent foreign policy deprives him or her of unfettered access to these desirable doo-dads.

Undoubtedly, Kristof's heartstrings would also be tugged into further empty expressions of "regret" and "apologies" by reports that American Apple sales clerks, acting on corporate instructions to adhere strictly to the US sanctions regime, are refusing to sell their electronic treasures to Farsi-speaking customers, whether or not they actually intend to send them to relatives inside Iran. [2]

Nevertheless, smuggled Apple products apparently enter Iran in large enough quantities that the premium is only $40 to $60 more than what US consumers pay. [3]

A more striking example of Kristof's neo-liberal tunnel vision occurs as he discusses another outrage inflicted on Iranian youth by the mullahs' refusal to knuckle under to the West:
I chatted with the owner of a store selling Nike, Adidas and Saucony sneakers, hugely prized as status symbols. If a young man wants to find a girlfriend, the shop owner explained, the best bet is to wear Nikes.

But sales have dropped by two-thirds in the last year, he fretted. He added in disgust that some Iranians are in such penury that they attend parties wearing Chinese-made, fake Nikes.
Perhaps Kristof needs reminding that Nikes, both real and fake, are made in China (virtually all Nikes are made in the democratic hot spots of Vietnam, China, and Indonesia).

For that matter, Apple is pretty much a Made in China operation.

Which brings us to the issue of unintended consequences.

Beyond inflicting pain on Iranian citizens and eroding the legitimacy and authority of the Iranian regime, the Western sanctions regime has accelerated both the strategic alliance and the economic integration of the Iranian regime and the People's Republic of China.

As the United States, EU states, and Japan have pursued their program of diplomacy by harassment against Iran, China has exploited the opportunity to scoop up energy and infrastructure projects.

This Chinese "backfilling" has attracted the anger and frustration of the United States for at least a decade - and some serious heartache for the EU, which regards Iran as its natural market and energy source.

But China can do what it wants, it seems. China hasn't signed on to the sanctions regime - beyond the narrow nuclear, weapons of mass destruction and missile-related sanctions passed by the Security Council - and has declined to follow US sanctions guidance or, for that matter, weigh in with any national sanctions of its own.

The Chinese conundrum has been a key headache for US strategy on Iran. Beijing's resistance to playing the sanctions game has undercut US strategy both toward Tehran and Pyongyang.

The US government has made what I believe is disastrous and strategically short-sighted decision in response - politicizing the enforcement powers of the Treasury Department in order to leverage the central US position in the world financial system for narrow geopolitical ends.

The theory is that recalcitrant nations can be coerced into supporting US national sanctions through the threat of cutting off their financial institutions from the world financial system.

The experiment was first tried against China on the issue of North Korea in the matter of a Macao institution, Banco Delta Asia (BDA) during the George W Bush administration.

In 2007, BDA was cut off from the US financial system on some extremely dubious charges concerning its purported role as a nexus for North Korea's alleged efforts to launder the notorious "Supernote" counterfeits.

The fact that BDA sent all of its cash deposits to that distinguished imperial institution, Hong Kong & Shanghai Bank, for inspection and no counterfeits had been detected for years was an evidentiary speed bump that the US Treasury Department's newly politicized Financial Crimes Enforcement Network or FinCEN easily ignored.

One of the architects of the policy, David Asher, declared in congressional testimony that the purpose of the policy was "to kill the chicken in order to scare the monkeys", the chicken being BDA and the monkeys being the People's Bank of China, an important conduit for North Korea's international financial transactions..

It appears that China received a genuine scare from the BDA case, but dodged the FinCen bullet when North Korea fortuitously detonated an atomic bomb and the US hardline against Pyongyang collapsed in a fog of proliferation-related anxiety.

The BDA case also collapsed in humiliation and disarray for the United States (despite the solicitous efforts of the many US foreign policy journalists to protect it from the embarrassment that honest and accurate reporting would have inflicted) as the (relative) grown-ups led by former secretary of state Condoleezza Rice regained control of the Bush foreign policy apparatus from vice president Dick Cheney, former UN ambassador John Bolton and the cowboys.

When President Barack Obama took office, the commitment to financial coercion was not abandoned; it was improved and upgraded.

Stuart Levey, who had directed the weaponization of FinCEN under Bush, was the second-highest Bush official retained by Obama (after former defense secretary Robert Gates).

In true Obama fashion, the financial sanction process was carefully formalized and legalized.

Instead of financial sanctions implemented in secret star chamber proceedings on trumped-up charges under US domestic financial regulations by a cabal of ideologues enjoying privileged authority within the executive branch thanks to the support of the White House, the Obama administration went to congress and acquired the color of law for coercion against nations that flouted US calls for financial sanctions.

Obama also enjoyed the immense advantage of not being George W Bush.

Instead of the Bush approach to foreign policy - which took as its point of departure unilateral, untransparent US decision-making and action, followed by ruthless testicle-twisting to obtain the compliance of reluctant allies - Obama's foreign affairs team solicited and obtained the buy-in of previously uncooperative governments in the European Union and Asia.

As a result, the sanctions regime against Iran, as Kristoff reported, is remarkably robust and effective.

But just as China was the monkey-or 400-pound gorilla-in the room on North Korean sanctions under the Bush administration, it plays a similar role in Iran sanctions today.

The key headache for the United States is how to keep China from either exploiting Iranian opportunities to the detriment of loyal sanctioners, or alleviating Iranian misery to the extent that the regime can escape the threat of an economic, subversion, and sedition-fueled "Iranian summer" of regime change.

The primary weapon in the hands of the United States is a section of the 2012 Defense Appropriations Act that gives the executive branch authority to sever banks that transact energy business with Iran from the US financial system - unless their home countries obtain a precious six-month waiver from the US government.

A decrease of 20% is enough to get the waiver. Presumably this is the number that the US came up after conferring with Saudi Arabia, the Gulf emirates, and Iraq to determine how much shortfall they could realistically make up. The grinding economic crisis has actually been a blessing in disguise; despite taking a considerable amount of Iranian energy out of the supply equation, prices have actually dropped instead of risen in an environment of slackening demand.

Iran has suffered a double whammy as its absolute volume of exports has dropped, and oil prices have sagged at the same time, delivering the "crippling" economic blow that sanctions advocates have always yearned for.

The EU, for whom economic suicide has apparently become a way of life, went the whole hog and banned Iranian energy imports entirely despite the reliance of weak sisters Greece, Italy, and Spain on Iranian imports.

Strategic allies such as South Korea and Japan heeded the call to cut imports.

South Africa, India, and Malaysia responded less enthusiastically, but reduced imports enough to gain the waiver.

In its unbridled and perhaps unnecessary enthusiasm, the EU sanctions will also forbid European insurers, who currently cover 95% of crude shipments, to cover Iranian cargoes, thus creating no small inconvenience for the compliant nations that have cut their imports by 20% but still somehow have to get the other 80% safely to their shores.

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.

Pinched and Griping in Iran, NY Times, Jun 17, 2012.
Iranian-Rights Groups Blast Apple, Discovery News, Jun 27, 2012.
Apple store the front line of Iran trade sanctions,, Jun 25, 2012.
Clinton hints China could avoid oil sanctions, The Hill, Jun 21, 2012.
Sinopec turns down cut-price Iran crude: source, Reuters, Jun 12, 2012.
Yuan today, gone tomorrow? Breakingnews, May 9, 2012.
India and China Skirt Iran Sanctions With 'Junk for Oil', Bloomberg, Mar 30, 2012.
Sanctions against Iran drive up China trade tenfold in decade, SCMP, Jun 28, 2012.
Guest post: Brics "hostage" to west over Iran sanctions, need financial institutions, FT, Jun 27, 2012.
China Busy Signing Currency Deals, Forbes, Jun 26, 2012.

Peter Lee writes on East and South Asian affairs and their intersection with the ZIOCONNED US foreign policy....

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