Iran nuclear sanctions: Why the world still does business with Tehran


By Parag Khanna

Fresh bilateral talks have started in Geneva this week between the United States and Iran over Tehran's nuclear ambitions -- but it is unlikely that the P5+1 group will lift major financial sanctions before the July deadline for this round of negotiations.

Instead, the most likely scenario appears to be an extending of the current interim agreement. Although the IAEA recently verified that Iran has eliminated its second stage uranium enrichment capacity, which was something of a significant concession, Tehran is unlikely to gain a permanent lifting of oil and banking sanctions by way of return.

Nevertheless, there is still a clear trend towards a break between commercial and nuclear diplomacy. Even if the latter stalls, the former is a train that has left the station -- and that will constitute the decisive and irrevocable breakthrough in the end.

As the nuclear talks continues the cat-and-mouse pattern begun more than a decade ago, commercial engagement is heading into uncharted -- and likely irreversible -- territory.

Understanding Iran's diplomatic push

The ink is not yet dry on November's Joint Action Plan, which was intended to ease sanctions: Russia has promised to buy 500,000 barrels per day of Iranian crude oil, lifting its exports by 50% and adding $1.5 billion a month to Iran's struggling economy. A $20 billion barter deal is in the works, exchanging Iranian oil for Russian industrial goods and food. With Ukraine revealing a deep fissure between the West and Moscow, it is unlikely that Russia would comply with any extension of sanctions anyway.

Iran's foreign minister Javad Zarif has firmly declared that there will be no agreement until all sanctions are lifted. The rest of the world is taking him at his word as well. At the World Economic Forum's annual meeting in Davos this January, Iranian President Hassan Rouhani met with CEOs and with EU Commission President Barosso, followed by a large French business delegation -- including major firms such as GDF Suez, Lafarge and Alstom -- visiting Tehran in February. Renault has resumed car part shipments to Iran. Clearly, the business community moves faster than governments.

China already does more than $20 billion per year in trade with Iran, and is responsible for most of the $16 billion direct foreign investment into Iran during 2013 double the volume in the previous year. In February China's commerce minister Gao Hucheng signed an agreement in Tehran aimed at doubling non-oil trade in the coming years. Chinese-Iranian trade and investment volumes have fluctuated due to sanctions -- and with the U.S. withdrawal from Afghanistan all but complete, both countries are accelerating plans to deepen the "new Silk Road" rail and highway corridor across the only country that separates them. No doubt the next Afghan president, who faces empty coffers as American aid slows to a trickle, will welcome his neighbors' initiative.

There have been plenty of other willing sanctions busters. Turkey has sold close to $10 billion in gold to Iran in exchange for much needed gas. Turkmenistan and other Central Asian republics have conducted oil swap deals with Iran in which they ship crude across the Caspian Sea to Iranian terminals and Iran delivers oil to their clients via its Persian Gulf terminals.

The message is clear: Sanctions are a false piety, and while they have been disastrous for an economy which might be on a par by now with Turkey or Mexico, they don't seem to have damaged Iran's nuclear program any more than fresh sanctions on Russia over the Ukraine crisis will hurt its military. The IAEA has said that Iran's centrifuge count, necessary to enrich uranium, has risen from 300 to 19,000, with a potential timeline to test a nuclear weapon of anywhere from one to three months. Some experts argue that even a military strike on one of Iran's major nuclear facilities at Nantaz or Arak would only delay nuclear weapon breakout capacity by six to 12 months. As far as global companies are concerned, therefore, blocking them from making commercial inroads into Iran makes little, if any, logical sense.

While America prides itself on doing the "heavy lifting" of conflict and diplomacy to liberate Iraq and contain Iran's nuclear program, the rest of the world seems to simply want Washington to get out of the way. Today's dynamic is reminiscent of when Libya opened up to the rest of the world in 2003: once Tripoli had pledged to abandon its nuclear program, Europeans raced into the country to make deals, with then UK Prime Minister Tony Blair lobbying for years on behalf of then-leader Muammar al-Gaddafi and Western business interests. Observing how Iraq's oil sector has played out is also instructive. America sacrificed more than 4,000 lives on Iraqi soil in order for Royal Dutch Shell, Russia's Gazprom, Malaysia's Petronas, and PetroChina to dominate the country's production and exports.

The Iran dynamic is similarly shifting from isolation to tug-of-war: whoever builds the most "Silk Roads" connecting commercially to Iran wins. A simple look at a map will suffice: Iran is a large and centrally located nation with thousands of years of regional ties -- and a large diaspora -- which serve to keep the country connected. It is not Cuba (not that isolating Cuba has led to regime change either): decades have been wasted pretending that a central civilization such as Iran could be contained, or believing that it is deeply irrational, a cause rather than a country.

Bringing Iran fully into the global economy is an opportunity few are willing to resist any longer: even American companies. Cargill, Archer Daniels Midland and other American food producers and traders have been among the chief beneficiaries of loopholes and exemptions in existing sanctions. Now others want in on Iran's lucrative market, not least oil and industrial giants eager to access and overhaul Iran's decrepit energy infrastructure. Under the vague provisions of the Geneva agreement, GE and Boeing now claim they have the right to inspect and repair American-made aircraft engines used in Iran's civilian aircraft.

If one year from now Iran remains close to developing a nuclear weapon, then we can expect that Russia, China, India, Turkey and other nations will nonetheless have moved well ahead in exploiting the current thaw to lock-in long-term deals with Tehran. Furthermore, the European temptation to tap Iran's energy supply and access its flows through the Nabucco and other gas pipelines will prove overwhelming, especially in the aftermath of Russia's ever unpredictable aggression in eastern Europe.

The U.S. stands little chance of unwinding these commercial arrangements, even if Iran proves recalcitrant on the nuclear front. Instead, Western countries should understand that their leverage can be more effective if applied to a dynamic of engagement than one of containment. The U.S. should add its weight to this tug-of-war over Iran. If the West fully lifts sanctions for the first time in decades, it can strongly re-shape Iran's economic and diplomatic constellations. The U.S. should, as it has done in Myanmar, allow American companies to invest directly except with blacklisted individuals and entities, and with certain additional reporting compliance requirements. After decades of leading isolation and sanctions, President Obama had an impactful visit to Yangon in 2012 and U.S. companies now enjoy a privileged status in Myanmar. Iran's recent cancellation of a $2.5 billion China National Petroleum Corporation project for the joint development of the South Azadegan oil field project is a very strong sign that an open Iran will choose Western quality goods and services over China's often under-whelming technology.

Places like Dubai, whose long-standing Iranian trade has been curbed substantially due to sanctions, would likely have a greater role in the race for the economic and strategic spoils in Iran. Indeed, the UAE has just concluded a high-level agricultural and industrial delegation to Iran that explored both investments in Iran and facilitating Iranian exports.

In a more regulated framework, Dubai will become the offshore hub for Iran's rehabilitation for at least a decade or more, a safe city to negotiate with Iranian counterparties, a location where investors can place collateral for transactions rather than with Iranian banks directly. This would also make it easier to monitor a large portion of the investment into Iran.

Oman, which in recent years has been a back-channel mediator between the U.S. and Iran, has just unveiled plans for a 1,000 km gas pipeline to Iran, making it another crucial Arab ally in overseeing the evolution of Iran's energy sector.

Lifting sanctions would not suddenly make Iran or Iranians pro-Western rather than playing the country's central geography to multi-align in all directions with China, Russia, India, Europe and others. But it would empower a stronger commercial constituency inside Iran to keep access to its markets open -- and more openly oppose Tehran policies that risk undermining their gains. This hardly amounts to an anti-nuclear lobby, but would certainly constitute one with a lot more to lose by supporting the regime's agenda.

Iran will only accept such a path as a genuine two-way street. As such, it must hold up its end of the bargain -- or face fully justified Western measures -- from sabotage to cyber-attacks to airstrikes -- to delay its nuclear program.

But America should not delude itself: Even a nuclear Iran is one most of the world will do business with.

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