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A Dangerous Partnership

By Ilan Berman
Wall Street Journal
February 22, 2007

Financial pressure by the U.S. and other Western governments in recent weeks is beginning to have a real impact, chilling investment into Iran's energy sector and ratcheting up the costs of the regime's atomic effort. But these gains are in danger of being erased, thanks to the growing economic partnership between Tehran and Beijing.

In late December, China's third-largest national energy conglomerate, the China National Offshore Oil Corporation (Cnooc), signed a memorandum of understanding to develop Iran's massive North Pars natural gas field. Under the prospective deal, worth a whopping $16 billion, Cnooc would cooperate with the National Iranian Oil Company to develop and liquefy the field's estimated 80 trillion cubic feet of natural gas. At around the same time, another Chinese firm, PetroChina, inked a deal to annually import some three million tons of liquefied natural gas from Iran over a quarter-century. PetroChina's parent company, the China National Petroleum Corporation (CNPC), has followed suit, finalizing a $3.6 billion project to explore and exploit Iran's South Pars gas field.

In the process, Beijing has put the Bush administration on the horns of a major policy dilemma. The first part of the problem is practical. Cnooc is a publicly traded company on the New York Stock Exchange. So is PetroChina. As such, both potentially are subject to the provisions of the 1996 Iran-Libya Sanctions Act (ILSA), which is intended to curb Iran's "ability to support acts of international terrorism and to fund the development and acquisition of weapons of mass destruction and the means to deliver them." It does so by authorizing the White House to impose a number of concrete economic penalties -- from prohibitions on large-scale U.S. bank loans to restrictions on the procurement of goods -- on foreign corporations engaged in commerce in the U.S., which also do more than $20 million annually in business with Tehran. The message of the law, as written by Congress, was clear: You can trade with us, or with Iran, but not with both.

But when it comes to China, the situation is not so simple. Cnooc, PetroChina and CNPC are not just private entities; they are appendages of the Chinese Communist Party, and de facto instruments of its foreign policy. The application of sanctions against them, therefore, would be tantamount to an act of economic warfare -- and the Bush administration has little stomach for a trade war (or worse) with China.

The second issue is strategic. Already, other foreign multinationals have begun to take their cues from Beijing. Royal Dutch Shell has, along with Spain's Repsol, just concluded a preliminary agreement with the Iranian regime worth an estimated $4.3 billion for the construction of a liquefied natural gas plant and port terminal in the Islamic Republic. Malaysia's L1, meanwhile, recently signed a deal worth nearly $3 billion to build a refinery in Iran's Khuzestan province. Needless to say, these deals have struck a body blow to the recent progress made by Washington in isolating the Islamic Republic financially.

Reversing this trend is bound to be an uphill battle. Over the past decade, ILSA has been honored entirely in the breach, with the U.S. consistently failing to apply its provisions to foreign violators.

The one time that it came even remotely close to doing so was in 1998, against Russia's Gazprom, France's TotalFinaElf and Malaysia's Petronas. But the Clinton administration ultimately chose to waive ILSA provisions in the spirit of international cooperation -- and as a sop to the new, "reformist" government in Tehran. That decision became the model for subsequent violations by companies such as Italy's ENI, Canada's Sheer Energy and Norway's StatOil. Each time, Washington's calculus has been the same: bilateral trade over international security.

This is a major miscalculation. Bilateral sanctions are a critical tool in the U.S. economic arsenal. By actively enforcing such measures, policy makers in Washington have the ability to hammer home the point that trade with an increasingly intransigent Iranian regime is not cost-free -- and to force Iran's trading partners to choose between doing business with Tehran and conducting commerce with the U.S.

At the end of the day, China's economic interests are understandable. Runaway economic growth has brought with it a voracious appetite for energy, and Iran has emerged as one of China's largest oil suppliers. As a result, policy makers in Beijing have studiously avoided making a choice on Iran's nuclear program, even as they provide the Iranian regime with the economic tools to accelerate it.

The failure of the Bush administration to take Beijing to task, however, is far less comprehensible. U.S. policy must be geared toward making China and its economic fellow travelers aware of the gravity of the unfolding Iranian nuclear crisis -- and providing them with the political rationale to make the right choices about partnership with Tehran. Raising the costs for China to do business in the Islamic Republic seems like a very good place to start.

Related Categories: Iran Freedom Initiative; Iran

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