An Analysis of Iran’s Trade Regime, and its Economic Ties to Key Global Players

As Iran continues to move forward with its nuclear program, and as attempts at diplomacy have given way to more aggressive rhetoric, the specter of economic sanctions has once again stepped out on to the international theatre’s main stage. Unlike previous sanctions, though, the current US proposal being circulated among UN Security Council members would reportedly call for an outright ban on specific transactions between UN countries and the Islamic Republic, in an attempt to more precisely target the banking, insurance and shipping sectors under the control of the Islamic Revolutionary Guard Corps (IRCG).

The debate rages on, however, over how effective a new slate of sanctions would be in halting or even deterring Iran’s uranium enrichment efforts. While most Western powers have come out in favor of the proposed sanctions, support from Russia and China remains critical. Not coincidentally, both hesitant, veto-wielding countries also have significant economic interests within Iran’s borders.

The debate may be shrouded in political discourse, but it’s unquestionably driven by economics. And while experts and policy-makers may continue to disagree over the capacity of sanctions to bring about real political change, the only way to undertake a cost-benefit analysis of prospective economic sanctions is from the bottom, with a more detailed excavation of the Iranian trade climate and the trade relations governing it.

Iran’s Trade Landscape

With a full 10% of the world’s known oil reserves within its vast borders, Iran’s economy revolves, not surprisingly, around energy. In 2007, the Iranian state pulled in $57 billion in oil export revenue, comprising about half of all governmental revenue. Oil currently comprises about 80% of all Iranian exports.

Under the administration of President Mahmoud Ahmadinejad, though, the country’s domestic economy has staggered under the weight of enormous government subsidies, rising unemployment, and double-digit inflation levels. Without proper infrastructure to refine its massive supply of crude oil, the country has been forced to import gasoline. According to a recent Reuters report, Iran imported 23% more gasoline in February of 2010 than it did during the same month last year.

While many agree that sanctions targeting the IRCG would exert some deleterious effect upon the Iranian economy, others believe that sanctions could actually benefit specific partners. Dr. Arang Keshavarzian, associate professor at the Department of Middle Eastern and Islamic Studies at New York University, claims that “the tightening of sanctions will benefit three groups-traders based in free trade zones in the Gulf (especially in Dubai), business interests in countries able to resist or skirt sanctions 9especially in East and Southeast Asia), and large parastatal organizations in Iran.”

Since 1996, when the US government unilaterally passed the Iran and Libya Sanctions Act (ISLA), Iran has greatly expanded its trade relations with specific partners. Although the EU and the People’s Republic of China lead the list of Iran’s top trade partners, recent years have seen a surge in Iranian trade with other developing countries, such as Syria, Venezuela, Cuba, and India.

With the prospect of multilateral economic sanctions once again looming over Iran, two of the Islamic Republic’s trade partners-Russia and China-have each stepped in to particularly pivotal political roles, warranting a closer look at their economic ties to Tehran.

Russian Uncertainty

Russian-Iranian trade stems primarily from a similar abundance in natural gas. The two countries possess the two largest reserves of natural gas in the world, and have developed strong economic relations in an effort to capitalize on their endowment. In October 2008, Russia, Iran and Qatar, together comprising a full 40% of the world’s natural gas reserves, entered into a formal agreement to strengthen their energy related economic bonds. In addition to their energy related endeavours, Russia and Iran have, since 2008, expanded trade in agriculture, telecommunications, and aviation.

Although the Russian government officially supported each of the three previous rounds of UN Security Council sanctions against Iran, it has openly helped the Islamic Republic develop its nuclear facilities in Bushehr, which will reportedly be completed in 2011. After vehemently arguing against bringing economic sanctions up for Security Council deliberation in 2005, Russia promptly voted in favour of the measures in 2006. Once again, Russian diplomats have expressed discontent over current proposals, while acknowledging the danger that a nuclear Iran could present.

The most contentious issue surrounding Russo-Iranian relations remains the impending delivery of air defense missile systems to Iran, which were guaranteed under a 2005 contract signed between Tehran and Russia’s state owned Rosoboron export agency. The deal has been met with derision from Western leaders, who argue that Russia is merely giving Iran the safety net incentive it needs to pursue uranium enrichment.

There has also been considerable concern expressed over Russia and Iran’s comparatively blatant exchange of scientific knowledge. For years, Iran has been allowing Russian and Ukrainian scientists free entry into the country via what policy experts call an “underground tunnel” of suspicious visa policies. Unlike other commodities traded across Russian and Iranian borders, it’s virtually impossible to gauge the true value of this knowledge exchange, although a 2009 CIA report firmly claims that the assistance of Russian experts has “helped Iran move toward self-sufficiency in the production of ballistic missiles.”

The Chinese Enigma

While the EU has long been Iran’s largest trading partner, accounting for over $35 billion of total trade in 2008, China appears poised to overtake the Europeans-if it hasn’t already. According to a February article in the Financial Times, China may have officially accounted for only $29 billion of Iran’s 2008 trade, but the actual figure is probably much higher, since a substantial portion of Iranian-Chinese trade flows are funnelled through the UAE. When these shipments are taken into account, experts estimate the grand total value of trade flows to be at least $36.5 billion.

Much of Iran’s imports from China consist of consumer goods and machinery, while Iran, in turn, provides roughly 12% of China’s energy needs, as evidenced by the 23 million tons of crude oil it exported to the People’s Republic in 2009. According to recent projections from the China National Petroleum Corporation, Chinese imports of Iranian oil could rise by as much as 9.1 percent in the coming year.

Iran, crippled by its inadequate refinery infrastructure, has begun importing greater amounts of refined fuel from China. According to a September report from the Financial Times, somewhere between 30,000 and 40,000 barrels of Chinese petrol arrive in Iran on a daily basis, usually via third party intermediaries.

Much like Russia, China’s outward approach to Iran has often been orthogonal to their economic and commercial actions. Although China has supported the three previous sets of sanctions, in recent years, it has only stepped up economic cooperation with Tehran. Several Chinese firms have assisted in developing Iran’s energy capacities, including last year’s $1.76 billion contract to development of the North Azadegan oil field, and a $3.39 billion deal to produce liquefied natural gas in the South Pars field, agreed to in March 2009.

Most critical to diplomatic negotiations, though, are rumoured Chinese sales of missile technology to the Islamic Republic. China, like Russia, has a long history of arms trade with Iran, dating back to the 1979 Islamic Revolution. The ability of Chinese scientists to reverse engineer military technology has allowed them to reproduce old Soviet missile technology, and funnel the end products to Iran.

Just last year, an investigative report by the AP bureau in Taipei revealed that Chinese merchants had successfully delivered over 100 pressure transducers to Iran, via an elaborate chain of delivery that masked the end destination of the devices. According to nuclear experts, the only logical explanation for a country purchasing that many transducers at one time would be for uranium enrichment activities. The Chinese government maintains it knew nothing of the clandestine trade, but many have read their defense as a veiled, diplomatic attempt to avoid ruffling Iran’s feathers.

For the moment, then, the fate of a new round of economic sanctions remains, rather ironically, dependent upon support from two of Iran’s most prominent trade partners. Furthermore, while the set of sanctions currently under consideration would not directly affect Iran’s energy sector, it’s clear that the complexity of its political economy goes far beyond oil. In a diplomatic climate in which words are invalidated by actions, and in which economic figures, on their own, only tell part of the story, separating political from profit-seeking behavior has become a nearly impossible task.

It’s too early to say whether politics or economics will ultimately decide the course of action the international community takes with Iran. But judging from the deeply entrenched trade relations the Islamic Republic enjoys with two enormously important world powers, arriving at a global consensus may only be part of the equation. At the end of the day, holding Iran’s trade partners accountable to their words may prove even more difficult.

First published: Tuesday 06 April 2010.