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Iran to open door for China as the West abandons the country

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Tehran traffic is gridlocked half the time, and the city spends most of the year engulfed in smog, so it’s not surprising that locals travel underground when they can -- on a metro system that sometimes carries 2 million people a day, reported Bloomberg (US).

During the sanctions decade, when Iran was largely frozen out of global commerce, the capital’s authorities managed to steadily expand the network -- roughly doubling its size. It wasn’t easy. Often, “the parts we needed, we had to build ourselves,’’ said Ali Abdollahpour, deputy managing director of Tehran Urban and Suburban Railway Operating Company.

A constant of those years was Chinese help, with everything from building rails to manufacturing wagons. The nuclear deal of 2015, and the lifting of major sanctions the year after, was supposed to broaden Iran’s options. Abdollahpour had his eyes on Europe (“their tech is better’’) for essential braking and signaling systems.

But when a major contract, to supply more than 600 wagons, came up for tender it went to a unit of China’s CRRC Corp, which beat off two European bids to win a contract worth more than $900 million this year. That’s part of a wider pattern. The nuclear deal hasn’t delivered more than a trickle of Western investment -- and even that is poised to dry up, after U.S. President Donald Trump pulled out of the agreement and said he’ll re-impose sanctions

Already Won
To develop its $430 billion economy, Iran is being forced to rely on political allies in the east.

Trade with China has more than doubled since 2006, to $28 billion. The biggest chunk of Iran’s oil exports go to China, about $11 billion a year at current prices.

Turning East
China's trade with Iran has outpaced that of the 3 biggest Eurozone economies (Germany, France and Italy).

Chinese direct investment is arriving too, though reliable data is harder to come by.

China is “already the winner,’’ said Dina Esfandiary, a fellow at the Centre for Science and Security Studies at King’s College in London, and co-author of the forthcoming ‘Triple Axis: Iran’s Relations With Russia and China’.

“Iran has slowly abandoned the idea of being open to the West,’’ she said. “The Chinese have been in Iran for the past 30 years. They have the contacts, the guys on the ground, the links to the local banks.’’

And they’re more willing to defy U.S. pressure as Trump slaps sanctions back on.

‘Going After Them’
Even that possibility has kept many European banks and manufacturers from doing business with Iran. And some of those that were ready to do so could reconsider in the light of tougher American rules.

Airbus Group SE’s contract for 100 jetliners, worth about $19 billion at list prices, was already held up amid financing problems, and Treasury Secretary Steven Mnuchin said Tuesday that the export license will be revoked (Russian manufacturers could be the beneficiaries). Total SA has a contract to develop the South Pars gas field together with China National Petroleum Corp., but has signaled that it would pull out if the U.S. re-imposes sanctions and it can’t win an exemption. In that event, Iran says, the Chinese partner would take over Total’s share.

Chinese companies aren’t beyond the reach of American regulators. Huawei Technologies Co. is said to be under investigation for possible violations over sales to Iran, and network-equipment maker ZTE Corp. was banned from buying American components for a similar offense.

Compared with the pre-sanctions era, “Chinese companies have become much more multinational and global, they have more of a brand reputation that’s important to them,’’ said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, an annual gathering for executives. That gives the U.S. leverage “to discourage them from engaging in Iranian markets, by going after them.’’

‘Seek to Dance’

But the Chinese have some workarounds that Europeans lack. There are many more Chinese companies with zero exposure to the U.S. And, since many of the Chinese businesses working in Iran are state-run, it’s relatively easy to set up special-purpose vehicles for bypassing U.S. regulations. “All they have to do is create a subsidiary that’s separate from the original entity, and they’re good to go,” said Esfandiary.

Chinese businesses are also likely to be more flexible about how they’re paid, says Batmanghelidj, citing a transaction he’s aware of where the European company declined to be paid in bonds.

The politics are different, too.

The key EU countries are longtime U.S. allies wary of a direct clash with Washington. They’re promising to keep the nuclear deal alive, but many Iranians doubt they are able or willing to do so.

Europe “doesn’t have the power to take important decisions,” said Alaeddin Boroujerdi, head of the Iranian parliament’s nation security and foreign policy committee. “The Europeans, by sanctioning Iran, seek to dance in front of the Americans.”

‘One Day You’re Friends’
But China -- along with Russia -- is America’s main strategic rival, with big geopolitical ambitions. Central to them is a plan to crisscross Eurasia with a web of transportation and infrastructure links. Persia was on the old Silk Road, and Iran is at the heart of President Xi Jinping’s plans for a new one.

Chinese companies are building or funding railway lines to the eastern city of Mashhad and the Gulf port of Bushehr, under deals signed in the past year worth more than $2.2 billion. India was supposed to be developing the strategic port of Chabahar on the Arabian Sea., but repeated delays have prompted Iranian officials to turn to China in the hope of speeding up construction.

China looks at relations with Iran “from a strategic perspective,” Foreign Minister Wang Yi said last year as he met Iranian officials in Beijing.

At the Tehran metro, it won’t be the first time that global politics have intruded on planning.

When building work began in the pro-Western Iran of the 1970s, it was under French managers. Within a year of the Islamic Revolution of 1979, they were gone.

That’s business, says Abdollahpour, the metro manager. “In the world of commerce, one day you’re friends with someone, one day you aren’t.”

***

Despite months of E3-US negotiations to avert an unnecessary crisis over the Iran nuclear deal, President Trump has declared a hard exit from the nuclear agreement. The decision demonstrates that the US has decided that confrontation with Iran is both necessary and inevitable, regardless of what European allies think, reported European Council on Foreign Relations (London).

The US administration looks set to increase tensions with Tehran and promote an implosion of Iran’s economy in ways that significantly increase risks of greater military escalation in the Middle East. Moreover, in the coming weeks, United States looks set to lead an economic and political assault on European interests.

The E3 should now acknowledge that its negotiating tactic of accommodation and comprise with Trump has failed. If Europe is to have any influence forthcoming US policy on Iran, European governments should quickly shift tack, unifying behind a more assertive diplomatic strategy aimed at deterring the worst-case scenario of renewed Iranian nuclear program and more instability and violence in a region close to its borders.

European governments are clearly tempted to think that the delays in implementation of sanctions mean they still have time to persuade the US president to reverse course. But the US president has acted on his promise to fully withdraw from the deal. He is now supported in that view by key advisors who have long advocated a forceful stand against Iran, not just on the nuclear deal but also in terms of encouraging regime change in Iran. It should now be abundantly clear that the current US administration cannot be a partner in salvaging the deal.

In this context the EU and its member states should now prioritize the following action points:

1. European leaders should use the forthcoming May 17 European Council meeting in Sofia to publicly and unanimously condemn the U.S. decision to withdraw from a multilateral global security arrangement and place the responsibility for any instability that results on the Trump administration.

2. European leaders should reject further negotiation between the E3 and the US administration on a “broader framework” on Iran policy, including the prospect of further EU sanctions targeting Iran, until and unless the Trump administration makes significant adjustments to minimise the enforcement of US secondary sanctions targeting European companies doing business with Iran.

3. European governments should prioritise measures aimed at maintaining Iranian adherence to the deal. The E3/EU should meet with Iranian counterparts at foreign ministerial level to agree on contingency plans. European governments should make a case to the Iranian government and public as to why the deal can be sustained and continue to serve Iran’s interest. This should emphasise the immediate economic benefits of continued oil exports (which Europe must vow to maintain as an priority). In this effort to entice Iran, Europe should cooperate with Russia and China, the other parties to the nuclear deal.

4. Europe’s approach should include the formulation of clear legal conditions for strategic sectors of trade with Iran aimed at protecting key European commercial deals seen as barometers of nuclear deal’s success and its ongoing survival (namely in the energy domain, aviation and automotive industries). The E3/EU should prioritise securing exemptions and waivers from enforcement of US secondary sanctions for European energy companies and related financial services to allow continued oil imports from and payments to Iran. Towards this end, EU member states should begin consultations regarding counter-measures against the United States. This should include political and legal threats that the EU will consider reviving the EU Blocking Regulation and even impose new penalties against assets of US companies based in Europe to allow for “claw-back” of unfair and illegal fines imposed on European companies doing business with Iran. European leaders should press this issue very hard with the Trump administration, making clear that this is a critical issue for the transatlantic relationship, as well as ongoing cooperation on regional issues in the Middle East.

5. European governments should also look to find bridging solutions to maintain banking connections with Iran even if at far reduced levels, including by temporarily connecting respective central banks in EU member states to the Central Bank of Iran and creating emergency exp0rt credit lines. The EU EAS should accelerate coordination among leading member states, their export credit agencies and state-owned banks to devise novel banking mechanisms allowing a degree of risk-sharing between governments and the financial sector on business with Iran. This effort should aim to facilitate a pan-European approach towards creating special purpose vehicles to finance sector-specific trade and investment with Iran. The EU EEAS should also advance existing proposals for the European Investment Bank to become a lending bank for long-term and medium-sized investments inside Iran.

6. It will now be more critical than ever for Europeans to maintain a dialogue with Iran on regional and ballistic missile issues, given that the US exit from the nuclear deal is already feeding wider regional escalation. This is particularly true given that the Trump administration is likely to work with its key regional allies to accompany the nuclear agreement withdrawal with a wider push against Iran. Germany, France, the UK and Italy should accelerate and formalise recently launched regional talks with Iran, including efforts to advance de-escalation possibilities between Iran and Israel in Syria where the situation is becoming increasingly febrile.

In the end, Europe may not be capable of salvaging the nuclear deal. But if the Europeans want to promote non-proliferation in the region and reduce regional instability, they need to demonstrate to the Americans, the Iranians and others that they are willing to try. Allowing the collapse of the nuclear deal without a proper fight will have immediate and disastrous consequences in the Middle East, while also significantly reducing European relevance on global security. Europe faces a critical and historic choice and must demonstrate its political will to advance its security interests through robust diplomacy.

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