China's leaders are betting big in the Middle East. In the high stakes game of geopolitical poker now being played between the West and Iran over the latter's nuclear program, Beijing has clearly placed its wager on Tehran. If China's leaders are right, and Iran does succeed in going nuclear, it will drastically alter regional politics, and quite possibly the global energy picture as well. If they are wrong, and the Islamic Republic is stopped from doing so, the Chinese economy could end up being one of the biggest casualties of the resulting fallout.
In the six-and-a-half years since a controversial Iranian opposition group disclosed previously unknown details of Iran's nuclear endeavor, the world community has been struggling to bring Tehran's atomic effort to heel. In this effort, China's role was and remains distinctly counterproductive. Rhetorically, at least, officials in Beijing appear to be on the same page as their Western counterparts. Thus, Chinese Premier Wen Jiabao recently told Newsweek's Fareed Zakaria that his government is "not supportive of a nuclear rise to Iran," and believes Iran "should not develop nuclear weapons." Along those lines, official visitors to the Middle Kingdom often hear of China's positive contributions to resolving the deepening stand-off over Iran's nuclear program, with Tehran's "disapproval" cited as proof that the P.R.C. is playing diplomatic ball.
In practice, however, Beijing's substantive contributions to curbing Iran's nuclear ambitions have been few and far between. True, the P.R.C. has acquiesced to three rounds of United Nations Security Council sanctions on the Islamic Republic to date -- in December 2006, September 2007, and most recently in March 2008. But those measures have been severely limited in scope, and carefully calibrated so as not to offend Moscow or Beijing. As a result, they have not raised many concerns in Tehran, either.
These steps, moreover, have proven to be the exception rather than the rule. More often than not, Beijing has used its diplomatic trump card, its permanent seat on the UN Security Council and associated veto power, to provide Iran with political cover in the face of Western pressure. At the same time, it has sought to keep other, more serious economic measures off the table. As one Chinese foreign ministry official put it to a visiting American delegation recently, Beijing opposes non-UN sanctions on Iran because it believes that "a complete embargo on Iran is not possible."
Beijing's preference for the status quo is pragmatic. China's runaway economic growth in recent years has been accompanied by a voracious appetite for energy, and a widening quest for foreign sources of it. Iran looms large in this calculus; the Islamic Republic is currently China's third largest supplier of crude, providing the P.R.C. with roughly 12% of its total annual oil consumption (nearly one million barrels daily). In a real sense, in other words, Iran has become an engine of Chinese economic growth, and an indispensable part of Beijing's energy plans.
But Beijing's ties to Tehran are more than merely commercial. "[T]he strengthening of the Tehran-Beijing axis is of great importance" in the context of "confronting the unipolar world being considered by America," Iran's conservative Abrar newspaper trumpeted nine years ago, on the occasion of then President Mohammad Khatami's visit to Beijing. Iran's continuing interest in diluting U.S. influence abroad is shared by China's leaders, who believe their country's rise as a great power requires a diminution of America's perceived hegemony in global affairs. Over the past decade, this meeting of the minds has led Beijing to help Tehran significantly expand its naval warfare capabilities, as well as the sophistication of its ballistic missile arsenal. China's leaders have even thrown caution to the wind and backed Iran's bid to become a full-fledged member of the Shanghai Cooperation Organization, the Moscow- and Beijing-led security bloc that now dominates much of the "post-Soviet space," even though bringing Iran into the fold could become a serious liability for China in the event the former is attacked over its nuclear program.
That effort, meanwhile, has become increasingly mature -- and menacing. In February, the UN's atomic watchdog, the International Atomic Energy Agency, reported to its board of directors that Iran had succeeded in producing 839 kilograms of low enriched uranium, enough raw material to eventually develop one nuclear device, if it is enriched further. The IAEA's report jibes with an earlier assessment by the Institute for Science and International Security, a Washington-based nonproliferation think tank that wrote late last year that Iran "is moving steadily toward this capability and is expected to reach that milestone during 2009 under a wide variety of scenarios."
If China's leaders are worried over these developments, or the potential Western response to them, they have not shown it. In March, news broke of a new $3.2 billion, three-year deal struck between the Iranian government and a Chinese consortium to develop Iran's mammoth South Pars natural gas field. The deal, coming as it did amid renewed U.S. sanctions against Iran, was a clear signal that the powers-that-be in Beijing don't think the West has much of a prayer of preventing Iran from going nuclear.
They may be right. The way the United States and Europe have approached Iran's atomic effort over the past half-decade has been far from serious. During his tenure, President George W. Bush sternly warned that the U.S. "would not tolerate" a nuclear-armed Iran. In practice, however, his administration did just that, subcontracting its approach first to the EU-3 (the United Kingdom, France and Germany) and then to the United Nations in their haphazard efforts to attain some sort of negotiated solution to Tehran's nuclear ambitions.
Today, the tenor of the rhetoric in Washington may have changed, but little else has. Despite alarming indicators that Iranian nuclearization is only a matter of months away, the Obama administration is moving forward with plans for "dialogue" in hopes that it can somehow convince Iran's ayatollahs to give up their nuclear project. All of which appears to be a surefire recipe for an atomic Iran, and a further decline of America's already waning influence in the Middle East.
But a nuclear Iran is not necessarily a predestined outcome -- at least not yet. Despite its historic lack of diplomatic engagement with the Islamic Republic, the United States still has a great deal of economic pressure that it can bring to bear on the Iranian regime. America's allies and trading partners, who, almost without exception, maintain extensive economic ties to the Islamic Republic, possess far more. Among the most promising is the concept of a gasoline embargo, which would leverage the Islamic Republic's deep dependency on foreign refined petroleum to progressively shut off Iran's access to international gas supplies unless it rolls back its nuclear effort. If implemented in a rapid, robust and coordinated fashion by the United States and its allies, this step -- and others that similarly exploit Iran's latent economic vulnerabilities -- stands at least some chance of changing Tehran's calculus about the potential costs associated with their nuclear program.
Then there is Israel, where new Prime Minister Benjamin Netanyahu has made no secret of his belief that Jerusalem must move militarily to eliminate the Iranian nuclear threat -- with or without approval from Washington. This sentiment has been echoed by the country's top military brass, which has warned publicly of the need to be prepared to go it alone if diplomacy fails. None of this is to say that an Israeli military option is attractive, or even likely. But neither is it off the table, and should Jerusalem take matters into its own hands, the economic fallout is likely to be significant, as world energy prices surge upward and remain there in anticipation of some form of Iranian retaliation, much to the detriment of regional clients.
Even if Iran does manage to successfully cross the nuclear threshold in the coming year, China could find the results decidedly not to its liking. Iran's economy, after all, is on the skids. As of October 2008, Iranian central bank statistics put the national rate of inflation near 30%. Unemployment is rampant, officially pegged at over 10% but unofficially estimated to be as much as two-and-a-half times that figure. Underemployment is likewise ubiquitous, the result of a chronic nationwide shortage of viable job opportunities—and an acute failure on the part of the Iranian government to create more. All of this has been exacerbated by the one commodity Iran's ayatollahs not long ago saw as their salvation -- oil. With production at almost four million barrels daily, Iran is the second largest oil producer in the Organization of Petroleum Exporting Countries and a bona fide energy powerhouse. Economically, however, Iran is a one trick pony, relying on oil exports for some 85% of government revenue. Over the past several years, this single-sector economy has been a boon to the Islamic Republic, swelling governmental coffers with around $250 billion since 2005, according to the Economist.
Today, though, things are very different. Since the onset of the global financial crisis last fall, plummeting world oil prices have sent Iran's economic fortunes into a tailspin -- one from which Tehran will find it very hard to recover. That is because the extensive subsidies doled out by the Iranian regime to its subjects as a sign of governmental largesse have created an enormous drag on domestic prosperity. According to recent International Monetary Fund estimates, Iran requires the world price of oil to be $90 a barrel to "break even," and above it if it hopes to make a profit. With global energy prices only slightly higher than half that sum, the Iranian regime has found itself on the horns of a serious crisis, forced to progressively deplete its once-massive hard currency reserves or go out of business.
Given this grim domestic economic reality, and the fact that a nuclear capability would afford it far greater ability to affect world markets, Iran may find the temptation to ratchet up global oil prices simply irresistible once it acquires "the bomb." All of which, of course, would be disastrous for the P.R.C. Officially, the Chinese government still estimates an 8% rate of growth for this year -- an ambitious target for most countries even absent a global financial crisis. But evidence abounds that the current downturn has hit China hard, and that its real rate of growth will likely be much more modest. Which explains why the World Bank recently slashed its forecast of China's growth to 6.5%, citing plummeting exports and a vulnerability to "external shock." Without Iran as a stable energy supplier, even that number is likely to be out of reach.
So far, China's leaders have been sanguine about such eventualities, at least outwardly. Officials in Beijing counsel "patience" in dealing with the Iranian nuclear problem, and reassure Western visitors that they are committed to a peaceful denouement of the current crisis. Increasingly, however, it is clear that the status quo approach embraced by the Chinese government over the past half-decade vis-a-vis Iran is anything but, and that by employing it Beijing risks inflicting great harm upon the international community -- and on its own economic fortunes.