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    Greater China
     Jun 24, 2010
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China in America's sanctions crosshairs
By Peter Lee

Retaining Levey to execute that policy may be a matter of tactics: reminding China that the loose cannon that threatened to bombard China's central bank in 2006 is still available and ready for action.

Same pit bull; new minder?
When the UN Security Council approved Iran sanctions and the spotlight moved to national sanctions, the Obama administration's first act was to appoint the State Department's Robert Einhorn as a "sanctions czar" for Iran and North Korea, charged with coordination of the implementation of a sanctions regime that


included other countries' national as well as UN sanctions, and as the US government made clear:
Mr Einhorn will direct US efforts to ensure full and effective implementation of all UN Security Council resolutions related to Iran, including most recently UNSCR 1929. He will lead US efforts with partners and allies around the world to strengthen multilateral and national measures to impede Iranian proliferation activities. [3]
This was construed as reassurance to hardliners that the State Department - supposedly a nest of sanctions-averse, diplomacy-centric appeasers - was completely on board vis-a-vis an aggressive sanctions push.

However, Einhorn's appointment would also reassure wary governments and corporations overseas that the integrated sanctions program was under professional, unified, and presidential management, and there would be no duplication of the insubordinate, and uncontrolled foreign policy by proxy conducted through OTFI under the pretext of enforcing US domestic money-laundering rules.

China should not derive too much consolation from the evolution of US sanctions policy beyond the cowboy years of the Bush administration.

What China should be concerned with is that the Obama administration has devoted considerably more effort than the Bush administration in establishing a solid strategic, legal, and diplomatic foundation for sustained and successful third-country sanctions.

The key flaw of sanctions is that, unless they are universal, somebody ends up eating everybody else's lunch.

Even as the UN resolution on the fourth round of Iran sanctions wound its way uncertainly through the Security Council, it was an open secret that China would water down the UN resolution.

The stated solution was follow-on national sanctions that, if not "crippling" as desired by Israel, would hit Iran where it hurt - in the energy sector. The perceived flaw to that solution would be that China would honor the UN resolution, impose no follow-on national sanctions, and scoop up Iran contracts while the US and Europe stood on the sidelines.

National and EU sanctions are useless if all they do is drive Iran - and its energy investments, petroleum products, and import/export and financial dealings - further into China's arms, as Glenn Kessler reported for the Washington Post:
US and European officials acknowledge that the administration's gambit faces uncertainties.

China, for instance, could swoop into Iran to replace Western investors. "China is the elephant in the room," one diplomat said, but the hope is that China will face political pressure not to appear to profit from an international pullout. Officials also say China cannot replicate some of the technologies and products produced in Europe. [4]
Both Russia and China have insisted that, in return for their support of the UN resolution, they received assurances that follow-on national sanctions by the US and Europe would not damage their energy and economic interests.

However, the obsessively forward-thinking Obama administration would certainly have a plan for addressing the underlying weakness of a massive geostrategic effort that has consumed the energies of the US administration for the last six months.

Perhaps the White House gave Russia and China the desired assurances with the caveat (perhaps implied or unspoken) that, if Iran's behavior didn't change, then promises to lay off Russian and Chinese interests would have to be honored, as they say, "in the breach".

The enabling US legislation on Iran sanctions - H.R. 2194, the Comprehensive Iran Sanctions, Accountability, and Divestment Act of 2010 - will arrive on Obama's desk by early July and provide ample justification for imposing third country sanctions, whether in sorrow or in anger. [5]

Its key feature, as announced after a meeting between Senate and House leaders resolved outstanding differences between two versions of the legislation: third country sanctions.

The proposed bill, announced in a joint statement by Representative Howard Berman (D-Calif.) and Senator Christopher Dodd, would bar non-US financial institutions dealing with Iran's Islamic Revolutionary Guard Corps (IRGC) or targeted Iranian banks from also doing business with the US banking sector. The bill would also penalize firms selling gasoline to Iran through restrictions on their US bank transactions, property transfers and foreign exchange in the United States.

"The act presents foreign banks doing business with blacklisted Iranian entities a stark choice - cease your activities or be denied critical access to America's financial system," an outline of the bill states, adding that it would address problematic moves taken by international branches of US financial institutions. [6]

US reporting has emphasized the expansion of third-party sanctions to the IRGC and gasoline trade; previous, though largely unenforced demands to sanction large foreign investments in Iran's energy sector apparently remain on the books.

Obama made a show of asking for explicit waivers for "cooperating countries", understood to be Russia and China, in return for their support on the UN resolution, as a show of good faith. He didn't get the blanket waivers, but he is perhaps not unhappy that he didn't. He will be able to grant one-year exemptions for individual corporations, albeit with a "name and shame" requirement to put the recipients on the public record.

Therefore, if China is excessively forward in exploiting opportunities in Iran, the familiar weapon of financial sanctions against its banks can be deployed, with the potential range from limited sanctions in clear cases of footsie with the IRGC to broad-brush sanctions affecting China's strategic investments in Iranian oil and gas.

So the stage is set for third-party sanctions round two, or the return of Levey.

But in this case, the US will not be sneaking unilateral third-country sanctions under the pretext of domestic anti-money laundering rules.

The Obama administration has established an international legal basis for national sanctions with the UN resolution and will soon have a domestic basis with the congressional legislation. Beyond establishing a sound legal basis, it has indicated that the sanctions will be carefully and rationally imposed under the direction of the White House and State Department and has persuaded many of the key European countries to jump aboard the sanctions boat.

As European and EU sanctions are imposed, they will institutionalize a shared US and the EU interest in preventing China and Russia from profiting overly from the economic and strategic vacuum created by the increased sanctions.

Beyond the Obama administration's manifest geopolitical cleverness, however, there is the question of what greater goal will be served by a global full-court press on Iran sanctions.

Will Iran's behavior change? Or will imposition of third-party sanctions merely deepen the existing divisions between China and the United States? And, unexpectedly, will the Obama administration's determination to reassert America's geopolitical supremacy lead to exactly the opposite result?

One of the ironic sidelights to the BDA affair was that, even after Banco Delta Asia was suffering full ostracization from the US financial system under Patriot Act 311, it still was able to continue to operate under the receivership of the Macanese financial authorities and even turn a modest profit in its local market.

It's a big world out there, and it is inexorably drifting away from dollar dominance.

Middle Eastern states attempting to avoid the long reach of US financial sanctions have frequently agitated for a shift from the US dollar to the euro as the currency of account for energy sales. Conspiracy theorists point to Saddam Hussein's announcement that he would seek to denominate his oil exports in euros as the provocative act that galvanized the Bush administration in its determination to prosecute the Iraq invasion.

With the EU largely lined up on the US side of the fence now, the focus is shifting from the euro as an alternative to China.

Considerable interest (and dismay) was occasioned by a suggestion by the head of the People's Bank of China in 2009 that the IMF's Special Drawing Rights (SDR) international reserve, which derives its valuation based on a basket of currencies including but not absolutely dominated by the dollar, might be adopted as the international currency of account.

Meanwhile, China is quietly expanding the international role of the yuan, also known as the renminbi (RMB).

The Hong Kong Trade & Development Council summarized China's RMB strategy as follows:
The RMB’s internationalization will likely follow a three-stage process (i.e. when it is used in pricing and settlement of trade and financial transactions; use as an international investment vehicle; and use as an international reserve currency), especially after the demand for RMB has hit certain critical mass in external trade and financial transactions. [7]
The first stage - trade settlement - is under way under a pilot program allowing enterprises in five Chinese cities to conduct RMB-based transactions with Hong Kong and the ASEAN nations.

Bank of China announced it holds 100 international accounts that settle trade in RMB (including a new account in Peru), with a transaction volume of 9 billion yuan (US$2.7 billion) over in the first nine months of the program. Standard Chartered Bank and Hong Kong & Shanghai Bank are both offering RMB commercial services. [8]

In a classic case of "don't ask what you wish for - you might get it", a by-product of American insistence that the yuan appreciate will be increased interest in transacting yuan-denominated business by nations that wish to avoid the financial risk of having to conduct their business using a devaluing dollar.

China likes the program, too, because it reduces the domestic fiscal and financial burden of buying up its exporters' US dollars with yuan and then sterilizing the inflationary consequences with sales of government bonds.

That's another less-than-ideal outcome for the United States, which relies on China's need to recycle its massive dollar holdings to absorb America's sizable sales of sovereign debt.

It may be a long time - or probably never - before China takes on the US role of provider of the global reserve currency.

However, it may not be too soon before the yuan is a legitimate international currency and a viable haven for states wishing to insulate themselves from the consequences of US fiscal, economic, and strategic policies (while leaving the US with the intolerable burden of managing the liquidity needs of the rest of the world's economy as it grows and its own share shrinks).

Even with US financial sanctions integrated into a largely consensual, legal, and multi-lateral effort, when it comes to the bottom line the US is still exploiting its financial clout to advance US geopolitical goals.

Looking into the long term, will the application of financial sanctions in the service of US policy objectives simply accelerate the disintermediation of the US dollar and displacement of the US from the center of the financial universe?

For US ambitions and interests, that might be an outcome worse than an Iranian atomic bomb.

1. US counterfeiting charges against N. Korea based on shaky evidence, McClatchy, Jan 10, 2008.
2. David Asher’s Dead End, China Matters, Apr 28, 2007.
3. Robert J. Einhorn to Serve as U.S. Coordinator for Iran and North Korea Sanctions, United States Mission, Jun 10, 2010.
4. US, Europe target Iran investment, trade, Washington Post, June 18, 2010.
5. Dodd, Berman Statement on Iran Sanctions Conference Report Agreement, Committee on Foreign Affairs, US House of Representative, June 21, 2010.
6. Lawmakers Agree on Iran Sanctions Bill, NTI, Jun 22, 2010.
7. The Pilot RMB Trade Settlement Scheme and RMB Internationalisation, HKTDC, May 29, 2009.
8. BOC: Cross-border trade RMB settlement accounts top 100, Trading Markets, Apr 21, 2010.

Peter Lee writes on East and South Asian affairs and their intersection with US foreign policy.

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