Economic Warfare

[kehenry1]

Back to the China-Iran oil and gas pipelines. These two inked a deal in 2004 for a ten year plan to create these pipelines that sought to by pass certain nations and the pipeline fees they would have to pay by planning to build these pipelines under the ocean, through the Straits of Malaca and the China Sea. ONe of the reasons that China has been making threatening noises towards Taiwan and arguing with Japan over control of long disputed Islands. They want to extend their international waters to protect these potential pipelines and work towards extracting resources that are just outside of their current boundaries.

Also one of the reasons that China has been working hard to improve their littoral navy and seeking possible aircraft carriers. They would have to protect this pipeline. It's very position through international waters would make it vulnerable to interdiction.

The problem with the pipelines are not just international borders. Neither China nor Iran at this time has the funds currently to invest in developing this pipeline. Plus, Russia's offer of an overland pipeline is much more feasible and possibly less expensive since it would be a major spur off of existing lines in the east and through the Caucus nations. Making the Iranian pipelines not quite the necessity they might have been if Russia simply maintained its focus on European markets.

Finally, sanctions that limit the amount of investment into Iran by any American corporation keeps Iran's ability to update its infrastructure limited and this pipeline a dream for the near future. which makes the proposition for eight new oil refineries interesting. Exactly how are they planning to build these refineries without huge foreign investment? Is China interested in that deal? Is the need for cash to spend on these investments and to offset inflation in China the reason that China is seeking to divest itself of some of its US assets. They need the cash for other projects and subsidizing their own gasoline.

One of the other things to look at is China's reluctance to support Iran as a full fledged member of the SCO. The SCO pact insists that an attack on one country is an attack on all like the NATO agreement. I think China sees that risk as too high considering their relationship with the US and their own desire to avoid conflict at this time (being without more than a littoral navy and their blue navy not anywhere near full strength). They are after long term economic growth and power, not war today.

Will China be enough of an investor for Iran or will Russia or Europe step up to invest? Would Russia do so at all considering their own interests in producing and exporting oil and refined products? is there an offering for a Russia/Iran pipeline that would allow oil to be refined and transported out of Iran through the Hormuz Straits? For Russia, a third or fourth port for exporting would be helpful, particularly one that bypassed the Dagestan, Igushetia and Chechen region. A long part of the Caspian Sea to port transportation system runs through this highly volatile region.

ON the other hand, the ME is highly unstable and risky for Russia unless they can help steer Iran towards more sane policies or offer more protection (a reason why they are upgrading their military besides their desire to hold sway over the Caucuses?)

Of course, Iran sees that Afghanistan and Iraq, developing nations with limited capabilities, as potential economic gold mines. Iran had also inked a deal with the new Iraqi government to refine oil for gasoline and pipe it back into Iraq. The problem, again, is that Iran has one refinery. Any utilization for export puts a strain on their own resources and increases the amount of net imported gasoline it requires for the state to function. Of course, this agreement put the Iranian oil minister in hot water with Ahmadenijad since it put further pressure on Iran's internal shortages.

They may be looking for Iraq to invest in the development of these refineries. Unsure on the possibilities. It is also unsure of the amount that European companies want to put into these additional refineries. To date, they have been pretty hesitant in investing large amounts in existing infrastructure. largely because it is so costly and secondly because Iran has been unable to or reluctant to put their share in, leaving these companies to shoulder most of the burden.

An additional problem is that investors see Iran as a high risk investment. Not just because of sanctions, but because of their internal economic structure. They don't want to risk what they are unsure of getting back. Not to mention that Iran in the previous decade and a half has taken considerable advancements against their oil revenues and has a tendency to nationalize certain industries.

According to current reports, Iran is only trading approximately 15% of their oil in US dollars right now. More than 50% is in Euros. The rest are in other denominations. This also presents a possible opportunity undermine their economy. Another factor in the demise of the USSR was the development of a large blackmarket that operated on the US dollar. The decrease in the value of the dollar could be somewhat helpful in this matter, allowing Iranians to purchase more black market commodities. Not only would this put another drain on the government run economy, reducing money returned into their economic system, but possibly devaluing their own currency against a black market currency.

The one problem with that is the IRGC controls the black market and smuggling in Iran (one of the reasons why we know they were complicit in the smuggling of EFP components and other arms into Iraq and Afghanistan). This might put more money in their hands. We would have to have a way to bypass it or make them complicit in their own economic downfall. Corruption in other states is sometimes good for us.