October 12, 2010 | International Oil Daily

US Report Calls for Sanctions Against Chinese Firms Active in Iran

A new report by a US think tank identifies 10 large Chinese energy companies that continue to do business with Iran in spite of international sanctions. It warns the Obama administration that failure to enforce sanctions on these firms threatens to unravel the entire sanctions regime against Iran.

The report by the Foundation for Defense of Democracies (FDD), a think tank with ties to several prominent neo-conservatives, aims to show how Chinese companies do business with Iran while enjoying access to North American markets.

“Without robust sanctions enforcement, it will be difficult to persuade the Iranian regime to halt its nuclear weapons program, human rights abuses, and support for terrorist activities,” says FDD Executive Director Mark Dubowitz.

“The US State Department estimates that companies have terminated between $50 and $60 billion in energy projects in Iran owing to the threat of sanctions, but European businesses remain concerned that Chinese companies will snap up their voided Iranian contracts if and when they withdraw,” he added.

China backed a fourth round of UN sanctions against Iran earlier this year, but only after winning important provisions that protected its energy interests in Iran. Harsher unilateral sanctions against Tehran were later enacted by the US, European Union, Canada, Australia, Japan and South Korea.

FDD says the Chinese energy companies it has identified warrant further investigation under the Comprehensive Iran Sanctions, Accountability, and Divestment Act, which President Obama signed into law on Jul. 1, 2010, as well as the Iran Sanctions Act (formerly The Iran-Libya Sanctions Act of 1996).

The ten Chinese companies fingered by FDD are: China National Offshore Oil Co.; China National Petroleum Co.; China ZhenHua Oil Co. Ltd.; Shanghai Zhenhua Heavy Industry; China Petroleum & Chemical Corp.; Zhuhai Zhenrong Corp.; The Kerui Group; Kingdream PLC; Panyu Chu Kong Steel Pipe Company Ltd.; and Shanghai Sunry Petroleum Equipment Co.

Dubowitz says the US government in the past has blacklisted “numerous” Chinese companies — including state-owned Chinese entities — for violating various sanctions against Iran without causing “grievous harm” to broader US-China relations. Some of these include China North Industries Corp., China Precision Machinery Import-Export Corp., China Shipbuilding Trading Co., and Liyang Yunlong Chemical Equipment Group Co; however, no energy companies have been sanctioned to date.

“After investing tremendous political capital to enact tough new sanctions against Iran, and encouraging US allies to follow suit, the Obama administration faces a choice,” says Dubowitz. “Maintain the broadest coalition possible, with Chinese companies punching enormous holes in the sanctions regime, or punish Beijing for undermining Washington's policy toward Tehran.”

If Washington does not counter Beijing, Dubowitz says the “progress the administration has made with the Europeans, Japanese, South Koreans, Canadians and Australians, as well as the scores of companies that have terminated their business ties with Iran, could unravel.”

While US unilateral sanctions laws require the administration to launch timely and credible investigations into sanctionable activities, they also give the president broad discretion to waive sanctions on national security grounds.

Before Obama, Presidents Clinton and George W. Bush waived Iran sanctions on a number of occasions for fear of upsetting important strategic alliances, mostly with European nations.

But Flynt Leverett, a Mideast expert at the New America Foundation, warns the White House against pursuing sanctions against the Chinese energy companies. For starters, Leverett says none of the 10 companies FDD identifies are prohibited or restricted by any of the international sanctions authorized by the UN Security Council.

“Chinese diplomats have been very careful to insist that draft language advanced by the United States and its European partners to limit energy-related business activities in Iran be deleted before Beijing would approve the final text of the various sanctions resolutions approved by the Security Council,” says Leverett.

As for applying US unilateral sanctions, Leverett says Washington should think twice because such a move would not generate “anything approaching strategic leverage over Iranian decision-making.” Instead, he thinks it would undercut whatever remains of Obama's engagement strategy with Tehran for negotiated solution to the nuclear standoff.

US sanctions against Chinese energy companies would come with reprisals from Beijing, Leverett warns. He noted that China is America's biggest creditor with “multiple channels through which to express its displeasure.”