from Energy, Security, and Climate and Energy Security and Climate Change Program

Will China and India Undermine Sanctions Against Iran?

January 31, 2012

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India

Fossil Fuels

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If analysts and reporters know one thing about sanctions, it’s that if you don’t have complete international cooperation, they don’t work. That instinct has been on full display in recent discussions of oil market sanctions targeted at the Iranian nuclear program. Yes, the United States and Europe might refrain from buying Iranian oil, but so long as China and India are willing to buy the surplus crude, won’t the sanctions be toothless?

Some recent research that has been shaping policy discussions suggests that that’s the wrong way to look at the problem. As buyers disappear from the market for Iranian oil, those that remain gain a stronger bargaining position, potentially allowing them to extract large discounts. That is not as effective as a complete cutoff in choking off Iranian oil revenues, but it does get you part of the way. It’s important to recognize that this dynamic is highly nonlinear: it is at its most pronounced as the number of potential buyers gets closer to one. In particular, discounts might become much deeper if India exited the market than if both it and China remained. It’s also worth noting that the decision to extract big discounts would ultimately be a political one: if Beijing decided that it did not want to crank up pressure on Tehran, it could instruct Chinese buyers to pay world prices (or close to that) for Iranian oil.

There’s also something more subtle going on. If all Iranian crude suddenly vanished from the world market, the impact on oil prices could be huge. That possibility would deter policymakers from pursuing sanctions in the first place. The existence of China and India as alternative markets for Iran is what assuages policymakers’ fears and lets them pursue sanctions to start with.

That dynamic is critical. It makes no sense to compare partial sanctions that are flouted by China and India with airtight sanctions that have no chance of existing. The fact that one or two big countries won’t go along with oil sanctions is precisely what makes those sanctions politically possible. Sanctions that are flouted by China and India are better – and potentially quite a bit better – than no sanctions at all. Until we try them, of course, we won’t know how much the sanctions will bite. For now, though, we know enough to try.

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