Iran Sanctions Leave China, Russia as Winners in Trade

Sanctions punishing Iran for its nuclear program are deepening the country’s ties with China and handing Russia opportunities to sell more gasoline while hurting suppliers in Europe and India.

Iranian Oil Minister Masoud Mir-Kazemi and Chinese officials pledged for their countries to cooperate more closely in the energy industry during talks in Beijing on Aug. 6, Iran’s government-run Press TV reported. Russia’s state-controlled OAO Rosneft and OAO Gazprom Neft may step up fuel shipments to the Islamic republic this month, the Iran Commission of the Moscow Chamber of Commerce and Industry said in July.

“These countries have long-term interests in the region,” said Gary Sick, a member of the U.S. National Security Council under Presidents Ford, Carter and Reagan and the principal White House aide for Iran during the 1979-81 hostage crisis. China wants “to maintain relations with Iran for the sake of maintaining some access to the oil,” he said.

While sanctions against Iran are denting the country’s fuel imports, squeezing supplies to the country’s 73 million people, they are forcing refiners including India’s Reliance Industries Ltd. to pay higher costs to ship gasoline to more distant markets. Sanctions also translate into lost profit for Paris- based Total SA and other European refiners, which are facing their lowest returns on processing crude since December.

Rations Reduction

Iranian President Mahmoud Ahmadinejad’s government cut gasoline rations by one-fourth on June 22 and may reduce fuel subsidies. The country, which has the second-biggest reserves of oil and gas, said in July it may stop exporting naptha and use the petrochemical as a blending agent to increase gasoline production. National airline Iran Air was forced to redirect jetliners “for a period of time” when BP Plc refused to refuel them last month, Chairman Farhad Parvaresh said on July 28.

That’s giving China and Russia opportunities. Even before Iran’s Mir-Kazemi arrived in Beijing last week, his deputy, Alireza Zeighami, was meeting Chinese officials to press for investment in refineries in the Persian Gulf country, the Oil Ministry’s Shana news agency reported. The two sides committed in the talks to expand their cooperation, and Chinese Vice Premier Li Keqiang said afterward that China is “Iran’s main economic partner,” Press TV reported on Aug. 7, citing official China Central Television.

Russian companies are discussing “serious deliveries” to Iran in late August or September, Rajab Safarov, head of the Iran Commission of the Moscow Chamber of Commerce and Industry, said July 29.

Sanctions Targets

“Looking at the political situation, I’m not sure if Europe and the U.S. were 100 percent sure about the possible responses from places like Russia and China,” said Alexander Poegl, an analyst at JBC Energy in Vienna. “Iran will find partners supplying them gasoline.”

The United Nations Security Council imposed a fourth set of sanctions on Iran June 9, curbing financial transactions and tightening an arms embargo. The U.S. introduced measures on July that target foreign suppliers of gasoline and block access to the American financial system for banks doing business in Iran. The European Union on July 26 banned investment and sales of equipment to the nation’s oil and natural-gas industries.

UN spokesman Farhan Haq in New York declined to comment.

The profit from refining gasoline from Brent crude in northwest Europe for September, or crack spread, fell to $5.95 a barrel on Aug. 6, the lowest level since Dec. 23, 2009, according to PVM Associates Ltd.

Gasoline Imports

India’s sales of gasoline and blending components to the U.S. rose to 2.94 million barrels in May, compared with 492,000 barrels in January, U.S. Energy Department data show. Almost all of the sales were accounted for by Mumbai-based Reliance, said Praveen Kumar, a consultant at Singapore-based Facts Global Energy group.

India-to-U.S. shipping costs, at $1.9 million, are almost five times higher than those to the Persian Gulf, according to Simpson, Spence & Young Ltd., the world’s second-largest shipbroker. Reliance didn’t respond to an e-mail requesting comment.

Iran imported about 60,000 barrels of gasoline a day last month, compared with 120,000 in May, according to Energy Markets Consultants Ltd., a unit of the Singapore-based Facts Global Energy, a provider of data for the U.S. Energy Department.

“We have seen a real quick drop-off in imports into Iran,” said Jamie Webster, a researcher at PFC Energy, a Washington-based consulting firm. “They are down significantly, by over half, from where they were a few months ago.”

Trader ‘Boom Time’

Vitol Group, the world’s largest independent oil trader, said on June 24 it stopped selling refined products to Iran. Reliance, Royal Dutch Shell Plc and traders Glencore International AG and Trafigura Beheer BV have frozen gasoline sales, Robert J. Einhorn, the U.S. State Department’s special adviser for nonproliferation and arms control, said in an interview last week.

“It’s boom time for Russian and Chinese oil traders,” said Michael Swangard, a London-based international trade lawyer at Clyde & Co., which counts BP and Lloyds of London among its clients. It’s “practically impossible” for Europeans to buy Iran’s oil or sell it gasoline, he said.

Sanctions against Iran were ramped up after diplomatic efforts last year failed to halt the country’s uranium enrichment, which can be used to produce fuel or make a nuclear bomb. Iran says the program is for civilian purposes only.

“The sanctions you pass should be thrown into the trash bin like a used tissue,” Ahmadinejad was cited as saying by the state-run Iranian Students News Agency June 9. “They are not capable of harming the Iranian nation.”

China’s Gains

When Iran began rationing gasoline in 2007, protesters burned filling stations. After the presidential election in June 2009 that returned Ahmadinejad to power, at least 44 people died in anti-government demonstrations, which were the biggest since the 1979 Islamic Revolution.

China may gain the most from the sanctions as it forges trade agreements around the world. The Chinese government owns part of a refinery in Sudan, whose President Umar al-Bashir is wanted by the International Criminal Court on charges of crimes against humanity. It’s also building a pipeline to transport oil and natural gas from Myanmar, the country formerly known as Burma, which U.S. Secretary of State Hillary Clinton said on July 22 may be trying to develop a nuclear bomb.

Refining Projects

State-run PetroChina International Co., also known as Chinaoil, and China International United Petroleum & Chemical Corp., known as Unipec, sold refined products to Iran in recent months, a United Arab Emirates-based oil trader with access to shipping reports said last week. The U.A.E. has been the main hub for shipments to Iran. The trader declined to be identified because the matter is confidential.

Huang Wensheng, a spokesman for Chinaoil’s parent company, China National Petroleum Corp., and Liu Weijiang from Unipec’s parent, China Petrochemical Corp., couldn’t be reached for comment at their respective Beijing headquarters or mobile phones today.

Chinese companies are already involved in energy exploration and production projects in Iran worth about $29 billion and in refining and other activities valued at $10 billion, Deputy Oil Minister Hossein Noghrekar Shirazi told the state-run Mehr news agency on July 31.

Iran wants to spend $26 billion on new refineries and $11.5 billion to upgrade existing plants to become self-sufficient in the production of gasoline, the Oil Ministry said on July 26. The government aims to meet its own needs in another two years, Deputy Oil Minister Noureddin Shahnazizadeh said at a conference in Bahrain in May.

To contact the reporters on this story: Ali Sheikholeslami in London at alis2@bloomberg.net; Anthony DiPaola in Abu Dhabi at adipaola@bloomberg.net; Alaric Nightingale in London at anightingal1@bloomberg.net.

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