The Iran Nuclear Deal and Asia

by John Ryan
January 13, 2016

This essay is part of a Strategic Asia Program series on Trends and Indicators in the Asia-Pacific.

On July 14, 2015, Iran, the five members of the UN Security Council, Germany, and the European Union agreed on a Joint Comprehensive Plan of Action (JCPOA) to address Iran’s nuclear program. The JCPOA is a fifteen-year roadmap to lift U.S., EU, and UN sanctions in exchange for limits on Iran’s nuclear program and fulfillment of transparency and verification obligations. The U.S. Congress approved the JCPOA in September, and its obligations went into effect in October. The next stage under the JCPOA is implementation day in early to mid-2016, when the International Atomic Energy Agency will report whether Iran has adhered to its obligations. On that notification, sanctions will be lifted and U.S. firms will receive a green light to do business and invest in Iran.

Implications of the Iran Nuclear Deal

Proponents of the deal argue that it will prevent Iran from building nuclear weapons, openly or covertly, by tying continued sanctions relief to compliance. Critics claim it could fail if growing trade incentives weaken multilateral resolve to reapply sanctions in the event that Iran reneges on the agreement, Tehran conducts covert nuclear weapons development that evades verification, or a more technologically advanced Iran builds nuclear weapons at the deal’s expiration. Opponents also argue that the deal empowers Iran to fund terrorism and continue human rights violations without diminishing U.S.-Iran security competition. An eleventh-hour compromise to gradually lift UN arms and missile embargoes fueled additional concerns about a conventional arms race.

A successful nuclear deal has broad energy, trade, and strategic implications for Asia and its two rising powers, China and India. China emerged as a mediator in the talks; while at least superficially sharing Washington’s proliferation concerns, Beijing has strongly objected to U.S. secondary sanctions that indirectly harmed Chinese businesses. China’s trade with Iran rose to over $50 billion in 2014, and oil imports increased to a new record in 2015. Similarly, India long opposed—at least publicly—unilateral sanctions and only endorsed UN-led sanctions. Nonetheless, India has increasingly complied with U.S. secondary sanctions that exceeded UN sanctions and joined Japan, South Korea, and the Association of Southeast Asian Nations (ASEAN) countries in welcoming the deal struck with Iran.

Iran has nearly 10% of global oil reserves and 18% of natural gas reserves, and even after years of sanctions, underinvestment, and mismanagement, the country is still the third-largest natural gas producer and ninth-largest oil producer. Crucially, Iran is a major supplier to import-dependent China, India, Japan, and South Korea. Further, these countries could seek to mitigate their vulnerability to maritime supply disruptions at chokepoints such as the Straits of Hormuz and Malacca with the construction of pipelines through Iran to the Persian Gulf. For all Asian nations, lower energy costs from a successfully implemented Iran deal have the potential to boost energy security, promote economic growth, reduce inflation, and improve trade balances. Beyond energy, as the third-largest economy in the Middle East, Iran is one of the world’s most promising emerging markets.

Although China desires friendly relations with all countries in the region, Iran is a natural partner given the thick web of U.S. security relationships. The Sino-Iranian partnership has thrived on the basis of energy, defense ties, arms sales, and common strategic opposition to the United States. Iran claims that China has already pledged to double investment to $52 billion. Iran could serve as a nexus of China’s One Belt, One Road initiative through energy, infrastructure, and maritime links. The nuclear deal has boosted prospects for the long-delayed Iran-Pakistan gas pipeline, where China stepped in after an Indian withdrawal, though challenges remain. China has supplied Iran with conventional weapons—both technology and finished items such as small arms and short-range ballistic and anti-ship cruise missiles—as well as turning a blind eye to transfers of dual-use materials and technical assistance for Iran’s nuclear program. Buffeted by regional instability and the plunging price of oil, Iran may seek a powerful extraregional benefactor in China. China’s defense minister has publicly expressed a desire to expand military ties with Iran, citing previous port visits, naval exercises, personnel training, and stated aspirations to move forward on naval cooperation, counterterrorism, and antipiracy.

India, once Iran’s single-largest oil export destination, has strong historical ties with Tehran. India remains dependent on the Middle East for 82% of its energy needs as well as $40 billion in remittances from seven million Indians working in the region. Reflecting Prime Minister Modi’s desire to “look west,” engagement has been rapid and deep: bilateral trade flows reached $15 billion in 2014, while Iran invited $8 billion of Indian infrastructure investment and mooted a bilateral free trade agreement. However, the nuclear deal is not without potential downsides for India—Indian oil firms will now face stiff competition from other foreign entrants. On a more positive note, the deal will smooth the way for billions of dollars of Indian investment in Iran’s southern port of Chabahar, which could link India to Central Asia (avoiding Pakistan) as part of India’s “connect Central Asia” policy. Iran and India, sharing a desire to defeat the Taliban in Afghanistan, may intensify cooperation as the United States draws down, although India is wary of expanding Iranian influence in Kabul. Further, the successful conclusion of the Iran nuclear deal would remove a major impediment to closer U.S.-India relations.

Outlook for the Next Year

In the coming year, Iran’s February 2016 parliamentary elections will be a referendum on President Hassan Rouhani’s support of the nuclear deal and foreign engagement. Hard-liners have already pushed back against the deal with politically motivated arrests, anti-American propaganda, and attempts to thwart economic reforms.

With regard to China, economic, military, and strategic engagement with Iran is likely to continue regardless of how faithfully the nuclear deal is implemented. Nonetheless, China has no desire to pick sides in the region and will continue to cultivate good relations with Saudi Arabia and the Gulf Cooperation Council. The limits of China’s embrace of Iran were shown in its opposition to full Iranian membership in the Shanghai Cooperation Organisation for fear of antagonizing the United States. China’s “all-weather friendship” with Pakistan and outreach to the Taliban in Afghanistan are also discordant notes. Nonetheless, expect Xi Jinping to reach a wide-ranging set of agreements during a mooted 2016 visit to Iran, which will likely focus on infrastructure and connectivity.

India’s closer alignment with the United States in recent years has put a brake on its engagement with Iran, but a successful deal allows a renewal of ties, emphasizing energy and infrastructure. Progress, or the lack thereof, at Chabahar port will be a key indicator of India’s will and capacity to engage Iran. Sino-Indian competition in Iran is likely to be muted, with the fiercer challenge coming from Western firms with highly coveted technology.

If Iran meets its obligations under the nuclear deal, the United States will lift secondary sanctions against the country, but primary sanctions targeting terrorist activities and human rights abuses will remain. U.S. options for curtailing Chinese rapprochement are limited, with a successful nuclear deal giving China more space to deepen ties to Iran without concerns of a tradeoff in the U.S.-China bilateral relationship. Accordingly, Washington cannot just monitor the successful implementation of the agreement in isolation but has to carefully manage the complex relationships that will evolve as the reduced sanctions allow Iran to strengthen its ties in Asia.

John Ryan was formerly an Intern in the Political and Security Affairs group at the National Bureau of Asian Research (NBR). The views expressed are those of the author.