ARAB EFFORTS TO CURTAIL TRADE WITH IRAN: PROBLEMS AND PROSPECTS

• Document Type: CREST
• Collection: General CIA Records
• Document Number (FOIA) /ESDN (CREST): CIA-RDP85T00287R001301510001-2
• Release Decision: RIPPUB
• Original Classification: T
• Document Page Count: 11
• Document Creation Date: December 22, 2016
• Document Release Date: August 23, 2010
• Sequence Number: 1
• Publication Date: May 2, 1984
• Content Type: REPORT

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Central Intelligence Agency
DIRECTORATE OF INTELLIGENCE
2 May 1984
ARAB EFFORTS TO CURTAIL TRADE WITH IRAN:
PROBLEMS AND PROSPECTS
Summary
Saudi Arabia and Kuwait, at Iraq's behest, are leading an
Arab League diplomatic campaign to curtail Tehran's warmaking
capability by restraining international trade with Iran. The
Arabs, however, apparently have not mapped out a clear strategy
for attaining their goals. They appear to be relying almost
entirely on moral suasion rather than concrete measures such as
trade sanctions or oil boycotts against countries that continue to
deal with Iran. This apparent half-heartedness has led Japan--
Iran's major trading partner--to conclude that the Arab League
campaign is a largely cosmetic effort designed to reassure Iraq of
Arab support rather than to seriously crimp Tehran's war effort.
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This paper was prepared byl Office of Near Eastern and
South Asian Analysis, with contributions from the Offices of Global Issues,
European Analysis, East Asian Analysis, and the Arab-Israeli Division of
NESA. Comments and queries are welcome and may be directed to the Chief,
Persian Gulf Division, NESA,
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Even if the Persian Gulf Arabs earnestly attempt to restrain
Iran's trade, their prospects for success would not be
promising. The Saudis and other Gulf Arabs Zack effective
leverage with most of Iran's trading partners except for a few
countries that are dependent on them for financial aid, oil
supplies, or their commercial markets. Military supplies of the
kind needed by Tehran are plentiful and difficult to monitor.
Moreover, non-military trade is too lucrative to forego for most
OECD countries, and Iran is willing to cut its oil prices to
maintain its market share. Finally, Saudi Arabia and Kuwait
traditionally avoid antagonizing powerful neighbors like Iran and
are unlikely to escalate their efforts to a Level that risks
retaliation from Tehran. This guarantees that their efforts will
be Largely ineffectual.
be used to bring pressure on Iran's trading partners.
The Arab League Campaign
During a meeting in Baghdad in March, Arab League foreign ministers
formed a special committee, consisting of Saudi Arabia, Kuwait, Jordan,
Tunisia, North Yemen, Morocco, and Iraq, to begin a "serious" campaign to stop
the flow of arms and oil revenues into Iran. Of the Arab League committee
members, only Saudi Arabia and--to a lesser degree--Kuwait have the immense
oil resources, financial wealth, and lucrative commercial markets that could
Iran's Sources of Arms
The revolutionary Islamic government of Ayatollah Khomeini has built its
military strategy around lightly armed infantry units, lessening its need for
the sophisticated--and hard to acquire--tanks and aircr
Shah.
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(given its reliance on massed
infantry, Iran's most pressing needs are for artillery, small arms, and
ammunition. These items are available world-wide, and a total arms embargo of
Iran is virtually impossible.
Arms deliveries to Iran from all sources since the war began in September
1980 are estimated at $2.9 billion. Communist countries have been the largest
suppliers, with deliveries worth approximately 1.4 billion. North Korea has
been Iran's most important source of military equipment, ranging from tanks to
small arms and ammunition.
China signed military sales agreements with Iran in 1983 worth $445
million that, when delivered. would make Beiiina the cprnnd larnpct c,innli.r
of arms to Tehran.
The USSR, on the other hand, has signed only two minor arms
agreements with Iran--in 1981 and 1982--since Ayatollah Khomeini came to power
in 1979.
Libya presently is Iran's second largest arms supplier.
West European countries have provided Tehran with spare parts,
ammunition, and small arms worth approximately $550 million sinc
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Non-Military Trade and Oil Purchases
The OECD countries (most Western European countries, Japan, Canada, and
the US) are Iran's major trading partners for non-military items, as well as
the major purchasers of Iranian oil. Iran's non-military imports consist
primarily of food (approximately 6 million tons of grains and rice in 1983),
construction and electric power generating equipment, machinery, steel,
chemicals, and plastics. Thailand provides virtually all of Iran's rice
imports; grains are readily available from a variety of countries.
Virtually all Iranian oil destined
for the OECD countries is actually purchased by private oil or trading
companies rather than through government-to-government contracts, and much of
it is traded on the world spot market for oil. US companies bought an average
of 101,000 barrels per day of Iranian oil this way in 1983, providing Tehran
with over $1 billion.
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Japan is Iran's major trading partner. West Germany exceeds Japan in
value of goods sold, but purchases relatively little oil to balance the
bilateral trade. Conversely, Italy is Iran's second largest buyer of oil,
but, unlike West Germany, runs a large negative trade balance. The US is the
third largest purchaser of Iranian oil, but exports relatively little to
Arab Economic Leverage
The Saudis and Kuwaitis so far have limited themselves to moral suasion
in their effort to convince most countries to restrain trade with Iran, but
few states are likely to forego such profitable commerce unless the Gulf Arabs
use economic leverage. In theory, the Gulf Arabs could apply significant
economic pressure on those developed and developing countries dependent on
them for oil, financial aid, sales markets, or development business such as
construction contracts. In practical terms, however, such pressure would he
difficult to apply except in a few cases. Moreover, Saudi Arabia and the Gulf
Arabs have minimal economic leverage over Iran's Communist arms suppliers,
The OECD countries probably believe--and we agree--that the present
situation is not so critical to the Saudis or the Kuwaitis that they would be
willing to take concrete steps such as cancelling major contracts or stopping
oil sales. In contrast to 1973 and the years immediately following, the
current soft oil market has greatly blunted the threat to Western nations of
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economic pressure from the Gulf Arab oil producers. In addition, the Gulf
Arabs now depend heavily on the OECD countries for domestic, economic, and
industrial development. Most Western governments can deflect Saudi or Kuwaiti
demarches on restraining trade with Iran by arguing that it is controlled by
private companies over which they have no influence.
years .
Several countries, however, could be vulnerable to Saudi pressure if
Riyadh decided to flex its economic muscle. South Korea received 31 percent
of its oil from Saudi Arabia in 1983, and another 11 percent from Kuwait. In
addition, South Korean construction firms do an estimated $5 billion business
annually in Saudi Arabia, providing crucial foreign exchange for Seoul and
employment for Korean nationals. Riyadh provides Taiwan with approximately 45
percent of its crude oil and is one of the few countries maintaining full
diplomatic relations with Taipei. In addition, the Saudis have provided, or
pledged, $300 million in development loans to Taiwan over the past few
Riyadh has made both countries aware of its displeasure at reports that
they are supporting Tehran's war effort.
the Saudis informed Seoul in early March that Riyadh might be forced to review
bilateral relations because of press reports that the South Koreans are
selling military equipment to Iran. In April, the Saudis made known to Taipei
their concerns that Taiwanese might be contracting to perform aircraft
maintenance work for Tehran. Both Seoul and Taipei recently have informed the
US--and presumably the Saudis--that they will refrain from providing military
assistance to Iran. Private South Korean companies however, are still
engaged in negotiations to sell arms to Iran_
Japan, with no indigenous oil resources, depends heavily on the Gulf
states for oil imports and is the OECD country most vulnerable to economic
pressures by the Saudis or other Gulf Arabs. Last year, Japan received
approximately 11 percent of its oil from Iran, but imported another 34 percent
from Saudi Arabia and Kuwait. The Iraqis and the Kuwaitis have told Japanese
officials and businessmen of their unhappiness over Tokyo's large oil
purchases from Iran, but their messages have been diluted by contradictory
Tokyo has concluded from talks
with the Saudis that Riyadh
believes:
? Arab economic sanctions against Japan could not be enforced.
? Japanese trade with Iran is so important to Tehran that Arab sanctions
against Tokyo could provoke Iranian retaliation against the Gulf Arabs.
? Good Japanese-Iranian relations may be useful in moderating Iranian
behavior or contribute to ending the Iran-Iraq war.
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complaints with Japan for the record than in seriously-insisting that Japanese
oil purchases from Iran be stopped or sharply curtailed. He commented that
Japanese oil purchases are the responsibility of the private sector--a
situation found in all OECD countries--and decisions are strictly governed by
market factors. the Arabs could easily assure a
decrease in Japan's oil purchases from Iran by undercutting Tehran's prices by
as little as five cents per barrel, particularly now when many Iranian oil
contracts are up for annual renegotiation.
no Arab oil producer has approached them with an offer to reolara
Iranian suppiies 1r lOKyo cuts its purchases from Tehran.
Syria theoretically is vulnerable to Saudi and other Gulf Arab economic
pressure, but it is a special case. A maverick on the Iran-Iraq war, Syrian
President Hafiz Assad has broken ranks with most other Arabs by siding with
Iran because of traditional Syrian-Iraqi political rivalry and Assad's
personal hatred of Iraqi President Saddam Husayn. Syria's closure since 1982
of an Iraqi oil export pipeline to the Mediterranean has forced Saudi Arabia
and the other Gulf Arab oil producers to spend billions of dollars subsidizing
the Iraqi war effort. At the same time, Syria has received $530 million per
year in Baghdad Pact subsidy payments from Saudi Arabia since 1979. Damascus
regularly defies Riyadh's expressions of displeasure over Syria's support for
the Iranian war effort and ignores Saudi requests to reopen the Iraqi
pipeline. The Saudis, however, have refused to use their aid as leverage
against Damascus. They fear that Syria would retaliate against any aid cutoff
with acts of terrorism, and they have a pan-Arab sense of responsibility to
support Syria as a front-line state confronting Israel.
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Libya, although an Arab country, supports the Iranian war effort for
revolutionary and ideological reasons. Tripoli's oil wealth makes Libya
immune to Saudi economic pressure. Over the past few years, Colonel Qadhafi
occasionally has altered his foreign policy to mend fences with the Arab
moderates, but has never lessened his support for Iran as part of these
undertook this campaign without an adequate understanding of the practical
problems involved in attempting to curtail trade with a major oil supplier
such as Iran. Oil is too vital to all modern economies, and too fungible a
Prospects and Implications
The UAE oil minister has commented--and many analysts of the
international petroleum market agree--that the Arab League foreign ministers
commodity on world markets, for its trade to be manipulated easily.
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If the Arab League's campaign were only partly effective in curtailing
Tehran's oil sales, it would put considerable downward pressure on Iranian oil
prices and, at least temporarily, on Iranian revenues. For example, a lOn,000
b/d drop in exports would cost Tehran about $1 billion per year. To
accomplish this goal, however, the Gulf Arabs would have to be willing to risk
a price war and destruction of OPEC's fragile cohesion on oil pricing and 25X1
production because Iran would retaliate by cutting its oil prices to attract
buyers, and increasing its exports to compensate for reduced prices. The
current OPEC pricing and production policies were hammered out only with great 25X1
effort by Saudi Arabia--against Iranian resistance--in 1983, and this probably
is a major reason why the Saudis appear half-hearted about pushing the Arab
League campaign with countries such as Japan.
The Arab League effort, moreover, is likely to have only a marginal
impact on Iran's non-oil trade with OECD countries, and no significant effect
on Iran's capability to import arms. The military equipment provided by
countries such as South Korea can be replaced, albeit perhaps with some delays
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SUBJECT: Arab Efforts to Curtail Trade With Iran: Problems and Prospects
NESA M 84-10180C
Distribution:
Copy 1 - Vice President George Bush
2 - RADM John Poindexter, NSC
3 - Geoffrey Kemp, NSC
4 - Roger Robinson, NSC
5 - Deputy Assistant Secretary Charles Fairbanks, State
6 - Under Secretary Lawrence Eagleburger, State
7 - Under Secretary Wallis, State
8 - Assistant Secretary Murphy, State
9 - Deputy Assistant Secretary Placke, State
10 - RADM Jonathan T. Howe, State
11 - Vice Admiral Arthur S. Moreau, Jr., DOD
12 - Under Secretary Ikle, DOD
13 - Deputy Assistant Secretary Tixier, DOD
14 - David Tarbell, DOD
15 - Donald H. Pearlman, DOE
16 - DCI
17 - DDCI
18 - EXDIR
19 - DCI/SA/IA
20 - EXEC REG
21 - DDI
22 - NIO/NESA
23 - C/NID
24 - C/PDB
25 - C/PES
26-29 - CPAS/IMD/CB
30 - C/CPAS/ISS
31 - SOYA/CS/C
32 - EURA/WE
33 - EURA/WE/I-AB
34 - EURA/EI
35 - C/OGI/SRD/EI
36 - OGI/SRD/EI
37 - OGI/ISID/WP
38 - OEA/CH/DEV
39 - OEA/CH/FOR
40 - OEA/CH/DEF
41 - OEA/NA/K
42 - OEA/NA/J
43 - D/NESA
44-45 - NESA/PPS
46 - C/NESA/AI
47 - C/NESA/PG
48-54 - NESA/PG/I
DDI/NESA/PG(
(2May84)
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