The Financial Crisis Fuels U.S. Diplomatic Talks


Economic turmoil and low oil prices may have created bargaining opportunities with prickly U.S. adversaries in China, Iran, and Russia

President Barack Obama has long vowed to offer diplomatic talks to U.S. rivals and adversaries. But a month into his Presidency, Obama may be benefitting from the financial crisis and low oil prices, which—while they have shaken banks, investment funds, and entire nations—seem to have created potential breakthroughs in some of the U.S.'s thorniest relationships.

On China, Secretary of State Hillary Clinton has shifted climate change—previously thought to have little or no chance of progress—to the core of U.S. policy toward Beijing. On Iran, the plunge in crude oil prices may make Tehran more flexible toward Washington and open the possibility of a fresh source of natural gas to Europe. Likewise, oil prices have made Russia much less able to finance geopolitically motivated energy projects, such as pipelines the U.S. opposes, and more open to a thaw with Washington.

Experts do not foresee easy agreement with any of these countries; indeed, each of the three appears to be attempting to turn the financial crisis to its advantage. Yet "there are lots of grounds for optimism that Obama can use his popularity and prestige for openings that may have been created by the financial crisis," says Michael Fullilove, a foreign policy analyst with the Brookings Institution.

Progress on Climate Change with China

Clinton appears already to have embraced climate change as a wedge into a broader and less prickly relationship with China. In China last week, she confessed that the U.S. had monumental lapses of environmental judgment during its own industrialization, but said America had become wiser since, and urged a joint effort with Beijing to reduce greenhouse gases. The approach infuriated some human rights groups that accused Clinton of ignoring such issues as Tibet. But it may also have signaled more deference to China, which in response may offer more cooperation on multiple issues, not the least of which is financing the enormous U.S. deficit.

Of course, China itself is exploiting the financial crisis to scoop up bargains around the world. In recent weeks, it has obtained a 20-year deal for 300,000 barrels a day in oil supplies from Russia in exchange for $25 billion in loans to the struggling Russian oil company Rosneft and pipeline operator OAO AK Transneft. Chinese leaders did a similar deal with Brazil, agreeing to $10 billion in loans to fund deep-water oil development in exchange for 160,000 barrels of oil per day. China has also signed a deal to invest $19.5 billion in British and Australian mining company Rio Tinto (RTP).

Serious skepticism remains as to whether China will soften its reluctance to sacrifice economic development in order to reduce greenhouse gas emissions. Nicholas Lardy, a China expert at the Peterson Institute for International Economics in Washington, said the economic crisis makes the chance of agreement on climate change more remote. "I think that in the short run—i.e., the next couple of years at least—that the Chinese will be unwilling to accept binding quantitative targets on emissions, and this probably precludes the possibility of getting any agreement through the U.S. Senate," Lardy said in an e-mail exchange.

Iran: An Alternative to Russian Oil

But the idea of a breakthrough on the subject is attracting attention in Washington foreign policy circles. Prior to Clinton's late-February visit to Beijing, Washington think tanks, including the Brookings Institution and the Asia Society, issued voluminous road maps to agreement between the two countries. "I have recently talked with key people in both governments, and I can see clearly the prospect for real progress," Kenneth Lieberthal, co-author of the Brookings study, said in an e-mail from Beijing. "Hillary Clinton very much highlighted this issue during her trip to China…and the Chinese made generally positive responses to her overtures."

Similarly, the slump in oil prices has raised optimism among experts about a diplomatic breakthrough between the U.S. and Iran. Experts think that any thaw will come slowly. But one bonus of a deal could be a much-prized new source of natural gas for Europe. Iran has the second-largest natural gas supplies in the world. In January large regions of Europe shivered for 19 days as Russia and Ukraine bickered over the price of natural gas sold by the former to the latter. Russia supplies some 25% of Europe's natural gas, and some 80% of that volume passes by pipeline through Ukraine. The row resurrected concerns that Moscow could parlay its natural gas leverage into political influence in Europe, and provoked calls for a more diversified European natural gas supply.

At the moment there is no significant alternative to Russian natural gas. The U.S. has encouraged the construction of a pipeline network called Nabucco, which would ship natural gas from Turkmenistan to Europe, but has not obtained supply commitments. While Iran is the largest nearby fresh supply of gas, it would take years to develop its fields and build infrastructure, including pipelines.

Even Russia Could Seek to Bargain

Skeptics doubt Iran's reliability as a supplier. And Bijan Khajehpour, chairman of the Tehran-based Atieh Group, an energy consultancy, said that as long as tensions remain between Iran and the West, the country is unlikely to agree to any natural gas deal that would upset its relations with Russia. But Karim Sadjadpour, an Iran expert at the Carnegie Endowment, said necessity could help encourage diplomacy. "Iran is the best alternative to Russian gas and to undercut the quasi-monopoly of Russian gas" in Europe, Sadjadpour said.

That Russia itself has been knocked back on its heels by low oil prices gives a potential cushion in terms of time for U.S.-Iran diplomacy to work. The oil price plunge has shrunk Moscow's cash reserves to about $380 billion, from $590 billion. And the banking crisis has dried up possible sources of financing for a prized Russian project called South Stream, a proposed natural gas pipeline to southern Europe, which the U.S. opposes because it might further increase European reliance on Moscow. The Kremlin, too, is using the crisis to diplomatic advantage. Recently it agreed to lend $2.1 billion to cash-strapped Kyrgyzstan, which in turn agreed to close the Manas Air Base that the U.S. has used since 2001 to ferry troops to Afghanistan.

But Russia's economic troubles also appear to make it more open to a warmer relationship with Washington than has been the case in recent years, experts say. Like the U.S., "they are also eager to press the reset button," said Stephen Sestanovich, a Russia expert at the Council on Foreign Relations who served in the Clinton Administration. "While that may mean that they are eager for the U.S. to make a lot of concessions, they also value the change in tone."

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