Asia key as U.S., EU tighten sanctions against Iran By Peter Apps and Yeganeh Torbati LONDON (Reuters) - Western states hope new oil sanctions will deter Tehran from pursuing its disputed nuclear program but ultimately it will be China, India and other Asian powers that determine their effectiveness impact on already volatile Iranian politics. Both the United States and European Union have introduced tough new restrictions coming into force later this year and designed to effectively choke off Iran's oil exports. But -- unlike rounds of sanctions imposed by the United Nations Security Council -- they are not binding on other countries. Although China has almost halved its imports of Iranian oil recently, Chinese officials are negotiating new contracts. Beijing has also made it clear it wants other Asian nations to continue their purchases. India, currently the largest single purchaser of Iranian oil, has struck a deal to pay for new deliveries with shipments of food. The U.S. and EU restrictions effectively block off large parts of the global financial system to purchasers of Iranian crude but also inevitably leave multiple loopholes. "To be truly effective, in this case, sanctions would have to be applied universally and internationally," said Dina Esfandiary, research analyst and sanctions specialist at London's International Institute for Strategic Studies. That won't happen. They will have some effect, but it will be diluted. What Beijing, New Delhi and others do look to be doing, however, is using the new sanctions and broader diplomatic pressure from Washington in particular to negotiate much better pricing from Tehran. Just how far China and others beat the price down will have dramatic implications for Iran's economy and politics. A parliamentary election is due on March 2 and it will probably deepen an increasingly apparent split within the ruling elite. After the Iranian state's ferocious suppression of street protests in 2009, few expect a reformist revolt and moderate groups will largely ignore the vote. But given their different urban power bases, the rift between nationalists around President Mahmoud Ahmadinejad and conservative hardliners loyal to the supreme clerical leader, Ayatollah Ali Khamenei, could still spill onto the streets, analysts believe. Recent subsidy cuts have driven up the price of petrol some 280 percent from early 2011 and the price of bread up 25 percent. Analysts say further cuts could fuel discontent and unrest, perhaps also raising the risk of hardline Revolutionary Guard elements attacking foreign targets as a distraction. Radical groups within Tehran's ruling establishment are believed to have been behind the storming of the British embassy in November and perhaps also an alleged attempted assassination of the Saudi ambassador to Washington D.C. In extreme circumstances, some worry that Iranian radicals could also strike crucial oil shipping in the Gulf. Only one thing is certain - the greater the economic squeeze, the greater the need to expect the unexpected. "If the last 13 months in the Middle East has taught us anything, it's the futility of making predictions about how people will react during times of economic disillusionment and political disenfranchisement," said Karim Sadjadpour, associate at the Carnegie Endowment for International Peace in Washington. Iran denies Western suspicions that it is enriching uranium with the ultimate goal of developing nuclear weapons capability. But investigations by U.N. nuclear inspectors have lent weight to such concerns and Iran has begun higher-grade enrichment in a mountain bunker better protected from air strikes. How tight the sanctions screws will be tightened is a big question, particularly as the issue has swiftly been sucked into the quietly growing geo-political face-off between the United States and China. Last year, Beijing was willing to comply with U.N. sanctions and Western efforts to financially starve both Libya's Muammar Gaddafi and Ivory Coast's Laurent Gbagbo by refusing to buy their key oil and cocoa exports. But it is making clear it has no intention of doing the same when it comes to targeting Iran. "China cannot stay aloof from the affair," the Communist Party-run "Global Times" newspaper wrote on January 30, saying Beijing's strategic goals should be to safeguard oil supplies, prevent another Western-backed overthrow of a Middle East government and begin to show greater global leadership. China should quicken its steps in coordinating with countries in Southeast Asia to try to best form a temporary alliance with them in continuing to buy oil from Iran. Such an alliance is possible, as seen from the hesitation of countries like Japan and India in sanctioning Iran. Not everyone believes that strategy will work. With many countries in Southeast Asia already concerned by China's rise, some suspect many governments will ultimately choose to stick with long-term ally Washington. "China's position on this is driven partly by commercial requirements but also by an ideological underpinning related to national sovereignty," says Michael Denison, a former senior adviser to ex-British Foreign Secretary David Miliband and now research director at London-based consultancy Control Risks. For other Asian countries, it's going to be a more structured decision in which they balance their commercial interests with their strategic relationship with the United States. Some Western officials say they are largely unworried if some oil trade continues. Even if Asian buyers were to ignore the sanctions completely after they enter force on July 1, Tehran would still be losing trade from Europe. Without new investment and exploration, Iran's oil output will also swiftly begin to fall off. Independent industry analysts forecast it will fall already this year by some nine percent to an average of around 3.3 million barrels per day. In retaliation for the EU and U.S. sanctions, Iran has threatened to block exports to Europe even before the sanctions enter force, a challenge for financially strapped Mediterranean states like Greece and Spain that have become more dependent on Iranian oil as they struggle to find credit elsewhere. But most experts say Tehran will be the ultimate loser, struggling to make up for the lost sales elsewhere. Given the risks of conflict, few countries seem willing to increase their reliance on Iranian output. With perhaps a view to keeping its options open, China in particular has boosted Saudi purchases and openly increased its contacts with Riyadh. "It's never going to be a complete block but it is going to squeeze them and we hope that will ultimately put pressure on them to pull back on the nuclear issue," said one Western official on condition of anonymity. There are signs it is already working. When you see barter - such as the Indians paying for their oil with, for example, food - that is having a real impact on (Iranian) revenue. Although imperfect, sanctions were the best option available, he said, with the only real alternative "something much more direct and kinetic" -- euphemism for military action. Whether they will actually have the desired impact on the nuclear program, however, is hotly disputed. The level of domestic popular support for uranium enrichment in Iran is hard to gauge, but many believe it is relatively widespread. Iran says its enrichment work is for peaceful energy only. "While it's difficult to make generalizations, I think sanctions often accentuate people's existing political disposition," said Carnegie's Sadjadpour. For government critics, it's another example of the regime's disregard for their well-being... but for government supporters, the sanctions provide further fodder to resent Western imperialism. Others disagree. If the sanctions can be made to work well enough to inflict real economic damage, they say, Tehran's leadership will have little choice but to soften its stance. "The moment where Khamenei will change is the moment where the economic consequences of his policies start to threaten the stability of the regime," says Israeli-Iranian Middle East analyst Meir Javedanfar. That's the moment of truth ... The health of the economy an existential matter for the Islamic Republic. The nuclear program is not.