COLOMBO (Reuters) - President Mahinda Rajapaksa was emphatic: China's presence in Sri Lanka is strictly business, and not political.
Challenged on speculation that China financed and built the $1.4 billion Mahinda Rajapaksa port on Sri Lanka's south coast so it could sneak a naval base into India's backyard, Rajapaksa laughed and said his giant neighbour had not complained.
"No one has said anything to us, not India, not even the U.S. Even the U.S., the British and India are now inviting China to come and invest," he said on Tuesday at a meeting with foreign journalists.
Located just off of India's southern tip, the island of 21 million has become a visible front in the cold war between the Asian giants, where mutual suspicion crossbred with commercial ambition have produced a construction arms race of sorts.
"They try to match each other. A coal plant on one side of the country by the Chinese, another by the Indians on the other side. A port in the south by the Chinese, a port in the north by the Indians," said a European diplomat based in Colombo.
Sri Lanka's location astride an ancient and lucrative trade route in the Indian Ocean makes it of strategic commercial and military interest to Washington, New Delhi and Beijing.
That, some analysts theorize, makes it a prime part of China's so-called "String of Pearls" strategy to surround India and project its presence by setting up coaling stations under commercial auspices at port after port in the Indian Ocean.
So far, the weapons of influence have been financial: India and China have both funded huge chunks of Rajapaksa's $6 billion post-war overhaul of roads, railways, ports and power plants.
STICKY IRANIAN WICKET
Rajapaksa's foreign policy is firmly rooted in Sri Lanka's Non-Aligned Movement history, and during the last year of a three-decade war with the separatist Tamil Tigers, he played China, India and the West off each other as it suited him.
So now, with the West lobbying for a probe into war crimes allegations from the conflict's bloody end in 2009 and U.S. sanctions on Iranian crude threatening almost all of Sri Lanka's oil supply, Rajapaksa once again is taking stock of his friends.
"We are talking with the Indian government and the U.S.," he said, referring to ongoing talks with New Delhi and a visit later this week by Luke Bronin, a U.S. deputy assistant treasury secretary, who is expected to brief the government on its options regarding the Iran sanctions.
"We'll tell them to give us an alternative. There must be an alternative. We can't stop all the railways," Rajapaksa said. "Finally, they are not punishing Iran, they are punishing us, the small countries."
Asked if he would consider seeking a waiver from the U.S. sanctions, Rajapaksa said: "We might, because 93 percent of our crude we are depending on Iran for."
The United States, at the fore of calls for Sri Lanka to look into war crimes allegations itself or else face an external probe, would likely extract concessions from the government on post-war reconciliation and reduced ties with Iran in exchange for a waiver.
"We likely won't want to spend that political capital," a senior government official involved in the Iran negotiations told Reuters on condition of anonymity. Iran is Sri Lanka's fourth-largest trading partner and biggest tea buyer.
NOT INDIA'S CUBA
That's where both India and China come in: both support Sri Lanka against calls for an external war crimes probe, and in finding a way around the Iranian oil sanctions.
China for the third year running was Sri Lanka's largest bilateral donor, committing $784 million through the first nine months of 2011, or 44 percent of the total.
India's bilateral loans pale by comparison in the same period at barely $9 million, but that primarily has to do with the fact that private Indian companies invest directly whereas China loans the money for projects in which its companies invariably do the work and provide the equipment.
Over the past two months, the lawn in front of the defence ministry on Colombo's Galle Face seafront in Colombo has been a show of Chinese commercial force: more than once it has been turned into an outdoor bazaar of freshly delivered Chinese buses, bulldozers, road graders and auto-rickshaws.
A Western diplomat in Colombo said commercial interests were a much better explanation for China's push into Sri Lanka than the "string of pearls" theory, which he dismissed as "existing mainly in the minds of Indian think tanks".
Sri Lanka would fall in line with "Mother India" very quickly if anything happened between India and China, the diplomat said. "This isn't going to become India's Cuba."
(Editing by John Chalmers and Sanjeev Miglani)
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