by Gareth Smyth
Back in 2006, John Garver, a China specialist and emeritus professor of international affairs at the Georgia Institute of Technology, looked at what Iran and China might share in common:
The spirit of Sino-Iranian relations arises, I believe from the fact that both were among the most accomplished, powerful, and durable kingdoms created by humankind since the beginning of human settlement – and that these rich and powerful kingdoms were brought low and stripped of their earlier high status by Western powers during the modern era…These shared civilizational beliefs lead to the conclusion that the existing world order, created and still dominated by Western powers, is profoundly unjust and must be replaced by a new, more just order…
The Sino-Iranian relation partners two proud peoples who see in the other affirmation of their own self-identity. They respect the history of the other and are aware of the long chronicle of mutually beneficial contact and, sometimes, cooperation between the two nations. They see that historic cooperation as an important element of the world prior to the European eruption and their consequent humiliation, and are determined to cooperate in putting the world once again to right.
Although this cooperation goes back to Iranian monarchs and is not peculiar to the Islamic Republic, Garver makes very clear that it does not preclude disagreements or tensions. The two states’ geopolitical interests may coincide but are far from identical, and both sides make calculations about their best interests.
China is keen on Iran both as a market for goods and investment and as holder of the world’s largest hydrocarbon reserves—157 billion barrels of oil and 33 trillion cubic meters of gas. Iran sees China both as ally in supporting its rights as a signatory of the Nuclear Non-Proliferation Treaty (NPT) and as a source of investment and technology.
Iran’s Preference for Europe
But Iranian skepticism about China is found both in technology transfer and in consumer behavior, where there is a marked preference for Europe. Although Iran’s trade with China topped $1 billion in 2000, it did not surpass its European trade until around 2010. International financial and energy sanctions introduced in 2012 curtailed Iran-Europe trade, but when the EU ended most sanctions after the 2015 nuclear agreement, its bilateral trade with Iran leapt by 53 percent in 2017.
This is clear with energy technology, even though Iran has welcomed Chinese energy companies and is keen to diversify. Back in 2014, Tehran ended the role of the China National Petroleum Corporation (CNPC) in the major South Azadegan oil-field, west of Ahvaz (Khuzestan province), leading to an initial agreement with Shell before the project was retendered in 2017. Recent remarks from Bijan Namdar Zangeneh suggest that the CNPC is back in talks over the field. The CNPC has also signed buy-back agreements for North Azadegan, where production began in 2016.
But there has been widespread Iranian grumbling. Zangeneh has confirmed that Iran is dissatisfied with Sinopec’s progress at the Yadavaran field (also in Khuzestan) where production began in 2016. Perhaps most important of all, Iran is seething over a lack of progress in phase 11 of the South Pars gas-field, where the CNPC again became lead developer after Total withdrew in August from a $4.8 billion contract for fear of punitive U.S. action.
Iran seeks to master the technology of liquid natural gas (LNG), the form most suitable for export. Although Iran currently consumes domestically nearly all its annual production of 202 billion cubic meters of gas, neighboring Qatar—with which it shares the South Pars/North Dome North Dome)—has used LNG to expand exports to 124 billion cubic meter.
“As the energy industry community knows well, China is unable to complete South Pars 11 as it is deprived of the technical expertise for doing the job and cannot use some machineries that rely on U.S. technology,” says Michel Makinsky, general manager of consultant Ageromys International. “In 2011 [during multination sanctions later lifted under the 2015 nuclear agreement], when Total had to withdraw following U.S. pressures, Tehran assigned the contract to CNPC; two years later, it was cancelled because the Chinese group did not make any progress. Our colleagues from French industry are expecting that, unless a miracle happens, the outcome will not be better [this time].”
The U.S. squeeze on Iran since President Trump tightened sanctions after withdrawing from the multilateral, UN-backed 2015 nuclear agreement with Iran (the Joint Comprehensive Plan of Action or JCPOA) has had a marked impact on Iran’s trade with China. This is clear with oil. Over oil sales, China is more important to Iran than Iran is to China. While China was Iran’s top oil buyer in 2018, taking an average 588,000 barrels a day (bpd), Iran was only China’s third largest supplier behind only Russia (1.44 million bpd) and Saudi Arabia (1.14 million bpd).
Washington Squeezes China’s Thirst for Iranian Oil
After China in November was one of eight countries granted a U.S. waiver to keep buying limited amounts of Iranian oil, its imports jumped to 506,0o0 bpd in December, after a low of 248,000 bpd in October, as buyers stockpiled. By March, China imported 628,000 bpd after 571,000 bpd in February. According to Refinitiv, China’s imports from Iran will reach 754,000 bpd in April as Chinese buyers store oil ahead of the U.S. decision due at the beginning of May to announce whether existing waivers will be extended. Although the Trump administration will likely try to restrict Iran’s oil sales to one million bpd this summer, Beijing’s state-run energy companies drive hard bargains in buying oil and in oil-recovery projects. Growing U.S. pressure weakens Iran’s position over both.
Beijing is wary about U.S. actions and must calibrate its wider relations with Washington, especially given the sensitivity of current trade talks. China’s annual exports to the United States at $500 billion (U.S. exports to China are $130 billion) dwarf its trade with Iran of around $40 billion.
According to research published in January into Chinese customs figures by London-based business analysts Bourse & Bazaar, China’s exports to Iran fell 70 percent from October to December as fear of sanctions increased. Likewise, Iranian customs figures reported by Radio Farda suggested a 12 percent year-on-year fall in Chinese exports in the nine Iranian months ending December 20.
This followed a decision by China’s Kunlun Bank first to put Iran trade on hold and then, in December, to explicitly restrict it to humanitarian goods. Although Kunlun, which is largely owned by CNPC Capital, has not commented, it may be following political direction. Kunlun, already sanctioned by the U.S. Treasury for involvement with Iran, had been processing trade in euros and yuan as the main bank dealing with payments for Iranian oil.
Supply factors are also at work. High inflation in Iran, the falling rial, and the onset of recession may all have dampened demand for Chinese goods, whether industrial machinery or consumer items. There has also been a public campaign in Iran, led by state television, encouraging Iranians to buy domestically produced goods. According to China’s National Statistical Bureau, imports from China of $16.4 billion in 2016 had already fallen from a record $24.3 billion in 2014 (Iran’s exports to China also declined, from $27.5 billion in 2014 to $14.8 billion in 2014).
For China, support for the JCPOA and for Iran fits a wider strategy of upholding multilateral institutions while tapping export markets and expanding global investments. But since China’s trade with the United States is much larger than its trade with Iran, Beijing keeps Washington in mind as it approaches Tehran.
Undermining the Dollar
China condemned the U.S. withdrawal from the 2015 nuclear deal and, like Russia, ignores U.S. and European protests over Tehran’s missile program. Beijing argues that no country is obliged to obey unilateral U.S. sanctions and seeks good political relations and trade with all countries whatever their rivalries—including Iran, Saudi Arabia, Qatar, Venezuela, and the United States.
China in February welcomed the establishment of INSTEX, Europe’s special purpose vehicle (SPV) to protect Iran trade from punitive action by Washington. Foreign ministry spokesman ministry spokesman Geng Shuang even hinted that China might use Instex, which might enhance its own links with Europe.
Neither discounts nor INSTEX will be enough to keep high volumes of Iranian oil flowing to China, says Makinsky:
Experts think that, like in the good old times, Beijing is negotiating huge rebates for keeping the flows at a significant level. But as this is a risky game due to potential added restrictions, both partners have to discuss specific mechanisms intended not only to deliver oil, but to provide Iran with payments instead of goods [effectively barter], a ruinous mechanism used before JCPOA. In this respect, as INSTEX will not be used for Iranian oil exports, Tehran is urgently looking for other solutions.
Iran is not alone in this. Russia and Turkey are looking at ways to protect trade with Iran from the United States. For Iran’s leadership, the presidency of Donald Trump, which may end in 2020, may seem a short-term problem. Might, then, Trump’s sanctions undermine U.S. global influence and economic sway? “INSTEX should have a political effect in protecting the JCPOA and may attract non-EU businesses,” says Sir Richard Dalton, former UK ambassador to Iran. “This may turn out to be significant in a long-term reduction of the use of the dollar in international trade.”
The here and now matters too. Without doubt, says Makinsky, Iran sees China as part of its resistance to U.S. pressure:
China has built and financed railway lines under the BRI umbrella and intends to build other critical infrastructures. For Iran, this is at least a serious flow of oxygen. In Tehran’s attitude, one may guess that there is a dimension of wait and see vis à vis Trump, [an approach] which may be vulnerable if Trump is reelected.
Gareth Smyth, who has reported from the Middle East since 1992, was 2003-7 the chief correspondent of the Financial Times in Iran.