Can China Help Iran to Bypass US Sanctions?

Published November 5th, 2018 - 12:18 GMT
Beijing, Forbidden City /AFP
Beijing, Forbidden City /AFP

Grady McGregor

In
January 2016, a freight train departed from the Chinese city of Yiwu, a multicultural trading hub in eastern China, and wound through western China, Kazakhstan and Turkmenistan for fourteen days before reaching its final destination, Tehran, Iran. This journey represented the first direct train link between Iran and China and a major landmark for China’s Belt and Road Initiative (BRI).

China championed the new train route as the first land-based corridor between China and the Middle East in many years, conjuring images of the Silk Road revival that lies at the heart of BRI.

In 2016, Iran was just emerging from years of sanctions resulting from the Iran nuclear deal, formerly known as the Joint Comprehensive Plan of Action (JCPOA). China along with other major world powers was beginning to increase its economic and political ties with Iran and envision a sanction-free future.

China’s importance to Iran is striking: China is Iran’s largest trading partner and the greatest importer of Iranian oil. This close trade relationship has also been enhanced in recent years through China’s Belt and Road Initiative.

Now, with the United States deciding to renege on the JCPOA and reimpose sanctions, the situation has become much more complicated. China’s ambassador to Iran recently said that they are firmly “opposed to U.S. sanctions” and “will continue cooperation with Iran.” 

China’s continued involvement in Iran, alongside the European Union and other foreign powers, has the power to significantly undercut the impact of Washington’s sanctions and provide Iran with a realistic means to keep its economy afloat. At the same time, China will have to balance its continued trade and investment ties with Iran against the potential to further damage the country’s already fraught relationship with the United States.

How this struggle plays out will certainly have major ramifications for Iran’s future. It remains unclear whether China will provide a serious lifeline to Iran and thereby help upend power structures in the Middle East. As Iranians brace for the newest round of US sanctions that threaten to debilitate an already weakened economy and increase economic insecurity for millions of its citizens, should Iran be looking to China for economic support?

Oil Sanctions, China and Iran

As President Trump highlighted via an ominous Game of Thrones inspired warning on Twitter, the United States reimposed full sanctions against Iran on Monday, November 5th. This new round of sanctions specifically targets Iran’s oil industry, and the sanctions provide a list of 700 companies that will be blocked from doing business with the US, and the international money transfer system known as SWIFT, if they do not comply with these sanctions.

As the sanctions deadline approached in recent months, China delivered mixed messages on how the country will respond to the US sanctions. In the last few months, China went from importing a record amount of Iranian oil in August to significantly cutting their imports in September.

Andrea Ghiselli is a Researcher at the School of International Relations and Public Affairs of Fudan University in Shanghai and fellow at China Hub who specializes in issues pertaining to China and the Middle East. He told Al Bawaba that there may be two equally plausible explanations.

“You can basically look at China’s mixed messaging in two ways,” he said.

“The first one is basically that China has given up. There is too much pressure with the worsening relations with the United States, so basically they are sacrificing Iran and they are showing some sort of compliance with the Americans.”

On the other hand, Ghiselli believes that China may be gearing up to make deals with other foreign powers in order to counter Washington’s sanctions. “If you want to make a common front against American unilateralism you will see that the Iranian issue is perfect to get closer with the Europeans,” Ghiselli said.

Recent news seems to still leave both possibilities in play. China’s Kunlun Bank, which handles the vast majority of money flows between Iran and China, told clients that they would no longer accept payments from Iran. Chinese oil giants Sinopec and the China National Petroleum Corp decided to halt the shipment of Iranian oil to China during the month of November in fear of violating US sanctions.

On November 2nd, the New York Times reported confirmed that eight countries, including China, along with countries like India, Japan and South Korea, would receive temporary six-month waivers from the oil sanctions.

To be included in the waivers, US Secretary of State Mike Pompeo told the New York Times that the countries needed to have “demonstrated significant reductions in their crude oil and cooperation on many other fronts.”

 

However, even with the US waivers seeking to ultimately reduce Iran’s oil exports to zero, completely halting oil exports from Iran seems unlikely. In October, as China was reportedly was in the midst of cutting its imports of Iranian oil, news reports showed a significant increase in tankers departing Iran for China’s Dalian Port.

According to a Reuters source in the National Iranian Tanker Company, the company expects to continue to sell the oil to Chinese or other nearby buyers. A Reuters source at the Dalian port refuted this possibility saying that they were not expecting a shipment of oil and intended to comply with US sanctions.

In the past round of oil sanctions, Iran mastered the art of evading US sanctions and secretly traded their oil to countries like China through such tactics as barter transactions, disabling tracking devices on tanker ships, conducting oil transfers at night and masking the ships’ flags. The United States is now apparently much more prepared to police this type of behavior through new satellite imagery and data collection techniques.

Employing these subversive tactics, combined with limited oil exports from Iran’s waivers, would still result in a huge decline in the exports of Iranian oil, as evidenced from the decline in Iran’s oil exports experienced during the 2012-2015 oil embargo period.

There is additionally a growing body of evidence that China and Iran are seeking other ways to avoid US sanctions.

Majid Reza Hariri, deputy president of the Iran-China Chamber of Commerce, recently told Bourse and Bazaar that China is negotiating with the European Union to gain access to the special purpose vehicle (SPV) being crafted in the EU. This would allow China to bypass the sanctions through a barter-style trade mechanism that Eleanor Beevor recently detailed in an article for Al Bawaba.

“It seems that the fate of our trade with China is linked to the support package being prepared by the European Union,”  Hariri told Bourse and Bazaar. “We are waiting for this financial mechanism to be finalized and for China to join the SPV.”

If the SPV mechanism falls through, or if China is not ultimately included in the SPV deal, China and Iran may look to craft a bilateral trade deal. Some Iranian news outlets are reporting that these negotiations are already underway. 

 

A new possibility is emerging for an alternative, bilateral financial and trade system to challenge the oil sanctions imposed or Iran, and perhaps eventually even take on the dollar-dominated global industry at large. In March this year, China introduced the first ever oil futures contract, dubbed the ‘petro-yuan,’ that trades exclusively in Chinese currency.

Since the introduction of the ‘petro-yuan,’ many experts have written off its importance arguing that it is unlikely to present a serious challenge to US dollar dominated oil markets.

Within a few days of President Donald Trump announcing in May that the would pull out of the JCPOA and reinstate sanctions against Iran, shares of ‘petro-yuan’ skyrocketed on speculation that China would use the ‘petro-yuan’ to openly circumvent the sanctions.

Mahmoud Sahimi, professor of Chemical Engineering and Materials Science at the University of Southern California and frequent commenter on Iranian politics, told Al Bawaba News that he believes the ‘petro-yuan’ may be a realistic option to evade US sanctions.

“Whether the petrol-yuan can replace the current market in international markets remains to be seen,” Sahimi said. “But there is no question that both Iran and China want to distance themselves from dollar and dollar-dominated markets. In fact, even EU is thinking about it. I believe it is doable, if many countries join the effort.”

Ghasselli remains skeptical that the petro-yuan will be a significant factor in post-sanctions oil-trade negotiations.

“You can talk about the RMB making a parallel system to the SWIFT to make oil exchange possible but the problem is that even if you make payments possible, who is going to risk losing the American market,” Ghasselli said.

The fact that China recently overtook the United States as the world’s largest importer of crude oil and is clearly interested in having the oil market increasingly denominated in the Chinese renminbi may make this possibility increasingly likely in the coming years. With the onset of the US’ oil sanctions, Iran may represent China’s best opportunity so far to catapult the ‘petro-yuan’ into the global financial system and begin challenging the US dollar as the dominant global reserve currency.

 
 

These China-Iran trade negotiations will likely take a back seat to China’s ongoing trade war with the US. And Iran likely won’t be high on the list of China’s priorities when US President Trump and Chinese President Xi Jinping meet at the end of this month at the G20 in Argentina.

“Any change in Beijing’s relationship with Tehran in relation to the coming US sanctions will be constrained by China’s greater concerns over its trade disputes with the US,” Mahmoud Pargoo, Iran expert and PHD candidate in Social and Political Thought at Australian Catholic University told Al Bawaba.

Pargoo also noted that such a move could turn public perception in Iran firmly against China, and potentially jeopardize the future of their relationship. “Thus, it can have varied outcomes based on China’s negotiations with the US over trade and the use of the “Iran card,” he said. “China’s perception among Iranians might turn even worse if China abandons Iran outright to secure a deal with the US.”

China’s BRI future in Iran

While the future of Iran’s oil trade with China will play a large factor in dictating the future of the bilateral relationship, China’s BRI involvement in Iran has grown considerably since that first China-Iran train voyage in 2016.

Among the many BRI projects in Iran, China is helping build five new hospitals, investing $1.5 billion towards electrifying Iran’s Tehran-Mashhad widely used railway line and investing another nearly $50 million to build a new railway.

Reuters in late 2017 published an article outlining how two Chinese banks, the CITIC Group and the China Development Bank, had combined to invest more than $25 billion into Iran. Reuters said that both sides were reluctant to discuss how the money would actually be used.

 

In the wake of the Iran sanctions, many Iran and China watchers will also be closely watching what happens to Iran’s Chabahar Port.

“Iran needs the port, not only for itself in a region far from the Western front, but also as an attractive option to present to Central Asia and Afghanistan for access to international waters,” Sahimi noted about the Chabahar project.

The port has been in development with investors from India for well over a dozen years, and India is motivated to build the port to counter China’s growing influence in neighboring Pakistan where China’s BRI investment plans exceed $60 billion and include the Gwadar Port and the China-Pakistan Economic Corridor. The sanctions could threaten India’s continued involvement in the Iran port project, and China may be ready to step in if India is indeed forced to pull out of the project.

The overall balance of China’s BRI ambitions however maybe changing. Ghaselli believes that there is a strong possibility that China’s seemingly endless BRI funding may start to slow down in coming years.

“If we don’t see an increase in BRI projects (in Iran) I would not be so surprised,” Ghaselli said. “People (in China) are already starting to question that they should be more careful with their money abroad, I think these are important factors that will not fuel expansion in the region. China is thinking that they need countries that are stable and that they can rely on.”

In addition to their oil relationship and the potential for continued BRI expansion, Iran and China’s long term relationship will also depend on how China is viewed among Iranians. China’s public image in Iran currently seems to be suffering a bit. Pargoo recently suggested that this is because of limited cross-cultural communication, an underwhelming media presence and an inability to build relationships with local political leaders.

“Shortcomings of China’s public diplomacy will not affect Iran’s short-term engagement with China,” Pargoo told Al Bawaba. “Iran has no other options at the moment and has to embrace whatever is offered by China. However, if China cannot improve its perception among Iranians, Tehran will be pushed even more toward the West as a strategic partner.”

Grady McGregor is a digital journalist working in Amman, Jordan. McGregor is a fluent Mandarin speaker currently researching the Belt and Road Initiative and China's diplomatic and economic presence in the Middle East.

The views expressed in this article do not necessarily reflect those of Al Bawaba News



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