China-Iran pact won’t be trouble-free for either side

The recent revelation of an agreement between China and Iran to strengthen their economic and security ties has surprised many. Some find it strange that Beijing should want to add more stress to its already difficult relationship with Washington. Others question the wisdom of Beijing explicitly aligning itself with Tehran, which could upset the delicate balance China has worked hard to maintain for itself between Iran and Saudi Arabia. In fact, China is precisely pursuing deals like the one with Iran to build allies among “like-minded” countries to counter what it perceives as an anti-Beijing coalition led by the US. These alliances are more significant than the US thinks and, equally, more fragile than Beijing might hope.

The deterioration of relations between Beijing and Washington in recent years has forced China to attempt to forge ties with previously undesirable partners. Of the states that are important to the great power competition and not yet a member of the Western club, Russia and Iran are the two most consequential “friendly forces” for China. Iran, with its regional influence and ambitions in the Middle East, as well as its grievances and defiance toward Washington, has become increasingly attractive in China’s grand strategy.

The value and desirability of Iran as an ally for China have been on the rise this year, as the coronavirus disease has pushed US-China relations into freefall. The “unprecedented complications in the external environment,” as expressed in a People’s Daily editorial, has put Beijing on a direct collision course with many countries, including Australia, India, Canada, Japan and much of Europe, over a variety of issues, from territorial and maritime disputes to the status of Hong Kong and Taiwan. As China’s relations with the US and the perceived US-led coalition drop to their nadir, Beijing is seeking out any sympathetic force that can strengthen its international standing.

Even before the pandemic, China, Iran and Russia had already demonstrated their propensity to coalesce around a strategic purpose. In December, the three hosted their first ever joint military exercise in the Gulf of Oman. Although the Chinese military justified the exercise as a demonstration of the three countries’ will and capacity to maintain peace and maritime security in the region, the move was widely interpreted as a signal of defiance against the US military in the area.

The China-Iran agreement, insofar as can be determined from the limited materials that have been leaked, includes the Chinese financing of Iranian infrastructure development in exchange for Iranian crude oil at a concessionary rate. China has been reducing its oil imports from Iran following the May 2019 expiration of the sanctions waiver granted by Washington. This reduction accelerated into this year. The drop in Iranian imports has happened even as China’s total oil imports rose, clocking in at 10.4 million barrels per day in May — a rise of 4.5 percent on the year.

Coerced by the US, Beijing has reluctantly adjusted its actions according to American sanctions. However, it continues to be massively unhappy with the US for its withdrawal from the Iran nuclear deal. Beijing does not only blame the US withdrawal and continued sanctions for the rising tensions in the region, but also resents Washington for the damage it has inflicted on China, especially the US’s long-arm jurisdiction over Chinese companies doing business with Iran. The ongoing extradition case in Canada of Meng Wanzhou, Huawei’s chief financial officer, originated from the US’ sanctions on Iran.

In practical terms, although Beijing opposes the US sanctions on Iran, it remains an issue that Sino-Iranian economic cooperation has not been able to circumvent. If the agreement is implemented, the most likely channel is through the barter system that the two countries have long been engaged in. The system avoids direct financial transactions and has used Chinese products and services to trade for Iranian oil.

Furthermore, there is a longstanding belief that the US is reluctant to sanction major Chinese financial institutions, such as the Bank of China, and key Chinese state-owned enterprises, such as the China National Petroleum Corporation, for fear of disruptions to the American economy. So, while the Trump administration has shown unprecedented willingness to sanction Chinese entities for a variety of reasons, Beijing is betting that the White House is not willing to go so far as to put these large institutions under sanctions for a barter trade. China is also betting that a different administration will emerge from the November election and Beijing might have some leeway to poke without provoking.

Iran is evidently desperate for investment and economic cooperation, while China is vying for partnerships, support and potential allies. These mutual strategic needs create the necessity for the deal. However, whether it will be economically feasible or desirable for either side remains to be seen.

Iran is evidently desperate for investment and economic cooperation, while China is vying for partnerships, support and potential allies.

Yun Sun

China does not want a repeat of its relationship with Venezuela, where the massive financing it offered Caracas — funds that were supposed to be repaid with crude oil — was not repaid because the country went bankrupt and could not pump out the oil. For its part, Iran does not want to be held accountable for payments in oil for too long a term. It has been particularly wary of being locked into suboptimal deals with China because of the unfavorable external environment for Tehran. If Iran decides that its relations with the West will improve, stringent terms with the Chinese will only breed grudges and resentment. While the two countries do desire, for now, to work together, the relationship will not be trouble-free.

The great power competition is increasingly dividing the world into two camps. China and Iran, along with Russia, could emerge as the new “axis powers” in the Western narrative.

• Yun Sun is director of the China program and co-director of the East Asia program at the Stimson Center in Washington, D.C. Her expertise is in Chinese foreign policy, US-China relations and China’s relations with neighboring countries and authoritarian regimes. Copyright: Syndication Bureau