Why China may have bought a $400bn Iran liability

Until late last year China’s posture in the Middle East revolved around energy demand as the world’s largest crude importer, and moderately paced development of the Belt and Road Initiative (BRI), aimed at placing China at the center of global trade and manufacturing networks. Beijing had little incentive or geopolitical need to add a security cooperation and military dimension to its diplomacy in the region, and was perfectly content with the long-standing US dominance.

As far as China was concerned, its interest in the Middle East would be best served along multipolar lines, non-interference and establishing strategic partnerships to enhance investment, trade, infrastructure development and energy. Such neutral engagement was a foil for aggressive Western interventions, heavily influenced by thought leaders in Beijing who believed that regional stability was attainable through developmental peace. China has since been able to conclude partnership agreements with 15 countries across the region from Djibouti to Turkey, encompassing the Gulf states and extending as far west as Morocco. Its ambitions for the BRI and to sustain a steady flow of oil imports from the region were mostly achievable, while leaving the US responsible for managing Middle East security, affording Beijing the luxury of distance and non-interference.

However, these favorable dynamics have changed drastically, with the world on the cusp of breaking a decades-long unipolarity in favor of a muddled collection of regionalized zones —sparked by the US turning into a reluctant sheriff and accelerated by the COVID-19 pandemic. Heightened tensions between Beijing and Washington have already unleashed a trade war, which has now morphed into a diplomatic tit-for-tat with consulate closures in Houston and Chengdu. In the Middle East, US disengagement would also expose Chinese investments and patchwork of partnerships to the region’s notorious volatility.

The Middle East is the most strategically important zone in China's ambitious BRI project — particularly Iran, which sits between the oil-rich areas Caspian Sea and Arabian Gulf. However, the need to mitigate pandemic risks by decentralizing global manufacturing, creating multi-node supply chains and adopting regional insularity will turn many BRI projects into white elephants.

Beijing’s view is that the post-pandemic world envisioned by policymakers around the world would significantly hamper Chinese ambitions for an advanced, consumption-driven economy. It is inevitable that China will step up its engagement and tailor it to current regional dynamics in order to keep the oil flowing to its industries, first to recover from pandemic losses and then to accelerate the BRI before the rest of the world's manufacturing capacity catches up.

In the Middle East, US disengagement would also expose Chinese investments and patchwork of partnerships to the region’s notorious volatility.

Hafed Al-Ghwell

Iran, meanwhile, has been reeling from sanctions and international isolation since the US withdrawal from the 2015 nuclear deal. Washington’s threat to cut off access to the international banking system for companies that engage in business with Tehran has scared away foreign investment inflows and trade at a time when Iran needs investments of as much as $186 billion in the upstream oil sector and petrochemicals industries.

Additionally, a pandemic and an economy in tatters are a recipe for widespread social unrest, destabilizing the government and threatening the ayatollahs’ grip on power. Repression and overseas distractions can work for only so long, especially when the latter fail to produce any significant positive outcomes. In Lebanon, Tehran-backed Hezbollah is part of a government that has repeatedly failed to address the country’s worst financial crisis. The Quds Force-backed militias in Syria play third fiddle to Turkey and Russia as the civil war nears its conclusion, forcing officials to loudly remind Bashar Assad that Iran has spent up to $30 billion propping up his regime and does not like having its interests sidelined. In Yemen, Iran’s sustained support for the Houthis has resulted in the world’s worst humanitarian crisis.

It is unsurprising that such a country finds itself at Beijing's door. In China, Tehran has apparently gained a powerful backer, capable of brushing off punitive actions from Washington and wealthy enough to pump an estimated $400 billion into Iran’s dilapidated economy over the next 25 years. In exchange, China will be able to buy heavily discounted oil, gas, and petrochemicals products. Beijing is also going to invest in Iran’s financial, transport and telecommunication sectors, and the two countries will cooperate in military and state security affairs via joint training exercises, weapons development and sharing intelligence. Iran is perhaps the ideal candidate to adopt Beijing's new digital currency, the e-RMB, to bypass the dollar and weaken its sanctioning power.

However, for all of its upsides, getting into bed with Iran will probably earn China the ire of most of an Arab world already facing intense criticism for turning a blind eye to China’s quiet genocide of Muslim Uighurs. Should Beijing fail to temper Tehran’s excesses, particularly those that harm Arab interests of states, it could jeopardize billions in Chinese investments across the region, especially the ambitious BRI plan to encompass 18 Arab world states.

The proposed military and security cooperation are a glaring departure from China's usual neutrality, and any consequent advancement in Iran’s weaponry is likely to be visible in active conflict zones.

Additionally, Beijing’s embrace of Tehran makes it more challenging for Western democracies to ignore China’s aggressive posture in Hong Kong, Taiwan, the Galwan Valley and the South China Sea. Combined with the furor over China’s poor handling of the COVID-19 outbreak, much of the world is likely to agree with Washington to some extent, and demand redress — further widening the geopolitical divide.

Alternatively, there are arguments for adopting a wait-and-see attitude to this budding relationship, erring on the side of optimism that China has simply collateralized Iran’s regional and even international ambitions. In this view, China will be able to rein in Iranian excesses because they will seek China’s cooperation first, followed by mutual respect, a formula that most strategic partnerships tend to follow.

The flip side is that if Iran refuses to curb its regional behavior, China will have bought itself a $400 billion liability —and if the raucous opposition within Iran to this as yet unapproved deal is anything to go by, there is little chance Tehran will change its policies.

• Hafed Al-Ghwell is a non-resident senior fellow with the Foreign Policy Institute at the John Hopkins University School of Advanced International Studies. He is also senior adviser at the international economic consultancy Maxwell Stamp and at the geopolitical risk advisory firm Oxford Analytica, a member of the Strategic Advisory Solutions International Group in Washington DC and a former adviser to the board of the World Bank Group. Twitter: @HafedAlGhwell