China-Iran deal complements the BRI, but faces Iranian domestic opposition and US sanctions

The recently signed China-Iran Comprehensive Strategic Partnership agreement will be a linchpin for China’s BRI in the Middle East, says Yu Hong. In the best-case scenario, it will be a win-win arrangement, providing Iran with the foreign investment it needs and China the oil supply and strategic influence it hopes to get. However, a number of challenges stand in the way including US sanctions and domestic opposition within Iran.
Iranians drive down a street in the capital Tehran, on 11 April 2021. (Atta Kenare/AFP)
Iranians drive down a street in the capital Tehran, on 11 April 2021. (Atta Kenare/AFP)

In March this year, Chinese State Councillor and Foreign Minister Wang Yi visited six Middle East nations. In particular, his visit to Iran captured the attention of the international community. During this visit, Wang and Iranian Foreign Minister Mohammad Javad Zarif formally signed the China-Iran Comprehensive Strategic Partnership, a 25-year cooperation agreement. Since signing the agreement, China and Iran have not publicly released its details. Such secrecy has led to speculations by the international community.

In fact, the China-Iran agreement was earlier proposed and drafted in 2016 to add substance to the strategic partnership between China and Iran. According to public information, the agreement is a roadmap for comprehensive cooperation and a strategic framework to guide the development of bilateral relations. The agreement covers diverse areas including politics, the economy, energy, finance, infrastructure development, defence and security, healthcare and cultural exchange.

Iran’s attractive oil resources and consumer potential

As Iran is rich in oil resources, its economy is highly dependent on oil exports. In 2018, the US reinstated comprehensive economic sanctions and an oil export embargo on Iran, dealing a heavy blow to Iran’s domestic economy. Despite the comprehensive sanctions and economic blockade by the US, the signing of this agreement demonstrates China’s confidence in Iran’s future development. As Western companies withdraw their investments from Iran in fear of the US sanctions, Chinese enterprises are seizing the opportunity to capture the Iranian market to strengthen their growth and operations. There is huge consumption potential in Iran’s young population of over 83 million. China hopes that the signing and implementation of the agreement can help Chinese enterprises to enhance their presence in the Iranian market and increase their export of goods and services.

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Cars drive on a highway with the Milad Tower in the background in the capital Tehran, on 12 April 2021. (Atta Kenare/AFP)

Iran has an urgent need for the upgrading of its infrastructure, including roads, airports, ports and power plants, so as to enhance its transport and logistical efficiency. According to the Global Competitiveness Report 2019 published by the World Economic Forum, Iran ranks very poorly in the quality of road infrastructure, efficiency of seaport services and air transport services, electricity supply quality and telecommunications infrastructure. Iran’s need for infrastructure improvements and operational efficiency provides opportunities for Chinese enterprises to penetrate the relevant markets.

Formulated for the next 25 years, the China-Iran agreement is strategic and forward-looking. As Wang said, “Our relations with Iran will not be affected by the current situation, but will be permanent and strategic.” Iran is an important Middle East nation that is influential in the Muslim world. Significantly, the cultures of the East and the West converge in Iran and its strategic location at the Strait of Hormuz, connecting the Persian Gulf to the Indian Ocean, is extremely important.

...it [China] is the most important export market for Iranian oil and one of its largest trading partners. In 2019, trade with China accounted for more than a quarter of Iran’s total foreign trade.

Linchpin for the BRI

Through strengthening its relations with Iran, China hopes to further promote the Belt and Road Initiative (BRI) in the Middle East and enlarge its circle of friends, so as to counter the US strategy of uniting its allies to oppose and block China. This will also reinforce China’s strategic influence in the Gulf region. On the one hand, the partnership will enable Iran to secure the foreign investment needed to deal with its economic difficulties and improve domestic infrastructure, at a time when Iran has the urgent need for foreign investment, technology and increased trade in the face of the US sanctions. On the other hand, the partnership will also enable China to secure a stable oil supply from Iran at a relatively favourable price, which will benefit China’s strategy to diversify its energy imports to ensure its domestic energy security.

China is the world’s largest consumer and importer of oil. In this light, China is Iran’s strategic, primary customer for energy products and not a typical buyer. In recent years, China has increased its influence on Iran’s economy since it is the most important export market for Iranian oil and one of its largest trading partners. In 2019, trade with China accounted for more than a quarter of Iran’s total foreign trade. Many Chinese enterprises have long participated in Iran’s domestic economic, industrial and infrastructure development.

Despite the US sanctions, China has not stopped importing oil and energy products from Iran. To avoid and reduce transaction risks due to the sanctions, China has continued to import Iranian oil through third parties and unofficial channels. According to data from Refinitiv Oil Research, China imported 17.8 million tonnes of Iranian crude oil, averaging about 300,000 barrels per day, during the 14-month period from January 2020 to February 2021.

Iranian politics, society and academic elites have many negative perceptions of China. There has been considerable opposition within Iran to the signing of this agreement.

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Iranian Foreign Minister Mohammad Javad Zarif (left) meets with his Chinese counterpart Wang Yi (right), in the capital Tehran, on 27 March 2021. (AFP)

Although the partnership agreement has been signed, the deepening cooperation between the two nations lacks the necessary and favourable public sentiments in Iran. Iranian politics, society and academic elites have many negative perceptions of China. There has been considerable opposition within Iran to the signing of this agreement. For example, former Iranian President Mahmoud Ahmadinejad has criticised the signing of the agreement by the Rouhani government as a national humiliation that betrays Iran’s sovereignty and interests. The Iranian elites have also criticised that the agreement will enable China to conveniently plunder Iranian resources. In addition, the two nations are far apart in terms of social culture, religion and ideology.

Despite domestic opposition to the partnership, the Iranian leadership has given due consideration to Iran’s isolation and to counter the US sanctions. Ayatollah Ali Hosseini Khamenei has explicitly supported the deepening of Iran’s cooperation with China and the agreement, clearing the path for its signing. In June 2020, the Cabinet of the Rouhani Government approved the draft agreement. Both China and Iran are facing the pressures of the US sanctions and geopolitical competition from the West. Like the Chinese, the Iranians are conversant in winning over allies in foreign affairs and understand that “the enemy of my enemy is my friend”.

Strategic partnership complements BRI

In 2016, Iran signed a memorandum of understanding (MOU) on the BRI with China and formally joined the initiative. The strategic partnership marks the deepening of the BRI implementation in Iran. Iran is no stranger to China’s new Silk Road initiative. Known as Persia in ancient times, Iran was an important regional transportation and trade hub along the ancient Silk Road, where silk was traded as a commodity between the Persian and Chinese merchants. Through Persia, China established a trade and transportation route to Europe.

It must be emphasised that despite signing the strategic partnership, Iran has always pursued an independent foreign policy of “Neither East Nor West” and will not fully lean towards China. With a long history of civilisation and profound culture, the Persian Empire emerged and, at its peak, competed for supremacy with the Roman and the Ottoman Empires. Boasting a magnificent and long history of civilisation, the modern Iranians possess a strong sense of national pride.

With the US sanctions and oil export embargo in place, doubts linger about the extent of implementation of the strategic partnership.

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An Iranian woman wearing a face mask walks past a wall of the former US embassy with an anti-America mural on it in Tehran, Iran, 6 April 2021. (Majid Asgaripour/WANA (West Asia News Agency) via Reuters)

In 2018, the US Trump administration withdrew from the Iran nuclear deal (also known as the Joint Comprehensive Plan of Action, or JCPOA) and reinstated comprehensive economic sanctions against Iran. The US prohibits its enterprises from doing business with Iran and threatens to sanction foreign enterprises and individuals for doing so. Constrained by the US dollar-dominated international monetary system, it is difficult for Chinese and Iranian enterprises to completely bypass the US financial institutions when executing commercial transactions. With the US sanctions and oil export embargo in place, doubts linger about the extent of implementation of the strategic partnership.

US sanctions will still prove a challenge

According to the partnership agreement, China and Iran will use the renminbi as the pricing currency for direct settlement for their oil trade. It remains to be seen whether the agreement can effectively help Chinese and Iranian enterprises to avoid the US sanctions in bilateral trade cooperation, especially in the trading of energy commodities. In 2020, due to the US sanctions and Covid-19, China-Iran bilateral trade accounted for only US$14.91 billion, which was over 35% lower than the US$23.03 billion in 2019. It is unclear how much progress can be made in China-Iran relations, especially in economic and trade cooperation, with this agreement.

China has adopted a strategic approach of balanced diplomacy in the Middle East and hopes not to be involved in regional disputes and bilateral conflicts.

One important reason for China keeping a low profile in the signing of the strategic partnership is that China needs to balance its relations with other Middle East nations, especially Saudi Arabia. Saudi Arabia is China’s largest oil supplier and major trading partner in the Middle East. China does not want its relations with Iran to affect its relations with Saudi Arabia and other Gulf states.

In view of the complex situation and diplomatic relations in the Middle East, China has adopted a strategic approach of balanced diplomacy in the Middle East and hopes not to be involved in regional disputes and bilateral conflicts. Wang’s recent visit to Saudi Arabia, Turkey, Iran, United Arab Emirates, Bahrain and Oman on his Middle East tour is a testament to this approach.

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