Author : Manoj Joshi

Expert Speak Raisina Debates
Published on Feb 18, 2019

Beijing’s Middle-East policy, especially that towards Iran, remains an enigma of sorts. Though it remains heavily engaged with Teheran, it is taking great care to avoid ruffling Uncle Sam’s feathers.

China and Iran: JCPOA and beyond

Last week, two parallel summits took place in Europe.

The first was an event in Poland on 13 February, billed as a conference to promote “future peace and security in the Middle East.” But its subtext was Iran, as evident from the absentees — Russia, China, Qatar, Turkey, the Palestinian Authority and Lebanon. Iran was not invited.

The second summit was in Sochi, Russia where Turkey’s President Recep Tayyip Erdogan met with his Russian and Iranian counterparts Vladimir Putin and Hasan Rouhani to come up with solutions for the Syrian civil war.

China was absent from both of them, though it was the elephant in the room. Beijing’s Middle-East policy, especially that towards Iran, remains an enigma of sorts. Though it remains heavily engaged with Teheran, it is taking great care to avoid ruffling Uncle Sam’s feathers or to take anything that would smack of an initiative.

The JCPOA fallout

On 4 November, the US re-imposed the sanctions on Iran that had been lifted under the 2015 Joint Comprehensive Plan of Action (JCPOA), better known as the Iran nuclear deal, involving Iran and  the Permanent Five of the United Nations, the European Union and Germany.

Under the JCPOA, Iran agreed to eliminate its stockpile of medium enriched uranium, cut its stockpile of low enriched uranium by 98 per cent and reduce by about two-thirds its gas centrifuges for about 13 years. It also agreed not to build any new heavy water facilities for the same period of time and to limit its uranium to 2.67 per cent and also undertake measures to convert its facilities to avoid proliferation risks. All this would be verified by the International Atomic Energy Agency and in return Iran would receive relief from the US, EU and UNSC sanctions.

However, in May 2018, the US declared that it would no longer accept the JCPOA and reimpose sanctions on Iran. On August 2018,  US President Donald Trump declared that the US would not only  walk out of the JCPOA, but that “anyone doing business with Iran will NOT be doing business with the United States.”

Prior to the 5 November sanctions, the US had already conducted some  19 rounds of sanctions targeting 168 Iranian entities. On 5 November, more than 700 individual entities, airlines and vessels were part of sanctions, of which 300 were new targets. In addition, the US began re-listing hundreds of individuals who had been given relief under the JCPOA.

At the time, the European Union, Turkey, Russia and China declared they would continue their normal economic relationship with Iran. The Europeans view the sanctions as unlawful and have now created a Special Purpose Vehicle (SPV) to facilitate business transactions with Iran.

But its major companies declared that they would pull out rather than risk their US business. Among the first to have suspended plans to invest in Iran were the French oil major Total and the big car makers PSA and Renault and their German rival Daimler. Danish engineering company Haldor Topsoe, a leading producer of industrial catalysts, also decided to retrench. The CEO of reinsurance group Munich Re also said it may abandon its Iranian business.

According to one calculation, nearly 100 businesses around the world began backing off from their commitments in Iran. Among them were banks, insurance and aviation companies, energy and automotive majors.

Included in this lists were several Indian entities like Uco Bank and Reliance Energy and Indian Oil.

In an unusually blunt speech at the Middle-East conference in Poland, US Vice President Mike Pence attacked UK, France and Germany and the EU as such for remaining parties to the JCPOA. He criticised the Europeans for setting up their SPV and said it was an attempt to break US sanctions against Iran. Earlier, Secretary of State Mike Pompeo had said that Iran was the biggest threat to the Middle East and there could be no peace there without confronting Teheran.

China-Iran relations

At  the time the US sanctions were re-imposed, China was buying 650,000 barrels a day of Iran’s crude, or 7 per cent of total Chinese imports, which would put their worth at $ 15 billion. State-owned energy companies like CNPC and Sinopec have invested billions of dollars in key Iranian oil fields such as Yadavaran and North Azadegan and have been shipping oil to China from there.  Iran was also seen as an important point in the Silk Road Economic Belt (SREB) the land-component of the Belt and Road Initiative.

China has played a significant role in Iran’s nuclear programme. After the Iranian Revolution of 1979, Iran, a signatory to the Nuclear Non proliferation Treaty, resumed its nuclear programme with the help of Pakistan and China.

In the 1980s, China helped build a research reactor and four small research reactors in Isfahan. It helped in the construction of a uranium hexafluoride enrichment plant. China also exported various kinds of nuclear material under a bilateral cooperation agreement of 1992. Thereafter, reports suggested that some Chinese companies continued to aid the Iranian programme.

The extent and the true nature of the Iranian nuclear programme was only revealed in 2002  and this led to the long process involving negotiations and sanctions that eventually culminated in the JCPOA.

China has a long-standing economic relationship with Iran. Chinese foreign aid and government-sponsored investment activities (FAGIA) have been substantial in Iran. In the 2000-2013 period, most aid was directed at developing the energy sector in the Middle East. In Iran, it was focused on the financing of oil and gas projects and the construction of a railway. Indeed, a RAND study concluded that Iran was the second largest recipient of China’s cumulative pledged FAGIA in the 2001-2011 period with a total of $ 89 billion.

However, another study revealed that China’s investments, totaled $48.6 billion in the 2005-2018 period. Of this $ 27 billion was investment-- $ 11.83 billion in energy, $6.3 billion in transport, $ 2 billion in utilities and $ 5 billion in metals and  another $ 21.6 billion  in construction contracts relating to energy, transportation, chemicals and metals. There was another $ 25 billion which were not confirmed and classified as “troubled.” 

China and Iran have had close military ties since the 1980s. China indirectly assisted Teheran’s missile programme by selling tactical ballistic and anti-ship cruise missiles. A 2012 RAND study said that Chinese design and technology “can be seen in many Iranian missile series.”

A number of Chinese entities have been sanctioned by the US for allegedly assisting Iran’s missile, nuclear and conventional weapons programme. However, the relationship has not been significant thereafter, though there has been talk of China trying to sell its J-10 aircraft to Teheran. The two sides have signed a military cooperation agreement to promote military to military exchanges CT training and joint military exercises.

China sees alliance with Shia Iran as useful in dealing with Sunni extremist threat that it faces in Xinjiang.

Like Iran, it has been supportive of the Assad government in Syria and feels it is a better option as compared to the Islamic State and the other Sunni rebels.

Shortly after the JCPOA was implemented, Xi Jinping visited Teheran and focused on China’s vision of an energy and transportation corridor throughout Eurasia and Iran’s role in it. He agreed to expand trade to $ 600 billion over the next decade.

The Chinese have been involved in the project to electrify the Mashad-Teheran railway line and link it up to the railway systems from Turkmenistan. They had also committed $ 845 million for building railway lines westward from Teheran and another to link Shiraz and Bushehr.

In February 2016, the first rail cargo from China arrived in Iran via the Kazakhstan-Turkmenistan-Iran railway link. In December 2014, a new railway was inaugurated through Iran, Kazakhstan and Turkmenistan, providing a link from Persian Gulf to Central Asia. A natural gas pipeline from Iran to Turkey fed with Turkmen gas began operations in 1997, and a second pipeline was completed in 2010. Now China has become Turkmenistan’s major natural gas customer and the need for the trans-Iran pipeline has declined.

China’s exports to Iran were $ 16. 4 billion in 2016 while its imports totaled $ 14.8 billion however both figures were lower that the 2014 figure which was $24.3 billion exports and $ 27.5 in imports according to Chinese figures. Obviously, most of China’s imports from Iran have been oil.

The impact of renewed US sanctions

On the eve of the imposition of sanctions on 2 November, the US announced that it would exempt eight nations from the sanctions. The countries were not immediately identified, but observers said they included India, South Korea, Japan, Turkey and China. The waiver would apply for six months and the EU, which had recently announced the creation of an economic channel to continue financial dealings with Iran, was pointedly not given a waiver.

Even before the sanctions came into effect, Bank of Kunlun Co, the key Chinese conduit for transactions with Iran, had stopped handling euro-dominated payments from Teheran. The bank, a subsidiary of the CNPC, is the main channel for money flows between the two countries. The bank had also face US sanctions in 2012 for doing business with Iran and for transferring money to an IRGC linked group.

Since they had not got the US waivers by November, Chinese oil giants Sinopec and CNPC  stopped loading Iranian oil in November 2018. But resumed it again after they got the US waiver which allows them to buy 360,000 barrels per day for 180 days. This, in any case, is half of what the Chinese were importing at the time the sanctions had been announced.

Besides oil purchases, the impact of the sanctions were felt in oil and gas development projects. In August itself, the French energy giant Total had officially quit its multibillion dollar gas project in Iran that it was executing in partnership with CNPC. Since Total has some $ 10 billion worth of assets in the US, it would have been vulnerable to US penalties. Iran has claimed that CNPC will take Total’s share of the project as per contractual obligations. But this has been denied by Chinese sources who said that several rounds of talks between American and Chinese officials had led to this decision. They also cited the fact that China was involved in a highly complex set of negotiations relating to the US-China trade and technology relationship  and would not like to have its state-owned entity come into the US cross-fire.

The future

China has been the largest importer of Iranian oil and a significant trade partner. It is also the best insulated from US sanctions and could enable Iran to ride them out. But as of now the Chinese are signaling that they will accept the US sanctions. China and Europe remain comfortable with Iran given the fact that it continues to uphold the JCPOA and shrug off US provocations.

There is speculation that China is behaving the way it is so as to get better terms for purchasing Iranian oil. The Chinese could also be working along a strategy which will insulate their giants like CNPC and Sinopec from the impact of US sanctions and will thereafter let smaller companies and banks with no exposure to the US to continue the trade. The ZTE and more recently the Huawei case have indicated to Beijing that crossing the United States on sanctions can be a costly affair. So,  China’s current posture is a subset of its larger negotiation over trade and technology with the US and that it is taking this position so as not to jeopardise the negotiations which are at a sensitive stage.

Iran, as well as the countries that had got waivers, are expecting that the US will come up with another round of waivers in May when the six-month exemption expires. The crunch will come when they have to confront the US at that point in time.

In early January, the US Special Representative for Iran, Brian Hook declared at a conference in Abu Dhabi that the US was not likely to give any more waivers. However, given the fraught consequences of confronting countries like China and India, the US may provide another round of waivers, provided the two further reduce their import of Iranian oil. But that will not resolve their basic problem which arise from the geopolitical importance of Iran to their respective regional and economic policies. Pence’s remarks at the Middle East conference in Poland is a signal that the US will continue to ratchet up the pressure on the Europeans.

As for China, there are also long term calculations.  Iran occupies a strategically vital position in the BRI. Not only is it a major source of hydrocarbons, but also a market for Chinese products, ranging from railway systems to consumer goods.

Chinese activities in relation to Iran’s railway projects suggests that Iran is seen as the southern route to Europe which effectively bypasses Russia.

The rail links that China is involved in — Mashad to Teheran, then onward to Turkey — are an important element in its BRI plans of linking China to Europe. In this case, however, they effectively bypass Russia, suggesting a deeper Chinese goal of ensuring its freedom of action.

Beyond  connectivity, Beijing also sees Teheran as an important component in its regional strategy of keeping the US away from its own periphery. It also sees it as a bulwark against Sunni extremism of the kind propagated by Saudi Arabia.

No Syria territorial integrity if YPG stays Ergogan says at Sochi summit”, Hurriyet Daily News February 14, 2019.

David M  Herszenhorn “EU powers set up firm to thwart Trump’s Iran sanctions”, Politico Pro February 13, 2019.

Matthew Lee and Aron Heller, “Pence urges Europe to quit Iran deal, back US sanctions”, Chicago Sun Times February 14, 2019.

 Charles Wolf Jr, Xiao Wong,  Eric Warner, “China’s Foreign Aid and Government-Sponsored Investment Activities: Scale, Content, Destinations and Implications (RAND 2013)  p. 33 and Table 6.1

Calculated from the AEI tracker.

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Manoj Joshi

Manoj Joshi

Manoj Joshi is a Distinguished Fellow at the ORF. He has been a journalist specialising on national and international politics and is a commentator and ...

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