Iran’s Largest Clients Are China, India & Russia. This Could Get Messy.

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Op/Ed by Chris Devonshire-Ellis

With a Donald Trump ordered assassination of Iran’s most senior General a few days ago, the world was introduced to 2020 with rather more than the traditional balloons and whistles. Just three days into the new decade and a major problem has been foisted upon global politics. It is not an issue that will see Washington get its own way – Iran, mainly on the back of its energy reserves, has significant friends in high places.

Of these, in terms of trade China is the most significant, and has been both investing in infrastructure in Iran as part of its Belt & Road Initiative and has also purchasing oil,  in turn, it has mainly purchased consumer goods such as clothing, vehicles, electronics, chemicals, household appliances, and telecommunications equipment from China. Although China has tried to balance US sanctions on Iran with reducing direct oil purchases, it has been the underlying oil purchasing that has been winning. It has accomplished this by covert operations conducted offshore and by allowing Iran to use barter trade and an initial small amount of experimental cryptocurrency deals. The main beneficiary of US sanctions on Iran has been Saudi Arabia, a US client state, and China has been increasing its purchases of Saudi oil to keep American face, while still working out ways to import from Iran. Iran’s sale of oil to China is essentially keeping the regime alive – China’s purchases have been running at between 25-40% of Iran’s total exports the past three years. Tehran has also priced its light crude at 30 cents less than Saudi light crude, incentivising buyers wishing to deal with the regime.

China’s bilateral trade with Iran decreased in 2019, although the levels of trade were erratic dependent somewhat on what sanctions loopholes China was able to uncover before Washington closed them off again. For example, in a neat utilization of China’s customs bonded zones, Iran has also been storing oil in China, and depositing reserves in Free Trade Zones in Jinzhou, Huizhou, and Tianjin. The Jinzhou facility alone is estimated to hold up to 6 billions barrels. As the oil technically belongs to Tehran, it has evaded US sanctions.

But the US is toughening up on Chinese evasions. In September last year, just three months back, the U.S. Treasury imposed additional sanctions on five Chinese companies and six Chinese nationals accused of importing oil from Iran. The United States designated the China Concord Petroleum Co. Ltd., and two units of a major Chinese shipping company, Cosco Shipping Tanker (Dalian) Co. Ltd. and Cosco Shipping Tanker (Dalian) Seaman and Ship Management Co. Ltd. Washington also sanctioned the companies’ top executives. “We are telling China, and all nations: know that we will sanction every violation.” said U.S. Secretary of State Mike Pompeo during a speech at the United Against Nuclear Iran Summit.  Yet China wants to be involved in Iran and its energy business. It will continue to play cat and mouse, and with a very well organised government structure and a population of 1.3 billion plus, the US imposing sanctions on a few senior Chinese officials doesn’t really damage Beijing.

What does China want from Iran
Energy supplies, involvement with processing and refining industries, infrastructure development.

India’s Commerce and Industry Minister Suresh Prabhu has also proposed to double bilateral trade with Iran in the next five years from the current level of $13.8 billion. Washington has also told India and other countries to cut oil imports from Iran to zero or face sanctions. After a September meeting between Prabhu and the Iranian Minister of Road and Urban Development Abbas Ahmad Akhoundi, Prabhu stated that “Our discussions were centered on expanding bilateral ties between India and Iran beyond the energy and security sector” indicating that for now, India intends to follow the US line. But what it will find more difficult to accept is interference with its long planned International North-South Transport Corridor, which extends from Chabahar Port in Iran and both wraps around Iran east into Afghanistan and also heads north to Russia. The route is seen as key in allowing India more access to Afghanistan, where Delhi is highly suspicious of Pakistani involvement with terrorism. While India’s energy trade with Iran is relatively significant, it also has alternative suppliers with Saudi Arabia and Iraq. But interfering with Iran in a manner that could promote Pakistan interests above those of Delhi’s could well prove problematic. Problems in Pakistan are also bad news for China, as the countries share a border with each other and with Afghanistan. Beijing will be watching closely.

What does India want from Iran
Energy supplies, increased trade and political access to Afghanistan.

A problem for Washington is that it has already placed Russia under intense sanctions for the past few years, meaning that Moscow doesn’t necessarily care what additional sanctions come its way. It has proven itself sufficiently strong to adapt to US policy designed to limit Russian influence. In 2019, Russian trade with Iran rose 24.6%, although Iranian exports of oil reduced, Russia’s exports increased – in both military and energy resource infrastructure. Russia is also energy rich, and can afford to not be purchasing from Iran. But it does want contracts for processing and related oil industry developments, and has the military muscle to support that.

What does Russia want from Iran
Involvement in its energy sector, military purchases

Washington’s recent attacks on Iran, taken in this context can be seen as having wider implications than just regime change in Tehran. They are also geared at limiting Chinese and Russian access to the region, and to prevent the development of energy infrastructure, and oil  reserves being managed by other, non-US allies. India will accept this, but not if any turmoil in the region destabilizes Pakistan and creates disturbances with India.

It remains to be seen what the attitude from Beijing and Moscow will be. Beijing will be unlikely to want to get involved in a military dispute external from its borders. Russia would and is prepared to do so, but not unless China would commit. It seems then in this immediate chapter Washington will get its way.

But there are longer term ramifications. This is the first time a major military problem has arisen along China’s Belt & Road Initiative. There may come a time when Washington feels it can push Beijing further. The line being drawn will all come down to when China feels enough is enough and commits militarily to protect its investments, energy needs and potential for future trade among its client states. To do that, it will need to involve Russia. Doing so in a far off country so that it is soldiers in the front line rather than citizens is problematic, as it brings the possibility that Beijing and Moscow may well decide to push back against Washington somewhat closer.

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About Us

Silk Road Briefing is written by Dezan Shira & Associates. The firm provides strategic analysis, legal, tax and operational advisory services across Eurasia and has done since 1992. We maintain 28 offices throughout the region and assist foreign governments and MNC’s develop regional strategies in addition to foreign investment advice for investors throughout Asia. Please contact us at asia@dezshira.com or visit us at www.dezshira.com

 

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