August 8, 2012
TSG IntelBrief: The US-EU Sanctions and the Importance of China-Iran Bilateral Relations
As of early August 2012, tensions between Iran and the West over the former's nuclear program escalated as the United States and the European Union announced further sanctions, including an EU embargo on Iranian oil. With steadily increasing economic sanctions against Tehran, China has become an increasingly important trading partner for Iran (witness the fact that, in 2007, it overtook Japan as the single largest destination for Iranian exports). In 2011, China received US$30.3 billion (bn) worth of Iranian exports, over 75% of which was oil and related products. This volume reflects a nearly 66% increase over the previous year, in part due to the fact that oil prices rose by 39% over the same period. In an effort to increase its exports of crude in the face of the closure of normal payment channels, Iran has adopted more flexible arrangements with China, including receiving payments in renminbi (the Chinese currency) and bartering for Chinese goods.
The trade is not one way, however, as China is also becoming a larger exporter to Iran. Iranian imports of Chinese goods rose by 33% to reach US$14.8bn in 2011, mainly in the form of machinery, metals and vehicles. Imports from China may be considerably higher, though, as much of the trade between the two countries is thought to pass through the United Arab Emirates, which has a valuable re-export trade worth an estimated US$57.2bn in 2011 (of which Iran received 22.5% according to data from the UAE's National Bureau of Statistics). China has managed a nuanced approach since the U.S. announced sanctions on firms dealing with Iran's central bank at the beginning of the year, reflecting an interest in balancing its geopolitical and business interests both in Iran and in the U.S.
Expanding Economic Ties Between China and Iran
Chinese interest in Iran has not been limited only to trade partnerships. As Western firms have drawn down their investment in Iran's oil and gas sector because of pre-existing sanctions and a challenging operating environment, Chinese companies have readily filled the void. China National Petroleum Corporation (CNPC), one of several Chinese companies with significant investment in Iranian energy, took over the upstream development of Phase 11 of the South Pars gas field in 2009. Development of the phase had originally been part of a US$4.7bn deal between France's Total and the Malaysian state-run oil and gas company, Petronas. CNPC pledged completion within 52 months, with production of about 1.8bn cubic feet per day of gas and 70,000 barrels per day (b/d) of condensates. The intention behind Phase 11 is to produce gas for a liquefied natural gas plant.
CNPC also agreed in 2009 to develop the North Azadegan oilfield, with expected production of around 75,000 b/d over the next 25 years. The same year, CNPC signed a Memorandum of Understanding to develop the South Azadegan oilfield, which has an expected production of 260,000 b/d. However, according to a report from Platts, an energy industry publication, none of the CNPC investments has moved beyond the Memorandum of Agreement stage owing to the difficult operating and investment climate in the country. In April 2012, Rostam Qasemi, Iran's oil minister, threatened to kick CNPC off of the South Pars projects if it did not begin development within one month.
Moreover, there has for years been disquiet expressed in Iran's parliament and media over the country's growing dependence on China. Politicians are wary of the centralization of Chinese buying, with the only two buyers of Iranian crude — Unipec, the trading arm of Sinopec, and Zhuhai Zhenrong — both being state-run Chinese enterprises. At a popular level, many Iranians buy, but are nonetheless also resentful of, the cheap Chinese goods that have flooded the market while bankrupting domestic textile and shoe manufacturers. There are also rumbles too over the quality of Chinese technology in building the Tehran metro.
The Limits of American Influence
Facing strong domestic political pressure, particularly from conservative groups, the U.S. administration has gradually overcome its wariness about putting pressure on China over Iran. Last year, the U.S. blacklisted 20 Hong Kong-based shipping companies it said were fronts for the Islamic Republic of Iran Shipping Lines (IRISL), which was earlier censured by the United Nations for aiding Iran's nuclear and military programs. (IRISL has apparently continued to operate in mainland China through a number of front companies and subsidiaries.)
In January of this year, the U.S. announced sanctions against Zhuhai Zhenrong, reportedly Iran's largest supplier of refined petroleum products. This was a signal to China to fall in line with sanctions rather than a decisive blow against Chinese trade with Iran, as Zhuhai Zhenrong has little or no business in the U.S. However, there are many other Chinese companies with extensive U.S. business: Sinopec is listed in New York, as is PetroChina, a CNPC subsidiary, while China National Offshore Oil Corporation (CNOOC) and Sinopec are also active in the U.S. shale gas sector.
Only recently, the U.S. administration specifically sanctioned China's Bank of Kunlun and Iraq's Elaf Islamic Bank, which it said had facilitated business with Iran barred by earlier sanctions. The latest U.S. measures against Iran, announced this week by President Barack Obama, tighten up existing sanctions and reflect political pressure in the U.S., particularly over China's trade with Iran.
The listing of Bank of Kunlun was condemned by China's foreign ministry as "damaging China's interests and Sino-US relations." China opposes sanctions not directly linked to Iran's nuclear or missile programs, and Bank of Kunlun is owned by the CNPC. However, confrontation with China could be costly for America. Of the US$12 trillion in treasury bills held abroad, China owns over 13%. Excluding China from America's financial system would wall off a substantial — and irreplaceable — customer for its own debt.
With China being the single largest consumer of Iranian oil, stability in its appetite for Iranian crude will be crucial for Tehran. Iran's fiscal position is very closely linked to its oil exports, which provide roughly 60% of government revenue. A drop of 100,000 b/d in average annual exports leads to a half percentage point fall in Iran's gross fiscal balance as a percentage of GDP. The impact on the current-account balance is even greater, highlighting the dependence of the country's external balance on oil sales (which have provided an average of 83% of export revenue in the past five years).
Yet in the globalization's complex network of connections — some simply vital, others both vital and ironic — China's growing trade with Iran and America's longstanding indebtedness to China highlights the limits of America's efforts to restrict the stream of oil-related cash to Iran.
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