Eurasia Group | Iran and China square off against the US

Iran and China square off against the US

24 July 2020
Iranian President Hassan Rouhani and Chinese President Xi Jinping. REUTERS. Iranian President Hassan Rouhani and Chinese President Xi Jinping. REUTERS.
As their respective conflicts with the US deepen, Iran and China are in talks to greatly expand an existing cooperation agreement and push back against their common adversary. Based on the details available so far, potentially extensive Chinese investments in an Iranian economy devastated by US sanctions have the capacity to deliver clear benefits for both sides. Yet, as Eurasia Group experts Henry Rome and Kelsey Broderick explain, multiple challenges will likely prevent the deal from delivering on its potential.

What would Iran get from a new deal?

Unconfirmed press reports have indicated that China would invest USD 400 billion in Iranian energy and transport infrastructure, including in upstream and downstream projects and upgrades of the Jask and Chabahar ports. According to an 18-page document purporting to be the agreement circulating on Iranian social media, China would also help build Iran's 5G telecommunications network, presumably using equipment from Chinese telecom leaders Huawei and ZTE, and provide assistance with internet security and censorship, including developing applications like search engines and messaging platforms, and hardware. Tehran appears eager to learn from China's experience in constructing a monitoring system to regulate what citizens can see online. Strategically, even if the cooperation agreement fails to provide concrete economic benefits in the near term, Iranian leaders likely view it as a way to reassure domestic audiences and demonstrate to Washington that Tehran is not as isolated as it may appear. Tehran could also be attempting to show that it has a “Plan B” if the US does not return to the nuclear accord. That said, this strategy could backfire by making it politically more complicated for a potential Joe Biden administration to strike a deal with Iran if the ultimate beneficiary is seen to be China. Moreover, the Iranian domestic politics of the tie-up with China are challenging. The government faced criticism that it was negotiating a secret deal to effectively become China's client state—a damaging accusation given the history of great power interference in Iran. The Iranian government has said the agreement could be concluded with China by March 2021, a few months before the end of President Hassan Rouhani's term and the election to replace him. The domestic politics will only get more complicated, especially if the China deal becomes an election issue.

What would China get?

According to the document circulating on Iranian social media, Iran would provide a “stable supply of crude oil to China,” which would be priced at a steep discount and potentially in renminbi. The supply agreement would dovetail with long-running speculation that Shanghai crude futures would be used to price Iranian oil sold to China, which would skirt restrictions on using the dollar and be an important step in furthering Beijing's goal of making the renminbi an international currency. While pricing Iranian crude in renminbi is feasible, China would not take this step lightly, given the concern from Washington; it may prefer to keep the relationship clandestine. But if the broader China-Iran energy relationship becomes more public and official, pricing in renminbi becomes more likely. But there is reason to be skeptical that China will take these steps in the near or medium term. It has limited need for oil today, and with prices low, long-term investment in a risky market like Iran is very unlikely. Moreover, there has already been public discontent over China spending money abroad when its own economy is in recovery mode.

How would the US respond?

The Trump administration has harshly criticized the proposed agreement. State Department officials dubbed Iran and China the “totalitarian twins” and pledged to use US sanctions to block closer ties.

Although the US has sanctioned smaller Chinese companies, Washington is unlikely to escalate and impose sanctions against systemically important Chinese banks or corporations in the immediate term unless it finds evidence of major sanctions evasion. But for China, that threat will loom large as it refines its approach toward Iran; US sanctions imposed last year on subsidiaries of Chinese shipping giant COSCO caused serious disruptions for the company. There are still major economic opportunities for China in the country, which Beijing clearly hopes to lock in over the long term, and a deeper relationship with Iran would have the added benefit of undermining US policy in the region—that has become more important to China as the US pushes back heavily on China's international actions. However, Beijing understands the risky balancing act it will have to play to avoid US sanctions and angering other partners in the region. Notably, Beijing has put significant effort into growing its relationships with Saudi Arabia and Israel. Officials may also be reticent to open up another fight with the US ahead of a possible snapback of sanctions on Iran and actions on Huawei, Xinjiang, and Hong Kong.

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