ALACO DISPATCHES: Could China scupper Trump’s bid to bring Iran to heel?

ALACO DISPATCHES: Could China scupper Trump’s bid to bring Iran to heel?
Supreme Leader of Iran Ali Khamenei is seen (right side of picture) receiving Chinese President Xi Jinping in his house in 2016. Seated to the left of Xi is Iranian President Hassan Rouhani.
By Yigal Chazan of Alaco September 25, 2018

President Donald Trump’s strategy of pressuring Iran into making more security concessions through renewed sanctions looks set to be undermined by China’s apparent determination to continue importing Iranian crude, a key source of revenue that could throw Tehran an economic lifeline.

In May, Trump unilaterally withdrew from the international nuclear agreement—signed in late 2015 between Iran and the five permanent members of the Security Council, Germany and the EU. Sanctions relief in exchange for curbs on the country’s uranium enrichment programme had allowed Iran, OPEC’s third largest oil producer, to achieve pre-sanctions crude export levels. But the US administration argued that the deal failed to stem Iran’s ballistic missile programme and its destabilising influence in the Middle East.

Washington now wants to squeeze Iranian oil sales—which generated $50bn in the last financial year—to force Tehran back to the negotiating table. Trump is looking to secure a more wide-ranging nuclear agreement that would address the perceived shortcomings of the original deal.

The US president is hoping to draw Iranian concessions by doubling down on its weak economy. Since the nuclear deal took effect in January 2016, Iran has been unable to attract the levels of foreign investment it hoped for, due in large part to pre-existing non-nuclear US sanctions. Crude sales—which along with oil products account for most Iranian exports—have been unaffected by these measures, helping to take Iran out of recession. But its finances remain in a parlous state, evidenced by recent nationwide protests over matters including steep price rises, the collapse of Iran’s currency, the rial, and high levels of unemployment.

The renewed US oil and gas sanctions come into force on November 4—following the first wave of sanctions introduced on August 6 that target areas including gold, steel, sovereign debt, the automotive industry and acquiring industrial process software and buying US banknotes—and Washington has been busy urging big importers of Iranian crude to find alternative suppliers. It has been considering temporary waivers for those, such as India, Iran’s second largest buyer after China, which might struggle to diversify their sources in the short term. While leading European countries remain committed to the nuclear deal, their oil companies are now wary of engaging with Iran because of the impending American restrictions. 

Pledge under strain
China, which purchases over 25% of Iranian oil exports, is another matter, however. In early August, reports suggested that Beijing which, like the Europeans and Russia, supports maintaining the 2015 agreement, told the US that it would not cut purchases of Iranian crude—valued at around $15bn—but agreed not to increase them. However, the pledge is likely to be put under strain by worsening trade relations between Washington and Beijing. Tit-for-tat tariffs on imports have been escalating over the last month or so.  And tensions heightened last week—the US imposing duties on $200bn of Chinese goods, China responding with levies on $60bn of US imports.

There was a surge in China’s imports from Iran in July, followed by a marked drop in August, suggesting stockpiling in advance of the re-imposition of the US measures. The trend was also seen amongst other big importers of Iranian crude and their purchases are likely to continue falling in advance of the November deadline. However, with Trump upping the ante on trade, Beijing may feel its commercial interests would be further undermined if it were to comply with his urgings on oil imports from Iran. Setting aside retaliation for US hostility on trade,  China’s arguments for pressing ahead, or increasing, imports from Iran include some of its refineries only being able to refine Iranian crude and the need to offset cuts by other importers to avert  price rises.

Hardline position
Former US president, Barack Obama, is said to have managed to persuade Beijing to limit its investments in Iranian oil at a time when US-China relations were on a good footing. Trump is likely to struggle to do the same. He would have to step back from the trade war to stand a chance of achieving compliance on sanctions. But such an outcome appears unlikely given his hardline position on Chinese exports and China’s dependence on Iranian oil.

Indeed, there are already signs that Beijing is exploring means of circumventing US sanctions. Reports have suggested that Chinese oil importing companies have been transferring their cargoes onto Iranian tankers for delivery to China, with Iran insuring the shipments. International insurance companies and banks are reluctant to underwrite and finance such transactions for fear of being penalised by the Americans.

With no sign of a downturn in US-China trade tensions, Beijing seems set to defy America over sanctions, though the extent of Chinese defiance remains unclear. Iran is hoping it will be sufficient to offer it an economic lifeline. Last month Iran’s foreign minister, Mohammad Javad Zarif, said China could play a pivotal role in helping to preserve the nuclear accord. If that proves to the case, Trump may have to rethink his strategy for bringing Tehran to heel. 

Yigal Chazan is an associate at Alaco. Alaco Dispatches is the business intelligence consultancy’s take on events and developments shaping the CIS region.