Abu Dhabi, UAEFriday 7 August 2020

Iran's deeper partnership with China is not all that it appears to be

Tehran says Beijing will invest $280bn in developing Iran’s oil, gas, and petrochemicals sectors

Iran's foreign affairs minister Javad Zarif informed the country's parliament of a 25-year strategic partnership deal with China last week. EPA
Iran's foreign affairs minister Javad Zarif informed the country's parliament of a 25-year strategic partnership deal with China last week. EPA

The apparent “leak” of a massive Iran-China investment deal last Sunday has fuelled much speculation. Beijing could bail out the struggling regime in Tehran, secure vital commodities for itself and further extend its influence in the Middle East, challenging Washington.

However, on closer investigation, the deal is less than it appears.

Iranian foreign minister Javad Zarif announced the 25-year deal in parliament. Further details have emerged in various leaks, and revolve around security, military and economic co-operation.

As reported by outlets including oilprice.com and Iranwire, China will invest $280 billion (Dh1.03 trillion) in oil, gas and petrochemicals, and $120bn in transport and manufacturing, within the first five years. It will have the first option to bid on stalled energy projects, which litter the Gulf coast, and will be given discounts for buying petroleum and petrochemical products that add up to as much as 32 per cent. These figures had in fact already been quoted in the Petroleum Economist magazine in September.

The deal would make Iran a regional keystone of the Chinese President Xi Jinping’s signature Belt and Road Initiative, to which all regional states have subscribed. Iran’s strategic position, spanning the Caspian and the Indian Ocean, is evident from the most cursory glance at a map.

This comes at a time when China is perceived to be on the offensive on many fronts: in international diplomacy, in response to the coronavirus, in Hong Kong and the Himalayas.

It is easy to see why Iran would want to play up such an arrangement. While battered by sanctions, low oil prices, coronavirus and a string of unexplained explosions at nuclear and civilian sites, the country must show that its touted “resistance economy” can hold together. The idea that Iran might move into Beijing’s camp is intended to discredit the Trump administration’s “maximum pressure” policy.

The government of President Hassan Rouhani is under domestic popular and hardline pressure to justify its mismanagement of the economy and the apparently misguided decision to trust the US in signing the 2015 nuclear deal.

China benefits from being seen as backing an ally, and from giving Tehran some hope to stay patient during the final months of this Trump administration. This reduces the chance of similar disruption, affecting Chinese energy security, to that after the attack on Saudi Arabia’s key Abqaiq oil facility in September.

Yet, the Chinese negotiations had already been announced during Mr Xi’s visit to Tehran in January 2016. The figures mentioned have even less reality than those in Donald Trump’s trade deal.

Since 2010, China’s investment and contracts in Iran amounted to $18.6bn, according to the American Enterprise Institute. Total foreign direct investment in Iran from all countries was less than $28bn, according to the United Nations Conference on Trade and Development.

This included periods when oil prices were high, and when Iran was not under such stringent sanctions. The idea of increasing this up to $80bn per year under much less favourable circumstances seems implausible.

Meanwhile, China’s entire outbound foreign investment averaged about $200bn annually from 2010 to 2019, and it is now feeling the strain of a slowing economy, the coronavirus pandemic and the US trade war.

The China-Pakistan Economic Corridor, the centrepiece of the BRI, referred to in the Iran-China accord, has absorbed only $62bn over fifteen years. So, the Middle Kingdom is unlikely to devote half of outward FDI to a single medium-sized country.

There is an emerging school of thought within China that its relations with the Middle East have already passed their peak, because of the slowing regional economy and the falling strategic importance of oil and gas. Under the pressure of American sanctions and coronavirus-battered demand, Chinese oil imports from Iran have fallen sharply, from about 630,000 barrels per day during 2017, to between 100,000 bpd and 200,000 bpd.

Despite their close political relationship, Chinese companies have not always fared well in Iran. The Iranians have complained of being fobbed off with third-rate, overpriced goods. China National Petroleum Corporation was expelled from the major Azadegan oilfield and Iran Liquefied Natural Gas project because of slow progress. In 2012, Sinohydro Group was pushed out of a $2bn contract to build Bakhtiari Dam in south-western Iran, and replaced by Khatam Al Anbiya, the construction arm of the Revolutionary Guards.

Elements of the reported deal allowing for 5,000 Chinese military personnel to be stationed in the country to protect its interests, and that the Chinese and Russian air forces would be given access to bases, have raised concern.

Some Iranians have spoken of a new “Treaty of Turkmenchay”, the humiliating 1828 agreement that gave up their remaining Caucasus territories to Russia.

Because of Iran’s poor relations with its Gulf neighbours, and the tendrils of sanctions ensnaring its economy, it does not offer an automatic bridge into the region. China has maintained an apolitical approach, unlike the US and Russia, eschewing involvement in the Middle East’s conflicts and disputes.

So far, China has been an indispensable trade partner for all the region’s oil and gas exporters and has managed to avoid any irreconcilable policy contradictions. It has not sought to compete in regional politics or security with the US, and it has not had to resort to stationing military forces to protect its assets or interests.

But this situation may not persist forever. Beijing, locked in deeper confrontation with Washington, may find taking an important geopolitical chess-piece too tempting to ignore.

Robin Mills is chief executive of Qamar Energy and author of The Myth of the Oil Crisis

Updated: July 12, 2020 07:25 PM

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