Axis of Oil: Sino-Iranian Relations after the US Withdrawal from the JCPOA

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Unless Europe finds a way to outweigh US sanctions on Iran, Iranian dependency on China will grow.

The decision to walk away from the Joint Comprehensive Plan of Action (JCPOA) announced by Donald Trump in May 2018 did not come as a surprise for those who have been following Trump’s politics, and his continuous portrayal of Iran as a ‘leading state-sponsor of terror’ and a ‘murderous regime’. In a direct opposition to the Obama Administration, which sought to pull Iran out of its isolationist status through quiet diplomacy, Trump’s approach not only pushes Iran back to its  China-Russian orbit, but also provides China with the perfect opportunity to seize the day as a defendant of free trade and, as Iranian Minister Mohammad Javad Zarif puts it, a ‘friend, which sided with Iran during the difficult days of sanctions’.

Even before the JCPOA, China was the main obstacle to impose sanctions via UN Security Council, where China holds veto. One of the main pillars of this Sino-Iranian relationship are oil and energy cooperation, as it was proved during the process of getting Chinese on board for the UN sanctions negotiations. Once Beijing’s primary concern, access to oil, had been guaranteed by boosting exports from Saudi Arabia and the United Arab Emirates, the Chinese started to consider the possibility of engaging in sanction negotiations. However, due to international economic isolation, Iran’s oil infrastructure has been deteriorating. This gives a future economic cooperation vast potential, since expanding Iran’s extraction rate could eventually satisfy a substantial amount of China’s energy need.

A win for China

China’s relationship with Iran is based on economic cooperation and, as some would claim, a ‘basis for psychological identification’ resting in history; China and Iran never fought to war against each other. Even though Chinese President Xi Jinping paid the first visit to Iran in 14 years only in 2016, due to previous economic sanctions, China has a long history of investment in Iran and is currently its biggest economic partner. These include deals between SINOPEC and China National Petroleum Corp (CNPC) with the Abadan refinery, the development of Yadavaran and North Azadegan fields, and also the $10 billion Chinese funding by CITIC group and a $1.5 billion loan to finance electrification of the Tehran-Mashhad railroad.

Counterbalancing the US in the Middle East is only one of the various goals of China’s expanding influence in the Middle East. Besides, cozying up to the Iranians might prove to be a difficult task given Beijing’s good relationships with other regional countries (Saudi Arabia, Israel), unless, the cooperation is being kept on strictly economic level. However, deeper economic ties with Iran and its further integration into alternative institutions like the Shanghai Cooperation Organization, while at the same time experiencing decreasing investment from European and American business might push Iran into China-Russian orbit, often described as an ‘axis of oil’. There, the interests of a major producer, a growing consumer and the nationalist oil producing states converge and are able to challenge the current global order.

As some have pointed out, the US withdrawal from the JCPOA might be seen as a ‘win-win’ outcome for China. In fact, immediately after the US withdrawal, the Iran’s Foreign Minister Javad Zarif travelled to Beijing to meet China’s Foreign Minister Wang Yi. This followed the precedent Preparatory Committee for the 2020 Review of the Parties to the Treaty on the Non-Proliferation of Nuclear Weapons where Russia and China confirmed their ‘unwavering support’ for the JCPOA through a joint statement. Nonetheless, the other signatory parties of the JCPOA have also been working to uphold the deal with Tehran.

European balancing act

The European Union (EU) repeatedly reiterated its stance on supporting the Nuclear deal and to ‘’act in accordance with its security interests and to protect its economic investments’’. Since the beginning of the Trump’s Administration, the US continuously demonstrated its discord with the EU which allowed the EU to act more independently from the US. In this case, the EU could continue to act as a balancing force to China regarding Iranian economy. The question is to what extent the EU will be able to sustain its investments in Iran. Despite ongoing talks about ‘a package of practical solutions’ from the EU countries, some have already expressed their doubts about the possibility of the EU to counter secondary American sanctions. An example of how the whole situation could unveil, China’s CNPC deal with South Pars gas project. Despite the French company Total having the majority stake (50.1%), China’s CNPC, which holds a 30% stake in the project, signed a deal which enables it to take over Total’s share if the company decides to pull out. According to reports, CNPC foresaw the likelihood of re-imposing sanctions. In fact, in May 2018, Reuters reported that, in light of a decision by Donald Trump, Total will not be able to continue developing the Iran South Pars unless ‘it is granted a specific project waiver by the US authorities.’

At the same time, it is not only American and European companies that are slowly ending their projects in Iran. Only a few days ago, reports about Russia and Kazakhstan cutting their hot-rolled steel coil exports to Iran emerged. This means that despite statements by foreign governments which signalize support and willingness to uphold the JCPOA, the situation on the ground is different. Businessman and companies have to consider the reality and decide whether they will take the risk of being exposed to the US jurisdiction.

Meanwhile , Iranian rial has plunged ‘to a record low’ creating social unrest due to rising import prices. After the Supreme Leader called for increased uranium enrichment capacities, Iran announced the building of a new centrifuge factory. The situation for now seems that the US withdrawal from the deal will have dire consequences for Iran’s economy. The escalating war of words between Trump and Rouhani only exacerbates tensions, which, according to some,   might be leading to the new war in the Middle East. However, the prospect of war is not a desired scenario for the increasingly isolated Iran. If the remaining countries cannot strike a deal and come up with the possible solutions, China might be the only solutions and might try to ‘go at it alone’ with Iran.

As some of the statements by the US Administration suggest, the real endgame behind the US withdrawal from the JCPOA is not an effort to renegotiate a better deal, but a hope for regime change in Iran. However, if Iran continues following the JCPOA, it will leave the doors open for Chinese investments which might ultimately prove to be helpful in keeping regime far from collapse. On July 15, Khamenei again reminded European states that their guarantees of Iran’s benefits under the deal are critical and that the country’s relations ‘with the East and the West must be further strengthened’. This suggests that Iran wishes to find a way out of isolation and to strengthen its relations both with East and West. However, whether Europe and Asia prevail over America’s economic weight will be crucial in deciding the extent of Iran’s dependency on China as well as its future as a fully integrated member of the international society.

 

Barbara Kelemen

Barbara is a graduate student of the joint LSE – Peking University master degree in International Affairs. Her research focuses on Chinese policy in the Middle East.

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