Iran looks toward China to Save its Oil Industry

 by Armin Baldwin
Washington and Beijing are in the midst of a trade war, and China has great energy needs. While US withdrawal from the Iran nuclear deal, along with the accompanying sanctions, has stopped European investors from doing business with Tehran, Iran believes it can use Chinese investment and oil purchases as a way to compensate for the loss.

The Chinese private sector is unlikely to be affected by US sanctions to the same degree as the Europeans, but Chinese investment, exports, and oil purchases can only be of so much help to the Iranians.

Iran and China have a close relationship. In fact, following implementation of the nuclear deal in 2015, Chinese President Xi Jinping agreed to a 25-year plan to broaden their relations, including increasing bilateral trade to $600 billion over the next decade. As well, China has the option to take over the Total deal, which was cancelled by the French company.

However, according to many experts, China’s investments cannot compensate for the losses from the West.

For instance, Iran will need to import advanced technology available only in Europe and the US to effectively rehabilitate its oil infrastructure and reduce production costs. Daniel Glaser, who enforced sanctions and counterterrorism efforts at the US Treasury for two decades, explained, “Chinese technology is simply not as good as Western technology with respect to exploration and extraction, so the reliance on the Chinese for this would place the Iranians at a huge competitive disadvantage.”

Just like European firms, the larger Chinese companies and banks who are interested in doing business in the US, or transacting business in dollars, will also be hesitant to do business with Iran. Even though European firms have been encouraged by European Union officials to keep trading with and investing in Iran, and Europe’s governments have offered to grant special business waivers and seek US exemptions for companies doing business with Tehran, European companies are not listening.

The first of the deadlines set by the Treasury before sanctions on Iran are fully imposed is August 6th, which will affect any purchase of US dollars, trade in gold and certain other metals, aviation, and the motor vehicle industry. Major Chinese corporations cannot afford to bypass these restrictions.

Iran now exports approximately 2.62 million barrels of crude oil per day. European markets make up approximately 38 percent of these sales, according to the Iranian economic publication, Financial Tribune. There is no question that its exports will shrink, even if some of the loss is made up by selling additional barrels to China. Additionally, Tehran’s lack of viable alternatives puts it at a disadvantage in any negotiation with the Chinese.

“If Iran is offering discounted oil or preferential investment opportunities, China will seek to take advantage,” said Glaser. “China is not going to alter its long-term energy strategy or become overly reliant on Iranian oil based upon a short-term diplomatic dispute.”

The result of a reduction in oil sales will be a decline in Iran’s foreign currency reserves, making it difficult for Tehran to meet its balance of payment obligations.

Iran’s internal dynamics are already experiencing its people’s anger. Despite the GDP growth that followed sanctions relief, the Iranian people saw few benefits. Their wages remained low while prices increased, and unemployment grew.

President Hassan Rouhani and Foreign Minister Javad Zarif have become increasingly unpopular. The IRGC is seen as diverting capital from Iran’s economy to foreign adventurism. The Iranian people’s desire for regime change seems achievable, if Tehran is not thrown a lifeline by China.