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Exodus by big firms pushes Iran toward smaller Chinese enterprises

To mitigate the impact of harsh US sanctions, Iran is increasingly turning to China by dispatching high-ranking delegations to Beijing to augment trade. But China is also mindful not to cross the red lines drawn by the United States.
Iranian Foreign Minister Mohammad Javad Zarif (L) and his Chinese counterpart Wang Yi iduring their meeting at the Diaoyutai State Guesthouse in Beijing, China February 19, 2019. How Hwee Young/Pool via REUTERS - RC12EA87AC90

China is still Iran's top trade partner, leading oil customer, a key technology exporter, a major political ally and one of the signatories to the Joint Comprehensive Plan of Action (JCPOA) still committed to the deal. All of this has given Beijing an increasingly central position in Iran's "Look to the East" doctrine, a key foreign policy strategy actively pursued by the Islamic Republic after the US withdrawal from the nuclear deal in May 2018.

The recent visit to Beijing of a senior Iranian delegation comprising the parliament speaker, ministers of economy, oil and foreign affairs, the central bank governor and senior lawmakers shows how Iran is banking on China as US sanctions are hitting the Iranian economy hard.

During those meetings, Chinese President Xi Jinping offered assurances to Speaker Ali Larijani that Beijing will continue to stick to its Comprehensive Strategic Partnership with Iran, no matter recent regional and global developments. The fact that China hosted the high-ranking Iranian delegation prior to an impending visit by the crown prince of Saudi Arabia — Iran's key regional rival and arch-foe — also highlights where Iran stands in China's Middle East policy.

On the ground, however, China-Iran ties have always proven to be more trilateral than bilateral, as the United States continues to play the role of a decisive third party — effectively determining the direction the China-Iran relationship takes. While Beijing and Tehran have found common ground for cooperation in response to American geopolitical strategies, US pressure has weakened Iran-China economic ties. In fact, with Washington's withdrawal from the JCPOA and an ongoing full-blown US-China trade war, the American role in Tehran-Beijing relations has now become even more complicated.

Iran has succeeded in mustering China's political support following the US departure from the nuclear deal. Chinese leaders have on multiple levels and on different occasions stood by the JCPOA, criticizing the US sanctions on Iran as illegal and stressing the continuation of robust economic ties with Tehran.

But who mainly decides Sino-Iranian business interaction is not the government in Beijing, but rather China's largest companies. Like their European counterparts, those enterprises are already entangled in the global value chain and follow a US-controlled international financial order. Understanding how devastating US punitive measures against any corporation could be, the Chinese government, therefore, has not put particular pressure on those companies to keep business with Iran flowing. 

With that at work, the Chinese customers of Iranian crude cut in half the volume of their imports (from a daily 750,000 barrels to 360,000) in the months that followed the US exit from the nuclear agreement. In yet another significant setback caused by US pressure, the energy giant China National Petroleum Corporation (CNPC) suspended its 80% stake in a mega development project focused on phase 11 of Iran's South Pars gas field. CNPC had grabbed a bigger chunk of that contract thanks to the vacuum created by the exodus of France’s Total, which left after it was denied a sanctions waiver in the immediate aftermath of Washington's farewell to the nuclear deal.

Meanwhile, several multibillion-dollar Chinese investment and financial procurement agreements with Iran are now hanging in the balance. The situation is being exacerbated by a recent US securitization policy manifested in the form of a legal crackdown on the Chinese tech giant Huawei for its alleged violation of Iran sanctions. With Huawei's chief financial officer about to be extradited from neighboring Canada, the United States is bound to set an example for other Chinese firms, scaring them away from Iran and making them feel that business with Tehran is not worth the trouble.

In non-oil trade, Iran's imports from China mainly cover intermediate goods and technology services, which are vital to the supply chain of Iranian industries. A 15% drop year-on-year was witnessed in that sector in the 10 months since the United States walked away from the JCPOA. This could be partly explained by the fact that those Chinese companies were not interested in the headache caused by US-imposed international financial restrictions.

The US punitive measures against Iran have also complicated Iran-China banking relations. Kunlun, the sole Chinese bank that used to actively work with Iranians, is now finding the road bumpier than ever.

On a larger scale, the same US sanctions have also affected Iran's partnership in China's ambitious Belt and Road Initiative. The massive project includes the development of a Silk Road economic belt, which connects China and Central Asia to West Asia via Iran. Once onstream, it is expected to offer China enormous economic benefits. But now, US sanctions are in effect functioning as sanctions against a key aspect of the Chinese project, with the US penalties meant to minimize Iran’s role. Thus, during his visit to China, one mission Iran's parliament speaker pursued was drawing the Chinese leadership's attention to the role Tehran could play in ensuring the success of the Belt and Road Initiative.

Against this backdrop, it is important to consider that a glance at the most recent trend of economic ties between Iran and China indicates that interaction has been mostly reduced to small- and medium-sized enterprises, as large corporations have either left for good or significantly reduced their involvement with Iran.

Although in the wake of the US departure from the nuclear deal Iran has gained relative success in winning China's backing, the logic adopted by Chinese companies is more or less that of their European counterparts. In other words, the risks posed by US penalties for business with Iran have forced them to either bid farewell to their projects or dramatically downsize them.

In the new Iran sanctions era, China is still sticking to an older model it devised during the first phase of tough sanctions that Iran grappled with during the presidency of Mahmoud Ahmadinejad (2005-2013). Beijing remains cautious not to provoke Washington into practicing its punitive measures. In doing so, China prefers a relative loosening of ties by keeping its large enterprises at a safe distance from the risk of business with Iran. It seems, therefore, that as long as US sanctions are in place, Tehran has no other option but to pin its hopes on trade with small- and medium-sized Chinese enterprises.

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