Iran’s Door to the West Is Slamming Shut, and That Leaves China
(Bloomberg) -- Tehran traffic is gridlocked half the time, and the city spends most of the year engulfed in smog, so it’s not surprising that locals travel underground when they can -- on a metro system that sometimes carries 2 million people a day.
During the sanctions decade, when Iran was largely frozen out of global commerce, the capital’s authorities managed to steadily expand the network -- roughly doubling its size. It wasn’t easy. Often, “the parts we needed, we had to build ourselves,’’ said Ali Abdollahpour, deputy managing director of Tehran Urban and Suburban Railway Operating Company.
A constant of those years was Chinese help, with everything from building rails to manufacturing wagons. The nuclear deal of 2015, and the lifting of major sanctions the year after, was supposed to broaden Iran’s options. Abdollahpour had his eyes on Europe (“their tech is better’’) for essential braking and signaling systems.
But when a major contract, to supply more than 600 wagons, came up for tender it went to a unit of China’s CRRC Corp, which beat off two European bids to win a contract worth more than $900 million this year. That’s part of a wider pattern. The nuclear deal hasn’t delivered more than a trickle of Western investment -- and even that is poised to dry up, after U.S. President Donald Trump pulled out of the agreement and said he’ll re-impose sanctions
To develop its $430 billion economy, Iran is being forced to rely on political allies in the east.
Trade with China has more than doubled since 2006, to $28 billion. The biggest chunk of Iran’s oil exports go to China, about $11 billion a year at current prices.
Chinese direct investment is arriving too, though reliable data is harder to come by.
China is “already the winner,’’ said Dina Esfandiary, a fellow at the Centre for Science and Security Studies at King’s College in London, and co-author of the forthcoming ‘Triple Axis: Iran’s Relations With Russia and China’.
“Iran has slowly abandoned the idea of being open to the West,’’ she said. “The Chinese have been in Iran for the past 30 years. They have the contacts, the guys on the ground, the links to the local banks.’’
And they’re more willing to defy U.S. pressure as Trump slaps sanctions back on.
‘Going After Them’
Even that possibility has kept many European banks and manufacturers from doing business with Iran. And some of those that were ready to do so could reconsider in the light of tougher American rules.
Airbus Group SE’s contract for 100 jetliners, worth about $19 billion at list prices, was already held up amid financing problems, and Treasury Secretary Steven Mnuchin said Tuesday that the export license will be revoked (Russian manufacturers could be the beneficiaries). Total SA has a contract to develop the South Pars gas field together with China National Petroleum Corp., but has signaled that it would pull out if the U.S. re-imposes sanctions and it can’t win an exemption. In that event, Iran says, the Chinese partner would take over Total’s share.
Compared with the pre-sanctions era, “Chinese companies have become much more multinational and global, they have more of a brand reputation that’s important to them,’’ said Esfandyar Batmanghelidj, founder of the Europe-Iran Forum, an annual gathering for executives. That gives the U.S. leverage “to discourage them from engaging in Iranian markets, by going after them.’’
‘Seek to Dance’
But the Chinese have some workarounds that Europeans lack. There are many more Chinese companies with zero exposure to the U.S. And, since many of the Chinese businesses working in Iran are state-run, it’s relatively easy to set up special-purpose vehicles for bypassing U.S. regulations. “All they have to do is create a subsidiary that’s separate from the original entity, and they’re good to go,” said Esfandiary.
Chinese businesses are also likely to be more flexible about how they’re paid, says Batmanghelidj, citing a transaction he’s aware of where the European company declined to be paid in bonds.
The politics are different, too.
The key EU countries are longtime U.S. allies wary of a direct clash with Washington. They’re promising to keep the nuclear deal alive, but many Iranians doubt they are able or willing to do so.
Europe “doesn’t have the power to take important decisions,” said Alaeddin Boroujerdi, head of the Iranian parliament’s nation security and foreign policy committee. “The Europeans, by sanctioning Iran, seek to dance in front of the Americans.”
‘One Day You’re Friends’
But China -- along with Russia -- is America’s main strategic rival, with big geopolitical ambitions. Central to them is a plan to crisscross Eurasia with a web of transportation and infrastructure links. Persia was on the old Silk Road, and Iran is at the heart of President Xi Jinping’s plans for a new one.
Chinese companies are building or funding railway lines to the eastern city of Mashhad and the Gulf port of Bushehr, under deals signed in the past year worth more than $2.2 billion. India was supposed to be developing the strategic port of Chabahar on the Arabian Sea., but repeated delays have prompted Iranian officials to turn to China in the hope of speeding up construction.
China looks at relations with Iran “from a strategic perspective,” Foreign Minister Wang Yi said last year as he met Iranian officials in Beijing.
At the Tehran metro, it won’t be the first time that global politics have intruded on planning.
When building work began in the pro-Western Iran of the 1970s, it was under French managers. Within a year of the Islamic Revolution of 1979, they were gone.
That’s business, says Abdollahpour, the metro manager. “In the world of commerce, one day you’re friends with someone, one day you aren’t.”
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