How U.S. Drove Iran and China Into Tighter Embrace

(Bloomberg) -- Since its Islamic revolution in 1979, Iran’s foreign policy motto has been “neither East nor West,” based on first Supreme Leader Ayatollah Ruhollah Khomeini’s warning to avoid dependence on outsiders. Under the pressure of U.S. measures aimed at crippling its economy, however, Iran has grown ever closer to America’s principal rival, China, and vice versa. The two are said to be contemplating a 25-year strategic partnership.

1. Why now?

The roots of a stronger alliance were planted in 2016, when Chinese leader Xi Jinping visited Iran a year after it agreed to limits on its nuclear program in exchange for a lifting of related sanctions by world powers including China. In 2018, President Donald Trump withdrew the U.S. from the agreement, arguing he could get a better deal out of Iran. The U.S. began reimposing old sanctions and adding new ones, contributing to an economic contraction in Iran that the International Monetary Fund projects will reach 6% this year. Iranian officials initially looked to Europe to deliver the trade and investment benefits they’d expected from the nuclear deal, but European entities for the most part have balked, unwilling to risk violating U.S. secondary sanctions. China, on the other hand, is the only country that’s continued to purchase Iranian crude, and it is dangling the prospect of investments across Iran’s economy.

2. What’s in it for China?

With the world’s second largest economy, China is keen to ensure steady supplies of oil. China’s biggest supplier is Saudi Arabia, but Iranian crude diversifies China’s sources. It’s not clear what details, if any, have been finalized between Iran and China in their agreement. But the publication Petroleum Economist reported that China will be able to buy Iranian oil, gas and petrochemical products at considerable discounts, with payments delayed by as long as two years, using currencies other than U.S. dollars, which helps get around U.S. sanctions.

3. What’s the background to their relationship?

China became a major buyer of Iranian crude oil in the 1990s. As its economy grew in the 2000s, China’s investment in and broader commercial ties with Iran expanded, too. When the European Union sanctioned Iran’s oil industry in 2012, China replaced the EU as the largest buyer of Iranian crude. By 2018, Iran-China trade had more than doubled from its 2006 level. Iranian President Hassan Rouhani’s government has often professed a desire to attract European expertise, but since the U.S. quit the nuclear deal, Iran’s hard-line politicians have become increasingly hostile to the idea of closer ties with European countries and have often called for expanded relations with China and Russia instead. For its part, China, driven in part by its trade war with the U.S., has become more vocal in its criticisms of U.S. policy toward Iran and more defensive of the nuclear deal.

4. What does the partnership entail?

In June, Iranian news agencies aligned with the country’s hard-liners reported that the agreement -- purported copies of which had been circulating on messaging apps -- would lock Iran into years of contracts in a deal worth $400 billion without any parliamentary oversight. After a backlash on social media ensued, the government tried to downplay the plans. Officials repeatedly denied that the deal would be worth $400 billion, and Foreign Minister Mohammad Javad Zarif insisted there was no formal contract between the two countries. Ali Aghamohammadi, economic adviser to Supreme Leader Ayatollah Ali Khamenei, did say in an interview with state TV July 3 that the partnership covers “all the sectors that come under our economic plans: oil, gas, research and development, advanced technologies, like 5G.”

5. Why was there a backlash in Iran?

Reports of the partnership sparked fears it would leave Iran financially dependent on China for decades. The heavy toll of Covid-19 in Iran has provoked scrutiny of relations with China: Officials said the disease arrived in the country via Iranian merchants traveling from China, and flights continued between the two countries despite an official ban. In a rare rebuke of the government, conservative politician Ali Motahari, a former lawmaker, tweeted on April 6, “Our struggle with the U.S. wasn’t supposed to result in our dependence on China!” after a spat on Twitter between China’s ambassador to Iran and a health ministry official angered him and many other Iranians.

6. What are the larger implications of the partnership?

The alliance is in part a result of the weakening of U.S. influence around the world, especially the Middle East, and could accelerate that trend. It supports China’s massive Belt and Road Initiative, aimed at reviving and extending the ancient Silk Road trading routes via networks of upgraded or new railways, ports, pipelines, power grids and highways. A broader Chinese footprint in Iran may make it harder for European companies to regain their share of markets there in a future less restricted by U.S. sanctions.

The Reference Shelf

• Related QuickTakes on the U.S.-Iran conflict, Iran’s Covid-19 challenge, Iran’s nuclear program, and the world’s oil flashpoint.
• Author John Garver argues that Iran and China are united by their shared displeasure over U.S. dominance of world affairs.
• An analysis in War on the Rocks downplays the prospects for an effective Iran-China axis.
• “China’s Western Horizon: Beijing and the New Geopolitics of Eurasia” by Professor Daniel S. Markey charts the factors behind China’s new foreign policies and assesses the implications for the world.
• Bloomberg News examines how U.S. sanctions left Iran’s economy open to China.

©2020 Bloomberg L.P.