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Proposed Iran-China deal

  • Najmuddin A.
  • Aug, 2020
  • 126
  • Covid Cooperation

At the moment, there is little chance of China defying a sanctions regime for illusionary benefits

As the Trump administration moves further towards confrontation with China and as China makes it clear that even while wanting to avoid a fight it will push back, a new factor has suddenly captured the headlines. This is a proposed agreement between China and Iran under which according to a ‘final draft’ received by The New York Times from Iranian sources China will invest $400 billion in Iran and receive in return Iranian fossil fuel - oil and gas - at discounted prices. The initial report on this so-called agreement which is not part of the NYT revelation had said the discount was to be 32 per cent on the prevailing market price. Many commentaries in Iran have welcomed this agreement. Others have been suspicious.

On the face of it, there could be nothing better for Iran than an agreement that enabled Iran to sell its oil in return for the sort of investment that the leaked paper talks about. Currently, subject to some correction, reports from normally reliable sources suggest that Iran has 30 tankers each capable of carrying two million barrels. Its onshore storage is said to be about 63m barrels. In other words, about 120m barrels which, instead of being a source of income, are drawing on scarce resources to finance the storage.

It is true that before the JCPOA was signed in 2016 Iran had huge problems marketing its oil and had learnt many ways to evade the sanctions that were imposed at that time. They were credited rightly with having devised clandestine means to market their oil and these channels are probably being used even now. But the level of surveillance has gone up manifold since those days and in my view if the sale entailed a discount of 20pc then it probably entails a discount of more than 30pc today for the ship to ship transfers at sea taking place whenever the satellite is not operating in the area.

The Iranians have set aside the agreement reached with India for Indian participation in the construction of the railroad from Chabahar to Zahidan for connectivity to Afghanistan and Turkmenistan and thence to Europe where India was expected to invest $1.6 billion and have also abrogated the agreement for Indian development of the Farzad-B gas field where an Indian investment of $6bn was expected. The Indians have said that difficulties arose because of US sanctions, while the Iranians said no progress was made in negotiations but that they would welcome India’s return. This, of course, is verbiage. The current Iranian expectation is that with their rail expertise and thirst for fossil fuel, China will step in for both but this is not the Chinese focus.

China recognises, as the UBS Bank of Switzerland’s study of December 2019 shows, that for the next 25 years the US dollar will remain the dominant reserve currency for central banks across the world. It also recognises that there has been little change in the leading role that the dollar plays in international trade. It will try to increase the role of the renminbi in international trade through currency swaps and other renminbi denominated trade but this will take a great deal of time. Sanctions imposed by the US will work quite well given the dollar’s dominance of international trade.

China’s principal focus is on the South China Sea and the steps the US is taking in this area to limit China’s ability to work out arrangements with its Asean neighbours and to use the Hong Kong issue to seek condemnation of China’s alleged breach of the ‘one country two systems’ that was promised for Hong Kong. The US has moved from suggesting that the countries of the region should take a concerted position on China’s territorial claims to terming them illegal and a breach of the freedom of navigation required under UNCLOS (law of the sea convention). The US says that it observes UNCLOS but has not ratified it because it cannot muster the political will to get 66 senators to ratify the convention which many senators see as an unacceptable restriction on America’s freedom of action.

China has also to be concerned about the US decision to insist that China become a party to arms control talks when the INF (Intermediate-range Nuclear Forces) treaty has been abrogated. This is a matter of concern to Europe since they fear that the US will now ask for the stationing of these missiles in Europe but is also a matter of concern in terms of allowing these weapons into the South China Sea where China has these weapons but has very restricted ICBM (intercontinental ballistic missiles) capabilities.

Much has been made in the NYT about the fact that this agreement would allow China to develop military capabilities in the Persian Gulf region in the ports it develops. The truth is that China developed one base outside the Sou...

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