Analysis: Iran and China seal $400bn economic and military pact

Iran and China signed a major 25-year economic and military partnership agreement at the weekend which could boost the Islamic republic’s sanctions-wracked economy by $400bn. The move comes as Tehran continues to resist efforts by the Biden administration to revive the 2015 nuclear deal which Donald Trump withdrew from three years ago.

What happened

• The agreement was signed on Saturday by Iran’s foreign minister, Mohammad Javad Zarif, and his Chinese counterpart during a visit by Wang Yi to the Middle East.
• Although it has not been published, it is thought to be largely unchanged from an 18-page draft – marked “final version” – obtained last summer by the New York Times.
• The draft outlined how China would invest $400bn over the next 25 years in the Islamic republic – including in banking, infrastructure, telecommunications and transport – in exchange for Tehran providing Beijing with a steady supply of heavily discounted oil.
• The draft also detailed how Iran and China will deepen their military ties, by undertaking joint training exercises, research and weapons development and intelligence-sharing.
• China is Iran’s leading trading partner and purchaser of its biggest export – oil – and has helped to keep the Islamic republic’s economy afloat after Trump imposed sweeping sanctions as part of his so-called “maximum pressure” campaign.
• That the agreement was kept secret – and signed during the Persian new year holidays – indicates Tehran’s awareness of its domestic unpopularity.

Trump’s poisonous legacy

A strategic agreement was first proposed by President Xi Jinping during a visit to Tehran in 2016 (pictured). However, Iran seemed to initially drag its feet as European businesses began to invest in the country following the easing of sanctions that accompanied the Joint Comprehensive Plan of Action. Trump’s withdrawal from the JCPOA cut Iran’s break-out time – the period it requires to assemble enough fissile material to fuel a nuclear warhead has fallen from one year before 2018 to three or four months now, according to US secretary of state Anthony Blinken – as the Islamic republic itself reneged on the deal. Trump’s approach also revived Iran’s interest in China’s 2016 proposals. The Iranian supreme leader, Ayatollah Ali Khamenei, appointed a conservative former speaker of the parliament, Ali Larijani, as a special envoy.

Talking it up

Despite the agreement remaining shrouded in secrecy, China and Iran hailed the closer ties between the two countries.

• “China firmly supports Iran in safeguarding its state sovereignty and national dignity,” Wang said after a meeting with the outgoing president, Hassan Rouhani. The Chinese foreign minister also urged the US to immediately drop all sanctions on Iran. In an apparent indication that, despite being a signatory to the JCPOA, China is uninterested in helping Biden to revive the agreement, he added: “Our relations with Iran will not be affected by the current situation, but will be permanent and strategic.”
• “China is a friend for hard times,” Zarif said. “The history of cooperation between two ancient cultures of Iran and China dates back centuries. Signing the cooperation agreement will further strengthen the ties of the two nations.”
• Hesamoddin Ashena, a top adviser to Rouhani, termed the deal “an example of a successful diplomacy”, saying it was a sign of Iran’s power “to participate in coalitions, not to remain in isolation.”

Belt and braces

The agreement is part of Xi’s “Belt and Road Initiative” which has seen China vastly increase its overseas economic investment programme in order to boost its geopolitical clout and ensure that Chinese goods move with ease from East and Central Asia to the Middle East and Europe. During his current tour of the region, Wang also visited Saudi Arabia and, after leaving Iran, headed for the UAE, Bahrain and Oman. China has indicated it is ready to host direct talks between Israel and the Palestinians, in a calculated bid to undermine the US’ position in the Middle East.

Only yuan option

The economic relationship between Iran and China is a highly significant one for the Islamic republic, especially in the face of US sanctions.

• The two countries have done some $20bn in trade in recent years, down from $52bn in 2014 due to declining oil prices and American sanctions. Over the past year, total Iranian trade stood at $73bn.
• Iran’s exports to China totalled $8.9bn, while imports from China stood at $9.7bn. However, considerable volumes of Chinese products are also imported to Iran from other destinations.
• “This agreement will definitely help expand ties with China and will change the nature of business because Chinese companies will invest in Iran now more confidently than before,” a business executive close to Iran’s hardline forces told the Financial Times. “Many lights in various sectors, notably the energy sector, will turn green for Chinese companies. This also shows to the US that Iran is not tied up with the rope of sanctions any more.”

Sanctions-busters

Iranian oil shipments to China have soared in recent months. China imported approximately 478,000 barrels of oil from Iran a day on average in February – a figure that’s expected to double to about 1m in March. Iran evades US sanctions by disguising its shipments as Omani ones. The Biden administration has warned China it will continue to enforce Trump-era sanctions. This enforcement could take the form of “secondary sanctions” like those imposed by Trump on some Chinese energy and transport companies in 2019.

Trouble at home

But not all Iranians are pleased with what many see as a secret and exploitative agreement with China.

• When news of a possible agreement broke last year, the hardline former president, Mahmoud Ahmadinejad, attacked the negotiations. “The Iranian nation will not recognise a new secret 25-year agreement between Iran and China,” he stated in a sign of the nationalist backlash against a deal.
• Voices were also raised against an agreement within the Iranian parliament. One former lawmaker, Ali Motahari, expressed concern about the fate of Muslims persecuted in China.
• The exiled son of the shah of Iran, the country’s last monarch who was ousted following the 1979 Islamic Revolution, also attacked the deal. Reza Pahlavi termed it a “shameful, 25-year treaty with China that plunders our natural resources and places foreign soldiers on our soil”.
• Ariane Tabatabai, a Middle East fellow at the Alliance for Securing Democracy at the German Marshall Fund of the United States, said many Iranians have long felt that China gains most from the relationship between the two countries. “From the elite’s perspective, China makes big promises and delivers little. And from the population’s perspective, China has been benefiting from the sanctions on Iran, it’s flooded the Iranian market, pushed out Iranian businesses, and has delivered products that are subpar. Many Iranians feel like this deal will cement this unbalanced relationship.”

Unreliable ally

China has not proved the most reliable of economic partners for Iran in the past. China National Petroleum Corporation signed a contract to develop the South Azadegan oilfield in 2009 after Japan’s Inpex withdrew. The agreement was terminated by Iran thanks to alleged underperformance and delays. Another CNPC multibillion-dollar contract – in the South Pars gasfield – was also a flop. CNPC stepped in after France’s Total pulled out under threat of US sanctions, but the Chinese energy giant subsequently abandoned the project for the same reason.

Military might?

The closer military and security ties envisaged by the agreement – which in some respects mirror those mapped out in a 2013 deal between Russia and China – are already evident.

• Since 2014, Iran and China have undertaken joint military exercises on a number of occasions, including in December 2019, when they joined with the Russian navy in the Gulf of Oman.
• But don’t expect anything too dramatic on this front. “Any Chinese-Iranian military and security collaboration – while viewed as a provocative move by the west – is likely to be a slow-burner,” Ellie Geranmayeh of the European Council on Foreign Relations suggested in a paper published last year. “When Iran, China, and Russia took the unprecedented step in 2019 of conducting joint naval drills, one Chinese security expert outlined in discussions with the European Council on Foreign Relations that this was much more about signalling to the United States rather than Beijing’s appetite to engage heavily in security operations with Iran.”

What happens next

“It remains to be seen how many of the ambitious projects detailed in the agreement will materialise,” the New York Times noted on Saturday. “If the nuclear agreement collapses entirely, Chinese companies, too, could face secondary sanctions from Washington, an issue that has infuriated China in the past.”