At the beginning of July, New York Times journalists revealed an 18-page draft agreement between China and Iran which sets the framework for their relations for a whole generation. This is not the first time information about the document has leaked to the public, but this time more details have been provided. International circumstances have changed as well, making such an ambitious plan more realistic. Will Beijing’s alliance with Tehran change the global balance of power? Is it really possible?
According to the agreement, the People’s Republic of China (PRC) will carry out nearly 100 projects in Iran, their total value reaching 400 billion USD over 25 years. These will be mainly concentrated in banking, telecommunications, ports, and railways. In return, China will gain access to Iranian crude oil at price lower than those on the market for the duration of the projects. Moreover, free trade zones would be established in Mak, Abadan, and on the island of Keshm. An integral part of the agreement would be the deepening of military cooperation through joint exercises and intelligence services, and the development of new weapons systems. According to NYT journalists, the final version of the document was agreed in June.
Oil, the foundation for cooperation
This is not the first attempt at rapprochement between Beijing and Tehran. The beginnings of the Sino–Iranian partnership can be traced back to the 1990s, when political and economic factors were combined.
During these unstable years, China and Iran found a solid foundation on which to build mutual relations: crude oil. The fast-growing demand for black gold in the PRC at the end of last century led to China’s shift in 1993 from an oil exporter to a net importer. The search for raw materials abroad has become one of the driving forces behind Beijing’s greater involvement in international affairs. As a country standing in opposition to the West, Iran has become an ideal partner.
The Sino–Iranian partnership has been tightening by leaps and bounds over the past two decades. Chinese President Jiang Zemin’s visit to Tehran in 2002 was a major political impulse to start this process. The demand for oil in the PRC at the time was 5 million barrels per day, with domestic production amounting to 3.4 million barrels. Minor agreements were signed during the visit, opening the door to larger future deals that were supposed to strengthen China’s energy security.
The first memorandum commencing cooperation on a truly large scale was signed two years later. It assumed that the Chinese fuel giant Sinopec would buy 250 million tonnes of liquefied gas within 30 years and 150,000 barrels of oil per day for 25 years. Moreover, together with the National Iranian Oil Company, the company was meant to be responsible for the development of the Iranian oil field, Yadavaran. The two parties priced the agreement at 70 billion USD. After lengthy talks, a contract was finally signed in 2007, which assumed that the Chinese would invest 2 billion USD in infrastructure development.
The two countries also tried to find other areas for economic cooperation. In 2007, the Chinese Gezhouba Group Corporation signed a contract worth nearly 600 million USD for the construction of the Rudbar-Lorestan hydropower plant (450 MW). Four years later, Sinohydro signed a contract worth around 2 billion USD for the construction of Bakhtiari Dam (1,500 MW).
The rapprochement between Beijing and Tehran has slowed down due to the economic sanctions imposed on Iran by the United Nations Security Council in 2010. Importantly, China voted for these sanctions, of which the main advocate was the United States. Beijing showed that it did not intend to jeopardise its relations with Washington for the Ayatollah regime.
Back to forging a strategic partnership
In the following years, a series of international processes led to a renewal of Sino–Iranian relations. First of all, the United States and China set themselves on a course of intensifying rivalry. While this is often forgotten during the Donald Trump era, apart from 2001–2012, relations between the two powers have been tense since 1989. The rivalry only calmed down after the United States focussed on the war on terror. However, as soon as the situation in the Middle East reached some degree of stability, the Obama administration developed a strategy of ‘pivoting to Asia’ that was clearly recognised by China as confrontational.
Meanwhile, Tehran’s international status changed. Following the 2015 nuclear deal between Iran and permanent members of the UN Security Council, Germany, and the European Union, new trade and investment opportunities opened up. Tehran was looking for partners who could revitalise both its oil industry and the rest of its economy. Beijing seemed like a dream partner—theoretically requiring no political concessions, but with surplus capital and a willingness to invest in fragile states, such as the neighbouring war-torn Iraq.
An additional impulse for Sino–Iranian relations was Xi Jinping’s coming to power in 2012. At that time, the previous trends—the growing Chinese assertiveness towards the West and Beijing’s greater activity internationally—had intensified. In 2013, the Belt and Road Initiative was announced, with Iran lying at the intersection of both the land and sea corridors of the initiative. Additionally, Tehran became one of the founders of the Asian Infrastructure Investment Bank.
In 2016, China was a much more powerful country than it was in 2002. Simply put, it has grown from a regional power into a global one in 14 years. In parallel, Chinese demand for oil has increased dramatically. According to OPEC data, in 2016 it reached almost 12 million barrels of crude oil per day, with its own production at approximately 4 million barrels. This has boosted the dynamics of Sino–Iranian relations. Among the 17 agreements signed at that time, the most famous one concerned an increase in bilateral trade by 600 billion USD over the next 10 years.
It was then that the joint declaration on the comprehensive strategic partnership included a provision on the commencement of consultations and negotiations on the ‘Agreement on Comprehensive Cooperation’. It is this inconspicuous excerpt that underlies the agreement, the final text of which was to be agreed in June, according to the New York Times journalists.
Dream of big investments
Regardless of the exact shape of the final agreement and whether it will be approved by the parliament in Iran (there is no doubt about it in China), in order to assess the document’s viability, it is worth looking at individual assumptions in the context of the last two decades of relations between the two countries.
The clause in the agreement regarding the 400 billion USD that China would invest in Iran was the most popular among the public. Spread over 25 years, this makes an average of 16 billion USD a year. It is worth noting that according to data from the American Enterprise Institute and the Heritage Foundation, the total value of all Chinese investment in Iran in 2005–2020 was 26.5 billion USD. This means that each year Beijing will invest on average the equivalent of 60% of its capital involvement over the past 15 years.
Had such an agreement been signed in 2016, this amount could be justified by China’s fast-growing foreign direct investments (FDI). According to the data of the United Nations Conference on Trade and Development, from 2006 to 2016 the total of these investments increased from 17 billion to 196 billion USD. However, the situation changed. By 2019, Chinese FDI had dropped to 117 billion USD. This is due to both the economic situation in China and Beijing’s concerns about losing control over the capital going beyond the country’s borders.
Another problem with the declared amount of investment is that signing the contract is not enough. It also needs to be put into effect, which has often been a problem for Chinese investments in Iran.
For example, Sinopec has never fully completed the expansion of the Yadavaran oil field. After completing the first stage (and the introduction of UN sanctions), the company withdrew from further work. To date, the two parties have not reached an agreement on the resumption of work. The exploitation of the South Pars gas field by CNPC was also incomplete. Chinese–Iranian cooperation is not always successful in the case of the construction of dams and hydropower plants, either.
There is a good chance that some of the still unfinished Chinese ventures in Iran will be included in the 25-year contract to be signed. However, it must be clearly stated—recycling uncompleted projects is not a solid foundation for building a strategic partnership.
More than just energy
The Sino–Iranian agreement also provides for cooperation in other areas of the economy. One of the points in the agreement is to create 3 free trade zones—as can be concluded from the Chinese investment experience so far, together with the transport infrastructure and industrial base. China is implementing similar projects in the Indian Ocean region. The most famous example is Gwadar, a port in Pakistan. The project can be called a moderate success, although there are problems with it: the work is dragging on and so far has not met expectations.
It can be assumed that even if free trade zones are created in Iran this year, the real effects would be visible no earlier than a decade from now. That is how long it would take to work out all the legal aspects of the venture, to build the appropriate infrastructure, and then to move enough industrial plants to the site for the costs incurred to be recouped. Iran’s economy, on the other hand, requires investment as soon as possible.
Another aspect mentioned in the agreement is military cooperation. Again, these assumptions can be viewed with less scepticism than in terms of investment. Firstly, China is very keen on acquiring intelligence information regarding the situation in the Middle East, particularly in the context of the involvement of the Uighurs, about whom Ondřej Klimeš wrote for the Jagiellonian Club recently, in local armed conflicts.
Secondly, Xi Jinping is trying to make the Chinese army more visible worldwide. This has resulted in a growing number of military exercises carried out abroad. The People’s Liberation Army Navy conducted exercises with Iran both in 2017 and two years later. It can be expected that they will be more frequent. Thirdly, Beijing is seeking new buyers for its weapons systems, and Iran does not have many other options to choose from.
However, the most tangible element of Sino–Iranian cooperation contained in the bilateral agreement is the expansion of the telecommunications network in Iran. Beijing will undoubtedly care about it, as it is trying to find the largest possible market for 5G infrastructure built on Huawei solutions.
The game-changer myth
The size of the potential Sino–Iran deal has led to speculation that it may be a game changer in the Middle East. It would enable Tehran to modernise its economy, and China would gain a permanent foothold in the region. Additionally, the partnership would be cemented by cooperation against the United States.
However, the history of Beijing’s relations with Tehran so far shows that a large part of the declarations are primarily propagandistic and symbolic in nature. The results of partnerships are often below expectations. Moreover, it seems that both parties are unable to define their relationship differently than in the context of the rules of the game imposed by Washington. At times, the situation looks as if Tehran was only a bargaining chip in Beijing’s relations with the White House.
This does not mean that the relationship with the Ayatollah regime is irrelevant to China. They have invested over 26.5 billion USD there, and the annual bilateral trade in the period of 2010–2018 remained at over 30 billion USD. Moreover, no power can compete in the Middle East without Iran.
When quoting economic statistics, however, it is worth remembering about the wider context. In the last 15 years, the PRC has not only invested significantly more in Saudi Arabia than in Iran (38.6 billion USD), but also in the United Arab Emirates (33.5 billion USD). Beijing also trades more with them than with Tehran. It may also be symbolic that Iran was the source of only 3% of Chinese oil imports in 2019. Even if we leave the economy aside, a deeper relationship with the Ayatollah regime will be politically difficult for Beijing, due to pressure not only from the United States, but also from Saudi Arabia and Israel (China’s other important partners in the region).
The Sino–Iran agreement will be implemented, but only to a certain extent. Investment will probably increase, but not to the assumed level. Some of the 400 billion USD will probably go to bilateral trade. Political and military cooperation will be strengthened and Iran will finally have an opportunity to become a member of the Shanghai Cooperation Organisation. The agreement, however, will not be a breakthrough in relations between the two countries. Contrary to prominent assurances, one should not expect a Middle Eastern game-changer.
Polish version is available here.
Publication (excluding figures and illustrations) is available under Creative Commons Attribution 4.0 International. Any use of the work is allowed, provided that the licensing information, about rights holders and about the contest "Public Diplomacy 2020 – new dimension" (below) is mentioned.
The publication co-financed by the Ministry of Foreign Affairs of the Republic of Poland as part of the public project "Public Diplomacy 2020 – new dimension" („Dyplomacja Publiczna 2020 – nowy wymiar”). This publication reflects the views of the author and is not an official stance of the Ministry of Foreign Affairs of the Republic of Poland.