The Russia Iran China Axis
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In 2018, the Trump administration withdrew from the Iran nuclear deal and initiated a “maximum pressure” campaign against the Iranian regime, re-imposing and expanding sanctions targeting Iran’s energy, shipping, insurance, and banking sectors. Major European businesses responded by fleeing Iran. However, the Trump administration’s efforts to isolate Iran still face a major hurdle as China and Russia move to fill the void and capitalize on the business opportunities emerging in the wake of European withdrawals.
The Political Context
The re-imposition of sanctions, coupled with years of economic mismanagement, have compounded the economic stresses facing Iran’s leadership. In late December 2018, President Hassan Rouhani unveiled his proposed $47.5 billion budget for the upcoming year, which, due to the impact of sanctions and the precipitous devaluation of Iran’s currency, was less than half the previous year’s budget. The failure of the JCPOA’s promised benefits to materialize, coupled with widespread political alienation, provided the impetus for a revitalized protest movement that has amplified the pressure facing Iran’s regime.
The re-imposition of sanctions coupled with years of economic mismanagement have compounded the economic stresses facing Iran’s leadership. In late December 2018, President Hassan Rouhani unveiled his proposed $47.5 billion budget for the upcoming year, which, due to the impact of sanctions and the precipitous devaluation of Iran’s currency, was less than half the previous year’s budget. The failure of the JCPOA’s promised benefits to materialize, coupled with widespread political alienation, provided the impetus for a revitalized protest movement that has amplified the pressure facing Iran’s regime.
By Itself, Europe’s INSTEX Won’t Save Iran
While the Trump administration’s efforts to squeeze Tehran are clearly having an effect, the lack of complete buy-in from the European Union, Russia, and China have shielded the regime from complete isolation. The EU has resisted the maximum pressure campaign, seeking instead to incentivize Iran to remain in the JCPOA by urging continued European trade and investment with Iran. Germany, the United Kingdom, and France have gone so far as to establish a Special Purpose Vehicle (SPV), known as INSTEX (Instrument in Support of Trade Exchanges), to allow European companies to facilitate ongoing non-dollar transactions with the regime through a third-party in circumvention of US sanctions.
The EU’s efforts to establish a sanctions-workaround will in all likelihood be a fruitless endeavor, as dozens of major European companies weigh the benefits of economic engagement with Iran against the costs of losing access to the American market. Trump administration officials have downplayed the significance of INSTEX and made clear that the U.S. intends to strictly enforce its sanctions against companies found engaging in illegal transactions.
Iranian officials have further expressed doubts about the efficacy of INSTEX, taking particular umbrage over concerns that Europe will link operationalizing INSTEX to Iranian compliance with the Financial Action Task Force’s (FATF) anti-money laundering and countering financing of terrorism standards. Iran’s foreign ministry explicitly stated that “Linking implementation of this mechanism… with the requirements of institutions such as the FATF is unacceptable.” The fight over INSTEX has also come against a backdrop of fraying EU-Iran ties due to a resurgence of Iranian terrorist and assassination plots on European soil that culminated in the EU announcing sanctions targeting Iran’s intelligence ministry in January 2019.
A Rising China in Iran
With INSTEX functionally stillborn, the primary obstacle to truly imposing “maximum pressure” on the Iranian regime will instead come from China and Russia. Both of these countries are unencumbered by concerns over Iran’s illicit domestic and regional conduct and are happy to continue doing business with Tehran if they can get away with it. Russia and China view the collapse of European deals in Iran as win-win opportunities to bolster their own economies while frustrating America’s objective of isolating Iran.
There is considerable historical precedent for China helping Tehran weather international storms dating back to the 1979 Islamic Revolution. China was one of the only countries willing to provide Iran with weapons and military equipment during the Iran-Iraq War, although it was also a large indirect supplier of military equipment to Iraq. China later emerged as a vital player in post-war reconstruction efforts and has remained engaged in the development of Iranian infrastructure, with a significant footprint in the construction of dams, factories, airports, roadways, and Tehran’s subway system. Iran is currently a linchpin in Beijing’s signature “One Belt, One Road” initiative, which aims to invest over $1 trillion in infrastructure, connecting over 60 countries in Europe, Asia, and Africa.
China has provided a vital lifeline for Iran’s energy sector as well, helping it to thwart the international sanctions regime that reached its zenith during the Bush and Obama administrations. With sanctions proscribing American and European investment in Iran’s energy sector, China was more than willing to fill the vacuum, with its state-controlled energy giants, Sinopec and the China National Petroleum Company (CNPC) acquiring massive stakes in the development of Iranian oil and gas fields. Both sides benefited tremendously from their arrangement; energy-dependent China received a source for oil and was able to bolster a US adversary while Iran gained a patron that invested heavily in its energy sector, and at the same time, severely diminished the efficacy of the US sanctions regime.
For example, in July 2017, France’s Total finalized an agreement to acquire a 50.1% stake in the $5 billion development of Phase 11 of the South Pars Gas field. Total decided to vacate the project in August 2018 after the first tranche of sanctions went back into effect despite having sunk $45.7 million into the project. In November 2018, Iran’s oil minister announced that CNPC, which already had a 30% stake in the project, would be acquiring Total’s stake. A month later, however, CNPC suspended its investment in the face of US pressure so as not to jeopardize ongoing Sino-U.S. trade negotiations. Nevertheless, CNPC plans to continue on investing in the North Azadegan and Masjid-i-Suleiman oilfields. Sinopec, meanwhile, is reportedly in talks with the state-owned National Iranian Oil Company (NIOC) to invest an additional $3 billion on top of its existing $2 billion investment in the Yadavaran oil field to boost capacity by 180,000 barrels per day.
Beyond the investment in Iran’s energy sector, China serves as a crucial lifeline to Tehran by maintaining consistent oil imports even in the post-JCPOA withdrawal era. At the same time the Trump administration withdrew from the JCPOA, it granted waivers to eight countries, including China, capping Iran’s legally sanctioned oil output at around 1 million barrels per day. This is a reduction from the 2.5 million barrels Iran was selling at the height of sanctions relief, but it is still a far cry from the Trump administration’s expressed desire to eventually drive Iranian exports to zero.
In order to shield its Iranian oil trade from sanctions, China has shifted to exclusively using Iranian tankers owned by the National Iranian Tanker Co (NITC) to transport its $1.5 billion per month of crude imports. With European insurers discontinuing their coverage of Iranian shipments, it is now incumbent on Iran to provide insurance for its cargoes. According to an Atlantic Council report, “To further insulate the Iran-China oil trade from foreign entities, CNPC has its own bank, the Bank of Kunlun, which has limited exposure to the global financial system. The Central Bank of Iran has accounts at the Bank of Kunlun, where Chinese buyers of Iranian oil have deposited billions of dollars before, prior to the existence of the JCPOA.” However, Reuters reported in December 2018 that Bank of Kunlun is seeking to cease Iranian transactions due to concerns over sanctions exposure. CNPC is exploring having smaller banks with less exposure to dollar-based transactions take over its Iran business.
The energy ties also burgeoned into military cooperation, with China selling ballistic missile components and conventional missiles to Iran and engaging in joint military drills. China has also played a role in the provision to Iran of sanctioned goods and services, as evidenced by the levying of fines against smartphone company ZTE and the arrest of Huawei’s Chief Financial Officer for providing telecommunications equipment to Iran in violation of US embargoes which was used in government surveillance and repression.
Content retrieved from: https://www.unitedagainstnucleariran.com/russia-iran-china-axis.