Iran's Increasing Reliance on China

September 11, 2019

By Alex Yacoubian

Longstanding trade relations between Iran and China have deepened since the U.S. imposed punitive economic sanctions on the Islamic Republic in November 2018. Chinese State Councilor Wang Yi called the two countries “comprehensive strategic partners” during a visit by Iranian Foreign Minister Mohammad Javad Zarif in August 2019.

Trade between the two countries dates back to at least 200 B.C. Their cultural and economic ties were cultivated along Asia’s ancient Silk Road. In the 13th century, they were both briefly consumed by the Mongol Empire. Both countries, ruled by successive dynasties for more than two millennia, witnessed revolutions in the 20th century—China in 1949, Iran in 1979—that transformed Asia and challenged the international order dominated by the West.

Iran-China Map

 

The break in diplomatic relations between Iran and the United States in 1980, after the student seizure of the U.S. Embassy in Tehran, created new opportunities for Beijing and Tehran to again deepen ties, both economically and strategically. Before the revolution, Iran’s oil exports had gone primarily to Western Europe and the United States in the 1970s, when oil prices quadrupled after the 1973 Middle East War. In 1974, Iran’s production peaked at a record 6 million barrels per day (bpd). It all changed after the shah was ousted.

For Iran, China became an ally to counter U.S. influence along its borders in the Middle East and South Asia. For China, Iran became an important source of energy to serve its burgeoning industries and rapidly expanding population. Iran was also a route to gain influence in the Persian Gulf. Over four decades, their relationship evolved through three phases: military cooperation during the Iran-Iraq War in the 1980s, energy cooperation in the 1990s as China rapidly industrialized, and oil trade defying sanctions.

 

Bilateral Trade Graph

Source: U.N. Comtrade

 

Phase 1: Iran-Iraq War

The Iran-Iraq War, between 1980 and 1988, was a key impetus in deepening ties.  Western countries, which had long sold warplanes and military equipment to the shah, imposed arms embargoes on Tehran. Iran turned to non-Western countries--such as China, North Korea and Russia--to restock its military.

The war coincided with Chinese leader Deng Xiaoping’s economic reforms, which had been launched in December 1978. He called for increased arms sales to Third World countries to generate foreign currency. From 1979 to 1985, Beijing sold $6.3 billion worth of weaponry worldwide; 95 percent of its sales were exports to the Middle East and South Asia. China became the largest source of arms to the Islamic Republic during its war with Iraq. In 1983, Beijing sold Tehran $444 million worth of military equipment. 

China provided Iran with 22 percent of its military equipment, including anti-ship missiles, surface-to-air missiles, artillery pieces, tanks, and radars, as well as small arms and ammunition. Chinese equipment allowed Iran to quickly replenish its losses and continue the war indefinitely. By the end of the eight-year war, China had sold Iran weaponry worth $3.3 billion.

 

Phase 2: Chinese Industrialization

After the war ended in 1988, trade ties shifted from arms sales to oil and energy. In 1989, China sold Iran $68 million in arms—down 89 percent from $612 million in 1987. Since then, Iran has mainly sold China petroleum products; in turn, it has mainly purchased consumer goods such as clothing, vehicles, electronics, chemicals, household appliances, and telecommunications equipment from China.

In the early 1990s, China underwent a period of rapid industrialization and economic growth. In 1993, it transitioned from an oil exporter to a net oil importer to meet growing energy needs. In 1990, China had consumed 2.3 million bpd.  By 2000, it needed 4.7 million bpd.  Beijing increasingly turned to markets in the Middle East and Southeast Asia—especially untapped markets where it did not have to compete for contracts with Western nations—to meet its fuel requirements. Iran had plentiful natural resources and a market from which the West had largely withdrawn after 1979. Bilateral trade between the two countries significantly increased from $400 million in 1990 to $1 billion in 1997, largely due to increased energy trade. Between 2000 and 2012, China hovered between 9 percent and 14 percent of its oil imports from Iran.

But Iran’s oil sector grew more reliant on China as a trading partner after the United States and the United Nations imposed sanctions in 2010. Only 5 percent of Iran’s total oil exports went to China in 2000; by 2011 Iran sold China 25 percent of its oil. China also became a crucial investor in Iran’s oil and gas industry as  U.S. and international sanctions reduced Iran’s access to foreign capital and the technology needed to develop its deteriorating energy sector. By 2019, China consumed 12.8 million bpd--or 13 percent of total global consumption.

 

China Increasing Oil Consumption

Source: U.N. Comtrade

 

Phase 3: Sanctions Era

In 2010, the United States and United Nations imposed major sanctions on Iran’s nuclear and energy sectors because of concerns over its ability to build a bomb. China tried to navigate between maintaining trade with Iran and complying with U.S. and U.N. restrictions. Iran, in turn, needed China’s investment to aid its isolated economy. In 2010, unemployment officially reached 15 percent—with higher unofficial estimates--as the population was growing by nearly one million annually.

In October 2010, China informally instructed companies to curtail development projects in Iran to avoid sanctions on its major energy firms. The China National Petroleum Corporation (CNPC) delayed a drilling exploration project at the South Pars oil field; Iran countered by demanding that China speed up development or lose the contract. Tehran ultimately suspended the contract in October 2011. China’s Sinopec company also halted the second phase of a 2007 contract to develop the Yadavaran oil field.

Yet Beijing continued to import large quantities of Iranian oil despite sanctions. In 2011, China’s Sinopec company signed and completed a deal to import an additional 90,000 bpd of Iranian condensate, a super light crude oil. Iran discreetly transported shipments to China and other Asian countries by renaming and reflagging its vessels. By July 2012, Iran was using more than 60 tankers—roughly two-thirds of its tanker fleet--to store up to 40 million barrels of crude oil at sea while it located buyers.  

Under growing economic pressure, Iran negotiated with the world’s six major powers between 2013 and 2015 on limits to its nuclear program in exchange for sanctions relief. The subsequent 2015 JCPOA (or Joint Comprehensive Plan of Action) led to the lifting of U.S., European and U.N. sanctions in January 2016. By September 2016, Iran exported 1.7 million bpd; about 41 percent—some 700,000 bpd--went to China.

The following two graphs illustrate Iran’s oil exports and China’s sources of oil in 2017 during the second year of the nuclear deal.

 

Iran Oil Exports

Source: The Observatory of Economic Complexity

 

China Oil Imports

Source: The Observatory of Economic Complexity

 

In May 2018, the Trump Administration abandoned the nuclear deal. At the time, Iran was exporting 2.7 million barrels per day—775,000 bpd to China, or 29 percent of total sales. The U.S. move—and the threat of new sanctions--had an immediate impact. Iran’s total oil exports halved in four months as Tehran struggled to find buyers. By September 2018, the Islamic Republic’s total exports plummeted to 1.3 million bpd. China imported 333,300 bpd from Iran, down to less than half of what it bought in May. Yet it still accounted for roughly a quarter of Iran’s sales-- 26 percent--as other buyers cut back.  “We should look East, not West,” the Supreme Leader, Ayatollah Ali Khamenei, said in October. “Pinning our hope on the West or Europe would belittle us as we would beg them for favor and they would do nothing.”

In November 2018, the United States formally reimposed sanctions and sought to reduce Iran’s exports to zero. It also threatened to sanction any country or foreign company that continued trading with Iran. In March 2019, 76 percent of Iran’s total oil exports went to Asia. The majority went to China, South Korea, India, Turkey, and Japan. China was granted a temporary six-month waiver. It was allowed to buy 360,000 bpd of Iranian oil without penalty.

In May 2019, the U.S. waivers expired. China defiantly continued to import Iranian crude oil, although sanctions did have an impact on bilateral trade.  Chinese companies appeared more hesitant to do business with Iran for fear of financial penalties. In June 2019, China imported only 210,000 bpd of Iranian crude—the lowest in nearly a decade and 60 percent below imports from Iran in June 2018.

 

China Crude OIl Imports

Source: The Observatory of Economic Complexity

 

The expiration of waivers had a swift effect; Iran’s economy suffered. By July 2019, Iran’s total oil exports fell to as low as 100,000 bpd, down from around 400,000 bpd in June. Even China changed its buying patterns. It doubled its oil imports from Saudi Arabia from the previous year. Beijing imported 1.8 million bpd from the kingdom in July, up from 921,811 bpd in August 2018.

Tehran became creative to circumvent U.S. sanctions. In January 2019, Iran offered discounts to Asian buyers. It cut the price of Iranian light crude by $1 per barrel, approximately 30 cents a barrel lower than Saudi Arabia’s light crude. It was the largest discount Iran had offered against Saudi prices in more than a decade.

 

Circumventing Sanctions

To beat sanctions and sell its oil, Iran began to engage in subterfuge and financial trickery. Ships carrying Iranian oil became difficult to trace, as some tankers reportedly turned off identification systems used by the International Maritime Organization to track ship movements. Some Iranian ships also stopped reporting their positions when they neared a buyer’s port. Other tankers transporting Iranian crude changed their names and identification numbers at sea to avoid detection.

After the U.S. reimposed sanctions in 2018, Iran reportedly stockpiled oil as bonded storage in the Chinese ports of Jinzhou, Huizhou, and Tianjin. Between May 2 and August 3, 2019, six Iranian tankers unloaded unspecified amounts of crude oil in Tianjin and Jinzhou, The New York Times reported. The oil in bonded storage did not go through local customs or register in China’s import data. Most of it was still owned by Tehran and, therefore, did not technically breach U.S. sanctions.

Keeping oil in bonded storage allowed Tehran time to find a buyer in Asia without payment of tariffs or other duties. This practice also allowed Tehran to free up its tanker fleet by reducing storage at sea while it found buyers. The crude inventory at Jinzhou reportedly almost doubled -- from 3.2 million barrels to 6 million barrels— over six weeks between mid-June and the end of July, according to the data provider Refinitiv.  Analysts predicted that global oil price would decrease if millions of barrels of stored Iranian crude entered the market.

Rouhani

President Hassan Rouhani and President Xi Jinping

U.S. Targeted Sanctions 

U.S. sanctions on Tehran are unilateral; Iran technically can still sell its oil to other countries. The United States, however, has intimidated countries —including major powers that brokered the 2015 accord—not to buy from Iran, or they would face similar sanctions too.

The United States took punitive measures on China after it defied U.S. sanctions. On July 22, Washington announced sanctions against the Zhuhai Zhenrong Co., a state-run energy company that “knowingly engaged in a significant transaction for the purchase or acquisition of crude oil from Iran,” according to State Department. The sanctions were the first by the Trump administration against a Chinese company for buying Iranian oil. The administration also targeted an “oil-for-terror” network that smuggled oil to Syria and China to financially benefit Iran’s Revolutionary Guards.

In July 2019, Beijing condemned U.S. sanctions on Chinese companies as “long-arm jurisdiction” and vowed to “firmly safeguard the legitimate rights and interests of its enterprises.” Iran appealed to its allies to continue buying Tehran’s oil despite U.S. pressure. “Even though we are aware that friendly countries such as China are facing some restrictions, we expect them to be more active in buying Iranian oil,” Vice President Eshaq Jahangiri told a visiting senior Chinese diplomat on July 29.

 

Iran-China Flags

 

Timeline of Iran-China Economic Relations

1974

China first imported oil from Iran.

                                                                   1979  Revolution                                                                          

1983

January– China and Iran signed a $500 million trade pact that increased bilateral trade by 150 percent. The package provided Iran with military supplies or civilian equipment that could be converted into military use, such as jeeps and trucks. Tehran became China’s top trading partner in the Middle East. In the early 1980s, the majority of China’s trade with Iran supported the Iranian war effort against Iraq.

1985

March 3 – Iran and China established the Joint Committee on Cooperation of Economy, Trade, Science and Technology to collaborate on energy, machinery, transportation, building material, mining, chemicals, and nonferrous metal.

1992-1998: Bilateral trade hovered between $437 million and $1.2 billion. During this period, energy cooperation between the two countries steadily increased as China entered a period of rapid industrialization and population growth.

1993

December – Beijing became a net importer of oil after domestic consumption rates exceeded production. In 1993, China produced 2.90 million bpd and consumed 2.99 million bpd. Rapid industrialization in the 1990s led China to increase its oil consumption from 2.33 million bpd in 1990 to 4.69 million bpd by 2000.  China gradually started buying oil from untapped markets in the Middle East and Southeast Asia.

1996

August 5 – The Clinton administration passed the Iran-Libya Sanctions Act that imposed tough penalties on companies found investing more than $20 million a year in Iran’s oil and gas industry. The sanctions had modest short-term effects on Iran’s economy. Contracts in Iranian oil and gas fields were delayed, and many foreign companies deferred bidding on new investments. The National Iranian Oil Company (NIOC) had to render greater incentives to negotiate term contracts for supplies formerly committed to U.S. companies.

September – China signed a comprehensive military contract to sell combat aircraft, warships, a variety of armored vehicles, missile and electronic equipment, and military training to Iran. This deal was eventually halted when Beijing agreed to stop selling missiles to Tehran after U.S. pressure.

1997

January – China signed an agreement for oil and gas exploration in Iran. It was Beijing’s first investment in Iran’s domestic oil and gas industry. The deal established multi-billion dollar development projects in the South Pars gas field and Azadegan oil field.

October - Chinese President Jian Zemin assured the United States that China would not transfer additional anti-ship cruise missiles or technology to Iran, nor aid its domestic production program.

2000

January - The NIOC signed an $85 million contract with the China National Petroleum Corporation (CNPC) to drill 19 new oil wells in southern Iran.                                       

2004

March 18 – Tehran reached a $20 billion agreement with China’s state-owned Zhuhai Zhenrong Corporation to purchase over 110 million tons of liquefied natural gas (LNG) from Iran over a 25 year period. It was, at the time, the world’s single largest purchase of natural gas. China had focused on moving away from burning coal to using cleaner natural gas for its domestic energy needs. Chinese companies rushed to purchase Iran’s large gas reserves—15 percent of the world’s total supply—to profit off Beijing’s growing energy needs.

October – Iran and China agreed to an additional $100 billion deal to add 250 million tons of LNG to China’s domestic supply over a 25 year period. Sinopec signed the deal to develop the Yadavaran oil field in 2006. Sinopec halted the second phase of project in May 2019 while two countries reopened contract negotiations.

2007

December 9 – China’s Sinopec signed a $2 billion deal to develop 137 wells at Yadavaran oil field in western Iran. The project had two phases, the first over four years to produce 85,000 barrels per day and the second over the following three years for an additional 100,000 bpd.

2008-2009: Bilateral trade fell from $27.8 billion in 2008 to $21.2 billion in 2009. Global trade generally decreased in 2009 due to fallout from the global economic crisis as global demand decreased.

2009

2009-2011: Bilateral trade significantly increased from $21.2 billion in 2009 to $45.10 billion in 2011. Tightened sanctions increased Iran’s reliance on Chinese imports as Western firms withdrew from Iran’s oil and gas industry. Beijing, as a result, surpassed the European Union as the top buyer of Iranian oil. 

January 14 – NIOC and CNPC signed a 12-year, $1.76 billion contract to develop the North Azadegan oil field in western Iran. The agreement was based on a buyback plan in which CNPC would develop the field then hand over operations to NIOC and receive payment in oil and gas production until the contract is paid off. Crude output capacity was expected to reach 75,000 bpd in the first 48 months of development. In 2016, CNPC began production at the field, which pumped an estimated 80,000 bpd.

March 9 – NIOC opened an office in Beijing to attract investment in Tehran’s energy sector. 

June 10 – CNPC signed a $4.7 billion contract with NIOC to develop Iran’s South Pars gas field, the largest natural gas field in the Middle East.

Nov. 21 – Iran opened its first foreign commerce center in Shanghai to streamline joint investment projects between Iranian and Chinese companies.

December – China overtook the European Union as Iran’s largest trading partner after bilateral trade soared to $36.5 billion, up from $14.4 billion just three years before. Crude oil accounted for approximately 80 percent of total Iranian exports to China. 

2010

June 9 – The U.N. Security Council adopted Resolution 1929 which tightened proliferation-related sanctions on Iran. It banned Tehran from testing missiles capable of carrying nuclear warheads and imposed an embargo on the transfer of major weapons systems to Iran.

June 24 – The United States adopted the Comprehensive Iran Sanctions, Accountability, and Divestment Act which targeted firms investing in Iran’s energy sector or selling refined petroleum to Tehran. It also imposed sanctions on foreign banks conducting business with Iran.

October – The Chinese government reportedly instructed companies to curtail energy development projects in Iran after U.S. sanctions and an agreement with the Obama administration to not undertake future Iranian investment projects. The United States, in return, agreed not to sanction prior Chinese investments.

2011

2011-2012: Bilateral relations decreased from $45.1 billion in 2011 to $36.5 billion in 2012. Many Chinese companies pulled out of contracts due to U.S., U.N., and E.U. sanctions on Iran. 

September – CNPC delayed a drilling exploration project at the South Pars oil field, leading to warnings from Tehran to speed up development or lose the contract.

China’s Sinopec company halted the second phase of a 2007 development contract at the Yadavaran oil field after pressure from the United States.

China’s Sinopec company signed a deal with Iran to import an additional 90,000 bpd of condensate. China continued to import Iranian oil despite a decrease in Chinese energy investment projects in Iran due to the threat of U.S. sanctions.

2012

January – The European Union adopted a set of targeted sanctions that banned the import, purchase, and transport of Iranian crude oil and petroleum projects. It also agreed to freeze the assets of Iran’s central bank in the European Union. E.U. countries imported 20 percent of Iran’s oil at the time.

2013

2013-2014: Bilateral trade increased from $39.4 billion in 2013 to $51.8 billion in 2014 due to U.S. sanctions waivers, which increased Chinese oil imports. 

November 24 – Iran and six world powers – China, Britain, France, Germany, Russia and the United States – signed a deal in Geneva that released $4.2 billion in Iranian oil sales from frozen accounts. Tehran, in return, committed to curbing its nuclear program. The agreement limited Iran’s oil exports to 1 million bpd.

November 29 – The United States granted a six-month sanctions waiver to China, India, South Korea and other countries in exchange for their commitment to reduce purchases of Iranian oil.

2014-2015: Bilateral trade decreased from $51.8 billion in 2014 to $31.2 billion in 2016. The drop was the result of a sharp decrease in global oil prices.

2015

July 14 – Iran and the six world powers known collectively as the P5+1 reached a landmark deal in which Iran agreed to curb its nuclear program and provide access to inspectors in exchange for sanctions relief. The agreement, known formally as the Joint Comprehensive Plan of Action, went into implementation in January 2016.

2018

May 8 – President Trump announced the U.S. withdrawal from the JCPOA and reimposition of sanctions on Iran. Britain, France and Germany moved to salvage the accord. Iran stated its intent to continue with the deal if its economic benefits could be guaranteed. Both China and Russia said they intended to observe the JCPOA and continue to trade with Iran.

November 5 - The Trump administration granted temporary waivers to China to import 360,000 bpd of Iranian oil, half of the daily average since January 2016. Beijing was allowed to continue nonproliferation projects at Iranian nuclear facilities.

December 12 – CNPC suspended its operations at Iran’s South Pars gas field after pressure from the United States.

2019

January – China’s Sinopec company offered Tehran a $3 billion investment plan to further develop the Yadavaran oil field.

May 2 – The Trump administration let sanctions waivers expire in an attempt to “bring Iran’s oil exports to zero.” The waivers had allowed China and seven other countries to continue importing Iranian oil despite U.S. sanctions. 

August China signed a $400 billion deal to invest $280 billion in Iran’s oil, gas and petrochemicals sector and an additional $120 billion investment in Iran’s transport and manufacturing infrastructure. Chinese companies, in return, were given first refusal to bid on any new or uncompleted oil and gas development projects. The deal was updated from a strategic partnership plan signed in 2016.  

 

Alex Yacoubian is a program assistant at the U.S. Institute of Peace.

Jordanna Yochai, a research assistant at the U.S. Institute of Peace, also contributed to this article.