Leaks from last month indicate that a deal with colossal scope has been agreed between China and Iran. All the details of the agreement are not yet known, but the parts that have been reported show that this will be the biggest deal between China and any Belt and Road Initiative (BRI) country. However, considering the potential of both nations, it does not go beyond their capacity.
The total range of the deal is reported to be $400 billion spread over a period of 25 years, which works out as $16 billion of Chinese investment in Iran each year. These investments will be in areas such as telecommunications, gas, oil, petrochemicals, harbors, railroads, and banking.
The concessions extended by Iran to China may look unusual for a country known for its sensitivity on national sovereignty issues, but both Beijing and Tehran have a tradition of aiming at longer-term strategic targets. Iran must have weighed up all the advantages and disadvantages before committing itself.
The secret part of the deal was negotiated when Iran was short of $150 billion for the completion of its oil and gas infrastructure, and another $250 billion for upgrading its major business sectors. At the same time, China was in search of an opportunity to creep into the Middle East without hurting the other stakeholders that are active in the region. So there was an excellent complementarity between the demand and supply sides. The deal will be implemented over a relatively long period, so if some regional or international stakeholders resist its implementation, China will probably find a way to eliminate them without urgent time pressure.
When the deal yields its full effects, the world will probably not be shaken quite as much as Napoleon Bonaparte predicted more than 200 years ago — he said, “Let China sleep, for when she wakes, she will shake the world” — but it will wake up to a different Middle East.
Iranian sources disclosed that China will buy Iranian oil with a discount of $10.95 per barrel. In addition, the transportation costs will also be covered by Iran. Beijing will meet the cost of the $16 billion investments per year partly with the price of this cheap oil. This is a fair give-and-take in view of the national interests of these two countries.
Despite the Chinese upper hand in this deal, it is also a life jacket for the Iranian economy.
China’s total crude oil imports in 2019 cost $238.7 billion. Iran’s share of this total was negligible at $7.1 billion. These figures prove that China can easily absorb all the oil to be exported by Iran and, if it does have a surplus, it may resell it to third countries for a profit.
The US seems to be adamant that it will not ease sanctions on Iranian crude oil exports but, despite Washington’s insistence, Iranian oil continues to flow into the Chinese market through backchannels. By selling its oil to China, Iran is able to circumvent the economic sanctions imposed on it by the US. So the wheels of the Iranian economy will continue to turn without major impediment.
The US may try to punish the companies that violate sanctions on Iran, but China — the world’s second-largest economy and perhaps even the largest in a decade’s time — will find a way to neutralize the effects of this.
Another consequence will be the effects of the deal on the power balance in the Middle East, as China will be further consolidated in the region. The US’ preponderance in the Middle East cannot be kept at the present level when China and Iran fully implement their cooperation project.
One of the most important components of the deal is the construction of facilities in Iran within the BRI framework. The upgrading by Iran of two Indian Ocean harbors — Jask and Chabahar — in cooperation with China has major regional implications. Chabahar was going to be linked by train to the eastern Iranian city of Zahedan and from there to India. New Delhi, under US pressure, slowed the implementation of the project and this component was ultimately deleted from the BRI, thus depriving India of an important alternative route.
India’s decision has also increased the importance of what is called the BRI’s “golden ring,” consisting of China, Pakistan, Russia and Turkey, as traffic will shift toward the Central Asia-Middle East route.
When the transport infrastructure from major Iranian industrial centers to Jask and Chabahar is completed, Iran will gain the leverage of harassing the passage of shipping through the Strait of Hormuz, thus negatively affecting inbound and outbound traffic in the Gulf.