Fanack Home / International Affairs / Why does China keep buying oil from Iran? Look at China and Iran’s long history of political and economic ties

Why does China keep buying oil from Iran? Look at China and Iran’s long history of political and economic ties

Specials- Mohammad Javad Zarif
China’s Foreign Minister Wang Yi (R) meets Iran’s Foreign Minister Mohammad Javad Zarif in Beijing on May 17, 2019. Photo AFP ©AFP ⁃ THOMAS PETER

On May 2, 2019, the United States ended the exemptions from its sanctions on Iranian oil exports, which had been given to eight countries among Iran’s major importers. The waivers were granted in November 2018 for the importers to adapt to the new U.S. sanctions. Those sanctions were re-imposed on Iran after the U.S. withdrew in May 2018 from the Joint Comprehensive Plan of Action (JCPOA). The plan, signed in 2015, lifted the original sanctions in exchange for Iran agreeing to put limits on its nuclear program. The new round of sanctions is quite similar to the ones imposed on Tehran before the JCPOA, that were introduced with the aim of bringing the country to the negotiating table during the Obama tenure. In April 2019, the Trump administration took the sanctions to their ultimate stage by announcing a total oil embargo on Iran.

To the Iranians, Trump’s move is the equivalents to demanding a total surrender. It would force Iranians to come to a table that would discuss their internal missiles program and regional power, as well as their nuclear program, which the U.S. think should be halted forever—beyond and above international norms and regulations. According to Iranian President Rouhani, Iran is ready for negotiation, but not for surrender.

Iran’s main bet on defying U.S. pressure is whether it can find parties that can help circumvent U.S. sanctions, especially in its oil exports. China is one of Iran’s major importers and seems to eye a strategic interest in supporting Iran’s policy of resisting U.S. maximum pressure. But the question is: to what extend can China support Iran’s resistance?

In the international realm, China is one of Iran’s oldest friends. Their initial ties predate the U.S. history by two millennia. For centuries, Iran was China’s main gateway to reach European markets through the Silk Road. The two countries fell victims to colonial powers and have similar worldviews when it comes to western policies in Asia and the Middle East. That is why the Chinese never espoused western views towards the Islamic Republic. Indeed, even at the initial stage of the establishment of the Islamic Republic, China was soon to recognize it as a potential partner and started working with it accordingly. And during the 1980s, China provided Iran with the much-needed arms that the West denied Iran while providing Iraq with them during the Iran-Iraq war (1980-1988). And while Iran has been under U.S. and western sanctions for much of its post-1979 history, China has continued its economic, military and political relations with Tehran.

In the run up to the JCPOA, China continued its business with Tehran despite the U.S. campaign for “crippling sanctions”. To avoid its banks being sanctioned by the U.S., China tasked a single bank, Bank of Kunlun, with the financing of its business with Tehran. Therefore, China was one of the international actors seen as a violator of U.S. sanctions on Iran. After the U.S. withdrawal from the JCPOA, China criticized the U.S.’ maximum pressure on Iran and sought exemptions from the U.S. sanctions. In November 2018, it was granted one of those exemptions. On May 2, 2019, after the U.S. stopped the waivers, Beijing came clear on its criticism of the U.S. Policy. It declared its intention to keep importing Iranian oil and doing business with Tehran in defiance of U.S. maximum pressure. But why is China doing this, and how much can it help Tehran in circumventing U.S. sanctions?

There are four main objectives seemingly relevant to Beijing’s intentions in supporting Tehran.

Firstly, China’s strategic interest lies with keeping Washington at bay. It is way more rational for Beijing to confront the U.S.’ aggressive policies indirectly. In this vein, Iran appears as an ideal ground to confront the U.S.

Secondly, there is the Chinese economic confrontation with the U.S. and the tariff war that the Trump administration has started against Chinese companies. China knows that any step back would lead the U.S. into stepping up its economic pressure. Therefore, it seems that the Chinese government is not in the mood for abiding by U.S. sanctions on Iran the way Washington expects.

Thirdly, Iran is one of China’s main partners in the Chinese Belt and Road Initiative (BRI) and giving into U.S. sanctions might hurt Iran’s willingness to cooperate with China in the BRI—thereby negatively affecting China’s main economic plan in the Middle East.

And finally, China has a share in Iran’s oil production. The two main Chinese state-owned oil giants, Sinopec and China’s National Oil Company, have invested in two of Iran’s main oil fields and export their production in Iran to China. Any change brought by U.S. sanctions could hurt their economic interests and their contracts with Iran—besides the legal repercussions. Another technical point is that some of China’s oil refineries are designed to process Iranian oil and—provided that China is to give in to U.S. pressure—and cannot easily switch to other sorts of oil.

As the main oil consumer globally, China seems to have no interest in abiding by U.S. sanctions. With U.S. exemptions ending on May 2, 2019, China came vocally against the U.S. ending the waivers and stated clearly that it will continue importing Iranian oil. In addition to its Foreign Ministry’s spokesperson, China’s ex-ambassador to Tehran said that ending the U.S. waivers does not mean that China will end its imports from Iran. In fact, China was the first destination of an Iranian oil tanker after the U.S. putting an end to its waivers—a clear indication of China’s intention to resist U.S. sanctions. Indeed, China’s oil imports from Iran reached a record-high rate of 792,000 barrels per day (b/d) in April 2019—a month before U.S. stopping of its waivers. The figures dropped afterwards, but still China continued importing more Iranian oil than any of Iran’s other consumers. And this situation has a precedent: during the height of U.S. crippling sanctions in 2014, another record of 803,000 b/d in Chinese importations was recorded.

The question that remains is the financing of Iranian oil imports. Again, China has a precedent in that regard. During the crippling sanctions of the Obama administration, China’s National Oil Company established a bank, namely the Bank of Kunlun, dedicated to financing those oil imports from Iran. And though, as expected, the bank was sanctioned by the U.S., it did not do any major international financial interactions with countries other than Iran. As such, sanctions did not stop China’s work with Tehran. Indeed, the Bank of Kunlun can be seen as the model similar to which the European INSTEX mechanism is established—though there is no indication linking them. It is generally admitted that the Chinese Bank of Kunlun is to continue its transactions with Iran, using the Chinese Yuan as a currency, instead of U.S. dollar. Iran’s first oil exports to China after the U.S. stopped its waivers went to the Chinese oil company Petro China, which owns the Bank of Kunlun.

Despite a general admission that China’s imports of Iranian crude are affected by U.S. sanctions, there is no indication to back the supposition that those imports will stop.

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