The Iranian-Chinese Agreement and its Strategic Repercussions

Mohamed Fayez Farahat | 30 Aug 2020

On 25 June 2020, the Iranian government approved a draft agreement for a comprehensive strategic partnership with China for a period of twenty-five years. President Hassan Rouhani assigned Foreign Minister Muhammad Javad Zarif to take the executive measures to sign the agreement. Since that date, a wide debate has arisen over the content of this agreement, the main motives behind it, and its expected strategic implications.

The intensity of this controversy is attributable to the nature of the current stage in Sino-US relations and Iranian-US relations, on the one hand, and the nature of the internal conditions in Iran, on the other hand, as well as the existence of models for relatively long-term Chinese strategic partnerships with other countries on the "Belt and Road" path. This was followed by the transformation of those countries into regional hubs or a Chinese support point. The most prominent model in this context is the case of the Sino-Pakistani partnership, which opens the way for the possibility that the Sino-Iranian relations would simulate this model.

The content of the agreement

The Iranian government has not yet announced the content of the agreement in detail. However, many international and Iranian reports, in addition to a leaked draft in Persian,[1] refer to huge concessions that China would obtain under the agreement, which covers a wide list of areas.

According to those leaks, the agreement includes China's investment of 400 billion dollars in various Iranian economic sectors during the term of the agreement, i.e. an average of 16 billion dollars annually, of which nearly 280 billion dollars would be invested in the Iranian oil, gas and petrochemical sectors. A large portion of those investments would be pumped during the first five years. As for the infrastructure sector, it would receive nearly 120 billion dollars.[2] The agreement also includes facilitating the entry of Chinese investments into the mining sector due to the lack of necessary technologies for the Iranian government to exploit the deep mines.

Furthermore, according to those leaks, China will enjoy access to oil imports from Iran below market prices, the possibility of deferred payment of up to two years, in addition to the possibility of payment in the Chinese local currency (yuan), which is a matter of mutual benefit for both sides as it increases the chances of converting the Chinese local currency into an international currency and a tool for fulfillment and settlement of international transactions. It would also enable Iran to avoid dependence on the US dollar.

The agreement also envisages the joint development of military industries, the exchange of intelligence, and joint military exercises. Some Iranian media reports said that the Iranian government has ceded the island of Kish to China. However, regardless of the accuracy of those reports, the agreement most probably gives China a great opportunity to access Iranian ports. According to many reports, the agreement allows the presence of 5,000 Chinese security personnel to protect Chinese facilities and projects inside Iran, although some Chinese sources have denied this.

Aside from the content of the draft, it is not unlikely that there are some confidential provisions that would not be made public.

Interests of both parties to the agreement

This agreement is the result of the successive developments in Sino-Iranian relations, and the "Pivot to the East" policy that was adopted by Iran some time ago. However, this does not negate the fact that the recent agreement constitutes a significant turning point in the relations between the two countries in a manner that raises many questions about the motives and the interests of the two parties from signing such an agreement.

1. Iranian interests and motives

There are a number of Iranian motives and gains expected from the agreement, most notably the following:

A. Saving the Iranian economy

It is not possible to understand Iran's decision to sign the agreement at this time in isolation from the crises afflicting the Iranian economy as a result of the policy of "maximum pressure" practised by the administration of US President Donald Trump against the Iranian regime, which aims to bring Iranian oil to the point of "zero exports." This policy has achieved great success, which led to a sharp decline in the performance indicators of the Iranian economy.

This US policy coincided with Iran's exposure to a number of other crises, the most prominent of which being the killing of Qasem Soleimani, commander of the Quds Force of the Iranian Revolutionary Guards Corps (IRGC) on 3 January 2020. Soleimani was one of the most important makers and implementers of the Iranian regional policy in a number of neighboring countries. This was followed by the incident of the downing of the Ukrainian plane on 8 January 2020 and Iran’s transformation into a regional epicentre of the Covid-19 pandemic.

All those problems led to a major shake in the legitimacy of the Iranian regime. In this context, the announcement of this agreement came as a lever for saving the Iranian economy by trying to secure the flows of Iranian oil exports to the second largest economy in the world, and to secure the flow of Chinese investments in a number of Iranian economic sectors, in a way that allows the regime to speak of an important achievement and of dealing an important "blow" to the US, especially in light of the Iranian regime's weak response to the killing of Soleimani and the operations to contain the Iranian policy in the region.

B. Iran's transformation into a regional centre on the "Belt and Road"

Iran has an important position on the land component path of the "Belt and Road" Initiative, through the "China-West Asia" corridor. This agreement would lead to maximizing Iran's role and position on the Initiative's track, by providing Iran with a great opportunity to connect to regional and trans-regional infrastructure within the framework of the Initiative, including the connection to port and rail networks. According to numerous reports, Iran has obtained Chinese promises to develop the internal railway network, develop the Makran coast on the Sea of ​​Oman, develop the Jask port, and build three free trade zones in Maku, Abadan and Kish Island on the Arabian Gulf.

In this sense, the agreement contributes to transforming Iran into a regional hub on the "Belt and Road", which would not only guarantee huge economic gains for Iran at a stage when the Iranian economy suffers from structural crises due to the current US sanctions package, but also generates strategic gains that are no less important. Deepening the Iranian economy’s connection to the regional and trans-regional infrastructure would create international interests in defending Iran against US policies. This interest may be primarily Chinese at the first stage. However, deepening the integration and connection of the Iranian economy and infrastructure with the other regional centres of the Initiative would gradually be followed by an increase in the volume of international interests in Iran.

2. Chinese interests and motives

There are several Chinese interests behind this agreement, the most important of which are the following:

A. Providing access opportunities to Chinese companies

The importance of this goal for China increases in view of two factors, the first of which is the problem of production overcapacity suffered by the major Chinese companies operating in the fields of infrastructure and related sectors due to the saturation of the Chinese domestic market, and consequently the existence of an urgent need for foreign markets in this area.[3] The second factor is the restrictions faced by Chinese communications technology companies (especially Huawei) due to US policies against Chinese fifth generation (5G) technologies, which also created an urgent need to provide alternative or parallel markets to Western markets. This explains why the agreement included - according to the leaks - Iran's commitment to purchasing 5G technologies from China.

B. Securing Iranian oil flows to China

As previously mentioned, the agreement includes Iran's commitment to ensure that oil is pumped to China at prices lower than international prices. Iranian oil sales to China would generate mutual benefits for both sides, especially if China manages to break the US sanctions imposed on Iranian oil exports.

C. Expanding the circle of Chinese presence in the Indo-Pacific theatre and completing the String of Pearls policy

There is a Chinese strategy that has been in place for years based on access to the largest possible number of sea ports, both through obtaining military concessions (such as the Chinese military base in Djibouti) and economic and commercial concessions. In this regard, China relies on signing the largest possible number of agreements regulating those facilities. Some of the those agreements also included developing the infrastructure in those ports (for example, the Pakistani port of Gwadar on the Arabian Sea). The duration of the Chinese concession contracts in those ports ranged between 10 and 99 years. Ports associated with the Indian Ocean included Gwadar (Pakistan), Kyaukpyu (Myanmar), Obock (Djibouti), Hambantota (Sri Lanka), and Feydhoo Finolhu (Maldives).[4]

In this sense, China's access to Iranian ports has become an important link within this strategy. The agreement included ensuring that China had access to Iranian ports, mainly the Jask port near the Strait of Hormuz on the Arabian Gulf. In addition to the strategic importance of the Chinese presence in Jask to protect Iranian oil flows through the Strait of Hormuz, it has another symbolic significance in terms of its proximity to the headquarters of the US Fifth Fleet in Bahrain, with what this represents in terms of ending the US monopoly of the international presence in the Arabian Gulf.

Strategic implications of the agreement

The strategic implications of the agreement are still the subject of intense debate between two main points of view. The first argues that the agreement reflects a part of important strategic shifts in Chinese policy towards the global system and regional policies, and represents an expression of a specific shift in that policy towards the Middle East region, from a traditional policy based on the priority of economic interests and policies to a new policy that gives importance to strategic and security interests alongside economic interests and policies. This assumption is reinforced by the timing of the announcement of the agreement, and its coincidence with the trend of Sino-US relations towards a stage of polarisation and overall confrontation in various fields. According to that assumption, the agreement would have important strategic repercussions, be this at the level of relations between the US and China, the level of Arab-Iranian relations, or the level of the military balance in the region.

On the other hand, the second view advocates that the agreement does not reflect a strategic shift in Chinese policy towards the region, does not go beyond the limits of China's numerous other strategic partnerships with other countries in the region, and is therefore still of a "tactical" nature.

Below is a discussion of the above two views.

1. The agreement as a planned strategic shift in Chinese policy

According to this trend, and assuming that the agreement reflects a strategic shift in Chinese policy, the agreement will have a set of important strategic implications, the most important of which are the following:

A. The transformation of the Middle East region into an arena for the Sino-US confrontation as a result of the direct Chinese presence in the Gulf region, or as a result of the expected arms deals between China and Iran. According to some reports, the two sides are preparing for a major arms deal, which explains the rejection by China – along with other powers – of the draft resolution extending the ban on Iranian arms imports within the United Nations Security Council (UNSC) in mid-August 2020.[5] Therefore, apart from the economic goals of the two parties to the agreement, the latter is not far from China's endeavour to challenge US hegemony in the Gulf region. This analysis is based on some important phrases contained in the agreement, according to the drafts that have been leaked, such as stipulating that the two parties are determined to implement the agreement "in the face of pressure from a third country", in a clear implicit reference to the US and to the US sanctions package against Iran, considering that the sanctions are one of the important obstacles to implementing the agreement.

B. The region’s entry into the stage of rebuilding the existing axes and alliances. In this case, many countries in the region, especially the Arabian Gulf states, are expected to rethink the nature of their relations with China, especially if those countries reach a final strategic assessment that the Sino-Iranian relations would result in imbalances in the balance of power in the region and strengthening the "Iranian threat" to regional security. This trend may also be strengthened in the event that the US adopts a policy of containing Chinese influence in the region or strengthening US axes and alliances.

C. Strengthening Iran's strategic position vis-à-vis the US in a way that may negatively affect Trump's chances of success in the presidential elections in November 2020. The signing of the agreement would promote the notion that the US deterrence policy and the policy of "maximum pressure" have failed to prevent Iran from taking the important strategic step of forming an alliance with the most important strategic rival of the US and allowing that rival to have a direct presence in the Gulf region, where the US enjoyed direct military dominance and presence. Even in the event that the US is forced to sit at the negotiating table with Iran, those developments would strengthen the position of the Iranian negotiator in any possible negotiations.

2. The agreement as a tactical measure that does not constitute a strategic shift in Chinese policy

This view advocates that the agreement is politically and analytically exaggerated and that it would not lead to a major change in the level of Chinese-Arab relations in general, and China's relations with the countries of the Gulf Cooperation Council (GCC) in particular. Advocates of this view rely on a number of indicators/arguments to assert that the agreement is not characterized by any special features that distinguish it from other strategic partnership agreements between China and the countries of the region. Thus, it would not have significant strategic repercussions. The most important of those arguments are summarized as follows:

A. China is aware of the sensitivity of the Iranian issue to the GCC countries, with which China has important interests, given that it has strategic partnerships with both the UAE and Saudi Arabia. China is not expected to risk sacrificing those important partnerships or interests for the sake of aligning itself with one party, which is Iran.

The important Chinese relations with Israel at the military and economic levels should also be taken into account, especially after the signing of the "Comprehensive Innovation Partnership" agreement between the two countries in March 2017,[6] and considering that the Chinese company Shanghai International Port (Group) (SIPG) gained in 2015 the rights to operate the Israeli Haifa Port for a period of 25 years, starting from 2021.[7] Therefore, China is not expected to take its relations with Iran to a level that would negatively affect its interests with Israel which pays great attention to the Iranian issue and classifies Iran among the main sources of threat to Israeli national security.

B. The existence of a consistent Chinese policy based on refraining from getting involved in any foreign conflicts unless they were associated with a clear and direct threat to Chinese interests. Until now, this type of threat is still concentrated in the Asia-Pacific region, specifically in the East China Sea and the South China Sea, in addition to Taiwan. Chinese writers point out that one of the established Chinese principles is that even in the presence of a common enemy between China and one of its allies or partners, China adheres to the Maoist principle (in reference to Mao Zedong) that each side should fight that enemy in its own way. This means that China would not confront its rivals directly in areas where those rivals have a strategic advantage, while it tends to adopt an offensive stance in areas where it has strategic advantages or low strategic costs. According to this principle, the optimal Chinese policy in the Middle East continues to be based on the avoidance of getting involved in any direct confrontation with the adversaries. Hence, the relationship with Iran does not go beyond considering Iran as one of the "harrassment" tools adopted by China against the US in the region.[8]

C. The experience of Sino-Iranian relations since the start of the US sanctions package on Iran and the beginning of the implementation of the "maximum pressure" policy provides another evidence of the ceiling to which Chinese support for the Iranian regime can go. In contrast to the Iranian bet, there has been a huge decline in the volume of trade relations between the two sides, including oil trade. Trade between the two countries in March 2020 reached its lowest level in twenty years, and many Chinese companies withdrew from Iran. Another important indicator of the modesty of mutual expectations is that after the signing of the nuclear agreement in 2015, and contrary to Chinese expectations, Iran greatly bet on attracting European and Western investments in general.[9]

D. The negotiations over the agreement do not go back to the deterioration stage in US-Iranian relations, and were not directly related to the US withdrawal from the nuclear agreement in 2018. In fact, they date back to 2016, that is, after the signing of the nuclear agreement, the improvement in Iranian relations with the West, and the lifting of sanctions imposed on Iran. Specifically, the negotiations started after the important visit by Chinese President Xi Jinping to Iran in 2016. In other words, the draft agreement was linked more to the improvement in Iranian-Western relations than to the deterioration in those relations. Therefore, it can be said that the agreement is not so much part of managing conflictual relations through China as it is part of the process of employing the improvement in Iranian-Western relations and benefiting from it.

The future of the agreement

Despite the expected Iranian gains from the agreement, it still faces many challenges, mainly the existence of internal opposition, including on the part of symbols of the conservative movement, including former President Ahmadinejad who argued that the Iranian government "sold" Iranian sovereignty to China. Reza Pahlavi described it in a tweet on Twitter website as a "shameful deal".[10]

This opposition is not just based on the size of the concessions to China included in the agreement. It is also based on some provisions in the agreement, such as the stipulation that “China will ‘pay attention’ . . . to the way Iran spends the proceeds from oil sales", and that “China expects Iran to use its oil receipts in an ‘optimal way’".[11] These ambiguous phrases raise controversy about the possibility that China would interfere in the way those proceeds are spent if it sees at some point that those proceeds are directed to items of spending that do not correspond to Chinese interests or would affect Iran's internal stability in a way that may negatively affect Chinese investments.

The issue takes on further dimensions, considering that perhaps the Chinese side may not have been the originator of this text, but rather the Iranian Presidency and Ministry of Foreign Affairs, which are the two main parties that negotiated the agreement with China. In this context, the goal would be to place restrictions on the possibilities of the domination by the IRGC over those proceeds in order to prevent channeling them to the foreign projects of the IRGC, represented by the Iranian arms in the region inside Iraq, Syria, Lebanon and Yemen. This may be in the common interest of both sides (the Iranian Presidency and China), given the existence of a Chinese interest in not involving Iran in regional confrontations that may increase the chances of putting pressure on China to intervene in the interest of Iran. In this case, the agreement is expected to spark a dispute at a later stage between the Iranian Presidency and Ministry of Foreign Affairs on the one hand, and the Supreme Leader and the IRGC, on the other hand, over how to use the financial revenues of the agreement.

Some also believe that the size of Chinese financial flows is not proportional to the size of the concessions that China would obtain under the agreement, nor is it commensurate with the size of Chinese needs of foreign direct investment (FDI). According to the Chinese development plan, in order to achieve an annual growth rate of 7 percent every year, the Iranian economy needs to pump investments ranging between 70 and 100 billion dollars in various sectors, at least half of which would be FDIs. This means that the Iranian economy needs an FDI volume of nearly 40 billion annually, or nearly 1,000 billion dollars over the next 25 years, a figure that far exceeds the Chinese promises according to the agreement.[12]

Conclusion

The Iranian-Chinese agreement continues to be the subject of intense controversy due to the fact that its provisions have not been officially announced. There is also controversy over its strategic implications, and whether it constitutes a strategic shift in Chinese policy towards the Middle East, or only a tactical move in light of the current stage in Sino-US relations. In all cases, it can be said that there are still many controls that prevent the agreement from turning into a threat to Chinese relations with the rest of the countries of the region, mainly the Chinese interests with the GCC countries and with Israel.

Moreover, the experience of Sino-Iranian relations during the stage following the signing of the nuclear agreement in 2015, or after the US withdrawal from the agreement in 2018, indicates that the mutual bets between the two sides were misplaced. Hence, the improvement of Sino-US relations or Iranian-US relations would lead to reducing the strategic repercussions of the agreement and may limit them to the economic and trade aspects.

Endnotes

[1] To review this draft, see the following link:

https://static1.squarespace.com/static/54db7b69e4b00a5e4b11038c/t/5f0a3b017adc097c9945645c/1594506439567/China_Iran_Document.pdf

[2] Shireen T Hunter, “How Iran-China deal could alter the Middle East's balance of power”, Middle East Eye, 14 July 2020. https://www.middleeasteye.net/opinion/how-iran-china-deal-could-alter-middle-easts-balance-power

[3] Dr. Efstratios Athanasiou, “The Overcapacity Problem of China”, Management of Innovative Business, Education & Support Systems (MIBES), MIBES 2011- Oral, pp. 292- 293. http://mibes.teithessaly.gr/proceedings/2011/oral/22.pdf

[4] For more details, see: Richard Ghiasy, FEI SU & Lora Saalman, “The 21st Century Maritime Silk Road: Security Implications and Ways forward for the European Union”, SIPRI & Friedrich Ebert Stiftung, Stockholm, June 2018, p. 6. Available at: https://www.sipri.org/sites/default/files/2019-10/the-21st-century-maritime-silk-road.pdf

[5] Michael Schwirtz, “U.N. Security Council Rejects U.S. Proposal to Extend Arms Embargo on Iran”, The New York Times, 14 August 2020. https://www.nytimes.com/2020/08/14/world/middleeast/UN-Iran-embargo.html

[6] Consulate General of Israel in Chengdu, “China-Israel Comprehensive Innovation Partnership”, 21 March 2017. https://embassies.gov.il/chengdu/NewsAndEvents/Pages/compre.aspx

For more details on the Sino-Israeli relations, see:

Matan Vilnai, Assaf Orion, Galia Lavi, “Israel and China: Toward a Comprehensive Innovative Partnership”, The Institute for National Security Studies, INSS Insight, No. 906, Tel Aviv, March 19, 2017. https://www.inss.org.il/publication/israel-china-toward-comprehensive-innovative-partnership/

[7] Avi Bar-Eli, “Chinese Company to Run New Haifa Port… Shanghai International Port Group was sole bidder for 25-year contract”, Haaretz, 24 March 2015. https://www.haaretz.com/israel-news/business/.premium-chinese-group-to-run-haifa-port-1.5341712

For more details on the Sino-Israeli relations, see:

Shira Efron, Howard J. Shatz, Arthur Chan, Emily Haskel, Lyle J. Morris, Andrew Scobell, “The Evolving of Israel-China Relations”, Rand Corporation, Published by the RAND Corporation, Santa Monica, Calif., 2019. https://www.rand.org/content/dam/rand/pubs/research_reports/RR2600/RR2641/RAND_RR2641.pdf

[8] See: Sheng Zhang, “The 25-Year Agreement between China and Iran: A Continuation of Previous Policy”, The Washington Institute, Fikra Forum, August 3, 2020. https://www.washingtoninstitute.org/fikraforum/view/25-year-agreement-china-and-iran-foreign-policy

[9] Ellie Geranmayeh, “A pragmatic partnership: Why China and Iran try to collaborate”, European Council on Foreign Relations, Commentary, 17 July 2020. https://www.ecfr.eu/article/commentary_a_pragmatic_partnership_why_china_and_iran_try_to_collaborate

[10] In his tweet on 7 July 2020, Reza Pahlavi says: “Citizens, the regime seeks, through a 25-year-long shame agreement with China, to seize the state’s resources and bring a foreign army to the soil of our homeland. Starting from displaying Chinese artifacts as if they were homemade to concluding the shame agreement, all of this falls within the framework of the policy of concealing and ignoring your rights, O people, by the ruling thieves who do not belong to the Iranian people and work against it”. See the Persian text of the tweet at the following link: https://twitter.com/PahlaviReza

[11] Quoted from: Ofira Seliktar and Farhad Rezaei, “The Iran-China 25-Year Plan: A Preliminary Assessment”, The Begin-Sadat Center for Strategic Studies, BESA Center Perspectives Paper No. 1,653, July 21, 2020. July 21, 2020. https://besacenter.org/perspectives-papers/iran-china-25-year-plan/

[12] “Chinese investments worth 400 billion dollars in Iran: Iran’s pivot to the East: what is the story of the 25-year-long Iranian-Chinese cooperation document?”, Aftab website, 10 Tir 1399. Available at: https://aftabnews.ir/fa/print/658549

 

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