This week, should high-stakes negotiations between Beijing and the Trump administration fail to produce a breakthrough on trade, blacklisted Iran could stand to benefit from the decoupling.
“The degree to which they [the Chinese] are willing to openly defy the US sanctions is a function of larger US-China trade issues,” said James Dorsey, a senior fellow at the S Rajaratnam School of International Studies and Middle East Center in Singapore.
“The more the US and China move towards ‘decoupling’ – or less interdependence, greater self-reliance and ultimately, perhaps, separate economic worlds – the easier it gets to defy the sanctions.”
The Trump administration broke with the Beijing-backed Iran nuclear accord in May of last year, granting six months notice before sanctions on Tehran’s petroleum sector would be reimposed for a goal of “zero” exports.
Eight governments, including China – long Tehran’s chief oil customer, were granted temporary waivers to import Iranian oil. Those expired in May.
Since then, Beijing has worked to circumvent the sanctions, first publicly via the state-owned Bank of Kunlun. Kunlun announced it would halt those transactions in December, but Iranian petroleum continues to reach Chinese ports.
Iran’s supreme leader, Ayatollah Ali Khamenei, long expressed his lack of trust in the West, even as he begrudgingly accepted the brokering of the Joint Comprehensive Plan of Action in 2015.
But last year, as major European companies like Total ran for the exits before the snap-back of US sanctions, Khamenei issued a stern directive.
“The supreme leader directed the diplomats, the armed forces – all the branches of the Islamic Republic of Iran – that you must go and make our best relations with the East,” said Hesam Razavi, former senior international editor at Iran’s Tasnim news agency.
Of all the eastern powers, from Moscow to Delhi, it is Beijing that is most critical to Iran’s ability to move its oil.
“China is our negotiator,” Razavi told Asia Times in Beirut.
John Kilduff, founding partner at the energy trading firm Again Capital, says that while Tehran’s oil exports have dropped off significantly, China has been allowing purchases by its smaller, less-exposed refineries, and – more critically – building up its stocks for the day after.
The Chinese are estimated to have built up stores of 14 million barrels of Iranian oil, held in “bonded storage,” or a no-man’s land before customs clearance.
“It’s a legal fiction they’ve created […] It’s insured, it’s safe, but hasn’t technically crossed customs yet,” the veteran energy trader told Asia Times by phone.
Those barrels loom large over trade talks between Washington and Beijing, and could even serve as an olive branch from the Trump administration to Tehran, he told Asia Times.
“To the extent there’s any breakthrough or warming between US and Iran, the Chinese have effectively created something of a reserve of millions of barrels of oil which would then be able to cross the threshold and immediately be tapped by the majors,” such as China’s state-owned Sinopec, he said.
And not all of those barrels are stagnant.
“The other thing the Chinese have been doing is letting independent refiners have at it. The so-called teapot refiners are still taking in Iranian crude because they’re not as exposed or can avoid US sanctions,” Kilduff said.
While small refiners are a limited market (most actual purchases are going through Iran’s neighbor Iraq, Kilduff says), the bonded storage serves an additional purpose for Tehran: decreasing the need for costly floating storage.
That capacity, however, is not limitless.
Not rogue yet
While Chinese authorities publicly emphasize their disagreement with unilateral US sanctions, China watchers point out that Beijing is, in practice, circumspect in its dealings with its key trading partner.
“Chinese entities are very careful about dealing with Iran. They have walked away from quite a few deals – they’ve been quite reticent on Iran because they know the consequences,” said Raffaello Pantucci, a researcher at the London-based think tank RUSI.
Chinese exports to the United States totaled more than $550 billion in 2018, according to US government statistics. Beijing’s exports to Iran were fraction of that, at under $20 billion, and officially they have declined drastically since oil sanctions were reimposed.
The US Treasury on September 25 announced sanctions on two units of China’s global shipping behemoth COSCO, effectively threatening the entire state-owned company.
The move, while limited to Cosco Shipping Tanker (Dalian) Co and Cosco Shipping Tanker (Dalian) Seaman & Ship Management Co, sent US importers looking for alternative supply lines.
With China’s global trade dependent on dollars, the sanctioning of COSCO was another reminder of the risk of being shut out of the system.
On Sunday, in what appeared to be a major concession on the part of the Chinese, the state-owned oil company CNPC canceled its participation in the development of Iran’s South Pars gas field – a multi-billion dollar project already abandoned by Total.
The wild card for trade talks, however, is whether Beijing will choose to play the waiting game and postpone any concession until after the 2020 US presidential election.
Should the US economy continue its downturn, it may give the appearance that the Trump administration went too far with its trade war, and offer a new page for Beijing – and possibly a new negotiating partner.