Chinese President Xi Jinping and Iranian President Hassan Rouhani in a file photo. Photo: Facebook

The recent revelation of an agreement between China and Iran to strengthen their economic and security ties has surprised many.

Some find it strange that Beijing should want to add more stress to its already difficult relationship with Washington. Others question the wisdom of Beijing explicitly aligning itself Tehran, which could upset the delicate balance China has worked hard to maintain for itself between Iran and Saudi Arabia.

In fact, China is precisely pursuing deals like that with Iran to build allies among “like-minded” countries to counter what Beijing perceives as an anti-China coalition led by the US. These alliances are more significant than the US thinks, and, equally, more fragile than Beijing might hope.

The deterioration of relations between Beijing and Washington in recent years has forced China to attempt to forge ties with previously undesirable partners. Among states important to the great-power competition and not yet a member of the Western club, Russia and Iran are the two most consequential “friendly forces” for China.

Iran, with its regional influence and ambition in the Middle East, as well as its grievance toward Washington, has become increasingly attractive in China’s grand strategy.

The value and desirability of Iran as an ally for China have been on the rise this year as Covid-19 pushes US-China relations into free-fall.

The “unprecedented complications in the external environment,” as expressed in a People’s Daily editorial, has put Beijing on a direct collision course with many countries, including Australia, India, Canada and Japan, and several in Europe, over a variety of issues – from territorial and maritime disputes to the status of Hong Kong and Taiwan.

As China’s relations with the US and the perceived US-led coalition drop to their nadir, Beijing is seeking out any sympathetic force that can strengthen China’s international standing.

Even before the pandemic, China, Iran and Russia had already demonstrated their propensity to coalesce around a strategic purpose.

Last December, the three hosted their first ever joint military exercise, in the Gulf of Oman. Although the Chinese military justified the exercise as a demonstration of the three countries’ will and capacity to maintain peace and maritime security in the region, the move was widely interpreted as a signal of defiance against the US military in the area.

The China-Iran agreement, insofar as can be determined from material that has been leaked, includes Chinese financing of Iranian infrastructure development in exchange for Iranian crude oil at a concessionary rate.

China has been reducing its oil import from Iran since the May 2019 expiration of the waiver granted by Washington. This reduction accelerated into this year. The drop in Iranian import has happened even as China’s total oil import rose, clocking in at 10.4 million barrels per day in May, a rise of 4.5% on the year.

Coerced by the US, Beijing has reluctantly adjusted its actions according to American sanctions. However, it continues to be massively unhappy with the US for its withdrawal from the Iran nuclear deal.

Beijing does not only blame the US withdrawal and continued sanctions for the rising tension in the region, but also resents the US for the damage it has inflicted on China, especially Washington’s long-arm jurisdiction over Chinese companies doing business with Iran. The ongoing extradition case in Canada of Meng Wanzhou, Huawei’s chief financial officer, originated from the US sanctions on Iran.

In practical terms, although Beijing opposes those sanctions, it remains an issue that Sino-Iranian economic cooperation has not been able to circumvent. If the agreement is implemented, the most likely channel is through the barter system that the two countries long have been engaged in. The system avoids direct financial transactions and have used Chinese products and services to trade for Iranian oil.

Furthermore, there is a long-standing belief that the US is reluctant to put major Chinese financial institutions, such as the Bank of China, and key state-owned enterprises, such as the China National Petroleum Corporation (CNPC), under US sanctions for fear of disruptions to the American economy.

So while US President Donald Trump’s administration has shown unprecedented willingness to sanction Chinese entities for a variety of reasons, Beijing is betting that Washington is not willing to go so far as to put these large institutions under sanctions for a barter trade. China also is betting that a different administration will emerge from the November election in the US, and Beijing might have some leeway to poke without provoking.

Iran evidently is desperate for investment and economic cooperation, while China is vying for partnerships, support and potential allies. The mutual strategic needs create the necessity for the deal. However, whether it will be economically feasible or desirable for either side remains to be seen.

China does not want a repeat of its relationship with Venezuela, where the massive financing it offered Caracas – funds that were supposed to be repaid with crude oil – was not repaid because Venezuela went bankrupt and could not pump out the oil. For its part, Iran does not want to be held accountable for payments in oil for too long a term.

Iran has been particularly wary of being locked into sub-optimal deals with China because of the unfavorable external environment for Tehran. If Iran decides that its relations with the West will improve, stringent terms with the Chinese will only breed grudges and resentment. While the two countries desire, for now, to work together, the relationship will not be trouble-free.

Great-power competition is increasingly dividing the world into two camps. China and Iran, along with Russia, could emerge as the new Axis Powers in the Western narrative.

This article was provided by Syndication Bureau, which holds copyright.

Yun Sun is director of the China program and co-director of the East Asia program at the Stimson Center in Washington, DC. Her expertise is in Chinese foreign policy, US-China relations and China’s relations with neighboring countries and authoritarian regimes.