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Business & Geopolitics: The China-Iran strategic partnership

As summed up by the New York Times, “China agreed to invest $400 billion in Iran over 25 years in exchange for a steady supply of oil to fuel its growing economy under a sweeping economic and security agreement signed on Saturday.

The partnership was signed by China’s Foreign Minister Wang Yi and his Iranian counterpart Jawad Sharif, at the conclusion of the former’s two days stay in Tehran – part of a regional trip including Turkey and Saudi Arabia. According to the New York Times, “it would vastly expand Chinese presence in banking, telecommunications, ports, railways and dozens of other projects. In exchange, China would receive a regular – and heavily discounted – supply of Iranian oil over the next 25 years.

The 18-page draft document outlining the partnership also calls for joint military training and exercises, joint research and weapons development and intelligence sharing. This moves the China-Iran relationship one step closer to a fully fledged military alliance. Here it is important to recall that Iran already enjoys an “Observer State” status at the Shanghai Cooperation Organization (SCO) – a multilateral economic and military Eurasian “defensive alliance”, co-headed by China and Russia. As such, Iranian President Hassan Rouhani participated to the physical SCO summit held in Bishkek in 2019 and to the virtual summit held in 2020 under Russia’s coordination. According to different sources, Iran is actively striving to become a full member of the SCO.

By abrogating the JCPOA, the nuclear accord signed by his predecessor Barack Obama in 2015, and by imposing harsh sanctions on the Oil exporting country, the former US President Donald Trump left no choice to Iran but to hasten its pivot away from the Western powers and to consolidate a strategic alliance with China, which has been in the making for over a decade. As a clear rebuking of the Biden Administration’s phased rapprochement and trust rebuilding process with Iran, China has insisted on the multilateral nature of the JCPOA. Indeed, as reported by the Chinese Ministry of Foreign Affairs, following the sign-up of the China-Iran comprehensive strategic agreement, the Iranian nuclear agreement is “not a revolving door.” It has also emphasised that “the United States should reflect on the damage to regional peace and international stability caused by the withdrawal of the comprehensive agreement, reflect on the losses it has caused to relevant countries, remove unilateral sanctions on Iran as soon as possible“.

For the Islamic Republic of Iran and its military-theocratic regime, this partnership provide a much needed lifeline, at a time when the country has to deal with a years-long multi-dimensional crisis, which has only been exacerbated and amplified by the Covid-19 pandemic. As a matter of fact, as reported by the FT, earlier Chinese endeavours and announcements in the Iranian oil sector have proven disappointing. But the deal would unlock much needed technology transfers and investment in other critical sectors to achieve economic diversification from oil, ranging from land-based and sea-borne transportation infrastructure to nuclear power (for now Iran has only one nuclear plant that was built by the help of Russia), telecommunications (broadband cables, 5G networks, satellite-based geo-localisation) and financial services.

As for the latter, Tehran, which has tolerated the development of a homegrown crypto-mining industry (as we have analyzed in a previous premium post) – partly as a way to bypass US sanctions – could be one of the main international early in-takers, alongside Russia, of the digital yuan – a disruptive financial and monetary byproduct of the “Belt and road initiative”.

From the Chinese perspective, this long term oil supply agreement and broader strategic partnership with Iran makes sense, especially following Donald Trump’s spectacular turnaround from the established tenets of the US-China relationship since the Nixon era, on the ground that China was no longer a developing nation-continent which had to be supported economically in exchange of an access to its huge consumer market and political transformation, but a superpower whose rise has entrenched the power of its authoritarian regime.

In this regard, it should be reminded that a constant, if not publicly stated, strategic objective of China’s “Belt and Road initiative” is to secure China’s long term access to energy and other much needed natural resources, by building a necklace of advanced port infrastructures, trade and military outposts alongside the East-West maritime route that stretches from the East and South China Seas down to the Persian Gulf and to shores of Eastern and Southern Africa.

Implications of the China-Iran partnership for markets:

In the short term, the most probable outcome is to put downward pressures on oil prices as Iranian oil supply and exports will recover faster than expected to their pre-sanctions level and could challenge OPEC+ efforts to balance the oil market. This comes at a time when there are growing tensions among OPEC+ members, not the least between Russia and Saudi Arabia, which have fundamentally divergent long term economic and geopolitical interests.

In the medium to long term, the China-Iran partnership could lead to a broader rebalancing of the balance of power in the Middle East, which is increasingly becoming a new playground for the intensifying US-China strategic competition. As a result, (bi)polarization in this already fractured and unstable region would heighten between a Pro-China camp and a Pro-US camp echoing developments last seen during the US-Soviet Cold war. For now, it is clear that the Beijing-Moscow-Tehran axis is cementing itself in the face of a waning Washington-Riyad axis and an assertive but fragile Turkey.