Does Iran’s Economic Fate Depend on a Lifeline From China?

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Yves here. I don’t know enough about the structure of the Iranian economy to assess whether oil export revenue is as critical as this article suggests. Iran clearly needs foreign currency (exports) to buy imports like pharmaceuticals and any critical materials and products they don’t produce domestically…like chips.

I was under the impression that Iran had become pretty autarchical due to having been under sanctions for so long. But it may still have enough import dependence to prevent it from simply net spending. If the sanctions have indeed meaningfully reduced domestic productive capacity, “printing” would produce inflation pronto. The Western press says yes. However an academic who visited the country in the last year (but before the latest round) said they didn’t see any signs of distress during several weeks there when he went about freely (and this individual spends most of his time in developing economies).

By Vijay Prashad, an Indian historian, editor and journalist. He is a writing fellow and chief correspondent at Globetrotter, a project of the Independent Media Institute. He is the chief editor of LeftWord Books and the director of Tricontinental: Institute for Social Research. He has written more than twenty books, including The Darker Nations: A People’s History of the Third World (The New Press, 2007), The Poorer Nations: A Possible History of the Global South (Verso, 2013), The Death of the Nation and the Future of the Arab Revolution (University of California Press, 2016) and Red Star Over the Third World (LeftWord, 2017). He writes regularly for Frontline, the Hindu, Newsclick, AlterNet and BirGün. Produced by Globetrotter, a project of the Independent Media Institute

It’s hard to predict what will happen in the oil market as the U.S. sanctions on Iran tighten. For now, it looks like India, Japan, South Korea and Turkey will hold off from buying Iranian oil. These countries—with China—had been the main sources of Iran’s foreign exchange. It is unlikely—at the present time—that India, Japan, South Korea and Turkey will break the U.S. siege on Iran. They have made it clear that they do not want to rattle the U.S. cage. Request for new waivers from the U.S. came to naught. India’s government had said that it would reassess the purchases of cheap Iranian oil after the elections. It is likely that India will restart some buys, but certainly not enough to prevent economic collapse in Iran.

As the May deadline for the U.S. sanctions loomed, these countries bought vast amounts of oil from Iran to create their own buffer stocks. Revenues from the export of oil reached $50 billion for the Iranian financial year of 2018-19 (ending March 20). The oil sector contributed to 70 percent of Iran’s exports. This income is essential for running Iran’s government and paying its 4.6 million employees. The cost of the government is roughly $24 billion. With the collapse of sales to India, Japan, South Korea and Turkey, Iran will have a very difficult time raising revenues to maintain its economy. The National Development Fund and the hard currency reserves have already begun to be depleted, with dollar holdings now in the tens of billions.

New Silk Road

Tehran has long been hoped that China would continue to buy Iranian oil and prevent the meltdown of Iran’s economy and its government. There are two reasons why China would want to ignore U.S. sanctions and continue to buy Iranian oil. The first has to do with the fact that Iran’s oil is cheap and of a quality that Chinese refiners prefer. The second has to do with Iran’s crucial location along the line of China’s Belt and Road as well as its String of Pearls initiatives. Chaos in Iran or a government in Tehran that is pliant to the United States would be unacceptable to Beijing. Roads, trains and pipelines—the infrastructure of the Belt and Road Initiative—are to run from the Chinese territory through Central Asia into Iran and then outward toward West Asia and—via Turkey—into Europe. Iran’s centrality to this project should not be underestimated.

In the first few months of 2019, China bought about half of Iran’s crude oil exports. It has become a crucial pillar for Iran, whose diplomats say quite openly that if China no longer buys Iran’s oil or invests in Iran, the problems for the country will be grave. Massive oil buys from China in the weeks leading to the end of the U.S. waivers are, however, no indication of the continuation of this relationship. Chinese oil companies put in large orders to stockpile oil in anticipation of the cuts. Oil analysts suggest that the two major Chinese oil importers—China Petrochemical Corporation (Sinopec) and China National Petroleum Corporation (CNPC) have not put in any buys since the U.S. waivers expired.

Why China Is Not Buying Iranian Oil

China—the world’s fastest-growing consumer of oil—continues to buy oil from the United States—the world’s fastest-growing producer of oil. These two countries are locked in a trade war, with tariffs rising on a raft of products from steel to soybeans. China has not placed any tariffs on U.S. crude oil imports, but it has reduced its purchases of U.S. oil by 80 percent. Despite China’s withdrawal from the U.S. oil market, it has not closed the door on future purchases. Meanwhile, China has increased its oil purchases from Saudi Arabia by 43 percent in April. There is every indication that China will continue to increase its buys from the kingdom during the course of this year—to substitute for Iranian oil and, perhaps, for U.S. oil. China has also been slowly increasing its natural gas imports from Australia, a tendency that is expected to rise.

New surveillance technology of tankers, low oil prices and more constraints on settling bills have made it difficult to smuggle oil out of Iran. Last year, smuggled oil out of Iran totaled a minuscule 0.3 million barrels per day. This is not enough to compensate for the oil purchases stopped by East and South Asian countries. U.S. sanctions, in this climate, have made tanker owners and insurers skittish about carrying Iranian oil.

Chinese firms are susceptible to this pressure. Nonetheless, the Liberian-flagged tanker Pacific Bravo is said to have loaded Iranian oil after the expiry of the waiver and is making its way to China. As of this writing, the tanker is off the coast of Sri Lanka. When it arrives in China and offloads its cargo, how will the U.S. respond?

Iran-Iraq-Syria

Iran’s Foreign Minister Mohammad Javad Zarif was in Baghdad on May 26. He met with Iraq’s Foreign Minister Mohamed al-Hakim, who said that Iraq’s government does not believe that the “economic blockade”—namely the U.S. sanctions—was good for the region. “We stand with Iran in its position,” Hakim said.

Earlier in May, Iraq’s Oil Minister Thamer Gadhba said that his country would continue to buy Iran’s natural gas—essential for Iraq’s electricity grid. This was despite U.S. pressure to cut natural gas purchases from Iran and to substitute this through a $14 billion deal with U.S. energy firms (including General Electric). Indications show that Iraq will not bend to U.S. pressure at this time. Nor will Iraq block Iranian oil from going to Syria by truck—an energy source that is essential to Syria.

China’s Shield

U.S. troops continue to arrive in the Gulf region, threatening Iran. Zarif and al-Hakim jointly said that this is a dangerous development. Pressure on Iran increases daily.

China has made it clear that it could buy Iranian oil if it can pay in yuan or euros, but it does not want to make Iran part of its dispute with the United States. The appetite to bring Iran onto the bargaining table with the United States does not exist in Beijing. Nor is Beijing willing to provide Iran with a protective shield.

But there are pressures on China not to ignore its own interests in the region. China built a large port in Gwadar, Pakistan, which was intended to circumvent the long transit of goods (and oil) from the Gulf through the Straits of Malacca to the South China Sea. But there are tensions here, as Baloch Liberation Army attacks mount on Chinese targets. One hundred and fifty kilometers west of Gwadar is the Iranian port of Chabahar, developed with Indian assistance. The United States—at a request from the Afghan government—has turned the other way to continued Indian involvement in that port, which includes transportation lines to the Afghan border through Iran. Iran has signaled that it would be interested in giving China a role in this port if India begins to drift away.

China has increased its engagement in West Asia, but not to the point of getting sucked into a conflict that it sees as unfortunate. What this means is that Iran cannot rely fully on China. And yet, China is the only antidote to the U.S. suffocation of Iran.

Global oil production is high, as are oil inventories. Oil prices, consequently, are low and will likely be lowered by reduced global demand. Projected low oil prices should raise more alarms in Tehran, since Iranian external revenues will decline and so too will its importance to Chinese importers. The only reason for China to throw a shield around Iran is to protect the Belt and Road Initiative. Not for the oil.

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14 comments

  1. PlutoniumKun

    I’ve no insights into the internal economy of Iran, but i would have assumed that the victory in Syria will take a lot of pressure off – its support for Assad cost Iran many billions in foreign currency which it can now hopefully wind down, especially as it looks like the Chinese and Qatari’s will step up in providing recovery aid for Syria.

    Another potential major source of revenue is Qatar, which is of course still in conflict with its Gulf neighbours. Qatar shares its vast off-shore gas reserves with Iran with a variety of secret protocols. It would hardly be a surprise if it turned out much of the gas they sell is in fact Iranian. The Saudis are dependent on Qatari gas for their electricity supply, so they could well be inadvertently providing funding for Iran.

    But the biggest problem for Iran is surely consistent low oil prices and the fact that their main customers have built up very large stockpiles. Also, low prices for Irans other exports, such as plastics, fertilisers, copper and aluminium can’t be helping. I believe climate change might also be impacting on their long term prospects for exporting agricultural produce, especially nuts and fruit. Iran future may be as dependent on avoiding drought as it is on rising oil prices.

    Reply
      1. PlutoniumKun

        Yes, sorry, my mistake, out of date information – KSA used to get natural gas from the South Pars field in Qatar prior to the LNG boom, but is seemingly now self sufficient for electricity generation. I was getting my pipelines mixed up.

        Reply
  2. Ignacio

    I wonder whether the aggressive stance against Iran has more to do with blocking the Silk Road Initiative rather than just Iran herself and Iran’s oil. Probably Xi Jinping feels this and will support Iran, in agreement with Prashad’s statement in this sense. I also believe that some EU leaders share this view. Given the importance of Iran this migth result in an acceleration of the development of swift independent payment systems. We will see.

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    1. NotTimothyGeithner

      Xi knows the Silk Road importance, and Obama’s forgotten Pivot to Asia wasn’t a feel good initiative.

      I think US foreign policy types are hold deeply racist convictions. Iran is still the target because Iran dumped our man In Tehran. How dare those little people reject a US approved choice? Combined with an expat crowd of SAVAK every bit as deluded as the Cubans who came after the fall of Batista who have it on “good authority” they are about to be returned to power…I mean democracy is about to flourish, the usual thugs in Washington have what they need to rant and rave.

      As a counter narrative, the problem is Iran is another country I wouldn’t normally worry about. I don’t have a monthly premium I send to Iran or went to Iran’s for school when I was a kid. Naturally only the SAVAK narrative gets pushed. Like anything, my guess is this is a bit of a last hurrah. 1979 was so long ago.

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    2. PlutoniumKun

      I think part of the justification for a hardline on Iran is indeed to block the Silk Road initiative, but its a clumsy and stupid one if that’s the case. You could argue that a more open Iran, trading freely with Europe and the US on its own terms would be much more cautious about being used as a transit hub for China. But Iran really has very little choice now but to make itself indispensable to China.

      From what I understand from the business media, it seems the US really is taking a hard line on the EU’s attempt to bypass the Swift system and most European companies are reluctantly falling in line with the sanctions. The EU may be given no choice but to accept the sanctions or overtly challenge them at every level – the latter being unlikely as it would need a unanimity and toughness the EU rarely shows, especially when it comes to the US.

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    3. MyLessThanPrimeBeef

      Xi feels this and will support Iran…

      The whole New Silk Road involves a lot of nations Xi will have to support, if not all the time, many times in the future.

      That will keep Beijing busy…could be opportunities to project power, I guess.

      Reply
  3. Brooklin Bridge

    Interesting how this fits in or contrasts with the recent (and remarkably well written) article on What does it Mean to Live in a Multi Polar World? We May Be About to Find Out. It’s clear from China’s behavior as described in this present article that the United States still has considerable and, given how much it’s been abused, remarkable clout. One can justifiably be boggled that the United States’ indiscriminate weaponization of economic sanctions hasn’t already exerted a devastating price internationally for US credibility that Trump – setting the world ablaze merely to distract his base and keep the virtually insane thugs in his administration happy – could care less about.

    Regardless that Trump is merrily squandering (more blatantly but hardly having a monopoly over recent US Presidents) any residual US credibility in unilateral power being a beneficial force, the suggestion that “Even the historic tendency to focus on state power should be questioned in this moment,” from the Multi Polar article, is well couched as a question rather than an assertion.

    It seems inconceivable that Trump is aware of it, but his self serving conflagrational antics if they don’t set off a major military conflict that could easily spread out of control, may be beneficial in the long run, but we’re not there yet.

    Mention of Russia and it’s reaction is unfortunately missing from the article (or I missed it).

    Reply
    1. Ignacio

      Yes, Trump looks not aware of much which doesn’t fall within his narrow set of interests.Regarding Russia, what I’ve heard is that it has an ambivalent position. In one side Russia fears the US but in the other side migth somehow fear the increasing power of China. Regarding oil they won’t protest high prices if this is a consequence of US politics, but Russia economically depends on Europe so they should be interested on diversification. And Russia’s leadership hate climate change initiatives of course. Just to make things clearer hahahahahahah

      Reply
      1. Brooklin Bridge

        Actually, the points you raise are exactly what would have been interesting to at least touch on in this article.

        Re Russia, I suppose this article is more about oil consuming nations than oil producing ones, but since US hegemony and the apparent lack of push back is so intrinsic to the discussion, it would have been helpful to include some mention of Russia.

        Also, as I look at it, my point that the US as a nation state still has clout can be turned on it’s head and align more with the question mark raised in the Muilti Polar article if one argues that the US instigated conflict with Iran stems more from perceived interests of the oil and fossil fuel industries and that Washington or more specifically puppet Trump, fickle as he is, is simply going along to get along and trying at the same time to use it for his own ends as much as possible.

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  4. Ptb

    I’ve been reading up on the natgas angle (Iran uses its big natgas supply mostly domestically, but this is related)…

    Pakistan seems willing to block the Iran connection for now – the unfinished Peace pipeline (natgas) is an indicator.

    Also in natgas, Asian spot prices collapsed in the past year to the $4 range due to both LNG and pipeline supply racing ahead of demand (import terminals, power plants), and also Japan in the process of reactivating its nuke electric. Asian NG was around $10 when the gold rush started, post Fukushima. This is also part of the story.

    At the same time, much seaborne LNG import capacity is being built in SE asia (Japan a big player in development apparently), due in mid 2020s. Together with Chinese and other NG plants being built to displace oil, this is supposed to drive prices to recover and probably overshoot in 4 years or so.

    For now, the economic pressure on gas importers is unusually low, and pressure on gas exporters is higher. The US is still basically neutral in net import/export, which is the best way to be. It is not good for Iran, since their natgas export will not be developed until this market phase passes. It does make it harder for US energy exports to work as leverage over importers in general (China, India, Pak.).

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  5. RBHoughton

    I think this author is too influenced by the power of money and neglects the power of nationalism and justice. Hardship brings people together in a delightful way, a shared burden and a real sense of “we are all in this together” – the sense that Cameron tried and failed to activate in UK because society had been destroyed by Thatcher. The Iranian people are strengthened by sanctions. I expect Chinese energy purchases will increase when the railway connection is perfected and shipments are no longer exposed to maritime attack by pirates or governments.

    I was glad to see this author characterise the sanctions as a blockade. We need to be straightforward in our terminology and Ron Paul was right to give them their proper name – blockade is an act of war, placing warships off another country’s commercial ports to prevent trade in and out. Lat’s be frank about that.

    Why is the Baluchi Liberation Army focused on attacking China? How does that enhance the prospects of independence for Baluchistan? There has been nothing on this in the western press to my knowledge. It sounds like cover for a gang of crooks. Can anyone help?

    Reply

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