China and the World, Talking Point

Going rogue

Why Beijing walks a tightrope in its relations with Tehran

Going rogue

So we’re friends, then? President Ahmadinejad with Premier Wen Jiabao

Sometimes the propaganda war can backfire. That was the lesson learned by an Iranian news agency late last month. Incredibly it reported a spoof poll from The Onion, a satirical website in the United States, suggesting that most Americans would vote for Iranian President Mahmoud Ahmadinejad over Barack Obama.

Missing the joke entirely, the Fars news agency reported the findings as fact, even noting that the poll showed that “60% of rural whites said they at least respected that Ahmadinejad doesn’t try to hide the fact that he’s Muslim”.

Fars later admitted its error, although with a spikiness reminiscent of certain ‘official’ sections of the Chinese media.

“Although it does not justify our mistake, we do believe that if a free opinion poll is conducted in the US, a majority of Americans would prefer anyone outside the US political system to President Barack Obama and American statesmen,” it told its readers, determinedly.

Iranian media outlets were also in full propaganda mode last month to report on a trip to Iran from Wu Bangguo, China’s chief legislator. Wu is ranked second behind President Hu Jintao in the power structure (confusingly Premier Wen Jiabao is third), so his visit was a weighty one – particularly for a country that isn’t exactly smothered with love from first-tier world leaders. It also came at a time in which Iran is in need of diplomatic support, following a steady tightening of international sanctions since it recommenced uranium enrichment work in 2005.

Despite the pressure being heaped on the Ahmadinejad regime elsewhere in the world, Wu made pledges to deepen Sino-Iranian trade and reaffirmed Chinese opposition to further sanctions or the threat of force in response to Iran’s nuclear programme. While Beijing has expressed opposition to any country in the Middle East developing nuclear weapons, Wu said that it believed in the rights of sovereign nations to use nuclear energy peacefully.

Why is China seen as a key influence in the Iranian crisis?

There are three overlapping sanctions campaigns currently being pursued against Iran by the United Nations, the European Union and the United States respectively. The US action has been the most effective, encompassing a variety of measures blocking foreign firms from purchasing Iran’s oil, banning foreign investment in Iran’s energy sector, and curtailing the sale of gasoline to Iran, which lacks adequate refining capacity.

Iran’s petroleum industry generates about a fifth of the country’s GDP, 80% of its exports and up to 70% of government revenues. But the sector is also in desperate need of further investment. Iran has the third largest proven oil reserves after Saudi Arabia and Canada but its infrastructure is decrepit. And it has major natural gas resources too but they also remain largely undeveloped as the international community shuns Iranian business.

The pressure seems to be building up a head of steam, with the International Energy Agency estimating that Iran’s oil exports have fallen to one million barrels a day since the start of the year, a decline of more than a third. Despite previous denials, the Ahmadinejad government is having trouble disguising the impact, with the president admitting himself this week that the collective effect of sanctions is “a hidden war”. The rial, Iran’s currency, has been in freefall, dropping more than 30% in the last week alone, and bringing demonstrators out onto the streets of Tehran on Wednesday.

The Iranian government sees China as the best way out of its current bind, both as an investor and a customer for its ailing economy. In contrast, if Chinese support was wholly withdrawn, the assumption is that Tehran would be forced to bow to international pressure and suspend its uranium enrichment programme. So China plays a decisive role in the Iran drama.

But haven’t sanctions blocked China from buying Iranian oil?

No, the Chinese are the biggest customer for Iranian crude, buying about a fifth of Iran’s exports last year. Like the other international buyers, China says it needs the supply. Plus there are financial incentives on offer, with the Financial Times reporting in July that Asian customers were being offered free credit periods and lower prices than the Brent benchmarks.

Nonetheless, the Chinese are not flouting the US sanctions legislation, having been granted a temporary exemption from the measures earlier this year, alongside a group of other importers including India, Japan and South Korea. The trade-off is that they have to promise to buy less oil from Iran in the following period. As WiC reported in July, China was one of the last to receive a waiver from Washington at the end of June. This was in large part thanks to a drop in China’s oil imports in the first half, with oil purchases from countries like Angola and Saudi Arabia rising to offset lower Iranian purchases.

Despite this, the Americans warned that they expected to see a “significant reduction” if a further exemption is to be awarded in December, with speculation that Beijing has agreed privately to cut imports by at least 18% to maintain its waiver.

In public, China disputes the right to limit its commercial relationship with Iran in this way.

As yet, it’s difficult to assess whether China will be able to deliver on further reductions, especially as analysts have suggested that Iranian exports wouldn’t have dipped as they did in the early part of the year without a dispute over pricing between Sinopec and the National Iranian Oil Company.

If so, that it will make it harder to find the full reductions in the second half of the year. The June figures also showed a surge in purchases to 632,618 barrels per day. But July and August volumes then showed consecutive declines, dropping significantly, according to figures released by China’s General Administration of Customs last month.

How about the ban on investment in Iran?

Foreign investment in Iran’s energy sector has largely disappeared since sanctions were tightened. But Chinese oil companies have now announced about $120 billion worth of oil and gas contracts with Iranian partners, and PetroChina became Iran’s largest foreign investor in 2009. That has led to talk that Chinese companies have been “backfilling” discarded projects, by stepping in where other firms fear to tread.

But the activity on the ground has been much less impressive than the flurry of newsflow on billion-dollar contracts. That’s especially so after Washington agreed not to sanction China’s pre-2010 activity if no further investment was conducted. Progress at the three best-known Sino-Iranian projects has also been painfully slow as far as Tehran is concerned, with output at the Yadavaran field (where Sinopec is a partner) and at Azadegan (where PetroChina is active) falling significantly short of anticipated levels. The South Pars natural gas project has also proceeded at a snail’s pace, leading Tehran to warn last year that the contract would be cancelled if the Chinese did not meet their obligations. Last month, Iranian officials reiterated the threat, saying they would bring in local contractors.

The Chinese have been blaming the sanctions for the delays, saying they have made it difficult to get the equipment needed to boost oil production. For the South Pars project, PetroChina is also citing trouble getting financing from banks anxious not to be caught up in sanctions themselves.

An alternative explanation is that the Chinese oil firms have been told to hold back by their government. Certainly the US State Department seems to think so, extolling a partial victory last year in the “slowdown” of Chinese involvement in Iran’s energy sector, and claiming that no new upstream investment or refinery construction had been announced since the investment restrictions were imposed in 2010.

But parts of the Iranian media wonders if there are other reasons for the delays, especially at the $4.7 billion South Pars project. The suspicion is that PetroChina is holding off on work while it negotiates a better price for the natural gas that will be produced. Here similarities have been drawn with the oil-pricing disagreement earlier this year, with the claim that Beijing cut back on purchases until Iran acceded to new terms, including the bartering of crude for Chinese goods like trains and oil equipment.

“That’s typical of the Chinese,” an Iranian official told the Dow Jones news agency, before going on to complain that the oil firms know that Iran will find it impossible to replace them if they leave.

What is China’s position on UN sanctions against Iran?

Beijing’s stance is that sanctions rarely work as planned, more often increasing tensions than reducing them. American policy in Iraq in 1991 and 2003 is often offered as evidence: a process starting out with a push for economic measures; then moving to demands for international approvals for the use of force; before concluding with a final phase of military action.

Despite this Beijing has still backed the United Nations sanctions effort – designed to block sales of arms and nuclear technology to Iran – although its critics suggest that it has dragged its feet in approving the measures and enforces them half-heartedly.

But the UN sanctions are already at the outer limit of China’s principle of non-interference in sovereign affairs. Last year it elected not to oppose a UN resolution establishing a Libyan no-fly zone. At the time, the abstention was heralded as a watershed but the Chinese were angered by what they regarded as a more vigorous enforcement of UN action in Libya than originally envisaged. Beijing has since stuck firmly to the non-intervention principle during the Syrian crisis, employing its UN veto three times to block criticism of the Assad regime or other action (such as censures) that it believes could result in armed intervention at a later stage.

But it’s US action that rankles most?

Yes, the Chinese resent being subject to measures drawn up outside the United Nations, especially those demanded unilaterally by the US.

Fortunately, the flare-ups have been kept to a minimum so far, with the most recent in July, when Bank of Kunlun was denied access to the US financial system on charges that it has facilitated transactions with Iranian institutions.

Kunlun, which is a financial institution directly owned and controlled by CNPC, PetroChina’s parent company, denied the allegations, claiming that its dealings with Iranian banks had been conducted in line with UN Security Council resolutions and other international standards.

The Chinese government also slammed the move. “The US side imposing sanctions, in accordance with its domestic law, on a Chinese financial institution has severely violated the principles of international relations and impaired the interests of the Chinese side,” a Foreign Ministry spokesman warned, voicing its “strong dissatisfaction” and “resolute opposition”.

The complaint was similar in January, when another Chinese firm was censured, this time for brokering the delivery of more than $500 million in gasoline to Iran. Zhuhai Zhenrong, a state-owned oil trader, denied the accusations but has been barred from receiving US export licences or applying for loans exceeding $10 million from US banks.

In Zhenrong’s case the punishment was seen as largely symbolic, as it has little US business exposure. But that’s not the case for China’s oil majors who have invested heavily in US energy. Zhenrong’s punishment has been widely interpreted as a shot across China’s bows by US regulators.

Correspondingly, Century Weekly wrote recently about PetroChina’s “balancing act” in Iran, suggesting that the risk of US sanctions has made it much more reluctant to proceed with Iranian projects that are ‘problematic’ – which is to say, don’t deliver immediately profitable returns.

Then there is the wider context of whether China wants to risk its broader pool of investment dollars in the United States, as well as the far greater market for its exports, by pushing its state-owned companies to do more in Iran.

That leaves China trying to straddle two positions: bending somewhat to US pressure by reducing investment from state firms (and perhaps slowing its uptake of Iranian oil), but also refusing to back stiffer action against the Iranians at the UN. To cover its discomfort, Beijing falls back on rhetoric, arguing about the ‘principles’ that curtail non-US companies in Iran.

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