Iran and China have drafted a sweeping economic and security partnership that would clear the way for billions of dollars of Chinese investments in energy and many other sectors.

A principal reason for the deal would have been to negate the isolation and economic squeeze imposed by the Trump administration on account of Iran’s nuclear and missile ambitions.

As detailed in the 18-page NYT report the partnership would vastly expand Chinese presence in banking, telecommunications, ports, railways and several other sectors.

According to Iranian officials and oil traders, in return China would receive heavily discounted supply of Iranian oil for 25 years.

The document goes on to describe military cooperation that would potentially allow China a foothold in West Asia right under the nose of the Americans.

It calls for joint training and drills, joint research, weapons development and intelligence sharing to fight, as is being said, terrorism, drugs and human trafficking and cross-border crimes.

The caution could be on account of the fact that the partnership could create potentially dangerous flashpoints in a new sector in the face of deteriorating relations between the US and China.

Iran’s desperation has pushed it into the embrace of China. Being one of the largest oil producers Iran has much to offer China by way of energy, the latter being the largest importer importing ten million barrels a day last year. It gets 75 percent of its oil from abroad.

The partnership was first proposed by President Xi Jinping during a visit to Iran in 2016.  According to Iran’s foreign minister Mohammad Javad Zarif the deal was approved by President Hassan Rouhani’s cabinet in June.

The document is said to be labelled ‘final version’ dated June 2020. It has not yet been submitted to Iran’s parliament for approval. It has not been made public, leading to suspicions about how much the government could be giving away to China.

Nor have the terms of the deal been made clear by officials in Beijing. The caution could be on account of the fact that the partnership could create potentially dangerous flashpoints in a new sector in the face of deteriorating relations between the US and China.

The Overwhelming Benefits to China from the Deal

The Chinese investments in Iran, which would total up to 400 billion dollars over 25 years, could trigger punitive actions against Chinese firms.

The draft deal with Iran shows that China feels it is powerful enough to withstand US penalty, the advantages accruing to it from the deal far outweigh the effect of any penalties.

For example, India was the third largest crude oil importer in the world in 2018. The country spent an estimated ₹8.81 lakh crore (US$120 billion) to import 228.6 million tonnes of crude oil in 2018–19; China’s annual crude oil imports in 2019 increased to an average of 10.1 million barrels per day (b/d), an increase of 0.9 million b/d from the 2018 average.

China remains the world’s top crude oil importer, surpassing the United States in 2017; In 2012, Iran, which exported around 1.5 million barrels of crude oil a day, was the second-largest exporter among the Organization of Petroleum Exporting Countries.

In the same year, officials in Iran estimated that Iran’s annual oil and gas revenues could reach $250 billion by 2015.In 2018, Iran exported around 650,000 b/d of oil to China, according to S&P Global Platts cFlow data and shipping sources.

Iran must take into account its relations with India, the most important country in the region with close relations and civilizational ties that have linked the two countries through the millennia.

Extrapolating from the above figures and taking for granted that Iran could produce several million barrels per day at the very least, China could potentially save well over 10 to 15 billion dollars a year from substantially discounted oil prices from Iran if not more, especially were the price of oil to rise.

It would give it a huge advantage over other oil importing countries till 2045. (These are back of envelope calculations requiring expert review).

To save repetition the other substantial advantages that China gains from the deal will emerge from consideration under the next heading below.

Most importantly, geo strategically China gains a foothold in Iran with ports on the Arabian Sea and control of the oil flow choke points from the Gulf. The aspect requires a separate paper to study the full ramifications.

What does Iran get from the Deal?

The Iranians are shrewd negotiators. On the face of it since China was willing to break the US embargo and face the consequences the Mullahs should have gone in for straightforward oil for cash deal, depending on the price of oil anything up to 25 billion dollars or more at the prevailing prices.

There would have been reasons for making a more complex deal many of whose trade-offs might never see the light of day.

China’s benefits will further increase because the roughly 15 billion dollars per year pledged to Iran will comprise over 10 billion dollars of infrastructure material, steel, cement and allied materials supplied directly from China’s mills for Iranian infrastructure, benefiting Chinese industry handsomely.

The remainder 5 billion dollars or so could be services, salaries and other disbursals, i.e., not much cash changing hands.

Instead China is likely to have offered weapons technology transfers possibly including nuclear materials as it did in the case of Pakistan. Failing which the deal does not make much sense for Iran.

Were India to get a waiver from the Americans its oil imports from Iran would be substantial. A deal with China automatically puts paid to good relations with India.

Seeing how China has treated its closest and only ally Pakistan in implementing the CPEC (China-Pakistan Economic Corridor) deal as well as the Hambantota deal with Sri Lanka, Iran is unlikely to allow itself to fall into a debt trap.

It will ensure that its relations with China remain one of equals. The reason is that Iran has much more to lose than China.

When President Trump walked out of the nuclear deal without consulting any of the other signatories, the latter continued to back Iran.

They have been doing so till this day. Once the deal with China is ratified France, Germany, Japan and all US allies will cut off with Iran; a very major geopolitical price to pay.

Saudi Arabia and the Arab countries will go in for additional armaments to match anything the Chinese give Iran.

An arms race in the region would be disastrous for all the countries in the region with China watching from the side lines.

In Conclusion

Iran must take into account its relations with India, the most important country in the region with close relations and civilizational ties that have linked the two countries through the millennia.

As late as the nineteenth century the language of Maharaja Ranjit Singh’s court was Persian. When this writer was in Iran* he was told that Farsi-e- qadimi (old pre-Arabised Persian) is preserved more in certain cities in India (Aligarh and Lucknow) than in Iran.

Were India to get a waiver from the Americans its oil imports from Iran would be substantial. A deal with China automatically puts paid to good relations with India.

The consequences of that break will not stop at the Indian border. The Majority of the countries to the East of India – ASEAN, Australia, New Zealand, Japan, Taiwan and South Korea would prefer to see Iran through India’s lens. The picture is unlikely to appear rosy.

And last but not the least it is well on the cards that Mr. Joe Biden wins the elections in November. On becoming President suppose he were to lift the sanctions on Iran along with many other global changes that President Trump has brought about. Where will that leave Iran?

(Synopsis of the reported deal as gleaned from the NY Times report)

*Attending the Imperial Iranian War College in Tehran 1973-74

(Major General Vinod Saighal is a retired Indian Army Officer, and Executive Director of Eco Monitors Society)