30.11.2022

China will not save Iran’s economy

The Donald Trump administration’s desire to strangle Iran economically after exiting the nuclear deal is already yielding first results: European investors are massively refusing to enter into deals with Tehran.

Nevertheless, the Iranian leadership believes that it has a secret weapon in stock: Chinese investments and oil exports to the Celestial Empire, which should compensate for losses from the West.

Given China’s high energy needs and the “trade war” between Washington and Beijing, this may seem like a realistic scenario. However, according to many observers, all this is nothing more than a fantasy. China is indeed capable of slightly mitigating the sanctions pressure on Iran, but it cannot and does not want to become Tehran’s economic savior.

For the Iranian government, the situation is becoming critical: the national currency is rapidly depreciating, dropping to the informal market to 90 thousand riyals to the dollar, which is half its value than at the beginning of the year. Last weekend, the most massive street protests since 2012 were held in Tehran. Moreover, US sanctions will be introduced only in August, Bloomberg points out.

The United States wanted to isolate Iran, but in the end they themselves were isolated. This opinion was expressed by the President of the Islamic Republic Hassan Rouhani. He noted that all the major countries of the world, including Russia and China, condemned the decision of Donald trump to withdraw from the agreement.

The situation is also aggravated by OPEC, which last week decided to increase oil production, which will further increase economic pressure on Iran. The country is not able to increase production, both due to upcoming US restrictions, and because of its decrepit infrastructure. Now that the price of oil is almost certain to fall, Iran will receive far less than much needed hard currency.

But is Plan B enough (the Chinese scenario) enough for Iran to overcome the difficult economic crisis?

There is a wide discussion in Washington on this issue. New US sanctions will not affect the Chinese private sector as much as the European, but only Chinese investment and exports will not greatly help the Iranians.

Recall that after the United States withdrew from the nuclear deal this spring, Iran turned to Europe. In an effort to keep the agreement in force, the leadership of the European Union called on companies not to panic, continue to trade with Iran and invest in its economy. European governments have offered to provide business with special guarantees and ask Americans for an exception for companies doing business with Tehran.

But European companies do not seem to be listening to Brussels. On the investment front, the PSA Group (car maker Citroen and Peugeot) has become the latest company to abandon already planned joint ventures with two Iranian automakers.

As for oil, the French Total also said it would refuse a multi-billion dollar deal with Tehran if it did not receive a special exemption from sanctions from the United States, which is unlikely. About a dozen other European firms have also canceled or suspended trade and investment agreements with the Islamic Republic.

It is true that Iran and China have for some time had rather close relations. After signing the nuclear deal in 2015, Chinese President Xi Jinping announced a 25-year plan to expand economic relations between the countries, which includes a tenfold increase in bilateral trade or up to $ 600 billion. China, for example, could take on the Total deal .

But many experts believe that Chinese investment will not be able to compensate for what Tehran will lose due to a break in relations with the West. So, in order to restore its oil infrastructure and reduce production costs, Iran needs to import advanced technologies available only in Europe and the USA.

In addition, observers doubt that the expected Chinese investment will ever materialize. Larger Chinese companies and banks that are interested in doing business in the US or making deals in dollars will avoid relations with Iran (just like European firms). The so-called extraterritoriality of US sanctions applies to any companies, including Chinese, that carry out operations in dollars, even if these operations are carried out with non-American firms or “daughters”.

Iran will also face serious problems in the oil market. Currently, the Islamic Republic exports about 2.62 million barrels per day. According to the Iranian economic publication Financial Tribune, about 38% of these sales are in European countries. Even if Europe refuses to impose harsh sanctions, its imports will almost certainly decline.

Iran may be able to compensate for some of the losses due to the sale of additional barrels to China (before signing the nuclear deal, it shipped a little less than 1 million barrels per day to Asia). But in any negotiations with the Chinese, Tehran’s lack of viable alternatives puts it at an extremely disadvantageous position.

Reduced oil exports will lead to a decrease in Iran’s foreign exchange reserves and make it difficult to fulfill payment obligations.

To this should be added the internal pressure from the conservative forces of the country, especially the influential Islamic Revolutionary Guard Corps. Supporters of Iran’s tough course are demanding that President Rouhani break all relations with the West and immediately resume the country’s nuclear program.

In this extremely difficult situation, Iran needs urgent foreign investment and reliable markets for the export of its oil. If Tehran hopes that it will receive all this from China, then it is likely to be deeply disappointed.

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