China and Iran Deepen Ties
A recent report in the Petroleum Economist provided some confidential details about the comprehensive strategic partnership agreement that Iran and China signed in 2016. The Iranian and Chinese foreign ministers met at the end of August to hammer out some of the accord’s details.
According to the reporter’s source, China will make substantial investments in Iran’s energy, transportation, and manufacturing sectors — some $400 billion in the deal’s first five years. That figure could grow in subsequent periods. China would get several benefits in return.
- Chinese firms would have the first right to bid on any new or stalled Iranian oilfield development projects;
- China would provide 5,000 security personnel to protect Chinese projects (i.e., a military presence);
- China would buy hydrocarbons from Iran at an 18–20% discount to benchmark prices;
- China could pay either in yuan, or in the currencies of Third World countries it has accrued from business ventures in Africa and Central Asia (i.e., no U.S. dollars involved in the transaction).
The deal involves Russia, since it would link Iran to the “New Silk Road” networks that China is building through several Central Asian states that Russia regards as being within its sphere of influence.
Besides the immediate economic advantage of helping Iran escape from the vice of U.S. sanctions, the deal also cements Iran’s relationship with two of the five permanent members of the U.N. Security Council, China and Russia (the others are the UK, France, and the U.S.). France invited Iran’s Foreign Minister to the August G7 summit, suggesting that France could also act as an Iranian ally on the Council.
Investment implications: Although this news could cause some commentators to begin discussing potential challenges to the hegemony of the U.S. dollar as a global reserve currency, we strongly disagree. The deal more smacks of desperation on Iran’s part, and calculation on China’s part to take advantage of that desperation. In accordance with the saying that “there is no honor among thieves,” we suspect that Iran, China, and Russia’s willingness to work together is purely transactional. China will not open its financial system in the foreseeable future, a move which would be essential to any rise of the yuan as a global currency. Russia is economically weak and geopolitically isolated, and Iran is a regionally belligerent pariah state. While this agreement may provide Iran some economic relief (if it goes through and as long as it lasts), we do not see that it has profound geopolitical significance.
