The belt and road initiative and U.S. sanctions: Pushing Iran into China’s sphere of influence 

By Clayton Cheney

The future of the Chinese-Iranian relationship will be one of the most impactful relationships shaping the geopolitical landscape in Asia. China and Iran have well established relations and, given their current tensions with the U.S., there is reason to believe a strengthening in Sino-Iranian ties is probable. Iran and China oppose the U.S.-led global order, with Iran challenging U.S. hegemony in the Persian Gulf and China challenging U.S. hegemony in East Asia and the Indo-Pacific regions. Both nations envision a multipolar global order with strong support for the principle of non-interference in domestic affairs, as signified by their 2016 Comprehensive Strategic Partnership agreement, which means their geopolitical interests are largely in alignment.

The extent to which China and Iran further develop their economic, security, energy and diplomatic ties will have important enduring consequences for the region, and the Belt and Road Initiative (BRI) will be a significant facilitator for developing these ties. Iran is part of the BRI through the China Central-West Asia Economic Corridor (CCWAEC), which, in addition to Iran, includes Turkey, Uzbekistan, Turkmenistan, Tajikistan and Kyrgyzstan. Chinese investment in Iranian energy infrastructure through the BRI presents unique geopolitical challenges and opportunities. Even as the U.S. withdraws from the Joint Comprehensive Plan of Action (JCPOA) and regional rivalries rage in the Middle East, China sees a lucrative geopolitical opportunity in Iran given its geographic location and abundance of energy resources. Iran can play a central role in the economic and geostrategic objectives that China seeks to achieve through the BRI.

China and Iran envision the BRI as a vehicle to achieve vital national interests, which means both nations will invest significant effort to realize BRI projects in Iran. The CCWAEC will serve as an economic connection to the Middle East and a land bridge to Europe for China, which it views as essential to increasing its economic presence in these lucrative markets. The Chinese objective with the CCWAEC is to establish infrastructure with two endpoints, one in Iran for access to Persian Gulf energy resources and one in Turkey creating land and maritime routes to European markets. From both an energy and an economic perspective, the successful implementation of the CCWAEC would achieve important Chinese geostrategic objectives.

Iran views BRI projects, and Chinese investment in general, as equally indispensable, especially in light of renewed sanctions by the U.S. on its oil sector set to take effect in November. Iran is in desperate need of energy infrastructure investment to bolster economic development, including $134 billion for its upstream oil sector and $52 billion for its petrochemical industry. With many nations and international institutions unwilling to invest in Iran, China and the BRI are one of the few sources that can meet these types of investment demands. China represents a crucial market for Iranian energy exports and goods in general. China is Iran’s largest trading partner and, in 2017, one third of Iranian oil exports went to China. As a result, it is essential for Iran to increase its economic and diplomatic ties with China to ensure it maintains China as a growing energy export market and trading partner.

China has made significant investments in Iranian energy infrastructure, especially through Chinese state-owned energy companies. The China National Petroleum Corporation (CNPC) has invested heavily in the North Azadegan and Yadavaran oil fields and has taken a major stake in developing South Pars gas field. With Iran being a leading global energy producer and China being the global leader in energy consumption, making energy infrastructure cooperation a cornerstone of BRI projects is a common-sense endeavor for China and Iran.

The geographic and economic realities of China and Iran make their interests highly aligned when it comes to promoting Iran as a destination for BRI projects; however, there are challenges to the BRI realizing its potential in Iran. One major challenge is the withdrawal of the U.S. from the JCPOA and renewal of sanctions against Iran. Europe, Russia and China are currently working with Iran to salvage the JCPOA, including through a Special Purpose Vehicleto circumvent U.S. sanctions, but its future is very much in doubt. This has important implications for the BRI and the geopolitical landscape in the Middle East. While the U.S. withdrawal from the agreement does create complications for BRI projects in Iran, the most plausible result is a strengthening of Sino-Iranian economic and energy interdependence.

If the JCPOA completely falls apart, instability in the region could directly threaten the BRI and Chinese strategic interests. The repercussions of the JCPOA dissolution are difficult to predict, but it is likely that it would have a destabilizing impact on Iran and the region as a whole and not just from an economic perspective. A stable regional environment is important to protecting energy infrastructure investments. Iranian and regional stability are largely dependent on Iran normalizing relations with the U.S. and to a lesser extent with Europe. In this regard, the JCPOA is inextricably linked to the BRI. Promoting the survival of the JCPOA and ensuring regional stability should be primary Chinese objectives in order to protect long-term BRI infrastructure projects.

Even if the Europeans, Russians, Chinese and Iranians are able to rescue the JCPOA without U.S. involvement, sanctions on Iran are set to comeback into force in the coming weeks, which will impact foreign investment in Iran, including for BRI projects. Renewed sanctions by the U.S. on Iran will reduce investment in energy infrastructure in Iran by Western companies, but an opportunistic China can capitalize on these investment vacuums. While the extraterritoriality ofthese sanctions will make it more difficult for Chinese companies to participate in BRI projects in Iran, Chinese companies have shown the ability to navigate around these types of sanctions in the past using domestic Chinese banks to settle transactions in Chinese renminbi. This could, in the long-term, increase the use of the renminbi in oil transactions and hasten the internationalization of the Chinese currency. Given the difficulties in the current relations between Beijing and Washington, China may actively seek to circumvent any renewed U.S. sanctions placed on Iran. As a result, the U.S. withdrawal from the JCPOA could serve to increase China’s influence with Iran and augment Chinese investment in Iran’s energy sector.

The geopolitical realities in the region represent an obstacle for China in pursuing BRI projects in Iran. Regional rivalries, including those related to the interests of India and Saudi Arabia, are relevant to Chinese determinations as to how aggressively to pursue investment projects and ties with Iran.

India represents the main regional rival to China and has, to some extent, pushed back against the BRI, especially projects in Pakistan. India is pursuing its own foreign infrastructure projects in Iran, including developing the only Iranian deep seaport on the Indian Ocean, the Chabahar Port. India is the leading Iranian partner in developing the port, which India views as a geostrategic investment, in the same way China views its BRI investments as geostrategic investments. The Chabahar Port is located only 900 kilometers from India, which would provide India with access to Central Asia without having to transit the territory of its longtime adversary, Pakistan. From a strategic perspective, India sees numerous benefits from developing the Chabahar Port, most notably access to energy resources to promote its energy security and as a transit route to Afghanistan where India is becoming an increasingly involved party.

India’s investments in Iran have important geopolitical implications for China and the BRI. If China and India continue to pursue large-scale infrastructure projects in Iran, their interests in the country will converge at some point. Meaning the two Asian giants will have to determine if they can pursue these investments in a cooperative fashion or if they will compete for investment superiority in the country. This could lead to Iran having to decide which regional power it views as the more important partner in the region. Given India’s close relationship with the U.S. and its reduction in oil purchases leading up to renewed sanctions, Iran will side with China in any competition over infrastructure investment. This would provide China with the ability to take the lead in the development of the Chabahar Port, which would be a strategic windfall for the Chinese.

China’s increased presence in Iran is further complicated by the regional tensions between Iran and Saudi Arabia, tensions that have been particularly pronounced in recent years. It is no secret that Iran and Saudi Arabia are bitter geopolitical enemies and, despite China’s best efforts to remain a neutral outsider, its investment in Iranian infrastructure may result in blowback from the Saudis. Because of China’s heavy reliance on Saudi imported oil, China must be cognizant of how the Saudis perceive Chinese investment in Iran. This is not to say that BRI projects cannot be pursued, as Saudi Arabia is equally dependent on China as a consumer of its exported oil, but these geopolitical realities must be considered as China pursues its BRI objectives in Iran. China, to the extent possible, should foster stable relations between these two Middle Eastern nations. As Chinese interests become increasingly tied to the Middle East, it will find it progressively more difficult to remain a neutral broker in the region.

Chinese investment in energy infrastructure in Iran will have lasting energy security consequences for China and Iran. China has the opportunity to enhance its ties with a world leader in natural gas and oil production through investing in Iran. China and Iran have jointly developed the North Azadegan and Yadavaran oil fields, which are now producing 75,000 and 100,000 barrels of oil per day. Additionally, CNPC had a 30 percent share investment in developing the South Pars natural gas field, with France’s Total taking a 50.1 percent share in the development; however, in light of U.S. sanctions, Total is withdrawing from this venture and CNPC is rumoredto be in line to take over Total’s investment. This would provide a state-owned Chinese energy company with an overwhelming stake in the development of the largest natural gas field in the world, which would certainly alleviate concerns for China about its access to natural gas.

BRI projects may also reduce Chinese exposure to transit risk for energy resources from the Middle East. Through the development of natural gas fields in Iran and completion of other portions of the BRI, namely in Pakistan, Beijing sees the potential to import natural gas to Western China through Pakistan via the Iran-Pakistan pipeline. China has expressed its support for financing the Iran-Pakistan pipeline, but the renewed sanctions on Iran will certainly make it more difficult to obtain funding for this pipeline.

Chinese investment in energy infrastructure in Iran will also enhance energy security in Iran. Through Chinese upstream investment in Iranian energy infrastructure, Iran can increase its own access to its energy resources for domestic consumption. It will also increase Chinese consumption of Iranian energy resources, which will become increasingly important to the Iranian economy as Europe and some Asian nations, most notably India and South Korea, reduce their Iranian energy resource consumption. Even as the JCPOA slowly collapses, Tehran is actively engaging to establish markets for its energy resource exports and the world’s leading energy consumer provides the perfect destination.

Renewed sanctions by the U.S. will strengthen Sino-Iranian bonds, especially through Chinese investment in energy infrastructure. Iran requires significant infrastructure investment and China is one of the few parties that is able and willing to make these investments. China is in a unique position to pursue infrastructure investment in Iran because it can insulate itself from the impact of U.S. sanctions. China will also view its increased investment in Iran as a point of leverage in the escalating trade dispute between the U.S. and China.Iran has the ability to capitalize on the current economic and diplomatic tensions between the U.S. and China, which may encourage China to undermine U.S. efforts to isolate Iran through economic sanctions. From the Chinese perspective, the ideal outcome of renewed U.S. sanctions against Iran may be a maintenance of the current status quo. A weakened JCPOA without U.S. involvement will maintain sufficient stability in the region to protect BRI infrastructure projects in Iran, while at the same time sanctions will push Iran further into China’s sphere of influence through increased economic and energy interdependence.

Clayton Cheney is a practicing attorney in New York City. He recently received his M.S. in Global Affairs from New York University where his studies concentrated on transnational security and energy issues. His thesis focused on the geopolitical, security, and energy implications of the Belt and Road Initiative. While at New York University, he graduated with distinction, served as the Managing Editor of the academic journal, and worked on a consultancy project at the UN Counter-Terrorism Committee Executive Directorate. He is a member of the New York City Bar Association’s United Nations Committee and he is the editor of the Bar Association’s UN Update. He previously worked as a graduate fellow and a legal intern at the UN refugee agency and several international human rights organization.