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Why The Iran-China Oil Alliance Is So Important

Summary:
Via Defense and Foreign Affairs, The steady rise in U.S. strategic competition with the People’s Republic of China (PRC) over trade and the South China Sea already has so many dimensions that it is sometimes easy to ignore shifts in the PRC’s behavior in other areas. On July 6, 2020, Iranian Foreign Minister Javad Zarif announced that Iran was negotiating an agreement with the PRC - with which it long has had trade and strategic links - which would now make the two countries the equivalent of strategic partners. This expanded U.S.-PRC competition to new parts of the world. Perhaps more importantly, the move is a substantive and significant response to India’s success in militarily outmaneuvering the PRC in Kashmir during June 2020. The PRC-Iran accord means the end of Indian use of

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Via Defense and Foreign Affairs,

The steady rise in U.S. strategic competition with the People’s Republic of China (PRC) over trade and the South China Sea already has so many dimensions that it is sometimes easy to ignore shifts in the PRC’s behavior in other areas. On July 6, 2020, Iranian Foreign Minister Javad Zarif announced that Iran was negotiating an agreement with the PRC - with which it long has had trade and strategic links - which would now make the two countries the equivalent of strategic partners.

Why The Iran-China Oil Alliance Is So Important

This expanded U.S.-PRC competition to new parts of the world. Perhaps more importantly, the move is a substantive and significant response to India’s success in militarily outmaneuvering the PRC in Kashmir during June 2020.

The PRC-Iran accord means the end of Indian use of the Iranian port of Chah Bahar and the construction of a rail link from that port city northward to link with a new rail spur into Afghanistan. India’s moves into Kashmir in 2019-2020 are widely perceived in Beijing to presage a new move by India to cut off the PRC-Pakistan landbridge through Pakistani controlled Azad (Free) Kashmir, giving India its own landbridge to Central Asia.

Thus, after the confrontation between the Indian Army and People’s Liberation Army (PLA) troops in the Ladakh region of Kashmir on June 15-16, 2020, Beijing determined it would respond by cutting Indian access to Central Asia through Iran. The first signs came as the Iran-PRC deal was announced and the Iranian government canceled the Chah Bahar to Zahedan rail link which was to be built by India, citing Indian delays on the 628 km project. The Iranian government said that it would complete the line on its own, with a $400 million investment from the Iranian National Development Fund to the Iranian Railways.

Indian Prime Minister Narendra Modi had gone to Tehran in May 2016 to sign the Chah Bahar deal, but work was indeed delayed as India fretted that the project might invoke U.S. sanctions against India.

The PRC-Iran agreement could involve serious military ties and lead to major PRC defense sales to Iran, involve some $400 billion in PRC economic investment over 25 years, and lead to a major PRC role in modernizing Iranian railroads, ports, 5G Networks, and telecommunications generally. In return, the PRC would get discounted supplies of Iranian oil products and gas for the next 25 years.

The PRC would be able to make Iran part of its Belt and Road Initiative (BRI), and be able to establish free trade zones in Iran in Maku in the northwest, Abadan in Khuzestan Province near Iraq, and Qeshm island just inside the Persian Gulf near the Strait of Hormuz.

The agreement would give the PRC access to Jask, a major Iranian port outside the Strait of Hormuz. The PRC began developing its strategic position in the Persian Gulf region during the Iran-Iraq war as far back as 1980-1988. And the PRC presence in the Persian Gulf has only increased since that time.

PRC activity over the last decade shows a clear intent to secure its energy imports from the Persian Gulf, compete with the U.S. and India, and look toward a day when it would be as real a power in the Persian Gulf and the Indian Ocean as it was striving to be in Asia and Pacific.

The PRC had also made Pakistan a key partner in its Belt and Road Initiative, and the PRC now plays a key part in developing and managing the Pakistani port of Gwadar, on the Arabian Sea. The PRC also invested some $10.7 billion into transforming an Omani fishing village into the special Economic Zone Authority of Duqm. But, significantly, Oman has reserved significant parts of the maritime facilities at Duqm for British and U.S. forces.

The PRC has taken these steps for both economic and strategic reasons. In 2019, Beijing attempted, without success, to bring Saudi Arabia and the United Arab Emirates into its orbit. It found it could not, however, have a strategic relationship with Iran and the Arabian Peninsula states simultaneously. It stayed with the more significant choice, Iran.

It is vital to the PRC to secure its access to the Persian Gulf oil and gas, and limit U.S. capability to influence this flow to the PRC during a crisis or war. The PRC imports more than 70 percent of its petroleum, and gets more than 40 percent of its supplies from the Persian Gulf.

Iranian-PRC trade and strategic linkages in many ways circumvent U.S. attempts to sanction the leadership of both states. At a time when both sanctioned states have come under great pressure, the new alliance, then, offers Beijing and Tehran some real respite and strategic resilience. Adding Russia into the mix only widens the trading zone of both states.

The real challenges, however, comes from whether the PRC economy can be sustained for the duration of the new accord, and whether an Indian military thrust to cut off the Pakistan corridor to the PRC will cause grave difficulties for Beijing.

But, certainly, the new deal with Iran is Beijing’s signal that it is planning for the day when the Pakistan corridor to the Indian Ocean may be lost to it.

Tyler Durden
Tyler Durden (a pseudonym) represents the idea that a return to truly efficient markets is a possibility and a necessity. After having experienced the inner workings of capitalism at various asset managers and advisors, Tyler believes that the current model is flawed and a deleveraging at every level of modern society is needed to reinspire the fundamental entrepreneurial spirit.

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