Pakistan Redux: China’s Secret Deal with Iran

19 August 2020 Lindsay Hughes, Senior Research Analyst, Indo-Pacific Research Programme

Background

China and Iran have reportedly entered into an economic and security agreement. According to its terms, the agreement would see China invest around US$400 billion ($553 billion) in Iran over the next 25 years. If that level of investment does actually take place, it would under cut the Trump Administration’s policy of “maximum pressure” on Iran in order to isolate the ruling theocracy. China’s investments would be in Iran’s seaport, railways, telecommunications and financial sectors. The eighteen-page agreement also specifies [in Farsi] security co-operation between the two countries, including joint military exercises, intelligence sharing and weapons development to fight ‘the lopsided battle with terrorism, drug and human trafficking and cross-border crimes’. Iran would give China, in return, a discounted supply of oil over the period of the agreement.

It was likely the Iranian theocrats who leaked some of the terms of the agreement in order to demonstrate to ordinary citizens that, despite the economic ravages that they suffered because of the US sanctions that were imposed, in turn, because of the ayatollahs’ intransigence, Tehran was able to find a way out of that economic morass. While that move is unlikely to absolve the ayatollahs in the perception of many Iranians for their sheer ineptitude, Tehran has indeed bought itself some time. The more pressing question now is, at what cost?

Comment

Iran has endured much social and political unrest in recent years, as a previous FDI paper illustrated. The theocracy was shocked during the 2018-2019 riots to hear public calls for them to remove themselves from positions of political power. Not much has changed since then; the same calls emanate from the Iranian public despite the brutality brought down upon those who make the calls by a beleaguered clan of men who are determined to remain in power – only because to withdraw from politics would see the Islamic revolution, initiated by Ayatollah Ruhollah Khomeini, be cast into the waste bin of History, alongside the principles of Communism that they loathe. That is anathema to them, so they hang on to their power and use it as a tool to repress the Iranian people.

It is hardly surprising, then, that an agreement that could potentially see massive sums of money injected into the all-but-failed Iranian economy causes them such joy that they leak some of the terms of the agreement. At the very least, China has agreed to purchase oil from Iran, albeit at reduced rates, for the next twenty-five years. Doing so, however, would see China violate US sanctions on trading with Iran; while its leaders may scoff at the US and its sanctions, its business leaders are only too aware of the risks involved with flouting those, as Chinese banks have learned. Whether China could actually purchase oil from Iran, therefore, remains to be seen. While trading with Iran could see China cut off by the US from trading in US dollars, at least where Iran is concerned, it would be a good opportunity for China to restart its efforts to internationalise the yuan as a US dollar substitute. If that effort were to fail or, worse, if the US were to cut China out of trading in US dollars altogether, via the SWIFT mechanism or through some other means, the blow to China’s banks and its economy would be tremendous. It remains to be seen, therefore, whether China will actually purchase Iranian oil.

There is a deeper risk that Tehran runs in entering into an agreement with China while it is in a weak situation. As in the case of Pakistan, Iran could become a vassal state to China in all but name. Consider the similarities between the two situations. During his visit to Pakistan in 2015, General Secretary Xi signed an agreement with Islamabad to invest around US$46 billion ($63.6 billion) in the country. It was estimated that between $35 billion and $37 billion ($48.4 to $51.1 billion) would go towards addressing Pakistan’s electricity shortage. It was anticipated that the power generation facilities that were proposed to be built would, apart from alleviating the Pakistani industrial sector’s need for power, assist then-Prime Minister Nawaz Sharif, whose electoral promises included developing power projects to enable the industrial sector to work to its full potential. Iran has, similarly, agreed to allow China to invest in its infrastructure – its ports and railways – and in its finance sector. It is liable to soon find itself indebted to China to the extent that it, like Pakistan, would need to borrow further loans from China to service its initial debt to Beijing.

Speaking at The Wilson Centre in Washington, Principal Deputy Assistant Secretary Alice Wells, whose term in that office recently ended made pointed reference to the issue of the costs that Pakistanis had to bear because of the terms under which China invested in Pakistan. She noted that Pakistani government statistics show that it costs thermal energy plants that were constructed as part of the China-Pakistan Economic Corridor around US$1.5 billion ($2 billion) to produce a megawatt of electricity, whereas it costs non-CPEC power plants around US$750 million ($1 billion) to produce the same amount. She also pointed out that the CPEC’s single most expensive project, the Karachi-Peshawar railway, was initially announced at a cost of US$8.2 billion ($11.3 billion). In October 2018, the Railway Minister announced that that cost had been negotiated down to US$6.2 billion ($8.5 billion). That cost had risen to US$9 billion ($12.4 billion) by October 2019.

China, whose own economy is but a shadow of itself in the 2000s, is nothing if not uber-mercenary. It has shown through its debt-diplomacy that it will take over ports, as in Sri Lanka, and when it has accomplished that and finds itself in a position from where it may dictate terms to the recipient country, its wolf-warrior diplomats attempt to further indebt those countries. While that strategy is now coming undone elsewhere – the President of Tanzania, John Magufuli, for example, recently cancelled a Chinese loan of US$10 billion ($13.8 billion) that had been negotiated by his predecessor, Jakaya Kikwete with Chinese investors to construct a port at Mbegani creek in Bagamoyo, just north of Da es Salaam, saying that only a drunkard would agree to its terms – it appears that Iran’s leaders are sufficiently panicked as to accept any terms that they may be given.

It appears that the inept Iranian leadership would do almost anything to retain their power. The danger lies in the fact that they could trade away much of Iran’s wealth before they are ousted.

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