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China and the Middle East

Beijing’s Opening in Tehran

The new Iran-China Deal

The announcement of a strategic partnership agreement with Iran highlights China’s ultimate will to take a more assertive geopolitical role, even if this poses a direct challenge to US policies.

The recent announcement of a strategic partnership agreement between China and Iran has raised alarms in the US about the implications of a possible alliance between its arguably two biggest international rivals. Even though a formal agreement has not yet been signed and the reported leaks of a secret protocol regarding military and security cooperation should be regarded with caution, the geopolitical implications of such a decisive step for the current international order are far-reaching. While the real intentions of the different players are still open to debate, this initiative could set in motion dynamics and ideas that will have to be heeded in the fields of international finance, trade, infrastructure deployment, defence and security not only in the Middle East and Central Asia, but also on a global scale.


Until now, Beijing has tried to avoid directly challenging US policies in the Middle East. While supporting multilateral efforts to preserve the Joint Comprehensive Plan of Action (JCPOA), President Xi has refrained from crossing the red lines of the US maximum pressure campaign against Iran. Even his signature international project, the Belt and Road Initiative (BRI), had a rather discreet presence in the Gulf, despite the strategic importance for China of securing its energy supply from the region. All the evidence to date suggested that the Chinese were averse to getting drawn into the region’s conflicts, preferring to support stability and the security of international energy supplies guaranteed by the US.


All this has been called into question by the leak of the content of the strategic partnership agreement announced by China and Iran, sounding the alarms in Washington about the implications of a possible alliance between the US main rivals. Some analysts suggest that this geopolitical nightmare is the result of US policies, which, in recent years, have pushed simultaneously for confrontation with China and Iran, regardless of the consequences. Other voices regard this agreement as proof that the ultimate objective of the Chinese leadership is to replace the US as the global hegemon.


The decision by China to take such a step at this moment in time is interpreted in very different ways depending on the political position of the commentators. For the growing party of China-bashers in DC, it poses an extremely serious threat to undisputed US global supremacy, while the defendants of constructive engagement with China consider it to be a defensive strategy in response to the increasingly hostile measures taken by the US administration.


This essay focuses on the possible implications of a shift in China’s policy towards the Middle East, regarding Iran as a paradigmatic example of Beijing’s geopolitical outlook, defined by long-term strategic considerations.


The political geography of Asia revisited


China and Iran have been connected since ancient times by cultural and trade exchanges, as a result of the geographical imperatives that made the Persian Empire an indispensable link with Rome and Byzantium. Marco Polo also took the caravan route through Iran on his journey to China 750 years ago.


Spain also played a significant role in the contacts between Europe and the Asian Empires. Henry III of Castile sent an embassy to Timur in 1403 that also crossed Persia on its journey to Samarkand in Central Asia. Ambassador Clavijo wrote a fascinating narrative of his mission, which is, to this day, one of Spain’s most extraordinary diplomatic endeavours. Later, at the time of Philip III, the Hispano-Portuguese Empire renewed its diplomatic relations with Persia because of its interests in trade with Asia. Nevertheless, the fast development of transatlantic routes from the 17th century onwards soon rendered the hazardous land journeys through Iran and Central Asia obsolete. It was not until two hundred years later that the rivalry between the British and the Russian Empires, defined as the Great Game by Victorian strategists, reawakened the interest for those long-forgotten regions.


In his recent collection of essays, evocatively titled The return of the world of Marco Polo, Robert Kaplan focuses on the re-emergence of Eurasia as a key strategic concept. He considers that the geopolitics of our time will be defined by the new and fierce competition among the different actors reincarnating the ancient empires of the past and the heirs of the post-colonial order, namely, China, the US, Iran, Russia, Turkey and the EU. This rivalry will be fought out in a space integrated by globalisation, technology and geography, where trade, transport and conflict bring all these powerful forces together.


The rationale of the new Silk Road


The dreams of the ancient caravan routes across the steppes of Eurasia have been reborn as a result of the impetus and massive resources that China has poured into a new Silk Road. Beijing has put the integration of trade and transport infrastructure across this supercontinent at the heart of this ambitious project. Besides its declared objectives, there is an additional geopolitical advantage in eluding its dependency on the international sea lanes that are vulnerable to possible blockades by the US or any other hostile maritime power at the chokepoints of the straits of Malacca, Ormuz or Bab el Mandab.


This does not mean renouncing the goal of becoming a maritime power, as the string of pearls strategy clearly demonstrates. China has established naval stations from Hainan Island to Djibouti with the objective of securing the vital sea lanes on which its trade depends. Nevertheless, it is very much aware that, in the event a confrontation, US naval power is still overwhelmingly superior.


The new inland Silk Road, and in particular the branch running through Iran, is at the centre of the Belt and Road Initiative (BRI), a general framework of international cooperation that President Xi presented at the beginning of his mandate in 2013. The name chosen for this economic corridor connecting China to Europe has strong historical connotations and refers to the Golden Age when China was at the centre of world trade. The BRI basically runs inland through Central Asia, via the maritime route across the Malacca Straits, or combining land and sea communications from Pakistan.


Previously known as One Belt One Road (OBOR), the most popular name internationally since 2015 has been the BRI, although the Chinese name has remained unchanged. The initial objectives focused on promoting connectivity and coordinating development initiatives across the Eurasian countries. As is often the case with Chinese policies, while the long-term strategic goals are clear, its practical definition and implementation is rather lax and flexible, and both its geographic scope and content has evolved in line with Chinese interests.


Besides contributing to the deployment of all sorts of transportation and energy-related infrastructure, the BRI has gradually come to incorporate other activities such as agriculture, construction, tourism, manufacturing, financial integration, and cultural, scientific and technological exchanges. The latest development has been a Digital Silk Road, incorporating telecommunications, cloud storage and computing and, especially, security and individual recognition systems. With regard to its geographical scope, what started out as a project for Eurasia now encompasses Africa, Oceania, Latin America and even the Artic.


In 2019, the Office for the Promotion of the BRI, a department of the Chinese Communist Party (CCP) that provides official information on the BRI, declared that 125 countries had already joined the initiative. In the same year, the World Bank issued a report titled Belt and Road Economics: Opportunities and Risks of Transport Corridors, identifying 70 corridors within the BRI connecting China with different countries accounting for 40% of its export trade. The report estimated the total planned investment, part of which has already been implemented, at over 500 billion dollars. Other reports put the figure of total planned and ongoing projects at over 3 trillion dollars in 2020, of which half is related to transportation infrastructure.


A strategic partnership agreement with Iran would be the paradigm of the ideal BRI model. Until now, Pakistan was the best example of China’s relations within the BRI, an alliance including inland and maritime transport infrastructure, as well as economic and military cooperation. The agreement with Iran would fully add the energy component to the mix, opening up a whole new geopolitical dimension. Regarding inland transportation infrastructure, it would connect the corridor that goes from Xinjiang, through Kazakhstan, Kirgizstan, Uzbekistan and Turkmenistan, to Turkey and Europe. On the other hand, it would connect China by land with Iraq and Saudi Arabia and by sea with the Persian Gulf and the Red Sea.


Asian geography shapes transport and communication routes much more than is apparent from political maps. Iran and Afghanistan are essential for the continuity and viability of the BRI. On the way to Europe, there are alternatives to Pakistan, but not to Iran. Located between the Caspian Sea and the Indian Ocean, Iran is the only alternative for any route that bypasses Russia. Afghanistan also has a border with China that can be used, although it is not the easiest of passes, whereas Pakistan remains the shortest route to the Indian Ocean. The border conflicts that both Pakistan and China have with India also enter into the strategic balance, especially in the case of Kashmir. In a nutshell, Iran is an essential part of the BRI and also offers the port of Chahbahar, as an addition or alternative to the deployment at Gwadar as part of the string of pearls strategy.


From the perspective of China, the investment along the trade routes reduces the costs of transportation and creates new markets, while investment in energy would secure a stable supply. At the same time, investment in infrastructure, linked to the implementation of the project by Chinese companies, offers a solution for their excess capacity and the problems of adapting efficiently to market conditions. It should be noted that these companies generally have significant public capital. The financial component is also important, as a means of increasing the relevance of the Chinese yuan in international transactions. Finally, the BRI has a direct impact on the economic development of China’s Western and Southern provinces, which have traditionally lagged behind the much richer provinces of the Eastern coast.


The same logic as applies to physical infrastructure can be easily extended to telecommunications and IT. In fact, Chinese telecommunications providers are already investing in different kinds of cloud infrastructure and IT solutions in Asia, rapidly gaining ground on the traditional suppliers, mostly US companies. This Chinese cloud would provide resources to store and process the data generated by all the companies involved. It makes perfect sense for Chinese companies to use this new digital infrastructure linked to the BRI. The logical conclusion would be for companies operating in the countries participating in the BRI to use Chinese communication systems, such as 5G, their cloud services and artificial intelligence solutions.


After the massive investments in transport infrastructure—railways, harbors, airports and navigation satellites—, China is moving into the telecommunications and energy sectors. Experts, such as Simon and Speck in their report Europe in 2030 for the Elcano Royal Institute, a Spanish think tank, have already discussed a number of scenarios in which China increases its financial assistance to countries in need of investment and infrastructure. A follow-on is the development of industrial parks located near transportation hubs with a view to establishing industrial and technological clusters that operate in close connection with Chinese companies and import-export platforms.


Following the logic of the arguments explained above, in 2018 China embarked on a “Digital Silk Road” that was to be an extension of the BRI, including mobile communications, 5G, quantum computing, nanotechnology, artificial intelligence, big data, blockchain, cloud computing and satellite navigation. The proposal to interested countries includes building digital infrastructure and developing Chinese-style internet security systems to protect national cyberspace from foreign interference. According to the Chinese vision, the ultimate objective would be to build a community with a shared destiny in cyberspace.


The goals of this Digital Silk Road would be to: (1) open up new markets for Chinese technology, (2) expand the database to improve China’s technological development, (3) create digital infrastructure to support the expansion of the BRI and (4) increase positive perceptions in the recipient countries about China’s contributions and good will.


Due to the sheer size of its market, China would progressively bring the economies of smaller countries under its sphere of influence. In China’s view, this strategy would surely succeed based on market dynamics rather than force or intimidation. In terms of power projection, it would achieve the desired result without recurring to confrontation, while contributing to increase general wealth. This strategy has nevertheless provoked increased criticism regarding the abusive relations that breed dependency in the recipient countries due to the excessive debt generated to finance projects. In fact, the EU has developed its own connectivity proposals for Eurasia aimed at countering China’s dominant position in this field.


From a historical point of view, the Marshall Plan launched by the US can be considered a precedent of the BRI, although the Chinese project has vastly more ambitious goals. Both have the same declared principle, that is, to assist countries in a difficult economic situation in need of foreign investment to fuel their development. There is, of course, the added advantage for the donor of financing the sale of goods and services generated in the US (then) and China (now) and creating networks of captive economies that would become dependent markets. As a result, the donors increase their geopolitical influence and, last but not least, strengthen the position of their currency in international transactions.


China enters the “Great Game”


Iran has always been of significant international importance due to its strategic position, increased recently by its geopolitical clout and its economic potential, particularly in the energy sector. Iran’s demographic alongside its economic and scientific weight makes it an attractive partner in itself. Besides, it provides privileged access to Europe. The fact that, due to the crushing US sanctions and the disastrous effects of the COVID-19 pandemic, it is now in a critical economic situation and in dire need of foreign investment to avoid the collapse of its economy, provides a unique opportunity.


From the Chinese point of view, Iran’s key strategic location is complementary to Pakistan’s. It therefore makes economic sense to develop transport infrastructure, such as roads and railways, as well as expand harbours at the terminuses of such routes. These ports would operate not only as logistical hubs for the sea lanes but would also be used to support eventual military operations in the region. There is a golden opportunity for China to step into India’s shoes as it withdraws from Chahbahar as a result of the US sanctions.


It goes without saying that the energy factor is of critical importance for China’s relations with Iran, as it is heavily dependent on imports. Securing supplies of oil that are not controlled by the US is an added advantage.


In the digital sector, Iran has the economies of scale required to make it a very attractive market for the deployment of 5G and cloud computing solutions. Also, in view of its limited access to international payment systems, Iran’s banking sector could greatly benefit from Chinese technology in e-commerce and online payment systems. Financial integration with such a big economy would boost Chinese aspirations to make the yuan a physical or digital reserve currency. The incorporation of Iran to an alternative financial system led by China would have a sizeable impact on the US’s current hegemonic control over the international financial system. The geopolitical use of financial instruments and trade sanctions by Washington could encourage Russia and other countries, dissatisfied with the weaponisation of the financial system, to join a possible alternative, despite its limited scope at present.


Implications of the China-Iran deal


Last August, the Iranian Foreign Minister, Javad Zarif, visited Beijing to negotiate the roadmap of a new strategic partnership between the two countries. This agreement would expand Chinese investments in key sectors of the Iranian economy exponentially in exchange for a guaranteed supply of oil under very favourable terms. This deal would have a security and military component, including training, anti-terrorist cooperation, intelligence and weapon sales. In this respect, Iran already plays the role of observer in the Shanghai Cooperation Organization (SCO) and its anti-terrorist branch (RATS).


Bearing in mind that negotiations started in 2016 and their intention to go ahead with the alliance has not been made public until now, the timing of the announcement of this strategic partnership is significant for both countries. In fact, the leaks of the content of the deal, most likely originating from Tehran, mention the 25-year time frame of the agreement, reflecting China’s preference for the long term, encompassing trade, military cooperation, transport infrastructure, such as roads, railways and harbours, as well as finance and telecommunications.


In the short term, the deal focuses on the energy sector. In exchange for Chinese investments, Iran would offer very favourable discounts on oil supplies (around 12% off the average market price to be revised every six months), payment in two years and the use of currencies in which China has excess reserves. Some experts have calculated the accumulative rebate in the oil price to be around 30%. Besides, China would be a preferred client not only in terms of supply priority but also as a partner in energy-related projects. On the other hand, China would invest 280 billion dollars over five years to develop Iran’s oil and gas industry, which is short on refinement capacity, as well as the petrochemical sector. The investments could be extended and increased in successive five-year periods.


Besides the favourable terms which make it an excellent deal for China—known to always drive a hard bargain—there are important geopolitical implications related to the security and military cooperation dimensions of the agreement. The linkage of the Iranian infrastructure network to China has the additional advantage of giving it access to the heart of the Middle East through Iraq. Last year China and Iraq signed an agreement for infrastructure development in which the Iraqi share was to be 10 billion dollars matched by much larger Chinese contributions. The integration of Iraq into this new BRI corridor would substantially increase the impact of the strategic partnership with Iran.


At the time of writing, the real nature of the agreement, its status and actual content are far from clear. However, if the leaked information is confirmed, it would mean a paradigm shift for China with important geopolitical consequences. Even though China has been one of the most important markets for Iranian oil since the end of the 1990s, China has, until now, complied with US sanctions to bring the Iranian nuclear program under international supervision. Between 2006 and 2015, China has voted in favour of economic sanctions on Iran at the UN Security Council. At the same time, it has reduced its oil imports from 800,000 to 200,000 barrels per day (bpd) and has curtailed its trade by 30% since 2014, when it peaked at 50 billion.


On the above grounds, the news of the Iran-China strategic partnership was received with surprise and has sounded the alarms in Washington. The current administration has considered Iran one of its main enemies and the “maximum pressure” campaign is an axis of its foreign policy. Until now China has avoided crossing US red lines in its relations with Iran and refrained from directly challenging the sanctions. If confirmed, the information about a secret protocol of military cooperation, including the access of Chinese forces to Iranian military bases, which could be extended to trilateral cooperation with Russia, would radically change the whole strategic outlook in the region.


Should the agreement finally be signed and implemented, the first question that comes to mind is what would happen to the sanctions regime imposed on Iran and how would other countries react to this direct challenge to the policies on which the US has increasingly based its foreign policy? So far there is no consensus on this issue. Some voices are in favour of letting China pick up the bill for its adventurous new foreign policy and argue that this move by Iran and China is proof that sanctions are working.


Others are of the opinion that the strategic partnership will have no far-reaching impact and could be allowed to proceed, provided that there is a systematic contention policy towards China, mobilising a more determined Western response that will be more attractive than the Chinese offer. Both views bask in satisfaction at the fact that the agreement actually will help contain China, since it has sided with a rogue state such as Iran.


On the other side, there are commentators that consider the agreement to be the result of the counterproductive US policies to isolate China and sanction Iran without offering space for compromise. This argument is widely shared in European capitals and the European External Action Service (EEAS), which have consistently defended a policy of pragmatic engagement with both countries, combining positive incentives and realistic demands. As the EU High Representative, Josep Borrell, has declared, considering China a systemic rival does not mean that the relationship with China should be seen as a systematic rivalry bound to inevitable confrontation.


The second question is how the agreement could be implemented in practice, especially in economic terms. Could an alternative commercial system be set up or should the two countries resort to some kind of barter economic system? In this context, it is worth taking a look at the declarations of the chief economist of the Bank of China, arguing in favour of using different international payment systems from the ones now in place. The development of blockchain technology by China could be part of this alternative to existing international financial transactions.


Since 2019, China has currency swap agreements with 20 countries integrated in the BRI and is arguing in favour of the Cross-Border Interbank Payment System (CIPS), a system that China developed as an alternative to the widely used Belgium-based SWIFT international interbank payment system, controlled by the US. At the moment, these alternatives are unlikely to be able to handle the volume of transactions involved in the Iran-China deal. In 2019, CIPS had up to 40 member countries that had signed up for the BRI and, according to its own data, operated and conducted transactions in 96 countries and regions.


Strategic alliance or tactical move?


The reactions to the announcement of this agreement in Iran have been more complex. Iran is more transparent and less homogeneous than China, where there is internal debate within the circles of power—and about this agreement—, and the regime’s parliamentary factions compete passionately. This debate is fuelled by intense Iranian nationalism, which is reluctant to fall under Chinese control after managing to shake off US hegemony. In fact, some groups, including former president Ahmadinejad, have compared this to the 1828 agreement that surrendered a large part of the South Caucasus to the Russian Empire.


Ahmadinejad has been one of the most outspoken critics of the secrecy of a deal “struck behind the Iranian people’s back”. His position is full of contradictions, especially considering his past record in government, but it nevertheless underlines the sensitivity of the matter. The debate is playing out against the backdrop of the upcoming presidential election, where President Rouhani is locked in battle with the conservatives that aspire to bring down his government. This strategic alliance with China would reinforce his position and would turn around his political fortunes, providing abundant resources to revive Iran’s economy, something his political opponents would certainly loathe.


China has also taken a peculiar standpoint that covers up some interesting points. The fact that Beijing has downplayed the significance of the deal, insisting that it is just an ordinary standard agreement with a friendly country, is revealing in itself. It is one of the few times in recent years of Xi’s presidency that he has reverted to Deng Xiaoping’s principle of “hide your capabilities and bide your time”. In any case, judging by traditional Chinese practice, as compared with more aggressive recent foreign policy moves, we can deduce that the agreement is really important, since otherwise it would have been used for propaganda purposes, especially internally, to promote the country’s image as an ascending world power.


To appraise this initiative, we should also spend some time weighing up President Xi’s thinking. In his writing and speeches, he states that leaders have to understand, take advantage of and not go against the tide of history. In his book The Governance of China, he wrote: “In observing the world, we should not allow our views to be blocked by anything intricate or transient. Instead, we should observe the world through the prism of historical laws”. From China’s perspective, one of the critical components of our times is economic development, which is much more important than elusive Western concepts that have failed to achieve economic progress and hence end up in open conflict.


Indeed, Xi argues that it is the lack of economic development that generates the possibility of conflict, stating that “In the interest of peace, we need to foster a keen sense of global community of a shared future. Prejudice, discrimination, hatred and war can only cause disaster and suffering, while mutual respect, equality, peaceful development and common prosperity represent the right path to take”.


China is also well aware that no world power has come out unscathed of meddling in the conflicts of the Middle East and that it has to tread a fine line between the Persian, Arab and Turkish worlds, and even Israel. Note that, from 2005 to 2018, Chinese companies have invested less in Iran than in Saudi Arabia or the UAE and as much as in Egypt. Nevertheless, China is in no hurry and considers that time is on its side. This is another recurrent idea in Xi’s narrative: the multipolarity of the new international system, where the US will not be able to impose its hegemony and where China will have the opportunity to exert its leadership, albeit not necessarily as a global hegemon.


Finally, the limited enthusiasm with which both capitals have greeted this agreement suggests that it is more a marriage of convenience than love, whereas both countries would probably have preferred a mutually satisfying arrangement with the US, at least at this point. Rather than a full-fledged geopolitical challenge, the announcement also appears to be a warning to Washington of the possible cost of taking its confrontation with China too far. In this respect, it would be a tool for increasing the leverage of both China and Iran in future negotiations.


The strategy adopted by the new US Administration after the elections will have an enormous impact on the future course of events, defining how far both Iran and China will take their strategic partnership. At the same time, the agreement has set in motion dynamics and ideas that will not be able to be overlooked in the future. The announcement of this alliance aimed at cementing long-term cooperation in the field of trade, finance, infrastructure, defence and security could create an unprecedented new reality that would generate its own geopolitical outcomes. In any case, paraphrasing one of Oscar Wilde’s famous paradoxes, the only difference between eternal alliances and short-term tactical affairs is that the latter last longer.

Ramon Blecua is a diplomat and Ambassador at large for mediation and intercultural dialogue of the Spanish Ministry of Foreign Affairs. Dr Claudio Feijoo is the director for Asia at the Universidad Politécnica de Madrid and co-director of the Chinese-Spanish Campus of Tongji University The opinions in this article are the authors own and do not in any way represent official policy positions of the Ministry of Foreign Affairs.

Ramon Blecua und Claudio Feijoo