By Yang Xiaotong, Assistant Researcher of a private Beijing-based think tank, for SIGNAL Group
As the Iran-backed Houthis up their attacks on ships passing through the Bab al-Mandab straits at the tip of the Arabian peninsula, they are causing major disruption to global trade. All eyes are on China, which is portraying itself as the peacemaker of the Middle East. It is expected to pressure Iran to rein in its proxy in Yemen. Pundits argue that because China is Iran’s largest trading partner, constituting a third of Iranian trade, and one of the few countries to continue purchasing Iranian oil despite of American sanctions, importing 90% of Iranian crude, Beijing wields considerable influence over Tehran.
Prior to the Red Sea Crisis, a third of global maritime trade, and 40% of trade between Europe and Asia passed through the Bab al-Mandab Straits. Although Chinese shipping has been untouched by the crisis, Chinese trade has taken a hit. Business representatives in Shanghai complained that ships carrying goods from Europe are forced to reroute around the Cape of Good Hope, incurring additional cost and time. Furthermore, due to the difficulty in discerning ship ownership, with most ships registered in Bahamas, Bermuda, Panama and other places, it is only a matter of time before a Chinese-owned ship or a ship carrying Chinese sailors is hit.
With much to lose and little to gain, China has time and time again tried to put an end to the crisis. According to Iranian officials, Chinese diplomats warned Iran that “if the Houthis do not show restraint, and Chinese interests are harmed, Sino-Iranian trade will be affected”. However, Beijing’s warnings to Tehran fall on deaf ears, and the Houthis continue to wreak havoc in the Bab al-Mandab Strait.
The difficulty of regulating the “dark fleet”
Tehran pays little heed to Beijing’s warning because Beijing’s warning is toothless.
Much of Iranian oil is sold to private Chinese “teapot” refineries – referred to as such because of their small scale compared to the large refineries owned by state-owned enterprise (SOE). Unassuming as they are, “teapots” handle 90% of Iran’s total oil export. In 2018, after the U.S. withdrew from the Joint Comprehensive Plan of Action (JCPOA) and launched the “maximum pressure campaign” against Iran, Chinese SOEs stopped purchasing Iranian oil out of fear of American extraterritorial jurisdiction. However, “teapots” are undeterred.
There are several reasons explaining this:
First, the reimposing of sanctions on Iran coincided with the outbreak of the Sino-American trade war. In the same year, the executive of Shandong Dongming Petrochemical Group – the province’s largest “teapot”, stated that as China imposed tariffs on American oil in a show of tit-for-tat, the company stopped purchasing American oil, which will be replaced by Iranian oil instead.
Second, “high risk means high return. At one time, Iranian oil was 13 U.S. Dollar cheaper than the market average.
Third, some of the smaller “teapots” do not do business with any other country beside Iran, and pay Iran in Renminbi instead of U.S. Dollars, thereby granting them immunity from American extraterritorial jurisdiction. In contrast, Chinese SOEs do not enjoy this versatility; they cannot afford to do business with Iran, lest they risk their investments in other parts of the world.
Had state-owned refineries been purchasing Iranian oil, Beijing would have a far easier time ordering them to cease purchase. “Teapots” working with Iran to smuggle Iranian oil into China make it difficult for Beijing to regulate, not to mention that Beijing is reluctant to exert too much pressure on Tehran fearing it would damage Sino-Iranian relations. Pitted against the vastly superior American-Israeli alliance, Iran discovered fighting asymmetric warfare is the only way which allows it to overcome the difference in weight class. Thus, pressuring Tehran to reign in the “axis of resistance” would effectively disarm it, and cast doubt in Tehran on whether Beijing is really as neutral as it claims.
Iranian oil purchased by “teapots” is difficult to regulate due to the many hoops through which they jump. Iranian ships carrying Iranian oil sail into the Persian Gulf or approach the Strait of Malacca, where they lower their national flag and switch off their automatic identification system. This allows Iranian ships to stop broadcasting their location and identity.
Omani, Malaysian or Indonesian ships waiting at the prearranged destination would conduct ship-to-ship transfers with the Iranian ships under the cover of darkness, allowing Iranian ships to figuratively and literally hide in the “dark” and Iran to obfuscate the origin of its oil.
These countries knowingly turn a blind eye for a few reasons. Being a middleman in this field is a lucrative business; they are sympathetic towards Iran – a fellow Muslim country; and they are discontented with American extraterritorial jurisdiction.
In February of this year, an Omani citizen by the name of Mahmood Rashid Amur Al Habsi, and a Chinese citizen by the name of Wang Shaoyun were indicted by the U.S. for violating American sanctions. The U.S. alleges that Al Habsi borrowed 16.5 million U.S. Dollars from American financial institutions to purchase an oil tanker which was later named M/T Oman Pride. The ship transferred Iranian oil to third-party ships using ship-to-ship transfer, which with the help of fraudulent documents, obfuscated the origin of the oil. The oil was then sold to Chinese refineries. The Iranians were paid in U.S. Dollars. The money was laundered through several shell companies before being placed in an American front company that was actually owned by Iran. Over 100 million U.S. Dollars’ worth of Iranian oil was sold this way before the U.S. caught wind of it.
The U.S.-based Iranian watchdog group United Against Nuclear Iran reported that earlier this year, a ship received Iranian oil from another ship via ship-to-ship transfer off the coast of Kharg Island, Iran, before delivering the oil to Sohar, Oman. As a long-time resident of Oman with connections in the country’s oil industry, the author knows that this is not an isolated case. Hundreds of millions of U.S. Dollars’ worth of Iranian oil, passed off as Omani oil, have been shipped to Chinese refineries in Shandong province, as well as to Liaoning and Shanghai in recent years.
Although Oman never officially declared itself to be neutral, it built a reputation for acting as a mediator in recent years, hosting dialogues between hostile powers in the region and outside powers with considerable presence in the region, including between Iran and Saudi Arabia, and Iran and the U.S. Oman is able to position itself as such because it is on the good side of all countries. In order to not invoke the wrath of either Iran or the U.S., Oman resorted to feigning ignorance of its citizens conducting illicit trade with Iran, whether on a large or small scale.
Musandam Governorate is an Omani enclave located south of the Straits of Hormuz. As a result of its isolation, the governorate is often neglected by Muscat when it comes to economic development. In order to stave off poverty, the local populace resorts to smuggling. Using speedboats, or “shooties” as they are locally known, smugglers ferry products ranging from electronic appliances to clothing across the strait. According to Mehr News Agency, in 2011, approximately 5 billion U.S. Dollars’ worth of goods is smuggled to Iran. A member of the Royal Omani Police’s Coast Guard, speaking on the condition of anonymity said they are told by decisionmakers to turn a blind eye to the smuggling.
Iranian oil disguised as Malaysian oil exceeds Malaysia’s own crude oil production, so much so that it places Malaysia as the 4th largest oil exporter to China, behind Russia, Saudi Arabia and Iraq.
In May of this year, U.S. Treasury Department representatives arrived in Kuala Lumpur to discuss how to stop Iran from circumventing sanctions with Malaysian counterparts. Malaysian Communication Minister Fahmi Fadzil responded that while Malaysia is willing to comply with UN sanctions, Malaysia will not follow in the footsteps of the U.S.’s unilaterally imposed sanctions.
To simplify, after Iranian oil arrives in China, it is passed off as Omani, Malaysian and Indonesian oil among many others.
China’s empty promise
Officials at the Iranian embassy in China have repeatedly complained to this author that despite signing the Belt and Road Initiative and the China-Iran 25-year Cooperation Program in 2021, Chinese investment in Iran has been minimal. China has only invested a fraction of the 400 billion U.S. Dollars it promised. Iranian embassy officials have launched multiple complaints to the National Development and Reform Commission (NDRC), the Ministry of Foreign Affairs and other departments but to no avail.
Indeed, whereas China’s total trade imported 64.36 billion U.S. dollars from Saudi Arabia, and 5.24 billion U.S. dollars from Israel last year, China imported only 4.58 billion U.S. dollars from Iran last year. While there is no doubt that many of China’s imports from Iran remain unaccounted for, the fact that China has severely underinvested in Iran remains true. Out of the two investment agreements China had signed with Iran in the past decade, China cancelled one following the U.S.’s withdrawal from JCPOA.
There are several reasons for China’s weak record of investing in Iran:
First, in the aftermath of the Iran-Iraq War, Iran’s Islamic Revolutionary Guard Corps (IRGC) began to “contribute to the country’s reconstruction” following encouragement from then President Akbar Hashemi Rafsanjani. Since then, IRGC has forged a business empire. Both President Mohammad Khatami and President Hassan Rouhani tried to stop the IRGC’s encroachment on key economic sectors to no avail. Currently, IRGC affiliated businesses are present in every economic sector, ranging from construction to telecommunication.
This gave rise to rampant corruption, crony capitalism and nepotism. Foreign investors are expected to bribe government officials for their services, and may have their license revoked or lose their contract, only for it to be awarded to IRGC affiliated companies. Chinese companies have often complained about Iran’s business environment being prejudiced against foreign investors. According to several Chinese business representatives who have chosen to remain anonymous, it is the policy of many Chinese companies to refrain from doing business with Iran due to the corrupt business environment.
It is unlikely that the situation will improve anytime soon. Being Iran’s most elite military unit; answering only to the supreme leader; and controlling 80% of Iran’s economy, along with the Quds Force – the IRGC has a monopoly over Iranian export and import. The IRGC has effectively become the “kingmaker” in Iranian politics; any politician would have to think twice before proposing reform.
Second, while the study of national character – the belief people belonging to a nation are predisposed to behave in a certain way, a concept that has been debunked as stereotype and largely abandoned in Western academia, remains popular in China. In fact, it plays an important role in General Secretary Xi Jinping’s goal of achieving “the great rejuvenation of the Chinese nation”. For example, n article published by Southern Daily – the official newspaper of the Guangdong provincial committee of the Communist Party of China – compares Chinese national character to that of the West by saying, “cultures of the orient are introverted whereas cultures of the occident are extroverted”.
According to Chinese scholars, Iranian’s national character is grounded in contradiction. While the achievements of the successive Persian Empire gave their heirs, the Iranians, a strong sense of national pride, Iran fell victim to colonialism and imperialism. Its isolation from the international community in recent centuries bestowed upon the Iranians the mentality of victimhood. Thus, Iranians are both proud and insecure.
Iranians’ contradictory national character means that despite being plagued by a myriad of exogenous and endogenous problems, Iran remains unwilling to compromise. The concept of “mutually beneficial win-win cooperation” – a “mantra” frequently uttered by Chinese diplomats, is an alien concept to Iran, a country that often overlooks long-term interests in favour of short-term interests.
Recently, under order from the Tehran, Iranian companies manually hiked up the price of oil sold to China. In previous years, the price of Iranian oil sold to China had been 10 to 13 U.S. Dollars below the Brent Crude benchmark. Now the discount stands at only 4.5 to 6 U.S. Dollars below average. A representative from a “teapot” located in Shandong province complained that “the new price is too high”, and said “they have been working day and night to lower the price, but Iranians have been very tough, and there is little room for negotiation”.
A representative from another “teapot” said that “Iran wants China to purchase Iranian oil at the same price it purchases Russian oil, which is 1 Dollar U.S. less than the market average, but what the Iranians could not comprehend is that Russia is not sanctioned to the same extent as Iran”. In other words, Iran does not understand that Chinese refineries will only assume the risk of buying Iranian oil if the price is low enough. Iran’s Energy Press News Agency even goes so far as to describe the decision to raise the price of oil as a “wise move”.
Third, In Iran, Chinese products suffer from the reputation of being low-quality. As the idiom goes, you get what you pay for. There are both high-quality, expensive goods, and low-quality, cheap goods made in China. However, rising inflation coupled with declining income in recent years means Iranians are increasingly unable to afford high-quality, more costly goods. As a result, Chinese goods have become associated with low-quality in Iran. Chinese companies complain that they have to contend with Iranian scepticism of China’s high-quality, expensive goods. The Iranian people consider them to be unreasonably expensive, and at the same time, Iranians turn their noses up to the low-quality, low priced Chinese goods, buying them only out of necessity.
Conclusion – Few sticks and even fewer carrots
With few sticks and even fewer carrots in the toolkit, there is very little Beijing can do. Despite conventional stereotypes, Chinese consumption of Iranian oil is dominated by “Teapots”, smaller refineries often on a provincial (or even lower) level. Beijing is hard-pressed to effectively regulate these relationships, often mediated and brokered by third parties (from Oman to Malaysia) who are far from China’s influence. China, dependent on efficient global shipping to maintain its global trade, finds it difficult to alienate Iran and thereby risk negative Iranian influence in the Persian Gulf that may affect China even more adversely.
Additionally, despite the steady and multilevel relationship between Iran and China, cultural differences remain. The Chinese view the Iranians as prone to contradiction (and thus less to stability) in their foreign policy, exhibiting pride and toughness alongside deep insecurities that are the result of dcades of isolation from the global framework. Iranians, on the other hand, view Chinese manufacturing as low-quality and are suspicious of Chinese firms importing their goods to Iran. The result of these misapprehensions is a gap in communication that makes it difficult to achieve the trust necessary for strategic changes.
Even if Beijing ups its pressure on Tehran, it is unlikely for Iran, which has withstood decades of sanctions to buckle and acquiesce under Chinese pressure. The revolutionary era slogan of “neither east nor west” stands true to this day, Iran’s “look to the east” policy does not means replacing American hegemony with Chinese hegemony. Given Beijing has little to offer, should Beijing ever decide to exert too much pressure on Tehran, it could quickly backfire.
photo by: https://theenergyyear.com/news/chinese-teapot-refineries-hard-hit/?amp