How Iran is seeking stability in a teetering world

Bourse and Bazaar | Alireza Saedi: Amid the current fragility of the nuclear deal, which was caused by the unilateral withdrawal of the United States, Iran finds itself mired between China’s rise, America’s retreat, Europe’s paralysis, and Russia’s ambitions. Iran’s most urgent challenge is to devise an effective geopolitical strategy that can address the challenges and opportunities posed by its relations with each member of the P5+1 states that signed the JCPOA nuclear deal.

For the time being, the Trump administration’s approach towards the Islamic Republic has amounted to a confused and incoherent strategy and a comprehensive agreement that will definitively resolve the long-standing conflict between Iran and the United States still seems far from reach.

Meanwhile Europe is grappling with its own internal challenges. Brexit remains unresolved, depriving the bloc of a key source of leadership. France is plagued by social crises and Germany is in a state of transition, in which the departure of Chancellor Angela Merkel is likely to trigger a decline in the German political leverage. A wave of nationalist movements continues to grip the politics of Italy and several other European countries. Against this backdrop, Europe is struggling to assert control over its foreign policy, particularly in regards to the crumbling nuclear deal.

Surprisingly, given these realities, Tehran has so far focused all of its diplomatic efforts on the European Union in order to save JPCOA, rather that counting on the other signatories (China and Russia) to the nuclear deal in equal measure. Iran has received little beyond symbolic gestures from the weakened European states.

Apart from US and EU, Russia has its own diplomatic crises with the West, ranging from Crimea’s conflict and its military presence in Syria to alleged interference in the 2016 US presidential election, Moscow is going out of its way to rejoin the G7 club and restore its economic growth with a renewed focus on oil and gas exports. Despite holding the world’s second largest gas reserves, Iran is just a nominal exporter due to lack of investment in renewal infrastructure. It is encircled by market rivals in Central Asia and in the Persian Gulf, which are relentlessly investing in and developing their energy resources and continuously facilitating the export of their products. So in some respects, Russia’s status as an energy exporter creates a hidden economic competition with Iran. Considering Moscow’s historical intention to be recognized as an European power rather than Eurasian one, this makes the Iranian public apprehensive of the foreign policy of its powerful northern neighbor.

But to really understand the complexities surrounding the Iran nuclear deal, one must look to the China and its trade war with the United States. Given the economic interdependence of the two states, the ongoing conflict would have been absolutely unimaginable a few years ago. Today, USD 1.1 trillion of the total US national debt is owned by Beijing. Last year China’s trade surplus with the US hits USD 419 billion.

But China’s willingness to push back on the Trump administration’s tariffs reflects increasingly strong links to other global markets. In 2018, China exported about USD 400 billion in goods to Europe, pushing its own surplus to around USD 180 billion. Meanwhile, China is the world’s second largest importer. It is a major destination for the exports of Japan (25 percent), the EU (11 percent) and the US (7 percent). Thus, any decline in China’s economic growth, which is deeply dependent upon imports of energy and raw materials, would consequently trigger a tremendous domino effect in economies worldwide. The conflict between the US and China is conditioned by a kind of mutually assured destruction—any economic attack by one actor will immediately invite a counterattack of equal proportions. This is a classic superpower battle.

A Superpower Called China

At the global scale, China’s trade surplus has provided enormous financial resources and it has used these funds to implement its ambitious Belt and Road Initiative (BRI), which seeks to diversify China’s trade partners and simultaneously guarantee the procurement of cheap energy and raw materials from multiple global suppliers. Whether China can be a reliable partner for Iran depends to a large degree on the outcome of the US-China trade war and the development of BRI projects.

China has taken steps to control key chokepoints in global maritime trade, most notably in the Strait of Malacca running between Malaysia and Indonesia. The narrow path connects the Indian Ocean to the South China Sea and functions is perhaps even more important than the Strait of Hormuz as it is the key passage for shipping between India, Singapore, the Philippines, Taiwan, Japan and South Korea. The ships that pass through Malacca account for 25 percent of the global trade and 80 percent of Chinese energy imports from the Middle East.

As it operationalizes the Belt and Road Initiative, China has been expanding its presence in other crucial trade corridors. In the period between 2015 and 2017, China signed numerous long-term leases in the major ports on the BRI maritime path. Contracts have been inked with the Pakistani port of Gwadar (for a period of 40 years), Myanmar’s port of Kyaukpyu along the Bay of Bengal (for 50 years), the port of Kuantan in Malaysia (60 years), the port of Obock in northern Djibouti (10 years), the port of Hambantota in Sri Lanka (99 years), and the port of Muara in Brunei (60 years). China has also made extensive investments in Africa, seeking to secure the strategic supply of the continent’s mineral resources.

While these ports and maritime links are ostensibly intended for the transport of goods and commodities, they may also facilitate the movement of military forces in times of crisis, raising concerns among international observers that China is using the BRI project as a cover for new hegemonic designs. Through these infrastructure projects, they argue, Beijing is employing “debt trap” to advance an expansionist agenda.

Such “debt trap” diplomacy has long been employed as a strategy of control by richer nations, who pledge long-term loans for massive infrastructure projects in the developing world. The borrower’s failure in repayment grants effective control of ownership and operation of the infrastructure to the creditor. In this new century and in the case of BRI, state-owned and politically connected Chinese enterprises will play a central role in financing and developing the projects, at the expense of local firms.

In 2018, Malaysia’s newly elected Prime Minister Mahathir Mohamad suspended a major pact with China signed by his predecessor Najib Razak. Under the deal, Beijing would have offered Kuala Lumpur USD 22 billion in loans in exchange for the control and development of an oil pipeline and a deep-water port. Mohamad argued that given Malaysia’s strategic role on the banks of the Strait of Malacca, such treaties inked under the umbrella of the Belt and Road Initiative could ultimately turn Malaysia into a modern Chinese colony. Mohamad’s concerns stemmed from the experience of others. Sri Lanka failed to meet its debt obligations to China in 2107. China took control of the Sri Lankan port.

The Gwadar Game

China’s Belt and Road ambitions reach Iran’s threshold at the port of Gwadar in Pakistan. On the back of a 43 year lease for the port and a surrounding free trade zone, China has devised a USD 62 billion investment plan to cover port construction, roads, railways, electricity and other major infrastructure projects. As part of the same agreement, Karachi will be connected to Gwadar through a massive 1,100 kilometer road project that will also upgrade the Karakoram Highway to connect Pakistan to China via Kashgar. India’s attempts to counterbalance Chinese investments in Pakistan include the Iranian port of Chabahar.  Despite the granting of a waiver from the US government exempting the port from sanctions, the project has seen little development. but it remains a notable opportunity for Iran to connect itself to one of the fastest emerging economies in the world.

But what makes the Chinese loans to Islamabad unique are the interests rates that have been offered, which are set as low as 1.6 percent. In contrast, the World Bank loans to Pakistan have been ratified with interest rates between 5 to 8.5 percent. Given the market risks, the foreign private sector investment companies have been charging Pakistani firms with 12 percent interest rates.

The low interest rates may reflect the high strategic importance China places on the Gwadar project, which gave the superpower a foothold in the greater Middle East—China has long considered the construction of a naval base near the Persian Gulf.

Iran and the “Heartland”

The United States is now less dependent on Middle East oil and is even projected to become a net energy exporter in 2020. But given China’s rise and the Chinese need to sustain reliable energy supplies, the Middle East will likely remain a focus for US strategists as a region in which to check Chinese power—for the first time since the Cold War, the Middle East will once again be an arena for competition between two superpowers. This competition will center largely on the Strait of Hormuz and Iran in particular, as China seeks to ensure its energy security and connect the Eurasian zone through Central Asia by reaching towards Europe. Meanwhile, the US has embarked on protectionism and isolationism weakening Transatlantic traditions.

Aside from its military capabilities (which are focused on the nation’s defense), Iran’s greatest source of leverage remains energy exports—and not necessarily its own. Today, the Islamic Republic is playing an old trump card, by modulating security and insecurity in the Strait of Hormuz, the pathway for oil exports equivalent to 20 percent of global demand.

Iran is using its control over the chokepoint as a means to pressure key players to do more to salvaging the nuclear deal. Most of the oil that passes through the strait is headed for China—the world’s second largest economy is energy hungry. That hunger underpins trillions of dollars of derivatives structured on the risk of oil price volatility, meaning that large and sustained disruptions in exports may disturb major capital markets. To the extent Iran’s geopolitical strategy calls for a turn eastward, it is as much about seeking leverage over China as it is about seeking economic support from China.

Those developments point to the renewed salience of Halford Mackinder’s geopolitical theories—the Belt and Road Initiative reflects a Chinese effort to control the political and economic “Heartland” that connects the Asia to Europe. Amid this shifting geopolitical landscape, Iran must promptly define its own strategy, or once again fall behind as it did in the case of its failure to join the World Trade Organization at the optimistic dawn of globalization, watching Turkey, Malaysia and India move up the economic ladder and celebrate newfound prosperity. In this new and more cynical era of great power competition, Iran must reassert its geopolitical importance and find its new balance in a teetering world.