Iran can no longer rely on trade with China

Bloomberg | Esfandyar Batmanghelidj: For all Beijing’s claims to support Tehran, it is spooked by American sanctions.

China’s trade with Iran has reached a stunning new low. Data released Thursday by the Chinnese customs administration show that declared imports of Iranian oil in March amounted to just $80 million, down 92%, year on year. The last time the value of Iran’s declared monthly oil exports to China were the low was 20 years ago. The demand for Iranian oil re-exported via Malaysia has fallen precipitously, too.

This is not merely a blip. For more than a year now, China has been downgrading its trading relationship with Iran, as reflected both in the shrinking of bilateral trade as well as changes in policy at Bank of Kunlun, the financial institution at the heart of China-Iran trade. As with all developing economies, Iran’s prospects for economic growth depend on a functional trade relationship with China, so the downward trend is highly alarming for Tehran.

Even though non-oil exports to China remained stable in March at $384 million, Iran has run a trade deficit with China since September of last year, contributing significant pressure to the country’s balance of payments crisis.

While China’s trade with most developing economies will likely recover as countries come out of their coronavirus-epidemic lockdowns and as global commodities prices recover, it is not clear that Iran’s trade with China will enjoy the same rebound. Beijing remains unwilling to defend its commercial ties to Iran in the face of U.S. sanctions.

China grew especially leery after Jan 10, when the Trump administration issued Executive Order 13902, which imposed sanctions on Iran’s construction, mining, manufacturing, and textile sectors—parts of the Iranian economy that had shown signs of resilience as “maximum pressure” sanctions campaign decimated oil exports and thrust the country into a two-year recession.

The new sanctions were, notably, issued less than a week before the Trump administration signed the first phase of its trade deal with China. They had an immediate impact: Bank of Kunlun changed its compliance policies, further limiting the scope of trade for which it would process payments.

The bank informed its Iranian clients that after April 9—a date corresponding to the 90-day wind-down period provided by E.O. 13902—it would “no longer accept any business settlement in construction, mining, manufacturing, and textile industries,” and would limit its services to “settlements involving humanitarian supplies and non-sanctioned industries.”

Denied services by the solitary bank that had been used by Chinese authorities to defy U.S. secondary sanctions for over a decade, Iranian executives have been forced to turn to what they call chamedooni (suitcase) trade, referring to payments made in cash and transported across borders in hand luggage.

By using front companies and payments routed through third countries or paid in cash, Iranian firms and their most loyal Chinese partners should be able to ensure that bilateral trade doesn’t hit zero. But the inefficient and opaque methods now required to facilitate payments will put an inherent limit on how much trade can take place.

The further degradation in China-Iran trade is all the more notable given the recent gestures of political solidarity made by Iranian and Chinese officials. In February, Tehran’s landmark Azadi Tower was lit up with a message of support for Wuhan. That same week, Iran announced its first deaths from the virus. The severity of the country’s outbreak has been linked to the decision by Iranian authorities to sustain flights to China even as the risk of importing an outbreak became clear.

As in other countries, China has sought to repair damage to its reputation caused by the coronavirus outbreak by providing aid to Iran. Western observers have tended to interpret these token gestures as evidence that China and Iran maintain a political alliance.

No such alliance exists. Despite its vast resources, China has done less than the European Union to defend its trade with Iran over the past year, despite Beijing’s stated support for the 2015 nuclear deal and its voiced opposition to U.S. secondary sanctions.

Commercial realities may mean the boom years are over for China-Iran trade. But it is political realities that could see the relationship go bust.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.