By Ivaylo Valchev *
The 25-year Iran-China cooperation program, signed in March in Tehran, has received little mainstream media attention. The vague and broad text of the draft agreement leaked the previous year and the lack of attention made it look like any other cultural cooperation agreement between two countries. However, further analysis showed that this act gave China a huge advantage in securing much of its oil supply, covering one of its main geopolitical risks – the Malacca dilemma – by making CPEC profitable. and making the Chinese presence in the region even stronger given current US foreign policy.
China’s thirst for oil has long been one of its main strategic problems. Its importance to the growing economy is understandable and expected. However, oil is of even greater value to the military complex as it is needed by every piece of machinery used to gain control and control the terrain. For this reason, every military campaign must solve two main problems: making sure there is enough quantity, and building the supply routes and procedures that will allow it to be delivered.
Over the past decades, China has increasingly focused on building a bigger, better and better military complex. He also said, through his secretary general Xi Jinping and various party leaders, that a conflict between their social system and that of the rest of the world, namely the West, is expected. It would be naive of the world to turn a blind eye to their direct statements.
The dangers of the Straits of Malacca
Supply for such a scenario cannot remain unresolved, especially in a centrally planned economy. Usually, China supplies its oil on the open market and transports it with tankers through the Straits of Malacca. This route costs between $ 2 and $ 3, but in extreme cases, when markets react to the implicit insecurity, costs can rise to levels of $ 10 to $ 14. Such levels are unsustainable because they have a serious negative impact on the economy.
The availability of oil is not the only problem they face. The Strait of Malacca route is the optimal route as it saves thousands of nautical miles of routes compared to alternatives such as Sundra Strait, Lombok and Makassar Straits, and Ombai-Weitar Straits. Its main problem, however, is that it can be closed very easily in times of military conflict. Unfortunately, it’s not much different for other routes – the Sundra Strait is only 13 miles wide at its narrowest point, while the Lombok Strait is only 11.5, followed by the Makassar Strait. , which is 400 nautical miles long, with widths ranging from 160 to 60 nautical miles.
Even tankers moving at the higher end of speeds would need 24-26 hours to cross it, making them extremely vulnerable to equipment, such as the highly mobile Israeli-made LORA rockets with a range of 400 km and a CEP of 10 meters. The Ombar-Weiter Strait, on the other hand, due to its depth and proximity to Australia, will be a likely location for underwater routes.
The army needs oil
The cost of transporting oil is not the only issue for China in a possible military conflict – the ability to actually reach its ports is a clear and present danger. Currently, all energy import routes for China pass through the Strait of Malacca – a long, narrow stretch between Indonesia and Malaysia. China’s implicit risk in this situation is that in the event of international disagreement this strait could easily be closed, a crisis event known as the “Malacca dilemma.”
This scenario would put the Chinese economy and people in dire straits without many options and they would be subject to influence. The bypass would require rerouting via the Java Sea or the Timor Sea, which would increase prohibitive delivery times and, above all, the risk of tanker capture and loss of cargo.
When China invested in CPEC and its influence in Pakistan, it theoretically dealt with the Malacca problem. In practice, the cost of transporting oil via CPEC has remained high, largely due to the difficulties resulting from the technical complexity required by the conditions on the ground – the pipe must pass through the highest mountains in the world and withstand a formidable climate. all year. For this reason, CPEC could be seen as a possible Plan B and an unsustainable solution. Until someone agrees to pay the difference.
Understanding Iran and its situation resulting from the sanctions imposed by the United States under the stricter Joint Comprehensive Plan of Action (JCPOA) is important in explaining how they have become close allies to China. When the sanctions were imposed at the end of 2018, the local economy entered a downward spiral. At the same time, Chinese oil purchases from them began to decline, from an average four-year peak of $ 2 billion per month to less than a quarter of that value – 0.2 to $ 0.5 billion and stayed at those levels. The data comes from the National Bureau of Statistics of China and Refinitiv.
The counter-argument is that China has compensated with unofficial purchases due to US sanctions. It is true that such purchases were taking place and that the practice of Iranian oil tankers turning off their transponders to avoid detection has been a hot topic in the news covering the oil industry. According to Refinitiv, also quoted by Reuters, these purchases were negligible (total amounts not exceeding $ 0.5 billion) until November 2020. Iranian tankers began to increase significantly, reaching nearly 3.5 million tonnes in February 2021.
China’s foreign policy towards Iran over the next two years became even more carefully selected. By letting Iran suffer for two years by limiting their own purchases, they have increased instability in the already painful economy of the Islamic republic. It was the perfect moment to present the opportunity to finalize the partnership agreement between the two parties. Such a strategy did not pose any risk to the Chinese economy, as Iranian crude only accounted for 9% of all oil imports during the 2014 peak, according to Statista data, so after the intervention, the share must be fell below 3%.
The perfect deal
In this dire situation, China offered its help by buying its oil at very favorable prices. This would fund infrastructure projects (which could most likely lead to increased economic and political pressure, similar to developments in Pakistan, Sri Lanka and the rest of the partners) and help in the IT arena. Considering the implementation of the social ranking system and mass surveillance in China, it can be assumed that they offered the autocratic Iranian government a way to exercise tighter control over its people in order to counter the western influence. Although details were not mentioned, such cooperation would be impossible without the use of equipment by Huawei and similar telecom / network companies with proven links to the PLA.
In finance, hedging consists of reducing the risks of unfavorable fluctuations in asset prices. It is similar to insurance – the interested party pays a premium to another party willing to take a specified risk. The state of Sino-Iranian relations is particularly interesting as China has an incentive to secure CPEC both physically and financially as well as to find a way to eliminate its greater risk from the oil supply chain. Additional goals include expanding the multibillion-dollar projects along the Belt and Road Initiative (BRI) and using this synergy to build dependence on an autocratic government, helping them further tighten control over its population and to give the PLA direct access to virtually all networks in the country. In return, the government would give them a preferable price over their main export product.
Understanding the magnitude of the discount requires calculating profitability in the worst possible scenarios. Even if a transport cost equal to the highest recorded peaks is used, it becomes clear that with this deal, China would get oil in its ports 8-12% cheaper than it would cost in peacetime. without the agreement. Moreover, a 20% discount on the current structure of extraction costs for Iran would require Iran to produce 35% more oil in order to get the same net income. This is basically the money that finances the state budget and anything less than this amount would be unsustainable as it would exhaust the budget in the medium and long term.
Iran gets cheated
The outlook for the Iranian government is rather bleak. The increase in oil purchases has been softening the deal and given Iranian crude’s share in Chinese imports, they are far from vital. This means that the Beijing leadership has very little motivation to keep purchasing at these high levels. Instead, he must continue to have Tehran pressed against the wall and dependent on that lifeline. It also means that the sanctions implemented by the White House could have a negative impact on Iran, but they certainly strengthen China’s position in the region.
Moreover, these sanctions were taken to avoid a situation where Iran would become a military nuclear power. But if in the future China sees a scenario where it is good for them to have WMD, they could easily provide them. Against another level of addiction, of course.
The profession is nothing less than a genius. China made Iran pay for its own export so that it would be profitable to go through the most expensive route at the most unfavorable time for international trade (given a military conflict, which closes the strait from Malacca). In the civilian world, this is similar to a client receiving the monthly premium payments from the insurance company for their auto policy, rather than making them. It is an absurd situation, which gives all the advantages to only one of the sides.
The west fails
The China-Iran partnership scenario is not the product of fortuitous political and trade decisions over the years, but rather a part of carefully crafted policy. Western strategists fail miserably against those in Beijing and must fundamentally reconsider their relationship as time is running out.
Partnerships such as QUAD must be at the center of Washington and EU foreign policy because the Chinese Communist Party is acting according to its plan. Risks, which seemed almost fiction a decade ago, are today’s reality hanging like the sword of Damocles over the democratic world.
* About the Author: The author is a Strategic Business and Geopolitical Analyst with an MA in Economics from the University of Buffalo, State University of New York, and an MBA from Cass Business School in London. The opinions expressed are personal. He can be contacted at [email protected]
Source: This article was published by South Asia Monitor