Occasional Paper Series No. 38 l September 2020 Last Among Equals: The China-Iran Partnership in a Regional Context By Lucille Greer and Esfandyar Batmanghelidj INTRODUCTION to reorient the balance of power in the Middle East in defiance of the United States, even In early June 2020, a scan of an 18-page though China’s policy is not to make alliances in document began circulating on Iranian social the region. media. Titled “Final Draft of Iran-China Strategic Partnership Deal,” the document, which While that the leaked document included no appeared to have been leaked from the Iranian financial targets, many news reports stated that Ministry of Foreign Affairs, immediately caused the deal would see China invest $400 billion in a firestorm among the general public and Iran, a completely fictitious number that can politicians alike. Soon, the international media be traced back to a dubious article published picked up the document and headlines blared in the spring of 2019.1 Such errors reflect the that Iran and China were forging a new “alliance” long-running overestimation of China’s economic Middle East Program Occasional Paper Series No. 38 l September 2020 engagement not just in Iran, but also in the wider China’s measured approach to building relationships Middle East. Reporting on potential or promised with several countries despite the mutual financing or investment is rarely balanced by the antagonism in the region. actual amount of capital committed and how it is applied across the region. This is the crucial context that is absent in most recent analysis of this deal and its ramifications. Understandably, given the rising tensions between In order to better understand these ramifications, the United States and China, and given the this paper presents a comparative study of continued sanctions pressure exerted by the Trump economic and security relationship between the administration on Iran’s economy, the prospect of two countries. Published alongside this paper is a China-Iran deal has been widely perceived as the first full translation of the 18-page document a new gambit to challenge Washington. But the from the Iranian Ministry of Foreign Affairs, which is leaked document, attributed to the Secretariat of presented in an appendix. The paper also quantifies the Supreme Council for the Mechanism of the the scale of Chinese economic engagement Iran-China Comprehensive Strategic Partnership, indicates a fact obvious to close observers of China- Iran’s renewed efforts to further Iran relations. Rather than herald a new alliance, the articulate and implement the CSP do document reflects a renewed effort on the part of the Rouhani administration to restart negotiations not reflect a grandiose ploy to resist around the Comprehensive Strategic Partnership U.S. sanctions. (CSP) agreement signed upon Xi Jinping’s visit to Tehran in January 2016, shortly after the implementation of the Joint Comprehensive Plan of across the Middle East. Time series data on trade, Action (JCPOA), and four days after Xi signed a CSP investment, external finance, and contracted labor agreement with Saudi Arabia in Riyadh. are analyzed to understand the development of the bilateral economic relationship between China and Iranian authorities had hoped that the CSP, which Iran.2 Data on arms sales and joint military exercises is an off-the-shelf framework China routinely uses are analyzed to examine the depth of military to structure its bilateral political and economic and security cooperation.3 All of this data is then relations, would help build a deeper partnership contextualized by drawing comparisons between between the two countries. Iran’s renewed efforts Iran, Iraq, Pakistan, the United Arab Emirates, Saudi to further articulate and implement the CSP do not Arabia, and Turkey – the most significant economies reflect a grandiose ploy to resist U.S. sanctions. in the wider Middle East. Rather, the leaked document speaks to Iranian frustrations regarding the relative weakness of The conventional wisdom is that Iran is dependent its bilateral relations with China when compared on China. But the scale and scope of that to the political, economic, and military ties that dependency are far more limited than believed. The its neighbors enjoy with Beijing. It also speaks to analysis of this paper makes clear that Iran is, in LAST AMONG EQUALS: The China-Iran Partnership in a Regional Context 2 Occasional Paper Series No. 38 l September 2020 relative terms, no more dependent on China than implications of the much-hyped China-Iran alliance. the other major economies in the Middle East. It remains to be seen whether China will seek to The authors also make clear that this dependency convert the CSP framework into a relationship that does not reflect a significant magnitude of Chinese can be called an alliance, but any movement in this trade and investment. On the contrary, relative to direction would reflect a significant break with the the size of its economy, Iran appears to be lagging long-standing pattern of Chinese foreign policy in behind other Middle Eastern states as a trade the Middle East, particularly with regards to China’s partner and investment destination for China. Iran’s ongoing need to balance its ties with Iran and its level of economic dependence on China is not a adversaries. After all, as this paper makes clear, function of Chinese strategic interests in Iran, but China is as at least as committed to Iraq, Pakistan, rather the result of the West’s initial abandonment the United Arab Emirates, Saudi Arabia, and Turkey of the Iranian market beginning with the imposition as it is to Iran. of multilateral sanctions in 2008. The Trump administration’s imposition of “maximum pressure” sanctions in November 2018 subsequently CHINESE ECONOMIC ENGAGEMENT derailed a short period of renewed European trade IN IRAN and investment in Iran following JCPOA-related As Western firms largely withdrew from the sanctions relief. Iranian market following the imposition of financial Given that Iranian dependence on China is, so far, sanctions in 2012, reporting on Iran increasingly primarily the result of Western strategy, rather focused on the presence of Chinese firms, drawing than Chinese strategy, the analysis that follows a connection between their persistence and the is an important correction for policymakers who rhetoric of Iranian policymakers – including the are concerned about the political and security Supreme Leader – who were calling for Iran to “turn East” and increase trade with China as part of LAST AMONG EQUALS: The China-Iran Partnership in a Regional Context 3 Occasional Paper Series No. 38 l September 2020 These reports, in turn, gave rise to has largely lagged other Middle Eastern countries with regards to economic engagement with China. a perception among the majority Moreover, when data in these four areas are viewed of analysts that Iran was becoming in time series formats, it becomes clear that the more economically dependent China-Iran economic relationship has stagnated, if not deteriorated over the last five years or more. on China as a result of Western sanctions... Deterioration in Bilateral Trade efforts to resist Western economic pressure. These Over the last two decades, China has emerged as reports, in turn, gave rise to a perception among the Iran’s leading trade partner. China has been Iran’s majority of analysts that Iran was becoming more largest oil customer and today remains the only economically dependent on China as a result of country purchasing Iranian oil in defiance of U.S. Western sanctions, and that it also fell in line with sanctions. China is also a major industrial supplier to the policy of Iranian leadership. Iran, having displaced Europe in 2008 as the largest supplier of industrial parts and machinery that are Contemporary analysis rarely sought to substantiate used by Iran’s growing manufacturing sector. In this the matter of Iran’s dependence on China by regard, Iran’s trade partnership with China resembles looking to the relevant economic data. This is both the partnership enjoyed with Europe prior to the a reflection of the journalistic nature of reports of imposition of multilateral sanctions in 2008. Foreign increased Chinese presence in Iran, which inherently exchange revenues earned through the sale of oil rely on anecdotal accounts, and also the fact that are spent on high-value industrial inputs as well as quantitative assessments of Iran’s economy rarely finished goods such as consumer products. appear in think tank analysis of Iran. Moreover, when quantitative data was cited – for instance, to highlight Chinese exports to Iran rose from $2.5 billion in the fast growth in bilateral trade – it was rarely 2004 to $14 billion in 2018, a significant increase in examined in comparison with China’s economic total magnitude. But in relative terms, this growth, engagement elsewhere in the region. equivalent to an annual rate of 16.9 percent, reflects the regional norm. The average annual growth rate As a result, although most journalistic and analytical of Chinese exports to Pakistan (15.6 percent), Saudi reports on the China-Iran relationship have accurately Arabia (16.1 percent), and Turkey (16.8 percent) are described the growth of economic ties between comparable to the growth seen in Iran. Growth in these two countries in absolute terms, most of Pakistan (15.6 percent) and the UAE (12.9 percent) this analysis has overstated the matter of Iran’s are slightly lower given greater penetration of economic dependence on China, and by extension Chinese goods at the beginning of the period. the depth of China’s economic commitment to Iran. Growth of Chinese exports to Iraq measures a Looking at economic data in four key areas – bilateral staggering 39.0 percent, reflecting growth from a trade, foreign direct investment, external finance, very low level of exports.