Will China trade with Russia, Iran? Analysis by Maxim Petrov

The volume of Chinese trade with Russia has increased in recent years, with estimates ranging from $140 billion to $150 billion last year. This is 10 times more than the volume of Iranian-Chinese trade. Today, some large Chinese corporations refuse to work with Russia, while others have increased their purchases of Russian oil. What is the future of Russian-Chinese trade in the face of increasing American and European anti-Russian sanctions? What will happen to Iran-China trade now that the US nuclear deal with Iran appears to be on the verge of being renegotiated? To recall, the essence of the nuclear deal is the lifting of sanctions against Iran in exchange for the cessation of its nuclear weapons programme.

In some ways, China is at ease with American and European sanctions against their partners. As a result, China buys oil from Iran at a price of $6 below the market and pays not in dollars, but in its own goods (cosmetics, household appliances, products, and so on), which are sometimes of poor quality. That is, purchasing Iranian oil is extremely profitable for China; it is a method of subsidising Chinese industry. However, the volume of purchases (300,000-700,000 barrels per day, according to various estimates) is clearly insufficient for China, so China will continue to buy Russian oil - albeit at significant discounts. In this regard, sanctions against Iran and the Russian Federation are extremely beneficial to China. After all, having lost the opportunity to sell oil to Europe, their partners are forced to sell it to other countries at a discount and on exceptionally favourable terms for the PRC, thereby subsidising the mighty Chinese economy.

However, there are disadvantages for China. First, if the breakdown of the nuclear deal becomes a fait accompli, in the future the United States is quite capable of imposing sanctions on Chinese companies that trade with the Iranians. While the Biden administration had hopes for a nuclear deal with Iran, the United States looked at China's purchases of Iranian oil through its fingers, but now everything can change. This may happen, although it will not necessarily happen: we cannot rule out a scenario in which Washington does not want to anger China too much (after all, Beijing does not give Russia weapons yet and partially complies with anti-Russian sanctions, despite his words about Moscow's support, and China behaves very restrained in relations with Iran). The same is possible with respect to Chinese companies buying Russian oil - they may fall under sanctions.

Yes, until now, the United States has not prevented China from buying Iranian oil, but only because they hoped to reach an agreement with Iran on limiting its nuclear programmes. If hope finally collapses, we should expect Washington's anti-Iranian sanctions to tighten and this could hit China. Similarly, it cannot be ruled out that the United States will first begin to put pressure on Chinese companies buying oil from Russia, and then impose sanctions against them.

Secondly, after President Donald Trump unilaterally withdrew the United States from the nuclear deal and imposed sanctions against Iran in 2018, China reduced trade volumes with Tehran by 30 per cent. A large-scale plan for economic cooperation between the two countries, providing for Chinese investments in Iran in the amount of $ 400 to $ 800 billion (the details of the deal were kept secret, but these figures appeared in the media), remained on paper. But the plan provided for Chinese investments in Iran's infrastructure and industry in exchange for oil supplies at fixed prices for 25 years. In fact, it was planned to restructure and modernise the entire Iranian economy in exchange for cheap oil supplies. The plan meant the growth of Chinese influence in this country.

But despite all the benefits, it turned out to be nothing more than a declaration of intent. In conditions when the Chinese do not want to fall under American sanctions aimed at Iran, there could be no question of anything like this in practice.

But why does China pursue such a policy? There are two reasons for this today. Firstly, the volume of Chinese trade with the European Union and the United States is ten times more than with Russia and 100 times more than with Iran. China cannot afford to lose the giant American and European markets, and this is exactly what can happen in a situation when and if it does not listen to the voices of Americans and Europeans criticising Beijing's cooperation with Moscow and Tehran. In addition, China is still critically dependent on the supply of a number of strategically important goods, including semiconductors and machines for their production. Although in recent decades the country has rapidly developed various sectors of science and industry and relied on the domestic market, it cannot allow the destruction of production chains and foreign trade with its main economic partners – the EU and the USA.

Secondly, China is currently experiencing enormous economic difficulties. They are related to the government's policy of blocking densely populated regions of the country in response to the coronavirus pandemic, as well as to the decline caused by the accumulated problems of Chinese construction and technology companies. It is doubtful that in such a situation, China will increase the risks of confrontation with the United States and Europe.

Summing up some results, we can say that while China does not intend to stop trading with Russia and Iran, it buys oil from them at a big discount. At the same time, a reduction in China's trade with these states is becoming quite likely.