China and Iran's New Love Affair?

"With sanctions removed, China will have a freer hand to deepen its relations with Iran not only on economic issues, but also in the cyber and military domains."

The Iranian nuclear agreement has been welcomed by a number of world leaders as a new chapter in foreign relations with Tehran, largely because sanctions removal will open up new trade and investment opportunities within Iran. While the majority of the P5 + 1 aimed to isolate Iran from the global economy for the last decade, China capitalized on Iran’s estrangement to secure primary positions in both the oil and non-oil sectors of Iran’s economy. Beijing is now placed first in line for Iranian business. More importantly, in the coming years, Tehran could deepen its long-standing relationship with the People’s Republic in the military, cyber, and strategic domains.

Beijing will benefit the most from the removal of sanctions. Since China became a net oil importer in 1993, Beijing has turned to Tehran to help satisfy its growing energy needs. Before UN sanctions were imposed, the Islamic Republic was China’s third largest crude oil supplier. In 2011, the People’s Republic imported a record 550,000 barrels per day from Iran. China reluctantly instituted sanctions on Iran, but oil importation continued even when sanctions were in place. In December 2013, reports even stated that the U.S.-sanctioned Zhuhai Zhenrong Corporation was negotiating a new natural gas condensate contract with the National Iranian Oil Company. According to The Wall Street Journal, Beijing’s oil imports from Iran have increased by 30 percent over the last five years and now account for 9 percent of its overall imports.

Across the region, sanctions relief will allow Chinese companies to score even larger windfalls in oil sector trade and investment. Pakistan is already hoping it will spur China to provide up to $2 billion for the completion of the Iran-Pakistan liquefied natural gas pipeline, a project started in 2010 but suspended in 2013 due to sanctions. This project would buttress the China-Pakistan Economic Corridor (CPEC), a set of highways, railroads and pipelines linking western China with the Pakistani port of Gwadar along the Arabian Sea, cutting Chinese shipping costs and fostering trade.

In return for oil, Beijing has flooded Iranian markets with cheap consumer goods and established relationships in non-oil sectors like construction, manufacturing and transportation. Last year, China raised its quota for infrastructure investment in Iran by over 50 percent. The sanctions regime imposed restrictions on giving the Iranians hard currency, but this actually benefited Beijing by expanding its market share in Iran to the detriment of local businesses. Chinese companies now occupy an optimal position for gaining non-oil concessions and investments after sanctions are removed, leaving other companies and investors a step behind.

Tehran is sure to widen its partnership with Beijing after the deal. During negotiations, continued Chinese trade and investment helped Iran evade the worst of the sanctions regime. However, fear of being seen as Iran’s enabler and imperiling investment links with the United States hindered China from helping Iran more. With sanctions removed, China will have a freer hand to deepen its relations with Iran not only on economic issues, but also in the cyber and military domains.

Chinese-Iranian cyber collusion is not new. In 2012, Reuters reported that the China-based telecommunications company ZTE Corporation signed a $130.6 million networking equipment contract in 2010 with the Telecommunication Company of Iran, which controls most of Iran’s landline services, to help Iran monitor Internet, text, and voice communications. ZTE Corp.’s Chairman stated that a U.S. criminal investigation into the claim forced the company to scale back its business in Iran but accused ZTE’s rival, Huawei Technologies Co Ltd., of continued dealings in Iran. Tehran has long relied on Beijing for technology and know-how, and recently called for joint cooperation in research and investment, ICT, airspace, and telecommunication. Iran will likely accelerate coordination with China in the coming years, to both improve its domestic cyber-surveillance and wage destructive cyber-warfare on international companies.