Former president Mahmoud Ahmadinejad has warned that Iran is in a "secret deal with a foreign government,” hinting that the public should be informed about talks between Iran and China. But the former president and his allies’ criticisms of the “new nuclear deal” or the "Eastern JCPOA” [Joint Comprehensive Plan of Action] has been seen as inappropriate and out of place, especially given that Ahmadinejad entered into similar deals with China during his own tenure.
According to an article published on the pro-Ahmadinejad Dolat-e Bahar [The Government of the Spring] website, Ahmadinejad told the people of Gilan province on June 27: "We have heard that they are negotiating and want to sign a new 25-year agreement with a foreign country, and no one knows about it.” An Iranian foreign ministry spokesperson responded by saying that Iran’s "cooperation with China has enemies.”
The agreement is not dissimilar one struck during Ahmadinejad’s presidency. Iran hopes the deal will boost Iran’s economy and international trade, and China gains both financially and in terms of strategic influence. It will be able to deploy 5,000 troops in Iran and will benefit from flexible payment arrangements, including deals settled in currencies other than the US dollar, which is crucial for the Islamic Republic.
The final draft of the 25-year comprehensive Iran-China plan was reviewed and approved by a cabinet meeting on June 23. President Hassan Rouhani commissioned Foreign Minister Mohammad Javad Zarif to advance the initiative.
"This cooperation is a platform for Iran and China to participate in key projects and development of infrastructure, including the Belt and Road Initiative, and will provide an opportunity to attract investment in various economic areas, including industry, tourism, information technology, and communications," Rouhani said.
China’s Belt and Road initiative aims to achieve a new economic order independent of the United States and with greater access to and for the Central Asian region.
“Turkmenchay” Contract with China Under Ahmadinejad
Ahmadinejad’s comments have attracted criticism, not least because while he was president, he had entered into his own secret currency deal with China, shielding the public from it for three years.
Under Ahmadinejad, the government pursued a policy of “facing eastward.” Despite these negotiations, a memorandum of understanding, and the signing of several oil contracts with China during the Ahmadinejad era, in 2006, China voted, as part of the UN Security Council, in favor of Iran’s nuclear program being monitored and supervised by the International Atomic Energy Agency. During this period, China reduced its oil purchases, despite Iran granting huge discounts. In addition, the country refused to transfer oil revenues to Iran.
In 2008, the Ahmadinejad administration signed an agreement with China that allowed it to keep the proceeds from the sale of oil and apply them as credits for goods Iran could buy from China. It also stipulated that the Chinese government would not be responsible for any loss Iran incurred due to fluctuations in currencies. Any losses were to be borne by Iran.
Three years later, the deal was leaked, and the media labeled it the"Turkmenchay currency contract with China," a reference to a deal China did with Russia in the 1800s that resulted in Iran surrendering a significant amount of land and with it, loss of influence and power. Between 2008 and 2011, the equivalent of more than U$25 billion was deposited in Iran’s account in China, and Iran had no choice but to import goods from China in exchange for the money.
In the winter of 2015, research into Iran-China relations during the Ahmadinejad era was published in the International Relations Journal. The report said the Ahmadinejad government was hampered by "the reactive nature of this policy” of “looking east” and said the government did not have adequate understanding of the international system. Furthermore, it pointed to Iran having a “different interpretation” of the vision of the arrangement and to the fact that the two countries did not have “a consensus on the nature and components” of the policy. It also said Iran had not considered the “role of regional rivals and pressure from the United States.” There were “no common expectations between Iran and China,” it concluded.
In 2016, the two countries signed a wide-ranging strategic agreement for a five-year period. Iran did not provide any updates on the agreement until it was updated in 2019.
According to the Petroleum Economist website, "Zarif's trip in 2019 to present the executive plan was a comprehensive strategic cooperation agreement between Iran and China, which was signed in 2016. During this trip, the 2016 agreement was updated."
The article reports that the main focus of the agreement was China's $280 billion investment in Iran to develop the country’s oil, gas, and petrochemical sectors. This amount is likely to be invested in the first five-year period of the contract, but it is inferred that more funds will be allocated in following five-year periods under bilateral agreement.
In addition, a further $120 billion investment has been planned to improve Iran's transportation and production infrastructure, which will also be spent over the first five years and can be increased with the agreement of both parties.
Iran expects China's support in the UN Security Council, the development of the oil fields South Pars phase-11, increased production of the West Karun oil field, and an increase in China’s oil imports.
In return, China will receive at least a guaranteed 12 percent discount in oil, gas and petrochemical products purchase from Iran. It will also receive a 6 to 8 percent discount on possible damages.
According to oil economists, the new agreement gives China the right to delay payment to Iran for up to two years. In addition, China can pay Iran in soft currencies (read as weaker currencies) derived from trade with African countries and the countries of the former Soviet Union, as well as in the Chinese yuan. This means that none of China’s payments to Iran will be in US dollars.
Another benefit in China forging links with Iran is what value it adds to its Belt and Road initiative. China can use cheap labor in Iran to build factories. Products manufactured in these factories will be the same quality as those manufactured in Chinese factories.
In its analysis, the Petroleum Economist website quotes an Iranian source who confirms that China will deploy 5,000 troops to Iran to protect its ongoing projects in the country. Other professionals will be deployed to protect oil, gas and petrochemical products shipped from Iran to China.
Has Economic Cooperation Been Implemented?
All of this comes as recent statistics regarding Chinese customs indicate that China's oil imports from Iran fell 90 percent between January and May 2020, and currently sit at 257,000 tons. Iran's oil exports following the signing of the JCPOA in 2015 were about 2.5 million barrels per day. The Chinese oil company CNPC, which had been working with French company TOTAL to develop phase-11 of South Pars, left Iran after the United States withdrew from the JCPOA in 2018 and imposed tougher sanctions.
The United States also boycotted Chinese transport company Casco on September 25, 2019 after it agreed to transport Iranian oil. The embargo, which increased global shipping costs, was lifted about four months later.
The China National Machinery Import and Export Company signed a €2.2 billion (US$2.4 billion) contract with the Iranian Mapna Company in May 2017 to electrify the Tehran-Mashhad high-speed rail, which was due for completion that year, but remains unfinished. Details of the Chinese company's fate have not been released since the US withdrew from the JCPOA. But on June 9, 2019, Saeed Rasouli, the CEO of the Iranian Railway Company, stated that the Chinese side had failed to provide the necessary guarantees for the project to get underway.
China's plans came as foreign investment in Iran was significantly jeopardized following the US withdrawal from the JCPOA and its imposition of further sanctions in 2018. The Organization for Economic Co-operation and Development (OECD), which classifies the investment risk index in countries from one (least risky) to seven (most risky), ranked Iran sixth in terms of investment risk two years after the United States withdrew from the JCPOA.
Declining international economic relations, a lack of money exchange opportunities and international insurance obligations are all factors in this increase in foreign investment risk in Iran. According to statistics released in January 2019 by the Iranian Cooperatives Chamber, the highest amount of foreign direct investment in recent years was in 2017, amounting to $5 billion. Despite plans and negotiations it is unclear how China's $400 billion investment in Iran will be realized.
Mahmoud Ahmadinejad may have harsh words to say about Iran-China relations, but it’s nothing his administration wouldn’t have done. And, with an economic future more uncertain than most, Iran has limited options beyond the advances made by the Chinese government.