China holds the high cards in Iran nuclear negotiation

US and Iranian diplomats will start negotiations in Vienna next week on the Joint Comprehensive Program of Action (JCPOA) following a virtual meeting April 2 including Iran, Russia, China, France, Germany and the United Kingdom, the US State Department announced on Friday.

The Americans won’t meet the Iranians directly, but will be involved in efforts to revive a pact on curtailing Iran’s nuclear program that the Trump administration unilaterally disavowed.

Iran’s Foreign Minister Mohammed Javad Zarif tweeted about the Friday virtual meeting: “Aim: Rapidly finalize sanction-lifting & nuclear measures for choreographed removal of all sanctions, followed by Iran ceasing remedial measures. No Iran-US meeting. Unnecessary.”

Economic sanctions against Iran are Washington’s main means of pressure, but China’s $400 billion bilateral investment agreement with Iran signed last week will undercut their impact.

Chinese experts told state media that China could nullify American sanctions by using its own currency to trade with Iran and other Central Asian nations. The sheer size of China’s economy and the scale of its Belt and Road investments in Central Asia means that the US cannot strangle Iran’s economy unless China plays along.

The Biden administration reacted to China’s fait accompli by praising China’s role in the Iran negotiations. State Department spokesman Ned Price said in an April 1 press conference, “Competition, as you know, does define our relationship with China, but we do have in some cases rather narrow areas of tactical alignment. We’ve spoken to some of those in recent days, and it so happens that Iran is one of them. China has been cooperative in efforts to constrain Iran’s nuclear program. Of course, China is an original member of the P5+1. Beijing, of course, has no interest in seeing Iran develop a nuclear weapon and the profoundly destabilizing impact that would have on a region upon which China does depend.”

That is a possible Chinese policy, but not the only one. In the past, Washington has accused China of providing ballistic missile technology to Iran, including solid fuel propellants and guidance systems, as well as assisting Iran’s nuclear weapons program.

In 2020, China allegedly brokered a deal to sell North Korea’s Hwasong-12 ICBM rocket booster to Iran, according to Bruce E Bechtol in The National Interest. Some analysts speculate that the high accuracy of the Iranian missiles that destroyed aircraft hangers at the American bases in al-Asad and Erbil, Iraq, showed that they were of Chinese origin.

China has the option to be either a stabilizer or a spoiler in the region, although its position as the world’s largest importer of Persian Gulf oil gives it a powerful economic incentive to avoid a major conflict in the region.

To what extent China has aided Iran’s development of nuclear weapons or its ability to deliver such weapons with missiles is not clear. But the fact that China has the ability to do so gives Beijing considerable leverage with Washington.

The Italian Sinologist Francesco Sisci, a research fellow at Tsinghua University in Beijing, said in an interview last week that China might use Iran as a way of countering American efforts to reinforce Taiwan.

Beijing holds the high cards in this negotiation, and Washington does not know which card Beijing might play. That explains why the State Department did not immediately criticize the Sino-Iranian investment deal. In the April 1 press conference, press spokesman Ned Price was asked, “Will [the Sino-Iranian] agreement change your approach to the Iranian nuclear fight and to the region as a whole?”

He responded: “No. It doesn’t, precisely because of what I said earlier, and that is that we are aligned in our interests, by and large, with Beijing on this question. Beijing has no interest in seeing Iran either acquire a nuclear weapon or have the ability to acquire a nuclear weapon. That’s precisely why China, Beijing was a member of the P5+1. It’s precisely why we have this alignment of interests that we’ll continue to pursue as we look to ways to find that mutual return to compliance with the JCPOA.”

That is an optimistic reading of the past fortnight’s events, particularly after China hosted Russian Foreign Minister Sergei Lavrov the prior week in discussions to “replace the US dollar” as an instrument of trade in Central Asia, pulling the rug out from under American sanctions.

The March 22 report of Lavrov’s visit in China’s official English language newspaper Global Times is worth quoting at length:

In a group interview with Chinese media ahead of his visit, Lavrov called for strengthening the autonomy of the science and technology industry, promoting the settlement of the local currency and other international currencies that can replace the US dollar and gradually move away from the Western-controlled international payment system, so that the risks posed by US or Western sanctions against Russia and China can be reduced.

“Russia’s suggestion will receive a positive response from China as both sides have already realized the huge risk of overreliance on the US dollar and Western-controlled payment system” since the financial crisis in 2008, and the latest massive quantitative easing done by the US for boosting its own economy also increased such concern, said Yang Jin, an expert on China-Russia relations with the Chinese Academy of Social Sciences in Beijing.

Promoting the settlement of local currency is a trend for the economies worldwide, and when the US withdrew from the Iranian nuclear deal, the EU’s core members have also considered to establish a new payment system to bypass SWIFT controlled by the US, Yang said.

“Washington has been abusing SWIFT to arbitrarily sanction any country at will, which sparked global dissatisfaction. If China and Russia could work together to challenge the dollar hegemony, a laundry list of countries would echo the call and join the new system,” Dong Dengxin, director of the Finance and Securities Institute at the Wuhan University of Science and Technology, told the Global Times on Monday.

As the payment system is linked to the trading system, Dong suggested that the new payment system use the yuan as the clearing currency.

A number of Russian banks have joined the China International Payment System to facilitate bilateral trade settlements, the Russia Today reported.

“At first, the system could push forward a trial run in Central Asian countries and countries and regions along the routes of the Belt and Road Initiative (BRI). As its influence grows, the system is poised to draw in other countries in Europe and ASEAN,” Dong said.

Until the second half of 2020, China cooperated with American sanctions against Iran, reducing oil imports from Iran to almost zero. China’s exports to Iran fell to a tiny fraction of their level prior to Washington’s withdrawal from the JCPOA in 2016.

China’s Exports to Iran (US$ in 1,000’s)

During recent months, though, China reportedly increased its unofficial imports from Iran, rerouting Iranian oil through Malaysia and other cutouts. The decision to re-engage with Iran probably reflected Beijing’s belief that negotiations would not persuade Washington to abandon its economic pressure against China and that it would do better by playing hardball.