China Floods The Market in Iran For Oil in Exchange

 With the Islamic republic increasingly cut off from global markets due to sanctions, Beijing is in a prime position to benefit

China Floods The Market in Iran For Oil in Exchange

 

On the north Tehran stretch of the busy Shariati Street, the newly opened car dealership, Geelran, offers a range of Chinese-made vehicles to middle-class city dwellers. A stone's throw from the former grounds of the British embassy, left vacant after a hostile takeover by anti-western demonstrators in late 2011, the new headquarters of the Geely brand is the second Chinese automobile manufacturer in Iran. Another company, Chery Motors, has been active here for five years, and produces several of its low-range vehicles on Iranian assembly lines.

The price of the French-made Renault Mégane, until recently a staple for local car buyers, has tripled since 2011. It now sells for around 42.2m tomans (£22,450), and spare parts are becoming scarce.

Meanwhile, Geely's Emgrand EC7 hatchback has a slightly lower price range (38.7m tomans), suggesting that Zhejiang Geely Holding Group is angling to attract a slice of the local consumer market as sanctions make western-made goods difficult to come by – but at a quality experts say is far lower than the European-made cars it imitates.

"It's an appalling car manufacturer, and yet another one flooding Iran with cars made on old platforms," said a Tehran-based financial analyst with close links to Sino-Iranian trade. "Instead of hard cash, China is bartering for Iranian oil with cheap consumer items."

With Iran increasingly cut off from global markets due to sanctions, China is in prime position to capitalise on what is left of the ailing economy. As the world's largest importer of Iranian oil, China has long used the Islamic republic's global isolation to sate its business interests, which have a wider scope than just the energy sector. The United States' latest instalment of sanctions, which on 6 February imposed additional restrictions on international entities that do business with Iran, are likely to further add to this trend.

Importing 441,000 barrels of Iranian oil each day, China is Iran's top trade partner. Some 70 Chinese businesses are currently active in the country, and the Heritage Foundation lists it as the Middle East's largest recipient of Chinese non-bond investment. While primarily energy-focused, the relationship stretches to key non-oil sectors like construction, transportation and manufacturing and has a strategic importance for Beijing's efforts to balance its position in the Middle East vis-a-vis US interests. Although China's oil imports from Iran declined by nearly 21% last year, few in Iran view this as the onset of a long-term weakening of Sino-Persian ties.

In what Iran's official media interpreted as an outward defiance of western sanctions, the Chinese oil firm Zhuhai Zhenrong announced in December it would keep importing 230,000 Iranian oil barrels a day in 2013, and that the end purchaser of this crude would be the China Petroleum and Oil Corporation (Sinopec). In addition, Zhenrong introduced plans to import gas condensate from South Pars gas field in the Persian Gulf, according to Iran's state-run PressTV.

"Since Zhenrong is already on the [US] blacklist, it feels no political pressure to cut Iranian oil imports," an unnamed Chinese oil trader reportedly told the news service.

As international sanctions make it increasingly difficult for Iran to get cash for these energy exports, China is likely to find novel ways to provide goods and services in exchange, which will likely be to the detriment of the already crippled non-oil sectors. By threatening to cut off companies that transfer money to Iran's central bank (even those from countries that currently enjoy waivers to the previous oil sanctions) from the US banking system, the United States' February sanctions aim to trap much of Iran's oil revenues in Chinese bank accounts. This, in effect, gives China a double advantage, allowing it to gain premium access to Iran's energy as well as investment opportunities in its non-oil sectors.

"These reserves will provide [China] with more bargaining power, since now the only way the Iranian government could receive its money is to accept barter products in return," said an economist based in Tehran.

These policies have a profound impact on ordinary Iranians. Chinese consumer products have long crammed local storefronts, and Iranian manufacturers are finding it increasingly difficult to compete, especially since the plummeting national currency drove up the cost of imported raw materials.

In addition, the Iran-China chamber of commerce last year announced it was receiving member complaints about the types of goods China was sending to Iran, which "usually ... contradicted the ordered goods."

Tehran's roads are thus full of taxi drivers who until recently owned businesses, but went bankrupt because they could no longer afford to pay for imports while competing with cheap Chinese merchandise.

"Unlike with most GCC economies, the craft, small and medium industries play an important role in the Iranian economy, but the flow of cheap Chinese goods, [which are] in some cases low-quality, generated a popular resentment against China and a backlash from merchants and factories that are exposed to significant competition from Chinese goods," UK-based Middle East expert Naser al-Tamimi recently wrote for al-Arabia.

Small business owners are not the only ones losing out. In a country where the state plays a significant role as an employer, the outsourcing of major infrastructure projects to Chinese businesses takes construction and engineering jobs away from the already struggling local labour pool. Over the past two decades of fortifying bilateral ties, Chinese engineers have spearheaded countless infrastructural projects, most prominently the Tehran metro system – a trend both Iranian and Chinese officials have been keen to encourage.

"The new agreement seems to be, no more consumer goods. If we're going to barter, build us motorways, bridges and dams," said the Sino-Iranian trade analyst.

As Iran's inflation and unemployment levels climb, the growing visibility of Chinese workers at public construction sites is thus likely to further foment public resentment. Presently, the massive expansion of Tehran's Sadr expressway – touted as a pre-election achievement of the mayor, Mohammad Qalibaf – may give enough cause for local ire. Easily the most visible infrastructural endeavour in Tehran, the two-level, four-mile project is sponsored by China.