What drives China to purchase oil from Iran despite sanctions?

China has also backed Iran's endeavours to restore the 2015 nuclear agreement. In 2018, the US administration under then-President Donald Trump exited the deal. Despite both China and Iran facing US sanctions, they inked a 25-year agreement in March 2021, with Beijing integrating Tehran into its Belt and Road Initiative.

In mid-April, Iran's launch of over 300 missiles and drones targeting Israel reignited discussions on the strict sanctions affecting Iran's oil exports, crucial for its economy. Despite these measures, Iran managed to achieve a six-year high in oil exports, totalling US$35.8 billion in the first four months of 2024, as reported by Iran's customs chief. The key to Iran's evasion of oil export sanctions lies in its trade strategy with its largest customer, China, which absorbs 80 percent of Iran's total oil exports. According to a report from the US House Financial Services Committee, Iran ships approximately 1.5 million barrels of oil to China daily.

Despite significant trade risks with Iran, particularly involving US sanctions, China, as the world's largest buyer, continues to purchase oil from Iran. The rationale behind this is straightforward: Iranian oil is both high-quality and cost-effective. With escalating oil prices globally due to various international conflicts, Iran, under embargo, is keen to sell its oil and thus offers it at lower prices than other sources. A Reuters report from October 2023 highlighted that in the first nine months of that year, China saved at least $10 billion by procuring oil from Iran, Russia, and Venezuela, all of which provide oil at reduced rates. While the global benchmark for crude oil fluctuates, it typically remains below $90 per barrel.

Humayun Falakshahi, a senior analyst at the data and analytics firm KPLR, suggests that Iran is currently selling its crude oil at $5 per barrel, down from last year's maximum price of $13 per barrel. Falakshahi views this situation through a geopolitical lens, indicating that China's support for Iran's economy presents a geopolitical and military challenge to the United States, particularly amidst ongoing tensions with Israel in the Middle East. Analysts note that Iran and China have honed a sophisticated method over time to facilitate the import and export of Tehran's banned oil. Key components of this trading strategy include Chinese teapots, 'dark fleet' tankers, and China's regional banks, which have limited international exposure. These teapots, responsible for refining Iran's oil, are smaller in scale and operate with some self-regulation, offering an alternative to large state-run refineries.

It's a standard term in this industry, referring to these refineries as "teapots" due to their small size and basic facilities, primarily situated in the Shandong region southeast of Beijing. These smaller refineries pose less risk to China, as the state-controlled companies operate internationally and have access to the US financial system. Additionally, the movements of oil tankers worldwide are closely monitored using various software that tracks their location, speed, and route. To avoid this tracking, Iran and China use an obscure proprietary network of tankers that do not show exact locations. This enables them to circumvent Western tankers and shipping services entirely, avoiding Western policies and sanctions. These 'dark fleets' usually turn off their automatic identification systems (AIS) while carrying oil so that they cannot be detected, or deceived by showing their position from one place to another.

These ships are thought to navigate international waters, avoid established transfer zones, and engage in direct ship-to-ship exchanges with China. They often opt for such exchanges during inclement weather conditions, complicating efforts to trace the origin of the oil. The majority of these oil transfers happen in Southeast Asian waters. Unlike the international transaction system monitored by the West, China and Iran conduct their transactions through small Chinese banks. China is well aware of the risks associated with purchasing oil from Iran under sanctions, which is why it prefers not to involve major banks in these transactions.

Instead, they opt for banks with limited international connections. Iran is also rumoured to have received payment for the oil in Chinese currency, sidestepping the dollar-dominated financial network. These funds are deposited into Chinese bank accounts linked to Iranian authorities. The money is then utilized to import Chinese goods, with the remaining balance flowing back to Iran. However, comprehending the intricacies of these transactions and whether Iran can repatriate all its funds remains challenging. Some reports suggest that Iran is utilizing internal "money exchanges" to obscure the origin of these funds.

On April 24, President Joe Biden of the United States approved an aid package for Ukraine, which included fresh sanctions targeting Iran's oil sector. This new policy expands restrictions on various foreign ports, vessels, and refineries involved in the transportation or processing of Iranian crude oil, defying ongoing sanctions. Simultaneously, a second wave of sanctions prohibits all transactions between Chinese financial institutions and sanctioned Iranian banks for the purchase of petroleum and related products. Washington is selective in its strategies, prioritizing the Biden administration's primary goal of preventing fuel price hikes domestically over broader foreign policy concerns. Iran ranks as the third-largest oil producer within the Organization of the Petroleum Exporting Countries (OPEC), with a daily output of 3 million barrels, equivalent to 3 percent of global oil production.

Experts suggest that any disruption in oil production and transportation could lead to an international increase in oil prices. President Biden is aware that pressuring Iran to further cut oil exports would reduce market supply, resulting in higher global oil prices. Such a scenario would also elevate fuel prices within the United States. However, Biden aims to avoid such a situation, especially with the upcoming US presidential election looming. Recent escalations, including Israel's attack on the Iranian consulate and Iran's retaliatory actions against Israel, have intensified tensions in the Middle East. While most regional countries align with Iran, many Western nations support Israel.

In the current geopolitical landscape, two additional global superpowers—Russia and China—operate behind the scenes, bolstering Iran’s influence. Concrete evidence of their support for Iran includes Iran’s utilization of China’s Beidu satellite navigation system as a missile guidance system during attacks on Israel, as well as their reliance on Russia’s GLONASS system. Moreover, Iran has been collaborating with Russia in the development of unmanned aerial vehicles (UAVs), some of which have been deployed in attacks against Israel. Last year, a 17-member Iranian delegation visited Russia at the invitation of an arms manufacturer, where they were exposed to advanced weapons technology. In a reciprocal arrangement, Iran has agreed to supply drones and missiles to Russia during the 2022 war against Ukraine, while receiving advanced fighter jets and air defence technology in return.

This enables the Middle Eastern nation to engage in direct conflict with Israel and Western nations. Michel Maloof, a former Pentagon analyst, has a distinct perspective on this matter. There are approximately 35 US bases surrounding Iran, all of which are currently at risk. These bases once posed an implicit threat to Iran, but now they feel vulnerable. The lack of condemnation from the United Nations or the United States regarding the attack on the Iranian consulate contrasts sharply with the condemnation of Iran's retaliation against Israel. This inconsistency is quite disheartening and reflects a biased approach by the United States.

After the attack on the Iranian consulate, Israel felt emboldened by the Americans’ silence. However, Iran has now dampened their courage. By striking Israel, Iran sends a clear message that transgressions won’t go unanswered. The United States won’t remain passive if Iran engages in war with Israel. Such an intervention could inevitably draw Russia and China into the conflict. Consequently, the spectre of a major war looms.

Author: Researcher and columnist