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Iran and Russia in China’s Energy Security

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Oil sanctions imposed on Iran by the United States (USA) during the Donald Trump era have led China to turn to Russian crude oil. During the mentioned period, Iran’s oil shipments to China fell by up to 350 thousand barrels per day. During the Joe Biden era, the reduction of sanctions pressure on Iran and the large cessation of activities such as monitoring and capturing oil tankers in this sense have allowed this shipment to reach over 900 thousand barrels per day. China’s oil imports from Russia have also increased simultaneously. In 2021, China became the country that exports the most crude oil and condensate per day from Russia.[1] In other words, China has imported about a third of Russia’s crude oil and condensate exports (1.4 million barrels per day).

At the moment, Iran is very uncomfortable with the fact that the countries of the world prefer to buy oil cheaper than Russia. Because Iran’s oil exports to China fell from an average of 900 thousand barrels per day to 640 thousand barrels in April 2022.[2] As a result, an average of 37 million barrels of Iranian oil are stored in tankers in Singapore and off China.[3] That’s why Iran’s 80 million barrels of oil stock are growing further. Therefore, it is crucial that the Beijing administration decide to import more oil from Russia and reduce its purchases from Iran. This would increase pressure on the Iranian economy. “Russian can relocate almost half of its exports to Southeast Asia, and especially to China … This is a major threat for Iran’s crude oil exports.” Hamid Hosseini, Executive Board Member of the Iranian Association of Petrochemical, Gas and Petrochemical Products Exporters, told Reuters.[4]

As it is known, on 25 May 2022, the United States imposed new sanctions on individuals and organizations involved in an international oil smuggling and money laundering network that allowed Iran to surpass oil sanctions.[5] These sanctions include the Hong Kong-based energy company China Haokun Energy, a subsidiary of Beijing-based “Haokun Energy Group”, as well as “Fujie Petrochemical Zhoushan”. The Iranian-Chinese joint venture “PetroChina Pars” was also sanctioned. Because of the sanctions, China’s oil refineries may avoid taking oil from Iran, at least in the near term, to avoid risk. On the other hand, it is attractive to Beijing to pay for discounted Russian oil and road-cost insurance. The fact that Iran has fallen behind in oil exports could be interpreted as an advantage for Moscow.

European Union (EU) leaders agreed on a new round of sanctions aimed at reducing Russian oil imports by 90% by the end of the year. This decision has led to a rapid increase in oil prices and is seen as an opportunity for the world’s oil producer countries. But countries like Iran and Venezuela, which continue to be subject to US or EU sanctions, will not be able to take advantage of the opportunity. Thus, China, as one of the largest oil importers, may turn to the Gulf states and other oil-producing actors instead of these countries. China has been the only country in recent years to continue to receive crude oil from Iran and Venezuela, ignoring the threat of US secondary sanctions.

Most of the oil China imports from Iran is shipped via the United Arab Emirates (UAE) or Malaysia.[6] The Tehran administration exports more than 1 million barrels of crude oil to China per day. However, a new EU embargo on Russian oil will increase competition between Moscow and Tehran on Chinese energy imports. Currently, Russian oil suppliers offer a 30 % discount. That is far more than the rate Iran has offered China in recent years. That’s why some Chinese refineries prefer Russian oil. China has been reducing its crude oil imports from Iran since February 2022 due to rising prices, tighter import quotas and increased sanctions pressure. It is said that at least 6 Iranian oil tankers carrying a total of 8 million barrels have been waiting for more than three months for evacuation in the waters off the ports of Shandong and Zhejiang.[7]

According to Refinitiv data, China’s marine-derived crude oil imports from Russia increased by 16% from the previous month in April 2022 to nearly 860,000 barrels per day. This is the highest level reached since December 2021.[8] A review of the customs data for April of that year shows that Russia could replace Iran. While logistical problems may prevent an immediate jump in Chinese oil purchases from Russia, these purchases have been steadily increasing. All Russian oil currently going to China is subject to a variety of discounts. This would require Iran to drive down its own prices to compete with Russia. Otherwise, there is a risk that Tehran will lose its market share.

In the medium term, Moscow has the opportunity to put pressure on Tehran because of its lower production costs and the discounted prices it offers. On the other hand, Iran’s oil sector, already weakened by a decade of sanctions, lacks the ability to withstand low prices. In short, Russia has significant leverage that could put Iran in a difficult position. In addition, Chinese oil refineries would prefer Russian crude, where the risk of sanctions is lower, given that Russian oil will not be subject to US secondary sanctions like Iran’s in the short and medium term.

It can be said that Iran has several options here: First, it can negotiate with Russia by trying to make a deal. Iran may even play an intermediary role in Russia’s energy exports to China by importing refined products from the Caspian and as part of a swap agreement. However, such cooperation is unlikely due to the track record of Russia-Iran relations and the fact that Russia considers Iran to be a “junior partner”.

Russia may ask Iran for help in learning mechanisms to avoid sanctions. Already, Moscow and Tehran are working to develop economic relations and establish joint companies and banks. Russia even plays an indirect mediator role between the U.S. and P3+1 countries and Iran. Moscow has asked Washington for guarantees that no sanctions will be imposed on its economic relations with Tehran after the possible nuclear deal.

The second option is for Iran to try to break its deadlock by taking decisive steps to re-establish the nuclear agreement. At the very least, the United States could lift secondary sanctions against Iranian oil. Thus, Europe can have a new oil supplier.

As it is known, the oil-exporting countries have moved to substitute Russian oil. Iran says it has 80 million barrels of oil stockpiles and is ready to increase its crude oil production.

Although sanctions for Iran’s oil sales have not been lifted, nuclear talks with the West have resumed, and the stated sales have reduced pressure on Tehran. This resulted in a relative increase in Iranian oil production and exports in the first months of the year. The freedom seen here in monitoring and preventing Iranian tankers allowed Tehran to increase its oil sales. Indeed, between December 2021 and January 2022, China imported an average of 1.9 million barrels of oil per day from Iran.[9]

Iran thinks it can sign a new nuclear agreement with the West as oil sanctions come to Russia. The Russo-Ukrainian War, however, is a major pressure on the West in nuclear negotiations with Iran. Now European forces can push Washington to agree with Tehran so that the energy market is not affected further. Iran therefore believes that its hand in nuclear talks is stronger than in the past. Because putting Iran’s oil sales back to the pre-sanctions level would ease the pressure on the world energy market. Iran also sees this as an opportunity and intends to exploit the Ukraine Crisis.

Moscow’s major concern is the secondary sanction of Russian oil sales, just as it was done to Iran. There, Russia tries to learn from the sanctions imposed on Iran earlier. The real disturbance of Moscow is Iran’s increasing sales of oil to the world market, and especially to China. However, in the current context, Russian oil seems more attractive to the Beijing administration. China’s interest in oil in Russia led Iran to seek new customers. All these developments indicate that Russia and Iran will face each other more often due to the imminent energy issue.

[1] “Europe is A Key Destination for Russia’s Energy Exports”, EİA, https://www.eia.gov/todayinenergy/detail.php?id=51618, (Date of Accession: 16.03.2022); “Here’s where Russian oil flows”, Washington Post, https://www.washingtonpost.com/business/2022/03/08/russia-oil-imports-ban/, (Date of Accession: 13.06.2022).

[2] “More Russian Oil Going East Squeezes Iranian Crude Sales to China”, Al Jazeraa, https://www.aljazeera.com/news/2022/5/19/more-russian-oil-going-east-squeezes-iranian-crude-sales-to-china, (Date of Accession: 13.06.2022).

[3] Ibid.

[4] Ibid.

[5] “New Iran Sanctions Prompt China Independents to Expand Focus on Russian Crude”, Hellenic Shipping News, https://www.hellenicshippingnews.com/new-iran-sanctions-prompt-china-independents-to-expand-focus-on-russian-crude/, (Date of Accession: 13.06.2022).

[6] Ibid.

[7] “China’s Iranian Oil Imports Ease on Poor Margins, Lure of Russian Oil”, Reuters, https://www.reuters.com/business/energy/chinas-iranian-oil-imports-ease-poor-margins-lure-russian-oil-2022-05-09/, (Date of Accession: 13.06.2022).

[8] Ibid.

[9] Ibid.

Dr. Cenk TAMER
Dr. Cenk TAMER
Dr. Cenk Tamer graduated from Sakarya University, Department of International Relations in 2014. In the same year, he started his master's degree at Gazi University, Department of Middle Eastern and African Studies. In 2016, Tamer completed his master's degree with his thesis titled "Iran's Iraq Policy after 1990", started working as a Research Assistant at ANKASAM in 2017 and was accepted to Gazi University International Relations PhD Program in the same year. Tamer, whose areas of specialization are Iran, Sects, Sufism, Mahdism, Identity Politics and Asia-Pacific and who speaks English fluently, completed his PhD education at Gazi University in 2022 with his thesis titled "Identity Construction Process and Mahdism in the Islamic Republic of Iran within the Framework of Social Constructionism Theory and Securitization Approach". He is currently working as an Asia-Pacific Specialist at ANKASAM.