China Power | Economy | East Asia

The Looming Threat of Sanctions for Chinese Companies in Iran

The United States has more excuses than ever before to impose sanctions on Chinese companies doing business with Iran.

By Pan Yuanyuan for
The Looming Threat of Sanctions for Chinese Companies in Iran
Credit: Flickr/ Nick Taylor

Real life is often stranger than fiction. Chinese companies investing in Iran have a better understanding of this old saying than anyone else.

Suppose you are a Chinese energy company — you may run a significant sanctions risk for investing in Iran, even though such deals are the natural outcome of both sides’ demand.

On one hand, China’s economic growth means an increase in energy demand, and almost half of China’s crude oil imports come from the Middle East. Iran’s oil is especially important to China because of its high quality, reasonable price, and long-term commercial credits. In 2018, Iran exported 29.27 million tons of oil to China, making it China’s third largest source of crude oil. Chinese companies can offer service throughout the production chain, from mining and extraction to refinement and processing, in Iran’s gas and oil industry. Such energy cooperation will help in satisfying China’s continuous energy needs.

On the other hand, Iran could utilize Chinese technology and know-how to exploit its natural resources, sell petrochemical products, and enlarge its market share when competing with other oil exporters. By doing so, Iran could earn more revenue and make up for the financial deficit, which is central to its economic development.

Why would such a deal, which benefits all parties involved, face the risk of sanctions?

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The U.S.-Iran conflict escalated in 2020, and Washington tightened its economic sanctions against Iran once again. Now the United States has more excuses than ever before for imposing sanctions on Chinese energy investments, by accusing Chinese entities of helping Iran bypass U.S. sanctions, trading with Iran in oil products, or even having connections with Iranian oil companies, to name just a few of the possible violations.

According to the American Enterprise Institute, Chinese energy investments in Iran amount to $5.5 billion, plus $7 billion in construction contracts. The threat of sanctions is so powerful that it will not only reduce the willingness of Chinese companies to invest in the future, but also slow down steps to implement existing contracts. What’s more, the United States could even sanction Chinese companies that have already completed energy investment projects. To Chinese energy companies such as CNOOC and Sinopec, who own energy assets in the United States, Washington’s ire may put these investments at risk and cause more losses should more broadly punitive sanctions be imposed.

And the impact extends beyond the energy sector. Would a company engaged in infrastructure development, for the provision of public goods, be exempted from the sanctions? On the contrary, the sanction risk is higher than ever.

As is well known, collaboration between Iran and China includes far more than energy ties. Access to economic markets around the world is another engine of China’s involvement with Iran. With this in mind, Chinese companies have helped in building subways, highways, metro systems, dams, bridges, and tunnels throughout Iran.

These projects, together with transportation services, facilitated the transportation of metal products and expanded Iran’s energy supplies, allowing Iran to sell more steel and oil on the international market, and keeping Iran connected with other countries. These semi-public goods are vital to Iran’s development — no isolated country can hope to improve the living conditions of the local people or restore peace and stability. These Chinese companies are doing a service to the people of Iran.

But in the past few years, several Chinese transportation companies have been sanctioned for these pioneering activities. The U.S. Special Designation Nationals and Blocked Persons (SDN) list includes COSCO Shipping, E-Sail Shipping Company, Gomei Air Services, and Hongyuan Marine Co. Ltd. for transportation projects related to Iran.

The U.S. Treasury Department may justify its actions by claiming that Chinese capital and services weakened the effect of sanctions or that Chinese companies exported the wrong kinds of products; dealt with entities and persons on the sanctions lists; or are supporting. But as the saying goes, it is always easy to find a stick to beat a dog.

High-tech Chinese companies will be another target for sanctions. Chinese companies involved in surveillance technology, 5G networks, and dual-use technology (such as drone production) should pay extra attention to their investments in Iran. Look no farther than the case of Huawei’s chief financial officer Meng Wanzhou, who was arrested over a year ago in Canada for violating U.S. sanctions against Iran.

China’s technologies can solve practical problems for Iranians. Surveillance technology can help improve security, 5G networks can cut down on the cost of communication, and drones can be used in many different industries. These technologies are necessary for Iran’s economic modernization and diversification. But Washington would rather keep such “sensitive” technology away from the Iranians and won’t hesitate to sanction anyone who may transfer the technology, turning a blind eye to the real demands of the Iranians at the same time.

The fourth kind of Chinese company that may face more sanctions are the financial institutions. Those firms who finance or insure the oil trade, help or deal with Iran’s central bank, and other entities may all be accused of violating U.S. sanctions. The penalties for Chinese financial companies could be huge fines, denial of access to the U.S. market, exclusion from the dollar-dominated financial system, an asset freeze, or even the restriction of senior executives’ personal activities.

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For Chinese companies, “strategic contempt, tactical attention” maybe the best response to sanctions. The sanctions may cause Chinese companies to re-evaluate their investment projects, decrease their exposure to Iran so as to minimize the operation risks, and signal their willingness to cooperate with the United States. But when push comes to shove, Chinese companies are also capable of safeguarding their legitimate rights and interests.

Pan Yuanyuan is an associate research fellow at the Institute of World Economics and Politics, Chinese Academy of Social Science. Pan is also a special research fellow at the Institute of Economics, City University of Macau.