Iran: how China is helping Tehran navigate international sanctions

Iran: How China is helping Tehran circumvent international sanctions Iran's launch of over 300 missiles and drones against Israel in mid-April prompted renewed calls for stricter sanctions on Iranian oil exports, which are the engine of its economy. However, despite measures taken against the country, during the first quarter of 2024, Iran's oil exports reached their highest level in six years, valued at $35.8 billion, according to Iran's customs director. How does Iran manage to evade sanctions on its oil exports? The answer lies in the trading methods used by Iran's largest oil buyer: China. The Asian giant is the destination for 80% of Iran's exports of approximately 1.5 million barrels per day, according to a report from the U.S. House Financial Services Committee. Trading with Iran carries risks, particularly due to U.S. sanctions. So why is China, the world's largest oil buyer, doing it? Simply because Iranian oil is cheap and of good quality. Global oil prices are rising due to international conflicts, but Iran, eager to sell its sanctioned oil, offers it at a discounted price. According to a report based on data from traders and ship trackers compiled by Reuters in October 2023, China saved nearly $10 billion in the first nine months of 2023 through record purchases of oil from Iran, Russia, and Venezuela, all of which are sold at a discounted price. The global benchmark for crude oil fluctuates, but is typically below $90 per barrel. Homayoun Falakshahi, senior oil analyst at data and analysis firm Kpler, estimates that Iran is marketing its crude at a $5 discount per barrel. Last year, this price cut reached $13 per barrel. According to Falakshahi, there are also geopolitical interests at play. "Iran is part of a big game between the United States and China," he says. By supporting Iran's economy, "China increases U.S. geopolitical and military challenges in the Middle East, especially now with tensions with Israel," he adds. Analysts believe that Iran and China have developed a sophisticated system over the years to market Tehran's sanctioned oil. "Key elements of this trading system are Chinese 'teapots' [small independent refineries], 'dark fleet' tankers, and Chinese regional banks with limited international exposure," Maia Nikoladze, Deputy Director of Economic Leadership at the Atlantic Council, told the BBC. The "teapots" where Iranian oil is refined are small and semi-independent refineries, an alternative to large state-owned companies. "It's industry jargon," explains Falakshahi, "because initially the refineries looked like teapots, with very basic facilities, mostly located in the Shandong region, southeast of Beijing." These small refineries pose fewer risks for China compared to state-owned companies that operate internationally and need access to the U.S. financial system. "The small private refineries that do not have operations abroad do not trade in dollars, do not need access to foreign financing," explains Falakshahi. Oil tankers can be tracked in the world's oceans using software that monitors their location, speed, and course. To avoid this tracking system, Iran and China use "a network of tankers with opaque ownership structures that do not report their precise locations," says Nikoladze. "They can completely bypass Western tanker, maritime, and brokerage services. And in that way, they do not have to comply with Western regulations, including sanctions," she adds. These "dark fleet" tankers carrying oil often disable their Automatic Identification System (AIS) - a maritime transponder system - to avoid detection, or deceive by pretending to be in one place when they are actually in another. It is believed that these fleets conduct ship-to-ship transfers with Chinese recipients in international waters, outside authorized transfer zones and sometimes in adverse weather conditions to conceal their activities, making it difficult to determine the origin of the oil. Falakshahi, the Kpler analyst, suggests that these transfers often occur in Southeast Asian waters. "There is a zone, east of Singapore and Malaysia, which historically has always been a place where many tanker ships sail to and transfer their cargoes between each other." Next comes the "rebranding" phase. With this method, as Falakshahi explains, "a second ship sails from Malaysian waters to northeast China and delivers the crude. Again, the goal is to make it appear that the oil is coming from Malaysia, not from, say, Iran." According to the U.S. Energy Information Administration (EIA), customs data indicates that China imported 54% more crude oil from Malaysia in 2023 than in 2022. In fact, the quantity that Malaysia reported exporting to China exceeds its total crude oil production capacity, according to Nikoladze of the Atlantic Council, "so it is believed that what Malaysia reports are actually exports of Iranian oil." There were reports that Malaysian and Indonesian officials seized Iranian tankers for conducting "unauthorized oil transfers" in July and October of last year. Maia Nikoladze explains that instead of using the international financial system, which is monitored by the West, transactions are carried out through smaller Chinese banks. "China is very aware of the risks involved in buying sanctioned Iranian oil, so it does not want to involve large and important banks in this transaction," she says. "Instead, what it does is use small banks that really do not have international exposure." It is also believed that payments for Iranian oil are made in Chinese currency to avoid the dollar-dominated financial system. "That money would be deposited in accounts in Chinese banks that have links to the Iranian regime," explains Falakshahi. "So that money would be used to import Chinese products, and obviously a large amount of this money is sent back to Iran. "But it is extremely opaque to understand how this is done and whether Iran is able to repatriate all its money," he adds. Some reports suggest that Iran uses "currency exchange houses" within its country to further complicate the financial trail. On April 24, U.S. President Joe Biden signed a foreign aid package for Ukraine that included increased sanctions on Iran's oil sector. The new law expands sanctions to include foreign ports, vessels, and refineries that intentionally process or ship Iranian crude in violation of existing U.S. sanctions. It also expands so-called secondary sanctions to cover all transactions between Chinese financial institutions and sanctioned Iranian banks used to purchase oil and oil products. Homayoun Falakshahi says that Washington may be reluctant to enforce all measures. "This is simply because the top priority for the Biden administration is the price of gasoline at home. This is much more important even than its foreign policy," he adds. Iran is the third-largest producer in the Organization of the Petroleum Exporting Countries (OPEC) and produces around three million barrels of oil per day, or about 3% of total global production. Disruption of its supply could lead to an increase in international oil prices, according to experts. "Biden knows that if the U.S. reduces Iran's exports, this will mean less supply in the market and will increase the price of oil internationally," says Falakshahi. "If this happens, the price of gasoline will increase in the United States." And this is something that Biden would want to avoid before the presidential elections.