- The Washington Times - Thursday, June 7, 2018

China’s adeptness at doing business with Iran through state-owned companies not exposed to the American financial systems could make Beijing the big beneficiary of President Trump’s move to withdraw from the Iran nuclear deal and reimpose sanctions on foreign companies doing business with Tehran.

While European firms fearful of losing access to the U.S. market have been canceling deals, China has been stepping up its commercial links to a country that occupies a strategic node in Beijing’s ambitious Belt and Road foreign economic investment strategy.

U.S. Treasury Department officials insist Mr. Trump will hold no punches in reinstating sanctions against Iran after pulling out of the 2015 nuclear deal. But the administration has been reluctant to target Chinese firms directly because of potential blowback that could negatively affect trade negotiations with Beijing.

At the same time, national security sources say, the U.S. sanctions may prove irrelevant to Chinese companies protected because of Beijing’s careful strategy of keeping their key economic assets isolated from wider global market transactions.

Chinese business in Iran has doubled over the past decade. Largely because of oil, China is Iran’s largest foreign export market and its second-biggest importer after the United Arab Emirates. With European countries backing away from tapping into Iran’s huge but largely isolated domestic market after the 2015 nuclear deal, Chinese firms are stepping in.

French petroleum giant Total last year signed a $4.8 billion contract to develop a portion of the South Pars natural gas field, the world’s largest, but has pulled out, citing the coming U.S. sanctions. Iranian Petroleum Minister Bijan Zanganeh has said the state-owned China National Petroleum Corp., which already owns 30 percent of the South Pars project, could take over Total’s 50.1 percent stake.

“If the U.S. administration does not agree with Total staying in Iran, China will replace this company,” Mr. Zanganeh said in a statement last month.

Other Western firms that have called off or curtailed pending deals with Iran include shipping giant Maersk, French automaker Peugeot and American aerospace giant Boeing.

Iranian President Hassan Rouhani will have his first opportunity for talks with top Chinese officials Friday when he travels to the annual two-day Shanghai Cooperation Organization summit in the Chinese city of Qingdao. In addition to exploring energy and infrastructure deals, China’s state-controlled media reported, officials are eager to discuss with Mr. Rouhani “how to handle international pressure” amid Mr. Trump’s nuclear deal pullout.

Iran is currently evaluating the signatories of the nuclear deal to see to what extent they’ll be able to effectively maintain it even after the U.S.’s withdrawal,” Gao Shangtao, an analyst on Middle East relations at Beijing Foreign Affairs College, told the Agence France-Presse news service.

“To put it bluntly, if Tehran feels assured that China and Russia can withstand the pressure of U.S. sanctions and continue to do business with Iran, then Tehran will seek to retain the deal; otherwise, it’s meaningless.”

Hua Liming, a former Chinese ambassador to Iran, told the Chinese state-controlled Global Times newspaper this week, “Unlike the U.S., China will not break its promise and will ensure that China-Iran relations won’t be affected.”

Watching closely

It’s a summit that U.S. officials and private analysts will be watching closely.

“The dynamics of the U.S. withdrawing from the [nuclear] deal and leaving European sides scrambling to protect their business interests has led to Iran reaching out to China and encouraging it to commit to investing,” said Ahmad Majidyar, an Iran analyst with the Washington-based Middle East Institute.

China is looking to fill the void left by departing companies,” Mr. Majidyar said in a recent interview. “But they face a dilemma: How will they maneuver around what new sanctions or conditions emerge? That remains to be seen.”

Carleton Greene, a former high-level sanctions official in the Treasury Department, said it is “entirely plausible that China could benefit from a reduction in competition from European companies fleeing business opportunities in Iran because of the threat of reimposed sanctions.”

But Chinese companies will have to be careful not to run afoul of “secondary sanctions” that the Trump administration has promised on foreign companies that want to do business in Iran while not losing access to the much bigger U.S. market and U.S. financial system.

“It’s going to depend on how willing the Trump administration is to impose sanctions that specifically target foreign companies and, in particular, Chinese companies,” Mr. Greene said.

U.S. officials have a track record of restraint when it comes to imposing secondary sanctions on Chinese targets, especially as Mr. Trump seeks Beijing’s help in the North Korea nuclear crisis and tries to break down Chinese trade and investment barriers. The Treasury Department targeted a host of Chinese entities and individuals for having supported illegal North Korean financial activity in June 2017, but it blocked only one Chinese bank from access to the global financial system.

There has been almost no precedent for directly targeting Chinese firms for dealing with Iran since 2012, when the Obama administration, as part of a push to generate a global embargo on Iranian crude oil, leveled sanctions against China’s Bank of Kunlun.

Intermediaries

If Washington goes too aggressively after Chinese banks — or targets a major Chinese entity with deep ties to the U.S. stock markets and trade deals — Beijing might seize on the action as an opportunity with counteraction that could damage the U.S. and global economies. China could also employ “intermediary companies” to conduct business with Iran.

Speaking at an event this week hosted by the Foundation for Defense of Democracies in Washington, Mr. Greene said that if such intermediary entities are caught using any of China’s major banks with deep exposure to U.S. financial systems, then the Trump administration will face a dilemma.

“You’re going to come up to a decision point where you have to say, ‘Are we going to designate one of the four largest banks in the world?’” the former Treasury official said. “What’s that going to do to U.S. trade with China that depends on those banks?”

The Treasury Department declined to comment for this article, but Sigal Mandelker, Treasury undersecretary for terrorism and financial intelligence, said this week that the Trump administration plans to impose the sanctions aggressively.

“We will apply unprecedented financial pressure on the Iranian regime,” Ms. Mandelker said at an event hosted by the Foundation for Defense of Democracies.

Analysts say the Trump administration may go after Chinese firms directly, but the challenge will remain of Beijing engaging in a kind of shell game of creating state-owned companies that have no exposure to the U.S. financial system.

The period when the Obama administration was pressuring the world to sanction the Iranian economy in an effort to drive Tehran to the negotiating table, China emerged as Iran’s top trading partner, a relationship that only accelerated when the sanctions were lifted by the nuclear deal. According to a recent report by Bloomberg News, two-way trade has doubled since 2006, to $28 billion, with the biggest chunk of Iran’s oil exports — some $11 billion a year — going to China.


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