The Cipher Brief spoke with expert and former National Intelligence Manager for Iran Norman Roule about the broader implications of such a deal. Roule served for 34-years in the Central Intelligence Agency, managing numerous programs relating to Iran and the Middle East. He served as the National Intelligence Manager for Iran (NIM-I) at the Office of the Director of National Intelligence from November 2008 until September 2017.
The Cipher Brief: What impact did the U.S. withdrawal from the Iran nuclear deal have on the Iran-China trade deal and what do both sides get out of this?
Roule: Certainly, each side saw an advantage in showing that they can work around U.S. sanctions. China also got to highlight its growing presence in the region. At the same time, it may well be that for Beijing, it was more important that the deal be consummated before a potential U.S. return to a deal.
The Cipher Brief: What does this new agreement between Beijing and Tehran mean for the region?
Roule: The deal is likely to have little impact on the region. Gulf Arab actors have their own ties to Iran and the region has long known that Beijing saw Iran as a player in China’s Belt and Road Initiative (BRI). This said, the deal underscores that China will continue its long-standing policy of not aggressively opposing Iran’s actions in the region despite its lucrative relationships with Gulf Arab countries.
Norman T. Roule, Former National Intelligence Manager for Iran, ODNI
If there may be a loser here, it could be India. Tehran values its ties with New Delhi, but the twin dynamics of the U.S.-India relationship and the India-China relationship will likely drive Iran’s leadership to lean toward China over India. Iran has signaled that it may drop India from the massive Chabahar development project. If this happens, Chinese companies could take India’s place in the project.
The Cipher Brief: What is the likelihood that Chinese investment in Iran will be used by Iran to threaten the region?
Roule: The Trump administration has repeatedly stated that Iran is likely to buy Chinese and Russian weapons. I think the seriousness of this issue has been subsumed in the broader debate over the Iran nuclear deal. The Gulf Arabs are under significant financial pressure and cuts to their respective military budgets – something we should support – will be more difficult if they believe they need to acquire different weapons systems to compete with, say, Russian or Chinese advanced aircraft or missile systems. For Israel, any improvement in Iran’s ballistic missile program is a real threat.
The Cipher Brief: What do we most need to understand about the history of the Iran-China relationship?
Roule: Good question. Media coverage of the deal rarely talks about their recent history and understanding that puts this announcement into a better perspective.
I have always thought it was interesting that hostage events shaped the U.S. relationship with each of these governments. Details of the 1979 U.S. Embassy takeover are still relatively well-known, but less recalled is China’s 1948 house arrest of U.S. consul Angus Ward and the 21 staff members at the U.S. consulate at Mukden in northern China. This detention – under harsh conditions – lasted for more than a year. As in 1979, the Chinese accused the consulate staff of espionage. The Mukden hostage incident, much like Iran’s 1979 Embassy seizure, would have a profound impact on U.S. policy and national sentiment.
Each country also has a history of foreign domination and sees the U.S. as a threat to its internal security and regional hegemony. They recognize that any international coalition against one could set a precedent for similar action against the other. Each country has also viewed Russia with suspicion. Oil and petrochemicals are now foundational to the stability of each country.
For China, Iran offers a reliable source of energy and a way to rebuff international efforts to undertake (from Beijing’s perspective) interference in the internal policies of other countries. Beyond that, I think China sees its relationship with Iran as a low-cost way to prevent the U.S. from achieving a foreign policy success (the overthrow of the Islamic government) while keeping the U.S. tied down in often politically and diplomatically costly regional engagement.
Three events shaped their relations.
First, there was the Iran-Iraq War. Unable to obtain western military technology, Tehran turned to Beijing and, by 1986, China had become the largest supplier of weapons to Iran. Trade and political discussions continued during this time, but at a relatively low level of activity.
The relationship evolved further in the 1990s. China became a net importer of oil around 1993 and saw Iran as an attractive source of petroleum products in a world where many oil producers are U.S. partners. The 1991 Gulf War also compelled Iran to seek anti-U.S. partners. In 1995, Iran’s then foreign minister Ali Velayati traveled to China to build an economic and diplomatic relationship with an anti-U.S. foundation. Tehran and Beijing announced a similarly significant commercial agreement around 1997, and this included Chinese investment in Iran’s energy sector. For a short while in the 1990s, China provided Iran with missile technology and offered nuclear cooperation.
Their relationship waxed and waned in the years that followed, although each country conducted high-level visits. Their ties tended to be influenced by broader international events, including relations with the U.S., regional developments, and opportunities to engage more essential partners. Trade also produced friction between the two. Chinese goods and technology have flooded Iran. But these products were often of poor quality yet so inexpensive as to outcompete Iran’s own manufacturers.
China has opposed Iran’s acquisition of a nuclear weapon and participated (with little real impact) in the negotiations that led to the Iran nuclear deal. China’s support for U.S. sanctions disappointed Tehran, even though Beijing showed some willingness to quietly purchase Iranian oil in violation of those sanctions. But China has also stood by Iran in important ways. Beijing joined Russia in regional naval maneuvers in 2019, allowing Iran’s military a rare showcase of its ties with two of the world’s major powers. China joined Moscow at the United Nations and International Atomic Energy Agency to repeatedly block action against Tehran.
Finally, both Iran and China see the latter’s Belt and Road Initiative (BRI) as necessary to their long-term political and economic influence. For China, Iran’s geography offers a path to Europe and the Persian Gulf. For Iran, the BRI offers an economic lifeline that provides an escape from U.S. sanctions and a chance to improve its influence through Iraq, Syria, and Lebanon.
The Cipher Brief: What would the deal cover?
Roule: That’s hard to say at this point. The draft of 25-year agreement reportedly contains nine sections, including a focus on regional cooperation, defense and security issues, energy, banking, technology transfer, and infrastructure and transportation development. Dozens of projects are envisioned, perhaps more than 100. The transportation proposal alone allegedly includes airports, railways subways, and free trade zones. In terms of China’s actual investment, Beijing has apparently promised to invest as much as $280 billion in Iran’s energy sector and another $120 billion to fund other projects.
Norman T. Roule, Former National Intelligence Manager for Iran, ODNI
Iran’s foreign ministry will lead talks to finalize the deal. These discussions will take months and the final agreement will need the approval of Iran’s parliament. Progress will likely be subject to Iranian political infighting and perhaps the approval of Iran’s next president. Regional and international political developments, particularly the U.S. election and any actions by Iran that exacerbate regional tensions, will also impact discussions.
The Cipher Brief: Does this deal come as a surprise to the U.S.?
Roule: Not at all. It has been expected for years. During Chinese President Xi Jinping’s travel to Tehran in January 2016, Iranian President Hassan Rouhani announced plans to develop a 25-year agreement aimed to increase trade to $600 billion. Xi met the Supreme Leader Ali Khamenei during this same trip, and the latter publicly endorsed greater cooperation with China to weaken Iran’s vulnerability to Western pressure. When the prospect of sanctions reappeared again in 2018, Khamenei repeated his belief that Iran should look to the east to build commercial relations.
The Cipher Brief: Are there aspects of the deal you are more focused on?
Roule: Three come to mind. First, Iran’s energy sector requires more than $150 billion to modernize its aging wells, refineries, and petrochemical facilities. A major injection of Chinese capital into this sector would improve the regime’s economic stability and ability to withstand future sanctions.
Second, the deal may allow China to take over the development of a large part of a critical coastline. First, there is the Iranian port of Chabahar on the Indian Ocean. Tehran and New Delhi agreed to develop this port, and the United States even exempted the project from sanctions. However, Iran reportedly believes India is dragging its feet on the deal to avoid upsetting the United States. China’s ability to take over this project would allow it to integrate the port’s operations into those of Gwadar, a smaller port China is building to the east in the Pakistani province of Baluchistan. We should also watch if India loses out to China in the development of Bandar-a Jask, a port west of Chabahar on the Gulf of Oman.
Also, the Chinese and Iranians plan to use China's e-RMB digital currency to bypass U.S. financial sanctions and reduce the U.S. dollar's power. This deserves close attention.
The Cipher Brief: Is the deal universally popular in Iran?
Roule: No. Although it likely has the Supreme Leader's support, important voices have complained about the deal. Former Iranian President Mahmud Ahmadinejad has spoken out against the agreement saying that the Rouhani government has given “Iran's purse to other countries without informing the nation."
Critics have reason to be unhappy. China’s rapacious commercial practices and poor performance on past Iranian projects cause some in Iran to worry that the agreement allows Beijing to acquire Iranian national resources and oil on the cheap. For example, Beijing may be willing to defy U.S. sanctions to some degree on oil purchases; it demands deep price discounts at the same time. Other concessions are also reportedly on the table, including allowing China to delay payments, the right to the first refusal on new petroleum projects, and the ability to pay in soft currencies. There are also reports that Tehran has agreed to allow Chinese influence in Iran’s Persian Gulf islands and even the right to import 5,000 Chinese security personnel to protect Chinese projects. The Rouhani government has responded that the agreement gives neither control of Iranian territory nor the right to deploy Chinese military forces into Iran.
These complaints press important historical buttons in Iran. There is a sensitivity of a time when larger countries took advantage of Iran’s isolation or political weakness to impose unfavorable trade and political deals. Some Iranians even compare the agreement to the 1828 Treaty of Turkmenchay between Persia and Tsarist Russia, in which Tehran ceded territory in the South Caucasus to Moscow.
The Cipher Brief: Is there anything that could cause this deal to fail?
Roule: Iran-Chinese trade will likely increase although the deal is unlikely to achieve its broad ambitions.
First, each side has a history of being unable to deliver on commercial promises. China has had difficulty achieving its Belt and Road ambitions in Latin America and Central Asia. Chinese projects routinely are plagued by reports of waste and fraud. Chinese companies also have a reputation for importing Chinese workers over local laborers, and its attention to environmental issues is considered weak.
Second, the agreement's vast scope makes it less a realistic program of investment and more a list of every conceivable area of cooperation. China’s investment in Iran in the last decade amounted to just under $20 billion.
Next, each country knows the other prefers western technology. If sanctions on Iran end, Tehran will be reluctant to accept Chinese products when better products can be found on the international market.
Finally, Iranian firms also will not simply allow China to grab large and profitable deals. A good example is in 2012, when Iran terminated a contract with the Chinese Sinohydro Group to build a $2 billion Bakhtiari hydroelectric dam project in the southwestern Iranian province of Lorestan. The project was instead carried out by the commercial construction arm of the Revolutionary Guards, Khatam al-Anbia. I fully expect this sort of thing to take place as this deal goes forward.
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