Will China – Iran ties remain strong in post-sanctions era?

Last year a new China – Iran rail link opened connecting Urumqi in China to Tehran, cargo trains now regularly wind their way through Western China across Central Asia all the way to the Iranian capital carrying an assortment of the many manufactured goods that China is so famous for producing. The new route is a potent physical symbol of the important trade ties that now entwine the two countries, but it also marks a new strand in the ever growing web of rail lines, roads and pipelines that make up the Belt and Road initiative – now the cornerstone of China’s foreign policy.

Trade relations between China and Iran date back two millennia to the original Silk Road when luxury items were carried across Central Asia by horse and camel. Modern ties really took off in the 1990s when Iran needed a new economic partner thanks to the severe sanctions regime imposed by the West which choked off much of its overseas finance and trade, at the same time China needed an injection of oil to fuel its fast growing economy which Iran could happily supply.

Before long Iran began to import goods from China in vast amounts and soon Chinese firms started investing in the country. In particular the Chinese made a major impact in the oil and gas industries, areas like the Azedegal oil field were brought by a CNPC from a Japanese firm at a discount price after they were effectively forced out by sanctions. While this benefited the Chinese, many in Iran felt that the Chinese firms did not have the technical expertise to match that of the Western majors and the industry suffered as a result.

Sino – Iranian relations have developed to the  point where China is now Iran’s biggest trade partner representing around a third of all its imports with a lot of consumer goods, machinery parts and electrical equipment in this mix. China views Iran as an important partner – partly thanks to supplying 10% of its oil supply but also for strategic reasons, its resolutely anti-western stance goes down well in Beijing and its unique geographic position linking Central Asia, the Indian Subcontinent, Turkey and the Middle East make it a natural partner for the Belt and Road initiative.

The relationship looks set to continue flourishing with a healthy pipeline of new projects such as a Tehran to Mashhad high speed rail link, a new petrochemical plant in Merhan; while Dalian Shipping, a major Chinese ship builder hope to develop the facilities to be able to construct container ships and oil tankers in Iran.

Relations between the two countries look particularly solid, but are there some clouds on the horizon. Many in Iran feel they have become over dependent on China, the flow of Chinese goods into the country had not always been welcomed with many prefering higher quality European or Japanese products and some believe that Iran is diplomatically isolated and should broaden its mix of allies.

India has announced its own regional infrastructure ambitions with the promise to develop a port called Chabahar in Eastern Iran. This port will help supply India with oil and gas from Central Asia and Iran, bypassing its traditional rival Pakistan. While New Delhi cannot yet match the reach and scale of China’s Belt and Road project, it is a signal that Beijing is not the only game in town and other powers in the region are interested in investing in Iran.

Western firms have been wary of returning to Iran because they fear the sanctions regime may return particularly with the Trump administration leading an unpredictable foreign policy agenda that has threatened Iran on a few occasions.

That may not happen, but it’s enough for make firms think twice before investing in the country. However many western firms are in investing in Iran or at least considering it. Peugeot, Total and Accor have all been eyeing more investment into the country and many more are dipping their toes in the water. The freeze on banking payments to and from Iran has eased and while there are still issues, large companies can move money around with few problems.

Iran’s economy has been partly disconnected with the rest of world and has suffered as a result, despite this it has some major advantages; it has a young demographic profile with a strong education system, low government debt and huge amounts of spare capacity thanks to sanctions. For a country with one of the world’s biggest reserves of oil and gas it surprisingly is not overly dependent on hydrocarbons and has a well diversified economy, unlike say nearby Saudi Arabia.

On the debit side Iran remains for now an uncompetitive, state dominated economy with banks that are suffering with a high level of outstanding bad loans. The shortage of foreign capital and trade has led to a poor investment climate and a distorted economy.  In short it is high on potential, but major reform is needed.

Investing in Iran is difficult unless you have local contacts or are a major firm. However Turquoise Capital offer a way into the stock market for foreign investors via a private equity fund, or via their Iranian ETF which holds stock in Iran’s 30 biggest stocks which account for 70% of the market capitalisation.

 

 

 



Categories: China Goes Global, Frontier Markets, Silk Road

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