The Trump administration’s Iran strategy is meant to force the Iranian government to cave to the United States and change its behavior by squeezing its finances. One huge flaw in that plan is that it depends on countries such as China to cooperate. Yet Beijing is playing Washington and Tehran against each other and making a ton of money in the process.
On Monday, the United States reimposed a raft of sanctions on Iran, including measures meant to punish any international company that does business with Iran’s oil sector. The idea, according to Secretary of State Mike Pompeo, is to reduce Iranian oil exports to zero, eventually. But Pompeo decided to grant waivers to eight countries for the next six months, including the No. 1 importer of Iranian oil — China.
According to U.S. law, sanctions should be waived only if a country “significantly reduces” its Iranian oil imports. Asked repeatedly if China had done so on Fox News on Sunday, Pompeo wouldn’t say.
“I am very confident that the sanctions that will be re-imposed this Monday … will have the intended effect to alter the Iranian regime’s behavior,” Pompeo said. “That’s our expectation. It’s the reason for President Trump’s policy.”
In a press call last Friday, Pompeo said the waivers were necessary to give some countries “a few months to get to zero.” Pompeo said he was confident the sanctions, along with the rest of the Iran strategy, would persuade the Iranian regime to change its ways and come back to the table to negotiate a better nuclear deal than the one Trump pulled out of earlier this year.
Iran hawks in Congress see the waivers as undermining the stated goal of “maximum pressure.”
“Sanctions waivers being given to key purchasers of Iranian oil, most alarmingly China, give Iran a financial reprieve, and should be eliminated as soon as possible,” said Sen. Marco Rubio (R-Fla.).
State Department officials have been circling the globe trying to persuade countries such as China to go along with the new U.S. sanctions, even if they don’t like President Trump’s decision to pull out of the Iran nuclear deal. The details of China’s actual commitments to the United States are secret, but there’s some evidence Beijing is playing ball. Chinese state-owned oil companies reduced their imports of Iranian oil from about 800,000 barrels per day in August to about 500,000 barrels per day in September, according to some estimates.
But Chinese officials have publicly stated that they have no intention of following Washington’s demands to stop importing Iranian oil completely. And Chinese firms have made arrangements to keep Iranian oil flowing after U.S. sanctions come into force. For example, Chinese firms have switched to using Iranian tankers to deliver the oil, to side step sanctions and reduce their own risk.
Meanwhile, Chinese companies have secured deep discounts on Iranian oil, because Tehran is in a tough spot. Iran doesn’t want to lose the Chinese business to Saudi Arabia, which is also knocking on China’s door with discounted oil prices. But that’s not the only way China is getting rich off U.S. sanctions.
While it’s true that China’s Bank of Kunlun will stop processing payments to Iran, that’s because under the new U.S. sanctions regime, Beijing will hold Iran’s money in a China-based escrow account. That money, according to U.S. law, can be used only to buy non-sanctioned goods inside China — another financial benefit for Chinese companies.
“China has Iran over a barrel,” said Mark Dubowitz, executive director of the Foundation for Defense of Democracies. “U.S. sanctions mean Beijing can force Iran to give them discounts on Iranian oil they do buy while selling Chinese goods to Tehran at inflated prices paid from the restricted Iranian oil funds sitting in escrow accounts at Chinese banks.”
In many cases, these are Chinese goods that Iran doesn’t even want, Dubowitz said. But because European companies are actually cutting off their oil business with Iran — and China is not — Iran is becoming more and more dependent on the Chinese market and therefore more vulnerable to Chinese tactics.
“Sanctions work best when they encourage people to act in their own self-interest,” said Dubowitz. “These sanctions empower Chinese traders to do what they do best: Squeeze those with less negotiating leverage.”
The fact that China is abusing the United States’ Iran strategy to make money is not just smart business on the part of the Chinese; it undermines Trump’s Iran strategy in a crucial way. Beijing increases its leverage while resisting a trade war brought by the Trump administration. And Xi Jinping now has another way to claim China is the responsible global economic power, while Washington is unilateralist and disruptive.
More importantly, China’s actions expose the fact that the Trump team really doesn’t have a plan to cut off Iran’s oil exports altogether. Today’s waivers on China are likely to be necessary again in just six months’ time. That’s one quarter of the time Tehran might need to wait out the Trump administration. Trump’s plan to reach “maximum pressure” is now largely dependent on China, and Beijing is not going to cooperate — at least not for free.