As Iran Sells More Oil to China, the U.S. Gains Leverage — Bourse & Bazaar Foundation
According to a recent report by Bloomberg, which refers to information from Kpler, an analytics firm, it is projected that Iran's oil exports to China will hit a ten-year high this month, reaching 1.5 million barrels per day. This report has generated significant backlash from those who strongly advocate for a tough stance against Iran's oil trade, arguing that President Biden is not effectively implementing the US sanctions and inadvertently enabling Iran to earn billions in oil profits. However, the truth is that Iran is seemingly unable to fully utilize most of this revenue, presenting President Biden with an advantageous position for potential future negotiations.
Iran is making a substantial amount of money from its booming oil exports. The current price of crude oil is approximately $80 a barrel, but when offering discounts to Chinese clients, the actual selling price is estimated to be around $74 per barrel. With this pricing, Iran's exports of 1.5 million barrels each day result in an impressive monthly revenue of about $3.3 billion for the country.
These rough estimations are important because China's customs authority ceased providing information about the worth and quantity of oil imported from Iran since May 2019. This decision came after the Trump administration eliminated waivers that allowed specific countries to buy limited amounts of Iranian oil. When relying solely on Chinese data, Iran's earnings from exports seem significantly reduced, concealing the real trading situation.
Over the last three months, according to the available customs data, Iran's purchases from China had an average value of $826 million. During the same time frame, Iran's exports to China, excluding oil, had an average value of $357 million. If we exclude Iran's oil exports, it seems that Iran's trade with China is experiencing a deficit of approximately $469 million. However, when we consider the estimated value of $3.3 billion from oil exports, the monthly trade balance drastically shifts in Iran's favor. It is probable that in recent months, Iran has had a monthly trade surplus with China of about $2.8 billion.
Put simply, it seems that Iran is making billions of dollars that it cannot spend. This is because Chinese goods, especially parts and machinery, are crucial for Iranian industry. If Iran had the opportunity to purchase more Chinese goods, it would certainly do so. There are two other pieces of information that support this interpretation. Firstly, exports from the UAE to Iran are still low, indicating that Chinese goods are not indirectly entering Iran. Secondly, data from purchasing managers in the manufacturing sector shows that Iranian companies are struggling to maintain adequate supplies of raw materials and intermediate goods. Additionally, Iran is persistently working towards the release of its frozen assets, including $6 billion that will be used for humanitarian trade as part of the recent U.S.-Iran prisoner agreement. If Iran had easy access to its oil revenues in China, it would not be so desperate to make these deals. In summary, Iran is selling its oil and earning money, but it is not fully benefiting from the increase in oil exports.
Chinese companies who export goods to Iran and the banks that support them are still cautious due to the presence of U.S. secondary sanctions. Many large Chinese companies do not consider it beneficial to engage in trade with Iran due to the potential risks involved. From January to June of this year, the average monthly value of Chinese exports to Iran was $898 million. However, this figure is 35% lower compared to the same period in 2017, when Iran experienced relief from sanctions.
It is uncertain if Iran can maintain this new, increased level of oil exports. Oil markets can be unpredictable, and China's economic instability could decrease demand. However, at the moment, Iran's substantial trade surplus with China also indicates that its renminbi reserves must be expanding. This is a unique situation. In the past, Iran has typically had a small trade surplus with China. From January 2012 to January 2016, when the Obama administration imposed severe financial and energy sanctions on Iran, the average monthly trade surplus was only $511 million (China's purchases of Iranian oil are included in customs data during this period). In simpler terms, assuming Iran's oil earnings are stuck in China, its reserves are now growing four times faster than they were during that time frame.
At first sight, this might appear as a significant letdown for the Biden government. Biden deliberately upheld the sanctions labeled as "maximum pressure" initiated by Trump, aiming to retain influence for talks and ensure that Iranian oil exports continue to be under the influence of U.S. secondary sanctions. However, individuals asserting that Biden is not effectively implementing his sanctions are neglecting to acknowledge the astuteness behind the current approach taken by the U.S. in terms of enforcement.
To begin with, Biden is strongly opposed to exacerbating the already heightened tensions with China. Imposing sanctions on Chinese refiners for their purchase of Iranian oil, which would directly impact China's energy stability, would represent a significant increase in the escalating economic rivalry between Washington and Beijing. Moreover, this escalation would serve no purpose considering the current situation surrounding Iran's oil exports - specifically, Iran is not receiving the usual economic advantages. As Iran is accumulating more funds but is unable to utilize them, the United States is actually gaining influence for future discussions and negotiations.
In contrast to Trump, Biden has put in a sincere attempt to partake in nuclear negotiations with Iran. It is highly probable that he will persist in these efforts if there is a feasible chance of reaching a fresh diplomatic agreement that effectively addresses Iran's nuclear program. However, American negotiators have encountered difficulties in presenting an enticing proposal to their Iranian counterparts. A number of Iranian policymakers have expressed dissatisfaction with the anticipated economic benefits of sanction relief, considering them insignificant. At the start of negotiations with Biden, Iran's initial stance involved asserting that sanctions had caused a whopping $1 trillion worth of damage to their economy and that they deserved compensation for it.
Due to the decline in oil exports, Iran has faced difficulties in increasing its foreign currency savings, which are estimated to be around $120 billion by the International Monetary Fund (IMF). Even though Iranian authorities acknowledge the need to recover $1 trillion worth of economic losses, the release of the frozen foreign currency reserves is not considered a substantial solution.
As the sanctions persist, a greater amount of funds will be required to reverse the cumulative consequences of the lengthy U.S. sanctions that have severely impacted Iran's economy for more than ten years. It is unfeasible for Biden to guarantee any form of reparation to Iran due to political reasons. The most the U.S. can offer is a commitment to unfreeze Iran's own funds within a fresh diplomatic agreement.
That's why it's beneficial for Iran to see an increase in its reserves. The oil exports from Iran to China can be seen as installment payments for a delayed insurance agreement. Eventually, Iran will be able to redeem this policy, but only if it fulfills the conditions imposed by the United States. In simpler terms, each drop of oil Iran is currently selling to China enhances the United States' bargaining power for future negotiations. It would be intelligent to allow the continuous flow of oil.
