Concern in Iran Over China Commerce as Trump Gets Trade Deal

Last week, an official from Iran’s communications ministry received an email from a Chinese supplier informing them that Bank of Kunlun, the state-owned bank at the heart of China-Iran bilateral trade, is weighing whether to cease processing Iran-related payments.

The email warned that after an April 9 deadline, “Kunlun may stop handling payment [sic] from Iran. For the exact situation then, we can only wait for further notice from the bank.”

The bank was set to inform clients that “all the payment [sic] should be received and goods should be shipped before April 9, and all PI (pro forma invoice) dates should be before January 10.”

The official, who shared the contents of the email with Bourse & Bazaar on condition of anonymity, speculated that the change in policy at Bank of Kunlun could be related to the recent agreement reached between Chinese and American negotiators over the first phase of a new trade deal.

If the email proves accurate, this would not be the first time that Kunlun has suddenly changed its policy in response to political developments in Washington. The bank paused its Iran business for one-month period following the Trump administration’s reimposition of secondary sanctions on Iran in November 2018. When Iran transactions were resumed, a new policy limited payments for trade in “humanitarian and non-sanctioned goods and services between Iran and China,” minimizing direct contravention of U.S. sanctions.

Reached for comment, Wu Peimin, the economic counselor at the Chinese embassy in Tehran, stated the embassy had not been made aware of any impending change in policy at Kunlun and that concerns amount to a “hypothetical situation.”

As analysts Julia Gurol and Jacopo Scita detail in a recent report, China’s has continued to purchase Iranian oil in defiance of U.S. sanctions in an “attempt to appease Iran and avoid a full-scale conflict in the Persian Gulf.” Although China has rebalanced its imports in favor of Saudi Arabia and could easily find an alternative supplier for the low volumes of oil still imported from Iran, recent incidents such as the attack on the Aramco facilities in Abqaiq and Khurais have made clear the risks to Chinese energy security if Iran acts on threats to prevent all exports through the Strait of Hormuz in the event it is prevented from exporting its oil.

But while China’s strategic interests are well-served by maintaining trade ties with Iran, albeit at reduced levels, there remains the possibility that China may have made tactical concessions related to Iran as part of its trade negotiations with the United States. For their side, U.S. officials have insisted that they would not reduce sanctions pressure on Chinese firms trading with Iran in order to gain concessions from Beijing related to the trade deal.

Chinese trade with Iran has fallen due to sanctions pressures, but remains a pillar of Iran’s economic resiliency in the face of the Trump administration’s “maximum pressure” sanctions campaign. Iran’s bilateral trade with China totaled USD 23 billion last year. While the annual total has fallen 34.5 percent, Iran has sustained significant oil and non-oil exports to China, totaling just over USD 13.2 billion dollars. The earnings from this trade have enabled Iran to afford continued imports of Chinese raw materials, parts, and machinery that support Iran’s manufacturing sector—total imports were USD 9.7 billion in 2019.

Much of this trade was facilitated through the payment channels available at Kunlun, a so-called “bad bank” sanctioned by the United States in 2012 for its critical role in supporting Chinese trade with Iran, particularly oil purchases by major state refiners like CNPC and Sinopec.

Mohammad Reza Karbasi, who is responsible for international affairs at the Iran Chamber of Commerce, expressed confidence that even if Kunlun proceeds to eliminate its Iran business, other smaller Chinese banks will step-in to support the longstanding bilateral trade between China and Iran.

“Iran is important to China and the same is true the other way round as well. Sure, there are attempts by Western governments to try and interfere with the expansion of ties between us, but we believe the Chinese won’t let them succeed given the trust that has been built between our two counties through years of cooperation,” Karbasi said.

In a recent interview focused on the trade deal, Treasury Secretary Steven Mnuchin stated that the Trump administration was “working closely with [China] to make sure that they cease all additional activities [with Iran]." The Trump administration has continued to sanction Chinese firms engaged in Iran trade, most recently targeting several buyers of Iranian oil.

Mnuchin also stated that “China state companies are not buying oil from Iran.” The statement remains factually incorrect—Chinese firms such as CNPC remain directly engaged in Iran oil purchases—but it may refer to a new understanding between China and the United States that is yet to be implemented.

Richard Nephew, who led sanctions policy at the State Department during the Obama administration, recently told S&P Platts that he does not expect such designations and the related pressure to compel China to drop it’s Iran trade outright.

However, reports that Iran’s January oil exports are significantly higher than the monthly average since May 2019 may reflect stockpiling of cheap Iranian oil by Chinese refiners ahead of an expected change in policy and reduction in imports. A similar pattern was observed when exports peaked in March 2019 ahead of the May 2019 revocation of the waiver permitting Chinese purchases of Iranian oil.

Given the timing, concerns in Tehran center on whether China will further downgrade its trade with Iran in order to avoid jeopardizing its new understanding with the Trump administration on larger issues of economic policy.

Massoud Maleki, the director of the Bureau for Developing Countries at the Tehran Chamber of Commerce said he was skeptical of reports Kunlun would bring an end to its Iran business, but warned of the consequences if there were such disruptions.

“Iran and China’s trade is not a paltry amount for it to be carried out through suitcase trade or exchange bureaus. If this is true, then I’m afraid that we will have to deal with a whole lot of hardship. This, I presume, is unlikely, but if it’s confirmed we must prepare and take necessary measures,” said Maleki.

Farhad Ehteshamzad, an Iranian industrialist and former head of Iran Auto Importers Association, echoed the call for preparations in case the U.S.-China trade deal has changed China’s intentions regarding trade with Iran.

“Transactions through the Bank of Kunlun had already been made difficult during the past two or three months. Kunlun in China was like one of our small credit institutions in Iran before being trusted with the responsibility to handle Iran payments. It gets all its reputation via collaboration with Iranian businesses.’

He added that if the industry ministry official had received such an email, the Central Bank of Iran has also been forewarned and urged officials to ensure that the Iranian funds currently held in accounts at Kunlun are not blocked.

“An emergency meeting should be held to determine how much capital lies in the bank and to inform traders and economic players before their money gets blocked. Also, if there is the possibility for certain goods to be shipped before April 9, this has to be done. If there isn’t, then money has to be transferred from Kunlun bank to other banks as quickly as possible before the money is out of reach.”

Ehteshamzad estimates that around 80 percent of payments made to support China-Iran bilateral trade are currently processed via Kunlun. “Yet, this does not mean if the bank stops its services, trade will come to a halt,” he insisted.

Citing the creativity and resolve of Iran’s private sector, Ehteshamzad noted that Iranian business boast “a myriad ways to circumnavigate the U.S. sanctions. The only downside to this is that transaction costs will rise, meaning goods will take longer to be delivered and will cost more.”

For now, Iran’s business community is waiting nervously to see whether decisions made in Washington and Beijing will force them to put their creative powers to use once again. 

Photo: U.S. Embassy Beijing

China Restarts Purchases of Iranian Oil, Bucking Trump’s Sanctions

On the same day that Iranian foreign minister Javad Zarif traveled to Beijing for talks on "regional and international issues,” the Chinese oil tanker PACIFIC BRAVO began traveling eastward, having loaded approximately 2 million barrels of Iranian oil from the Soroosh and Kharg terminals in the Persian Gulf over the past few days, according to analysis provided by TankerTrackers.com.

PACIFIC BRAVO is currently reporting its destination as Indonesia, but the tanker was recently acquired by Bank of Kunlun, a financial institution that is owned by the Chinese state oil company CNPC. TankerTrackers.com believes China is the ultimate destination for the oil on board.

PACIFIC BRAVO is the first major tanker to load Iranian crude after the Trump administration revoked waivers permitting the purchases by eight of Iran’s oil customers. The revocation of the waivers, which sent shockwaves through the global oil market, was a major escalation of Trump’s “maximum pressure” campaign on Iran.

The purchase of Iranian oil in the absence of a waiver exposes the companies involved in the transaction—including the tanker operator, refinery customer, and bank—to possible designation by the U.S. Treasury Department, threatening the links these companies may maintain with the U.S. financial system.

Bank of Kunlun has long been the financial institution at heart of China-Iran bilateral trade—a role for which the company was sanctioned during the Obama administration. Despite already being designated, Bank of Kunlun ceased its Iran-related activities in early May when the oil waivers were revoked. PACIFIC BRAVO’s moves point to a change in policy.

China-Iran trade slowed dramatically after the reimposition of U.S. secondary sanctions in November, suggesting the Chinese government had chosen to subordinate its economic relations with Iran to the much more important issue of its ongoing trade negotiations with the United States. But these negotiations have since broken down. This week, President Trump announced plans to impose tariffs on a further $300 billion in Chinese imports in addition to punitive measures against Chinese telecommunications giant Huawei, which has been targeted in part for its alleged violations of Iran sanctions.

These announcements stoked anger in China, which has vowed to fight back. Last week, foreign ministry spokesman Geng Shuang told reporters that China “resolutely opposes” unilateral sanctions on Iran. But until now, there had been little evidence that the Chinese government was encouraging its companies to ignore or evade U.S. sanctions in the interest of maintaining trade with Iran. While Chinese multinationals will likely remain wary of trading with Iran due to the risks posed to their increasingly global businesses, China’s apparent decision to use state-enterprises to purchase at least some Iranian oil represents a direct and significant challenge to U.S. sanctions. Earlier this week, Trump trade advisor Peter Navarro singled out China’s sanctionable activities in Iran’s metals industry in a Financial Times op-ed. With this kind of messaging, the Trump administration has made it impossible for China to keep the trade war separate from its disagreements with the United States over Iran sanctions.

For Iran, China’s decision to continue to purchase at least some Iranian oil could prove a vital lifeline as it struggles to withstand the Trump administration’s “maximum pressure” sanctions campaign. The failure of Europe, China, and Russia—the remaining parties of the Iran nuclear deal—led Iran to announce last week that it would begin to reduce its compliance with parts of the Joint Comprehensive Plan of Action (JCPOA) in 60 days.

Iran’s announcement greatly concerned European officials who have urged continued compliance with nuclear commitments under the JCPOA. In private, European officials acknowledge that the decision by the Trump administration to revoke the oil waivers was a significant escalation to which Iran was compelled to respond. Noting that economic pressures are fueling political opposition to the JCPOA in Tehran, European officials have been urging Chinese and Russian counterparts to do more to support bilateral economic ties with Iran. Dispatching PACIFIC BRAVO may be just the first step.

Photo: IRNA

Policy Change at China’s Bank of Kunlun Cuts Iran Sanctions Lifeline

Bank of Kunlun, the state-owned bank at the heart of China’s trade with Iran, has made a dramatic change in its policies, informing clients that it will no longer process payments that contravene US secondary sanctions on Iran.

On December 10, deputy president of the Iran-China Chamber of Commerce Majid Reza Hariri announced that Bank of Kunlun has restarted handling Iranian money after a two-month pause that created about USD 2 billion in backlog demand. But just ten days later, Pedram Soltani, deputy president of the Iran Chamber of Commerce, Industries, Mines and Agriculture (ICCIMA), announced in a tweet that Kunlun had informed its clients that it would clear Iranian money only in full compliance with US sanctions until the end of April, when China’s Significant Reduction Exemption for the import of Iranian oil runs out.

Soltani tweeted a letter from Iran’s Tose’e Ta’avon Bank, informing its clients that Kunlun will only process payment orders or letters of trade in “humanitarian and non-sanctioned goods and services.” Kunlun’s change in policy cuts a longstanding financial lifeline for Iran’s automotive, shipping, petrochemical, and steel industries. “I believe the current situation with the Bank of Kunlun will create serious challenges for our trade with China in the coming months,” Soltani told Bourse & Bazaar. The change in policy and related concerns were separately confirmed to Bourse & Bazaar by two companies which maintain accounts at Bank of Kunlun.

Soltani believes that the cautious approach may reflect the need for Chinese state energy group CNPC, the majority shareholder in Bank of Kunlun, to protect its interests in the US market. Kunlun’s increasing focus on consumer banking may also be affecting risk appetites. The turn to compliance reflects a major change for a bank that grew rapidly after its selection as the principle financial institution through which China would process oil payments to Iran.

Kunlun continued to process Iranian money even when the Islamic Republic was subject to multilateral sanctions imposed by world powers, leading to its designation by the United States Department of Treasury in 2012. Perhaps reacting to events such as the arrest of Huawei CFO Meng Wanzhou, Soltani says that “[Kunlun’s] owners have shown that they are disinterested in facing another challenge with the US by violating sanctions frameworks.”

When Kunlun first informed its customers in late October that it would temporarily stop handling Iranian money in advance of the reimposition of US sanctions, Iran-China trade was brought to a standstill. At the time, Bourse & Bazaar reported that Chinese authorities were interested in using the Special Purpose Vehicle (SPV) being devised by the European Union to continue sustain trade and investment with Iran without putting financial institutions in the crosshairs of US authorities.

This assessment is supported by recently leaked diplomatic cables published by the New York Times. During a working lunch at the EU-China Summit in July, Donald Tusk, president of the European Council, asked Chinese officials whether they “would consider financial mechanisms to mitigate secondary sanctions” placed on Iran by the United States. Chinese Premier Li Keqiang responded that China would “not act unilaterally” in this regard, according to a European summary of the meeting.

Both sides agreed that “'longarm jurisdiction' by the US would harm the interests of many companies” but China ultimately “looked to the EU for the protection of its interests.” Publicly, the Chinese government has said it opposes any unilateral sanctions and has defended its business relations with Tehran.

With Europe’s SPV set to be launched in the coming weeks, Iranian executives will be eager to see whether China engages the new mechanism. Soltani thinks that China may still be “willing to do Iran a favor” and “connect its banking channels to the SPV.” This would mean that Iran’s oil revenues at Bank of Kunlun could but used to purchase goods from European exporters via the SPV, which will most likely initially focused on the non-sanctionable and humanitarian trade for which Kunlun remains open.

In such a model, Bank of Kunlun would play a similar role to that which Japanese banks such as MUFG, Sumitomo Mitsui, and Mizuho played in supporting non-sanctionable trade during the previous sanctions period. But Iranian industrial firms, which rely on raw materials and parts imported from China, would remain without a clear banking solution.

Despite Iranian reports in late October that Beijing aims to establish “a new banking mechanism” for Iran, it remains unlikely that Chinese commercial banks will risk disconnection from the international banking system by transacting with Iran. As such, it will require the intervention of the Chinese government to identify a new state bank to facilitate lucrative industrial trade in the Iranian market, where Chinese companies have come to dominate as European industrial players rolled back their investments over the last decade.

In the meantime, Soltani believes that Iranian industrial leaders will rely on stopgap solutions, just as they did when banking ties with Europe and Japan were interrupted in a similar fashion in the previous round of sanctions. “Our imports from China will exit the Kunlun channel and our trade model will once more be forced to rely on smaller transactions cleared by a network of exchange shops,” he said, referring to the use of sarafis. “In fact, such a scenario could prove easier with China compared to other countries because many Iranian businesspeople are active in China and have offices there,” Soltani noted.

Photo Credit: Bank of Kunlun

China Unexpectedly Gambles on European Mechanism to Sustain Iran Trade

China has halted its financial transactions with Iran as part of an unexpected gamble on the future of its trading relationship with the Islamic Republic.

Earlier this month, ahead of the reimposition of US sanctions on November 4, China’s Bank of Kunlun informed its clients that it would stop handling all Iran-related payments. The news followed months of speculation that Kunlun, the financial institution at the heart China-Iran trade for more than a decade, would bow to US sanctions pressure.

According to Majid Reza Hariri, deputy president of the Iran-China Chamber of Commerce, China is hoping to sustain its trade with Iran without putting its financial system in the cross hairs of US authorities by joining the special purpose vehicle (SPV) currently being devised in Europe. In the meantime, Chinese trade with Iran has ground to a halt as no banks are available to facilitate transactions.

"It seems that the fate of our trade with China is linked to the support package being prepared by the European Union," Hariri told Bourse & Bazaar in reference to the SPV promised by Iran’s key European trading partners.

The SPV would facilitate trade with Iran by offering a netting service between exporters and importers, reducing the need for funds to be transferred between Iranian banks and foreign financial institutions. Such financial transactions are increasingly difficult due to the risks posed to international banks by US sanctions.

"We are waiting for this financial mechanism to be finalized and for China to join the SPV," Hariri said. In a statement in September, EU High Representative Federica Mogherini stipulated that the SPV “could be opened to other partners in the world.”

Under the previous round of international sanctions, Beijing had designated Kunlun as its primary bank to process billions of dollars payments related to Chinese imports of Iranian oil. The bank also supported the significant growth in non-oil trade between China and Iran as European companies were forced to leave the market when US and EU sanctions came into force.

Kunlun’s perseverance led to US Department of Treasury sanctioning the bank in 2012, but the so-called “bad bank,” shielded by political support from Beijing, continued to maintain its lucrative connections to Iran.

Given this history, the news that Kunlun was cutting-off Iran has served to indicate the intensity of the Treasury Department’s sanctions threats.

Hariri relayed that during his recent trip to China, it became clear that China’s major commercial banks increasingly fear being targeted by US authorities because of links to Kunlun, even if they are not involved in Iran trade themselves.

Bourse & Bazaar also spoke to the chief executive of an Iranian industrial group that conducts significant business with Chinese firms. The executive, who requested anonymity given commercial sensitivities, relayed that large Chinese suppliers do not “want to be in export list, which is where US eyes are looking” because of a pervading fear that “in the weeks following November 4, the US will be making example cases,” targeting companies to create a “system-wide scare.”

Until the situation is better understood, Chinese authorities have opted to pause their trade with Iran and to “let chips fall into place and then figure out way” to sustain commercial ties.

The sudden pause in trade with Iran may explain why China imported an “unprecedented” 20 million barrels of oil to its Dalian refinery in October, twenty times the normal volume.  Pointing to issues of energy security, oil analysts do not expect China to cease its imports of Iranian oil, and so the October purchases may have been intended to buy China some time to see if the SPV will become operational.

Two of China’s leading refiners, Sinopec Group and China National Petroleum Corporation, the parent company of Bank of Kunlun, have not placed any orders to purchase Iranian oil in November.

Reports suggest that the SPV will be legally established on or around the November 4 sanctions deadline, but it may take several months for operations to begin in earnest.  There remain many hurdles. EU member states are understandably less than enthusiastic about the prospect of hosting the financial channel that will be perceived by US authorities as an attempt to circumvent sanctions.

If SPV fails to become operational or is unable to accept Chinese participation, it will fall to China and Iran to find a new bilateral banking channel, explained Hariri. "If the EU continues with its procrastination, we can once more restart efforts to continue bilateral banking relations," he said.

It is unclear what a new financial channel look like. On Monday, Iranian reports cited "credible sources" to claim that Beijing aims to establish "a new banking mechanism" to continue working with Iran and several meetings have already been held on the matter.  

Iran may seek to hold an ownership stake in the new banking channel. The concept that Iranians could become shareholders in Chinese banks has been floated for about a decade. But new draft rules issued by the Chinese regulators may present Iran with a new window of opportunity. Regulators now allow foreign entities to set up wholly owned banks and branches in China.

As Hariri points out, any negotiations over the Chinese participation in the SPV or the creation of a new banking channel are made more complicated by the fact that Iran currently lacks an ambassador to Beijing. Nonetheless, it seems likely that sooner or later Iran-China trade will resume, even under US sanctions. Iran is too lucrative a market for China to simply ignore.

The question is how long Iran’s business community can wait for the rebound. While Iran may have sold a bumper volume of oil in October, private sector companies were caught off guard by China’s move to halt trade. In a matter of weeks, inventories of manufacturing inputs and finished goods will begin to run out.

Photo Credit: Xinhua