As Iran Sells More Oil to China, the U.S. Gains Leverage — Bourse & Bazaar Foundation

According to a recent Bloomberg report that cites information from Kpler, an analysis firm, the amount of Iranian oil exported to China is expected to reach 1.5 million barrels per day this month, the highest it has been in ten years. This report has sparked a wave of criticism from hardliners who believe that President Biden is not effectively implementing sanctions on Iran's oil exports, which in turn, is allowing Iran to earn billions of dollars in revenue from oil. However, the truth is that Iran is facing difficulties in utilizing a large portion of this money, which ultimately gives President Biden an advantage in future negotiations.

Iran is making a substantial amount of money from its flourishing oil exports. The current value of crude oil stands at approximately $80. However, Iran applies a reduction on its oil price specifically for Chinese consumers, meaning the price per barrel is likely closer to $74. With this price in mind, Iran's exports of 1.5 million barrels per day yield the country an estimated monthly income of around $3.3 billion.

These rough estimates are important because the Chinese government ceased providing information on the worth and quantity of oil brought in from Iran in May 2019. This occurred when the Trump administration withdrew a number of exemptions that allowed certain countries to make limited purchases of Iranian oil. By only relying on data from China, it seems like Iran's income from exports is much lower than it actually is, thus concealing the accurate trade balance.

During the last three months, for which we possess customs information, Iran's purchases from China reached an average value of $826 million. In that same time frame, Iran's exports to China, excluding oil, reached an average of $357 million. If we disregard Iran's oil exports, it seems that Iran is operating with a trade deficit of approximately $469 million in regards to China. However, considering the reasonably estimated $3.3 billion worth of oil exports, the monthly trade balance takes a significant turn in Iran's favor. In recent times, it can be assumed that Iran has managed to achieve a monthly trade surplus of approximately $2.8 billion with China.

To put it differently, it seems that Iran is unable to utilize the billions of dollars it is earning. Chinese goods, particularly parts and machinery, are crucial for Iranian industry. If Iran had the opportunity to purchase more Chinese goods, it would do so. There are two other pieces of information that support this interpretation. The exports from the UAE to Iran remain low, which implies that Chinese goods are not indirectly reaching Iran. Additionally, data from the purchasing managers' index for the manufacturing sector reveals that Iranian companies are still struggling with insufficient supplies of raw materials and intermediate goods. Furthermore, Iran is persistently seeking the release of its frozen assets, including $6 billion that will be allotted for humanitarian trade as part of the recent U.S.-Iran prisoner agreement. Iran would not be so desperate to make such agreements if its oil revenues in China were readily accessible. In essence, Iran is selling its oil and earning money, but it is not reaping the full economic benefits from the increase in oil exports.

Chinese businesses and their financial institutions continue to be cautious about engaging in trade with Iran due to the possibility of facing U.S. secondary sanctions. Many Chinese multinational corporations consider it too risky to trade with Iran. From January to June this year, Chinese exports to Iran had an average monthly value of $898 million. However, this figure is 35% lower compared to the same period in 2017, when Iran experienced relief from sanctions.

It is yet unknown whether Iran can maintain this new, increased level of oil exports. Oil markets can be unpredictable, and China's economic instability may reduce the demand. However, at present, Iran's notable trade surplus with China implies that its reserves of renminbi must be expanding. This is a unique situation. Traditionally, Iran has 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, and the nuclear deal provided significant relief from sanctions, the average monthly trade surplus was only $511 million (China's purchases of Iranian oil can be seen in customs data for this period). In other words, assuming Iran's oil revenues are trapped in China, its reserves are now growing four times faster than they did during that period.

Upon initial observation, this may appear to be a significant setback for the Biden government. Deliberately, Biden upheld the sanctions enforced by Trump under the "maximum pressure" strategy to sustain bargaining power and continue imposing secondary sanctions on Iranian oil exports. However, those who assert that Biden is ineffective in implementing his sanctions are disregarding the astuteness behind the present enforcement approach of the United States.

To begin with, Biden is unwilling to worsen the already heightened tensions with China. Imposing sanctions on Chinese refiners for buying Iranian oil would be a significant increase in the economic rivalry between Washington and Beijing, which would be unnecessary. Additionally, this escalation would serve no purpose considering the circumstances surrounding Iran's oil exports. It is important to note that Iran is not reaping the usual economic advantages from these exports. As a result, Iran is accumulating more funds that it cannot effectively utilize, ultimately granting the United States more leverage for future negotiations.

In contrast to Trump, Biden has put in significant effort to actively participate in nuclear discussions with Iran and is expected to continue these efforts if there is a fair chance of reaching a new diplomatic agreement that curbs Iran's nuclear activities. However, American negotiators have faced difficulties in presenting an attractive proposal to their Iranian counterparts. Numerous policymakers in Iran believed that the expected benefits from sanctions relief would be insufficient. Iran's initial move in the negotiations with Biden comprised asserting that the sanctions had caused a whopping $1 trillion worth of damage to their economy and that compensation was owed to them.

Due to the considerable decline in its oil exports, Iran has been unsuccessful in substantially increasing its reserve of foreign currencies. The International Monetary Fund (IMF) approximates Iran's foreign exchange reserves to be around $120 billion. If Iranian authorities believe that they must address a whopping $1 trillion worth of economic losses, the amount obtained from unfreezing the foreign exchange reserves appears to be insignificant.

As the sanctions continue, it will require increasing funds to reverse the accumulated impact of the U.S. sanctions, which have severely damaged Iran's economy for more than ten years. Biden cannot make any political commitment to compensate Iran, but the most the U.S. can offer is to again release Iran's own funds as a part of a fresh diplomatic agreement.

That's why it's beneficial if Iran's reserves are increasing. Iran's oil exports to China can be compared to payments made for a deferred annuity insurance agreement. Eventually, Iran will be able to benefit from this agreement. However, Iran can only receive the benefits if it meets the conditions imposed by the United States. Simply put, each barrel of oil Iran sells to China at present is strengthening the U.S.' bargaining power for future negotiations. It would be smart to allow the oil to continue flowing.