In recent months, the Bab al-Mandab Strait, a crucial maritime chokepoint at the southern tip of the Arabian Peninsula, has witnessed escalating attacks on ships by the Iran-backed Houthi rebels. These assaults have caused significant disruptions in global trade, threatening one of the most vital corridors for oil and goods.
Amid this turmoil, China, with its significant economic interests in the region, is under intense scrutiny. Positioned as a peacemaker in the Middle East, Beijing faces increasing pressure to leverage its influence over Iran to curtail the Houthi threat. However, the complexities of Sino-Iranian relations suggest that China’s capacity to sway Tehran might be more limited than expected.
Before the onset of this crisis, the Bab al-Mandab Strait was a bustling artery for global maritime trade. Approximately a third of the world’s maritime trade and 40% of the commerce between Europe and Asia passed through this narrow waterway. The strait’s strategic importance is undeniable, linking the Red Sea to the Indian Ocean and serving as a gateway for the Suez Canal.
However, the Houthi attacks have forced many ships to reroute around the Cape of Good Hope, leading to increased costs and delays. While Chinese vessels have thus far escaped direct assaults, Chinese trade has not been spared. Business representatives in Shanghai have raised concerns, noting the increased transit time and higher shipping costs for goods arriving from Europe. This disruption underscores the potential for broader impacts, as it is only a matter of time before a Chinese-owned ship or a vessel with Chinese sailors becomes a target.
China’s Influence Over Iran: A Double-Edged Sword
China’s substantial economic relationship with Iran positions it as a key player in addressing the Bab al-Mandab crisis. Beijing is Tehran’s largest trading partner, accounting for a third of Iran’s total trade. Despite stringent American sanctions, China continues to import approximately 90% of Iran’s crude oil. Such deep economic ties suggest that China could exert considerable influence over Tehran, possibly compelling it to restrain the Houthi rebels.
Indeed, Chinese diplomats have reportedly cautioned Iran that further Houthi aggression could jeopardize Sino-Iranian trade relations. However, these warnings have largely fallen on deaf ears. The Houthis continue to engage in disruptive activities in the Bab al-Mandab Strait, highlighting the limitations of Beijing’s diplomatic leverage.
Limits of Beijing’s Influence
The main challenge for Beijing in wielding its influence over Tehran lies in the nature of its oil trade with Iran. Much of Iran’s oil is sold to small, independent Chinese refineries known as “teapots.” These entities, which operate on a much smaller scale compared to state-owned enterprises (SOEs), handle about 90% of Iran’s oil exports. After the U.S. withdrawal from the Joint Comprehensive Plan of Action (JCPOA) and the imposition of sanctions, Chinese SOEs ceased purchasing Iranian oil to avoid American sanctions. However, teapots have remained undeterred, lured by the discounted prices of Iranian oil.
- Sino-American Trade War: The U.S. sanctions on Iran coincided with the Sino-American trade war. When China imposed tariffs on American oil, many teapots, including Shandong Dongming Petrochemical Group, decided to halt purchases of U.S. oil, opting for the cheaper Iranian alternative.
- High Risk, High Return: Iranian oil has been priced significantly below the market average, at times up to $13 cheaper per barrel. This discount makes Iranian oil an attractive option for teapots willing to take on the risk of sanctions.
- Sanctions Evasion: Some teapots exclusively trade with Iran, conducting transactions in renminbi rather than U.S. dollars, thereby circumventing American sanctions. These smaller entities do not have the same exposure to international markets as SOEs, making them less vulnerable to U.S. extraterritorial jurisdiction.
If state-owned refineries were involved in purchasing Iranian oil, Beijing could more easily control the flow of trade. However, the decentralized nature of teapot operations makes regulatory oversight challenging. Moreover, Beijing is cautious about applying excessive pressure on Tehran, fearing it could harm bilateral relations, which are strategically valuable given Iran’s antagonistic stance toward U.S. influence.
Tehran’s Strategy: Asymmetric Warfare
Iran, facing the formidable U.S.-Israeli alliance, has long relied on asymmetric warfare to offset the conventional military imbalance. The Houthis’ actions in the Bab al-Mandab Strait are an extension of this strategy, disrupting global trade routes and asserting Iran’s regional influence. From Tehran’s perspective, reining in the Houthis would equate to weakening its deterrent capabilities against its adversaries.
Therefore, any pressure from Beijing to disarm its proxies or to reduce their activities could be perceived by Tehran as a betrayal. Such a move would not only undermine Iran’s asymmetric warfare tactics but also cast doubt on China’s supposed neutrality in the Middle East.
Smuggling Iranian Oil: Role of Middlemen
Smuggling plays a pivotal role in sustaining the flow of Iranian oil to Chinese refineries. The process involves complex maneuvers, such as ships turning off their automatic identification systems and transferring oil between vessels under the cover of darkness. These ship-to-ship transfers often occur in the Persian Gulf, or near the Strait of Malacca, with Iranian ships transferring oil to vessels registered in countries like Oman, Malaysia, or Indonesia.
- Economic Gain: Serving as intermediaries in oil smuggling is a lucrative business.
Religious and Political Sympathy: Shared Islamic heritage and a common discontent with U.S. extraterritorial jurisdiction motivate countries like Oman and Malaysia to facilitate Iran’s evasion of sanctions. - Neutral Stance: Countries like Oman, which has a reputation for mediating regional conflicts, prefer not to antagonize either the U.S. or Iran.
Case Studies in Sanctions Evasion
Recent legal actions highlight the complexity and international nature of Iran’s sanctions evasion. In February, Mahmood Rashid Amur Al Habsi, an Omani citizen, and Wang Shaoyun, a Chinese national, were indicted by the U.S. for facilitating the illegal sale of Iranian oil. The indictment alleged that Al Habsi used loans from American financial institutions to purchase an oil tanker, the M/T Oman Pride, which was then used to conduct ship-to-ship transfers of Iranian oil.
The oil, eventually sold to Chinese refineries, was paid for in U.S. dollars, with the proceeds laundered through various shell companies. These cases underscore the sophisticated networks involved in sanctions evasion and the challenges faced by international regulators in tracking and controlling illicit trade.
China’s Reluctance to Invest Heavily in Iran
Despite the robust trade relationship, Chinese investment in Iran has been surprisingly limited. Although China and Iran signed the 25-year Comprehensive Strategic Partnership Agreement in 2021, promising $400 billion in Chinese investment, actual investments have fallen far short of expectations. In comparison to the billions China invests in countries like Saudi Arabia and Israel, its financial commitments to Iran appear minimal.
- IRGC’s Influence: The Islamic Revolutionary Guard Corps (IRGC) dominates Iran’s economy, with a presence in virtually every sector. This has led to widespread corruption and a business environment that is highly unfavorable to foreign investors. Chinese companies, wary of the need to navigate a complex web of bribes and political influence, are often reluctant to commit significant resources to Iranian projects.
- Perception of Iran’s National Character: Chinese scholars often describe Iran’s national character as being a blend of pride and victimhood, rooted in its history as both a powerful empire and a nation subjected to colonial exploitation. This perception suggests that Iran may prioritize short-term gains over long-term partnerships, a stance at odds with China’s preference for “mutually beneficial win-win cooperation.”
- Price Hikes and Negotiation Stalemates: Recently, Iran has increased the price of its oil exports to China, reducing the discount previously offered. This has made Iranian oil less attractive to Chinese teapots, who view the new pricing as unreasonable given the risk involved in purchasing sanctioned oil.
- Reputation of Chinese Goods in Iran: Chinese products in Iran are often associated with low quality. Rising inflation and decreasing purchasing power in Iran mean that consumers are more price-sensitive, yet skeptical of the value offered by Chinese goods. This perception complicates efforts by Chinese companies to establish a foothold in the Iranian market.
China’s position in the Bab al-Mandab crisis highlights the challenges of balancing economic interests with geopolitical strategy. While Beijing has significant economic leverage over Tehran, its ability to influence Iranian behavior is constrained by the complexities of the Sino-Iranian relationship. The decentralized nature of the oil trade, Iran’s reliance on asymmetric warfare, and the entrenched power of the IRGC all limit Beijing’s ability to enforce its will.
Moreover, any overt pressure from China could be interpreted by Tehran as a departure from Beijing’s traditionally neutral stance, risking a backlash that could strain Sino-Iranian relations. The longstanding Iranian principle of “neither East nor West” suggests that Iran is unlikely to bow to Chinese demands, even if they are backed by economic threats.
As the Bab al-Mandab Strait remains a flashpoint, China must navigate this crisis carefully. With limited sticks and carrots at its disposal, Beijing’s influence may be more about diplomatic finesse than direct intervention. How China handles this delicate situation could have far-reaching implications for its role as a peacemaker in the Middle East and its broader ambitions on the global stage.
