Energy Trumps All in Iran-China Ties

China is a natural trading partner for Iran as a major non-western economy prepared to do business with it, but the relationship is not always a smooth one. 

Until recently, Chinese-made oil industry equipment offered one of the few ways round the numerous United Nations and unilateral sanctions imposed on Iran because of its uranium enrichment programme.

Beijing’s decision to back the latest set of UN sanctions in early June – requiring it to apply tougher conditions to trade and financial transactions with Iran – has clearly miffed officials in Tehran.

But that is unlikely to have a major impact on an economic relationship that is important to both countries.

What really concerns Iranian businessmen is that from their point of view, the economic relationship with China is decidedly one-sided. The influx of cheap Chinese-made goods has priced many Iranian companies out of the market, while exports to the country mainly consist of crude oil rather than manufactured goods.

Morteza Zaghi, managing director of Techno Tar, an Iranian firm, complains that although his company makes good petrol station equipment, the government in Tehran persists in importing Chinese-made items of lesser quality. He believes defective Chinese petrol pumps are one of the reasons why Iranian drivers have to spend long periods queuing up for fuel.

The same criticisms are heard in other areas.

At a session of parliament in July, Hossein Naghavi said imports of Chinese fruit, milk, meat, rice, tea, textiles and industrial goods posed a “serious threat to Iranian products”. Iranian factory owners had even relocated their own production to China and now “send their products back to Iran from there”, he added.

The disappointment felt by people like Naghavi is all the more bitter because of the “Look East” policy eschewed by Tehran over many years.

This focus on China came out of the need to rebuild after the eight-year war with Iraq in the 1980s, and the realisation that western assistance would not be forthcoming because of the fraught diplomatic environment. Some conservative regime figures even advocated a conscious adoption of the Chinese model of development.

Two decades on, critics of this policy are expressing their concerns.

“The only outcome of the Look East policy for Iran has been that China sells its products at prices four times the [world] market rate,” Pirouz Mojtahedzadeh, a professor at the Tarbiat Modarres University in Tehran, told the Khabar daily.

Ali-Asghar Attarian of Hepco, a company making heavy machinery, says Iranian companies cannot possibly compete with the Chinese.

“In China, workers’ wages and interest rates are so much lower than in Iran,” he said. “In Iran, workers earn at least 320 US dollars [monthly] and you can’t find an interest rate lower than 20 per cent, whereas a Chinese worker’s wage is 70 dollars at most, and interest rates are about two per cent.”

The head of the National Iranian Oil Company, Ahmad Ghalebani, has said the machinery used in oil production still has to be bought in from China for the present because the industry has deadlines to meet.

But at a meeting with oil industry equipment manufacturers, he promised that these imports would stop, and local manufacturing would be encouraged to fill the gap instead.

An energy expert in Iran who asked to remain anonymous suspects that Ghalebani’s pledge was just for public consumption and that in reality, “there is no plan”.

“The NIOC managing director was addressing Iranian oil equipment manufacturers, many of whom regard the abundance of cheap Chinese products as a hindrance,” he added.

In reality, the energy expert said, it was unrealistic to expect domestic firms to start making all the machinery that the Iranian oil industry needed. At the moment, the country lacks both the complex industrial structure and the technological know-how to do this.

Other Iranian producers are similarly dependent on Chinese inputs, notably car-making, the second biggest industry after energy.

Mohammad-Reza Roshani Moghaddam, managing director of the automotive components supplier Mega Motor, says that the car-maker Saipa sources 70 per cent of its parts from China as well as Japan and South Korea.

China has responded to criticisms about of product quality. Its economic attaché in Tehran, Wang Liping, told the Khabar daily that his country’s trade ministry had slashed the number of companies permitted to export to Iran from 20,000 to just 1,000.

Beijing’s backing for the latest round of UN sanctions against Iran was hardly surprising – the Chinese have voted in favour of all previous Security Council resolutions.

But it still evoked some anger in Tehran, which is increasingly hemmed in by the sanctions imposed by individual countries as well as the international community.

“Iranian officials will not forget China’s vote for sanctions and will respond at the right time,” Hossein Noghrehkar Shirazi, until recently the international deputy in Iran’s oil ministry.

The importance of the economic relationship is likely to override such diplomatic differences, however.

Last year, Beijing became Tehran most important trading partner, while Iranian crude accounts for one-third of imports for the energy-hungry Chinese economy. The Iranian-Chinese chamber of commerce estimates that bilateral trade will continue booming in 2010, and show a 50 per cent year-on-year increase in monetary terms.

Soon after the UN resolution was passed, President Mahmoud Ahmadinejad spoke warmly of Iran’s ties with China, and his oil minister Massoud Mirkazemi went off to Beijing to invite even greater interest in the Iranian energy industry.

Iranian officials have proposed that to get round the financial strictures created by sanctions, crude exports could be paid for in yuan rather than dollars or euro, or used as payment in kind for Chinese investment projects and key import items like refined fuel and machinery.

Reihaneh Mazaheri is an Iranian economic journalist based in Paris.