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Is China Investing in Iran After Losing Hope with CPEC?

Oct 29, 2019
  • Adnan Aamir

    Journalist and Researcher, Islamabad, Pakistan

In an unexpected move, China has decided to include Iran in the Belt and Road Initiative (BRI). In September, China announced an investment of $400 billion into the struggling economy of Iran. Proposed investments in Iran would be the largest sum that China has pledged to invest in a single BRI country. This project will most likely replace the China-Pakistan Economic Corridor (CPEC) as the flagship project of BRI. This decision shows that China has lost hope in the success of CPEC as a role model for BRI.

The details of the proposed investments were revealed after the visit of Iranian Foreign Minister to Beijing. According to the details published in Petroleum Economist, the investment of $400 billion will be divided into two major components. $280 billion will be invested in the Oil and Gas sector and $120 billion will be invested in the transport and infrastructure of Iran. Moreover, the investment will not be capped at $400 billion and it can be increased after five years. Just like the case of other BRI countries, China has ensured priority treatment for its companies. For all the projects in Iran, Chinese companies will have the first right to get the contract. In addition, Iran has agreed to station 5,000 security personnel of China to protect the proposed investments.

CPEC: Not the flagship project of BRI anymore?

CPEC is the Pakistan component of BRI. Comprising of different portfolio of projects worth $62 billion, CPEC was meant to achieve two objectives: the first was to help grow the economy of Pakistan and the second was to provide an economic corridor, which can be used to connect South-western China with the Indian ocean. Since its inception in April 2015 until 2018, CPEC was a top economic priority for Pakistan. However, after a change of government in Pakistan in 2018, Pakistan lost interest in CPEC. The new government in Pakistan effectively took steps to scale down CPEC and earned the ire of China in the process.

When China realized that CPEC can’t continue to be the flagship project of BRI, it started looking for alternative options. From CPEC, China was getting two benefits; profit from loans and investments, and secondly connectivity to the Indian ocean. The other country to provide the same benefits to China is Pakistan’s neighbor Iran. By investing in Iran, China will not only get a return on its investments of $400 billion but also connectivity to the Indian Ocean via the Persian Gulf. The additional benefit which Iran offers for China is its vast oil and gas reserves. China can secure supply for its energy needs in the long term by cementing its economic ties with Iran through these proposed investments. Therefore, China announced that Iran will become a part of BRI. It is significant to point out that Chinese proposed investments in Iran are seven times more than CPEC. Therefore, this new corridor, which is not named yet, will be the new flagship project of BRI.

Can Iran be a success story of BRI?

The most important question to be asked in this case is whether Chinese investments in Iran can be a success. The first issue, which affects the success of this venture, is the high value of the investments involved. Investing $400 billion in any country will not be an easy task, let alone in a country like Iran which is already engulfed in crisis. In the case of most of BRI projects, the actual investments have always been much less than the pledged Chinese investment. Even in the case of CPEC, only $33.9 billion was invested by China, so far as compared to the pledged amount of $62 billion. That’s why the investment of this enormous amount will be the first challenge for this venture.

Secondly, by moving on with this project, China is inheriting the geopolitical baggage of Iran. Since the so-called Islamic revolution in 1979, Iran has been in an adversarial position with the west. It is not very well connected with global financial institutions. It is even facing sanctions by the USA at the moment. These sanctions make it very difficult for other countries to trade with Iran. China, being a major economic power, can defy the U.S sanctions. Still, it needs to bear additional costs and diplomatic resistance just because of its investment in Iran. In the long term, these additional costs can take a toll on China and negatively affect its resolve to continue investing in Iran.

Furthermore, Iran is not very friendly with its Arab neighbors. Iran is involved in multiple proxy wars in the Middle East. Iran is regularly blamed by Saudi Arabia for sponsoring terrorist attacks on its oil fields. This means that Iran can also face violent reprisal attacks by its neighbors and their allies. In fact, President Trump ordered a strike on Iran and canceled it at the eleventh hour, in June this year, in retaliation for Iranian shooting down a U.S drone. This suggests that Iran can face such attacks in the future as well, and that will not bode well for the Chinese investment in Iran. A major attack on Iran would completely suspend the Chinese projects in Iran and that will cause a loss of billions of dollars to China. Therefore, it would be unrealistic on the part of Beijing to tie too many hopes into investments in Iran.

What happens to CPEC?

Whether the government of Pakistan accepts it or not, this is a big blow to CPEC. As a consequence of this decision, CPEC has lost its coveted status as the flagship project of BRI. Once China starts investing in Iran then it will further lose interest in CPEC. This means that China might not honor its commitment of $62 billion once the Iran corridor shows promising returns. This would result in a reduction of investment in the already struggling economy of Pakistan. At the same time, China would also reduce the diplomatic and strategic support for Pakistan once it finds a new partner in the form of Iran. Therefore, the Chinese investments in Iran are a lose-lose situation for Pakistan.

In order to control further damage, Pakistan has already started taking steps to please China. Pakistan established a CPEC Authority to fast track implementation on CPEC projects. It has also waived off tax for Chinese companies in Gwadar for 23 years. Pakistan’s Prime Minister Imran Khan paid a sudden visit to Beijing in October to earn back the trust of China. However, apparently, there is no indication that China is going to change its mind with regards to CPEC as a result of these decisions. It would be safe to assume that, due to flawed policies of the government of Pakistan, Iran has become the new favorite BRI country of China in the South Asian and middle eastern region.

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