In late March 2021, China and Iran finally signed a 25-year cooperation agreement known as the China-Iran Comprehensive Strategic Partnership. While final details were not publicly released and the agreement is not binding, its contours could prove significant. China has reportedly offered to invest as much as $400 billion in Iran over the course of 25 years—more than an eight-fold increase over the pace of investment in the previous decade. The balance of power in the Middle East will not shift overnight, nor is China likely to jettison its partnerships with Iran’s regional rivals, but such a deal could prove a vital lifeline to Iran’s struggling economy. The ultimate fate of this long-term proposal will be tested by two crucial factors: China’s willingness to stick by its pledges in the face of international pressure, and the Iranian government’s ability to overcome domestic fears about ceding the nation’s sovereignty to China.
Early reports on the deal received some initial attention in the media, including a misleading level of certainty about what is actually part of the agreement. Much of what we know about the contours of this new proposed partnership comes from draft documents that were leaked in mid-2020. The New York Times reported nearly 100 different potential projects in that draft, including the construction of airports, subways, and railways, three different “free trade zones” in Iran, investment in Iran’s oil and natural gas production facilities, and assistance building 5G telecommunications infrastructure. At that time, Petroleum Economist alleged that $280 billion would be spent on the oil, gas, and petrochemical sectors while the remaining $120 billion would be spent on infrastructure. Additionally, the same publication held that China would receive discounts from the market rate on its petroleum purchases and that it would have the right to lease Iranian islands and deploy some number of troops in the country. The Iranian government swiftly denied those reports.
If we want to understand the potential impact of such a deal, and even this is hypothetical, we have to examine the spending breakdown. Does the $400 billion figure include China’s oil and natural gas purchases, or is it purely referring to new direct investments? The latter case would obviously be much more significant than the former. If the previously-leaked information proves to be mostly accurate, the deal would represent a serious increase in Chinese investment in Iran. The vast majority of this proposed spending is concentrated in construction, infrastructure development, and heavy industry, all areas where China has plenty of expertise. These types of projects have large multipliers—they provide a major demand boost for construction companies, associated service providers, and producers of building materials (like cement, steel, and lumber companies).
Just how significant would such a partnership be for the Iranian economy? From 2010 to 2020, China invested only $18.6 billion in Iran, while it invested roughly $30 billion in both Saudi Arabia and the United Arab Emirates, Iran’s rivals. A $400 billion investment over 25 years would equal around 3.5% of Iran’s present GDP each year. That represents a massive increase from today, where Iran’s foreign direct investment inflows may be as low as 0.5% of GDP. These figures show us the serious damage that the U.S.-spearheaded international sanctions regime has done to the Iranian economy, as well as the potential impact of a materialized Iranian-Chinese partnership.
The international context for such an agreement is relatively obvious: the U.S. is putting more pressure on both China and Iran in their respective regions, increasing the benefits and decreasing the costs of cooperation. Hopes for a “Biden reset” have waned in both China and Iran, as it becomes clear that the Biden administration is seeking to use Trump’s “maximum pressure” tactics as leverage in renegotiating U.S. agreements with both countries. As Iran’s economy suffers under heavy sanctions, the U.S. remains reticent about any real plan to renegotiate the nuclear deal that was torn up by the Trump administration. Iran thus desperately needs foreign partners to provide markets for its oil and investment to restart its economy. With an economy that is critically dependent on foreign energy supplies, China fits the bill perfectly. And with the Biden administration maintaining Trump’s tariffs and continuing to pressure China over trade, there is little more it can do to punish China for assisting Iran. China will also be happy to increase its influence with Iran which, unlike Saudi Arabia and the UAE, has no military or diplomatic ties to the U.S. alliance system.
Indeed, one of the main threats to Sino-Iranian cooperation comes from Iran itself. The Iranian government must balance its need to seek out foreign sponsors and economic partnerships against serious domestic opposition and fears over ceding Iranian sovereignty, one of the central planks of Iran’s historical “neutral and independent” foreign policy. For the parliamentary opposition, the government “caving to China”—mostly by allowing troop deployments or island concessions—provides an ease point for critique. Just as crucially, the influential Islamic Revolutionary Guards Corps (IRGC) profits in some ways from the sanctions regime, as it controls a significant number of domestic companies. The IRGC might be less enthusiastic than other elements of the Iranian state about introducing more Chinese competition into the Iranian economy. Indeed, domestic opposition could be one reason that no binding agreement was reached in March, allowing the Iranian government to avoid publishing any details or putting them up for a parliamentary vote.
Should this nebulous partnership manage to metamorphosize into something concrete over the coming years, it will represent a substantial upgrade for China-Iran relations. Iran, in particular, has much to gain here, as the sums China is allegedly offering would make for a huge boost in foreign investment. China has plenty of incentives to pursue these deals as well—Iran could provide both a reliable source of energy and a platform for China to expand its long-term influence in the Middle East. The international context, as always, is paramount. So long as the U.S. continues to apply pressure on both countries simultaneously, Chinese and Iranian policy will tend to drift into alignment. Only time will tell whether Iranian domestic opposition or the lure of $400 billion will prove more potent—though, as a cynic, I’d place my bets on the $400 billion.