October 15, 2014 | Policy Brief

The Iran-China-Russia Triangle

A wave of U.S. and EU financial sanctions aimed at Russia following its annexation of Crimea in the summer of 2014 have brought Russia and Iran closer. However, Russia is not the only economy that Iran is sounding out for closer ties. Tehran has also turned to China, as a means to elude sanctions and thus, reduce Western leverage in negotiations.

Russian Energy Minister Alexander Novak told Iran’s English language state-sponsored Press TV last month that “Tehran and Moscow have signed projects worth of seventy billion euros to develop their trade and economic ties.” The Russian minister announced this during the 11th round of the Iran-Russia Trade Council, held in Tehran. This was the latest in a series of mutual steps taken by Moscow and Tehran in recent months to bolster financial ties in banking and oil, among other activities hit by sanctions.

With Western financial sanctions hammering both Moscow and Tehran, banking is an urgent, and mutual concern. Asadollah Asgaroladi, the Chairman of the Iran-Russia Chamber of Commerce, told Press TV last week, “Since Russian banks fear the implications of working with Iran due to sanctions, we want to establish the joint Iran-Russia bank with the help of our central banks and private sectors. Such a bank would be able to exchange money between the two sides using rials and rubles and put aside Dollars, Euros and Pounds.”

There has also been talk of a $20 billion oil-for-goods deal that would allow Iran to circumvent sanctions by paying Russia directly with energy. The agreement has been under negotiation since January 2014.  But Iran has mixed feelings, which derive from concerns that its economy might become too reliant on Russia.

In part, this desire not to put all of Iran’s eggs in Russia’s basket also comes from a new opening – China. According to Iran’s news agency, Alef, a Central Bank official two weeks ago briefed members of Iran’s parliament, the Majles, about a new deal between Iran and China. In the deal, China will finance a wide range of Iranian projects, up to $70 billion, as long as Iran can finance 15 percent of each project. For some special projects, the threshold is 7.5 percent.

The deal was reached when Valiollah Seif, head of Central bank of Iran traveled to China last August to discuss how China could finance Iran’s projects. China was particularly eager, in that it owes more than $22 billion to Iran. The aforementioned Asgaroladi, who doubles as the head of the Iran-China joint chamber of commerce, played a crucial role. Asgaroladi reportedly bought shares in two Chinese banks to facilitate bilateral trade. Asgaroladi later denied these rumors but explained that he has been helping the private sector to acquire a bank in China.  

The establishment of banking channels in Russia and in China, would give Iran access to financial instruments in two important markets for both its imports and exports. It would also ease pressure on Iran’s banking system from U.S. and European financial sanctions.

Moreover, by expanding economic ties with countries like China and Russia, Iran is diversifying its assets and ensuring that its economy will develop suitable alternative access to the international financial system, regardless of whether a nuclear deal can be reached which lifts sanctions. It is a development that U.S. negotiators need to monitor closely and raise with their Chinese and Russian counterparts in the P5+1 framework as negotiations enter their final stretch.

Saeed Ghasseminejad is an associate fellow at Foundation for Defense of Democracies, where Emanuele Ottolenghi is a senior fellow.

Issues:

Iran Iran Sanctions