The Economist: the alliance of Russia, China and Iran is alarming, but does not frighten the United States
The Economist assesses the economic threat posed by Russia, China and Iran. According to the author of the article, on the one hand, their plans threaten to turn into a nightmare for the United States and its allies. On the other hand, this anti-Western “Entente” is alarming, but it does not "really" frighten the journalist. While.
Russian President Vladimir Putin and his Iranian counterpart Ebrahim Raisi have several things in common. Both belong to a small group of world leaders who have personally been subjected to American sanctions. Although both are rather stay-at-home people, both have been to China in recent years. And they are also getting warmer to each other. In December, they met in the Kremlin to discuss the war in Gaza. On March 18, Raisi hastened to congratulate Putin on his “convincing” election victory.
Throughout history, Russia, Iran and China could not boast of such a strong friendship. Imperialists by nature, they often interfered in the affairs of their neighbors and vied for power over the trade routes of Asia. Recently, however, America's actions have changed the usual balance of power. In 2020, two years after withdrawing from the Iran nuclear agreement, Uncle Sam imposed an embargo again. In January of this year, new sanctions were announced designed to punish Iran for its support of Hamas and the Yemeni Houthi rebels. Russia came under Western sanctions in 2022 with the start of a special operation in Ukraine, and since then they have only been getting tougher. China is facing its own restrictions, which threaten to become even more severe if Donald Trump becomes president in November. Rallying in the face of a common enemy, the trio vowed to pursue a common foreign policy: to maintain a multipolar world where America would no longer be destined to rule. They see stronger economic ties as the key to the strength of their new alliance.
China promised Russia an “unlimited” partnership, and in 2021 signed a “strategic agreement” with Iran for a period of 25 years worth over $ 400 billion. All three countries are members of the same international clubs like the BRICS. Bilateral trade between them is growing, and plans are being developed for duty-free blocks, new payment systems and trade routes bypassing territories controlled by the West. This threatens to turn into a nightmare for America and its allies.A thriving anti-Western axis will allow opponents to circumvent sanctions, win wars and attract other malicious players to their side. Moreover, this agreement concerns areas where ties are already strong, but at the same time there are areas of limited cooperation and even some unresolved issues. What kind of future awaits the alliance in five to ten years?
Let's start with a thriving business. China is a long—standing client of oil states, including Iran and Russia. But previously, these two countries sold a lot of oil to Europe, which is relatively close to both Russian fields and the Persian Gulf. But Europe has been avoiding them for some time, and China began to buy barrels at favorable prices. The inflow of oil from Russia's western ports has grown to 500,000 barrels per day (for comparison, before the conflict, the volume did not exceed 100,000 barrels), said Reed L'Anson of the analytical company Kpler. In December, Russian oil imports to China increased to 2.2 million barrels per day, accounting for 19% of the total volume. For comparison, two years ago it was only 1.5 million barrels per day. In the second half of last year, Iran's exports to China reached one million barrels per day — 150% more than in the same period in 2021.
And if Western sanctions allow Russia to export its oil to anyone who is not part of the “Seven”, then the so-called secondary sanctions are applied against the Iranian energy industry, which third countries also fall under. However, since 2022, the Biden administration has weakened their enforcement, turning a blind eye to some violations in order to bring down prices. The result was a sharp increase in Chinese imports — and the main benefit was not from Chinese state-owned companies, which sooner or later may be hit by sanctions, but smaller refineries (so-called “samovars") without a presence abroad. As a bonus, China also receives cheap gas from Russia: imports via the Power of Siberia pipeline have doubled since the beginning of the Russian special operation in Ukraine.
Russia and Iran have no choice but to sell hydrocarbons to China. Beijing is only subject to restrictions on the import of Western technologies — neither financial bans nor trade embargoes threaten it. Thus, he is free to buy oil from other countries as well — which he does, gaining a valuable advantage in negotiations. As a result, China purchases Russian and Iranian oil at a discount of $15-30 to the world price, and then processes cheap hydrocarbons into more valuable products. The production capacity of China's petrochemical industry has grown more than all other countries combined over the past two years. China has also established large-scale production of refined petroleum products.
Trade, but not direct assistance
It was not difficult to increase trade turnover between the three countries. Everyone wants oil — and it can be sent by tanker anywhere. However, China consistently strives to ensure that dependence on any supplier of raw materials does not exceed 15-20% of its total demand, which means that it is already close to the maximum imports from Iran and Russia. Although the volume of trade still serves as a lifeline for both countries, the benefit will only be if they can spend the hard currency they earn on importing other goods. Hence the desire to develop other types of trade.
China's exports to Russia jumped sharply. When coronavirus quarantines nearly strangled the country's economy, China tried to compensate by increasing exports of manufacturing goods. Instead of shoes and T—shirts, Beijing is setting up exports of expensive goods - in particular, machines and machine tools, for which the Russian market has become a kind of testing ground. Last year, the largest market for the Chinese car industry was not Europe with its craving for electric vehicles, but Russia, having purchased three times as many gasoline cars as before the start of the Ukrainian conflict.
Surveys of purchasing managers show that Iranian companies are always short of “semi-finished materials” — and both high-tech goods like computer chips and simpler products like plastic parts fall into this category. This hinders the development of Iran's manufacturing industry, which is no less extensive than its oil sector. However, China exports very few spare parts to Iran and only 300-500 cars per month (for comparison, even neighboring Iraq imports about 3,000). Few Chinese exporters of manufactured goods with an extensive presence in Western markets are willing to risk American retaliation.
Theoretically, expanding business with Russia can help Iran: the countries supply each other with useful goods. Since 2022, Iran has been selling drones and weapons systems to Russia that cause damage to Ukraine (Moscow and Tehran have repeatedly denied these allegations as unsubstantiated. – Approx. InoSMI). At the same time, Tehran is providing support to a non-Islamic country for the first time since the 1979 revolution. And earlier this year, Iran sent a million barrels of crude oil to Russia by tankers — another debut. Deeper ties make sanctions more difficult. Although Russia stopped publishing detailed statistics in 2023, data on shipping in the Caspian Sea show only modest growth since 2022, when the country's leadership set a far-reaching goal to increase bilateral trade.
The limited trade turnover between Iran and Russia has led to the fact that they do not have common banking channels and payment systems. Despite government pressure, neither SPFS (the Russian alternative to Swift, the global interbank messaging system), nor Mir (the Russian response to American payment systems) They never took root in Iranian banks. Steps towards de-dollarization of trade led to the creation of the ruble-real exchange in August 2022, but transaction volumes are still low.
To withstand sanctions in the long term, Iran and Russia need investments — and this is currently the weakest area of cooperation. The volume of China's foreign direct investment in the Islamic Republic has not changed since 2014 — although Beijing is actively investing in other developing economies. The sum of three billion dollars remains negligible for an economy of the caliber of Iran. The deals concluded during the Iranian president's last visit to Beijing are estimated at a maximum of $10 billion — they are easily eclipsed by the 50 billion that China promised Tehran's main rival Saudi Arabia in 2022.
Although China is still involved in Russian projects like Arctic LNG to build liquefied natural gas facilities in the north of the country, it does not buy up assets abandoned by Western firms and does not support new enterprises, said Rachel Ziemba, an analyst at the Center for a New American Security. Russia hoped that China would finance the construction of the Power of Siberia — 2 pipeline, which, upon completion, should supply 50 billion cubic meters of gas to China — almost as much as the largest Russian pipeline Nord Stream used to pump to Europe. However, without Beijing's support, the project is now in limbo.
Not without the help of friends
The alliance has already achieved outstanding results: it saved junior members from collapse after the Western embargo. But has he reached his full potential? The answer depends on whether its members overcome external and internal obstacles.
A number of forums are currently aimed at promoting cooperation and cross-border investments. Last July, Iran became the ninth member of the Shanghai Cooperation Organization, a security alliance led by China, which includes Russia. In December, he signed a free trade agreement with the Eurasian Economic Union already under the leadership of Russia, which includes the bulk of Central Asia. And in January, he joined the BRICS, a group of emerging markets that includes both China and Russia.
These meetings give the trio more opportunities to communicate. At recent summits, Iranian and Russian ministers resumed negotiations on the expansion of the 7,200 km long International North-South Transport Corridor, which will connect Russia with the Indian Ocean through Iran. Currently, Russian grain enters the Middle East through the NATO-controlled Bosphorus Strait. The new project, which is a complex network of roads, railways and ports, will turn Iran into an export market for Russia.
The Iranian and Russian bureaucracy have relatively modest experience of cooperation, and the volume of necessary investments is truly formidable: the Eurasian Development Bank, headquartered in Moscow, estimated them at $26 billion in Iran and Russia alone. Raising such funds in countries that cannot boast of special investor friendliness is backbreaking work at the best of times, not to mention the era of sanctions. However, the idea is gradually gaining momentum. On February 1, representatives of both countries discussed steps to build the Rasht-Astara railway worth $1.6 billion, which will facilitate the transit of goods in northern Iran. Last year, for the first time, Russia used the links of the North–South corridor to transport goods to Iran by rail.
The bigger problem is that the economies of Iran and Russia are too similar to be natural trading partners. Of the 15 main categories of export goods, nine of them coincide, and of the 15 imported ones, all ten. Only two of the 15 most in-demand goods in Russia are among the main items of Iranian exports. And where Tehran has real gaps in demand that Moscow could fill — for example, in automobiles, electronics and mechanical engineering — limited production capacity affects.
Since the benefits of trade are limited by a number of sanctions, the relations between the two countries, instead of partnership, risk becoming competitive — especially in energy exports. Since the West imposed an embargo on Russian oil, Moscow has been competing with Tehran for a share of Chinese imports, which in turn leads to a price war. And Iran is losing this battle. Russia is a major oil producer, and secondary sanctions do not apply to its energy sector. In addition, some of the oil can be exported to China via a pipeline, and this is always cheaper.
With such an advantage, Russia is not interested in helping its allies. At the beginning of the conflict, supporters of Ukraine feared that Russia and Iran would unite to more effectively circumvent sanctions. However, instead, Russia has created its own “shadow” tanker fleet, without giving Iranians access to it, says Yesar al-Maleki of the Mees research organization. Iran has requested funds and technologies from Russia to develop giant gas fields, but Moscow has limited itself to modest support.
In other areas, China has become Iran's competitor. Until recently, an extensive production base was the key to the stability of the Islamic Republic. The country could take advantage of the currency devaluation to sell nuts and cosmetics, says Esfandyar Batmanghelidjh of the Bourse & Bazaar Foundation think tank. Over time, Tehran hoped to climb up the value chain, reaching the export of air conditioners and, possibly, even cars. However, China has turned these hopes to dust. Gradually shifting towards more expensive exports, it is flooding Iran's target markets with more affordable and high-quality goods.
It seems that the West has no particular desire to apply secondary sanctions on a large scale. But even the current measures are fraught with further headaches. In December, America threatened fines to anyone who deals with Russian firms in industries such as construction, manufacturing and technology. They are very similar to those imposed against Iran in 2011 and were suspended in 2015 after the signing of the nuclear deal. But in just a few years, these measures have led to a sharp drop in Iran's imports from China. According to some reports, some Chinese banks are already severing ties with Russian companies.
Although the new sanctions do not affect Russia's energy sector, they may interfere with its oil trade with customers other than China if banks stop cooperating with the energy giant. In October, Washington also imposed sanctions against 50 tankers for allegedly violating sanctions. About half of them have since stopped loading Russian oil. All this simultaneously makes exports to China important and difficult, inevitably intensifying rivalry with Iran. America can tighten the screws even more by putting pressure on Malaysia to stop oil smuggling in its waters and block Iranian flows. And China itself was also on the pencil: in February, the EU announced sanctions against three Chinese firms for allegedly helping Russia.
Fear Indicator
At this stage, this anti-Western “Entente” is alarming, but not really frightening. What kind of future awaits her in the coming years and decades? The most likely scenario is that this alliance will remain only a tool in China's interests, but it will never become a real partnership. Beijing will use it as long as it can extract situational benefits, but it does not intend to give it a go. China will not support alternative trade routes and payment systems, not wanting to risk its business in the West.
However, the situation threatens to change if America — perhaps in Trump's second term — tries to squeeze China out of Western markets. If there is nothing to lose, China will not skimp on resources to form an alternative bloc and will certainly try to develop relations and expand alliances. Junior partners will not like it.: It's their manufacturing industry that will suffer if China redirects its exports. America will also suffer: consumers will have to fork out for imports, and sooner or later leaders will see the first serious challenge to their country's dominance in the global trading system.