U.S. To Scale Up Sanctions On Iran’s Key Financier China
The U.S. aims to cut Iran's oil exports to near zero to deny funding for its nuclear program and weaken the Islamic Revolutionary Guard Corps (IRGC), with China being a key enabler by importing Iranian oil.
Despite U.S. sanctions, China continued to increase oil imports from Iran, using methods to bypass official customs data, and maintained operational independence through institutions like the Bank of Kunlun.
- The U.S. is intensifying sanctions, targeting Chinese entities involved in trading Iranian oil and petrochemical products, with more measures expected to further restrict Iran's revenue sources.
The U.S.’s short-term objective on Iran is for it to have zero enriched material that could be used to make a nuclear weapon. Its long-term objective is to remove from power the key element behind the drive for such armaments – the Islamic Revolutionary Guard Corps (IRGC). Its principal mechanism to achieve these aims is to deny Iran funding, and as the core of its financing comes from oil exports, the U.S. wants to cut these to as near to zero as possible. Cue China – the biggest importer of Iranian oil and therefore, in effect, Iran’s chief enabler. As a very senior legal source who works closely with the U.S. agencies involved in sanctions on Iran and its allies exclusively told OilPrice.com recently: “We want to put Beijing back in its box when it comes to Iran and the Middle East, as part of neutering the threat from China and its allies more broadly.” Last week saw Washington move to do just this, as part of a scalable ladder of sanctions against Iran’s key supporters – China now very much included – to come. But will these efforts succeed?
Back in 2018, just after the U.S. had unilaterally withdrawn from the Joint Comprehensive Plan of Action (JCPOA, or colloquially ‘the nuclear deal’), Washington stated that its aim was to reduce Iran’s oil sanctions ‘to zero’ and subsequent statements out of Washington were a virtual countdown of various benchmark levels through which Iran’s oil exports supposedly dropped from their previous position at that time of around 2.5 million barrels per day (bpd). On the other side of this version of reality was the fact that China on its own was importing nearly 1 million bpd from Iran, and the trend was rising rapidly as the global oil market discounts on Iranian oil increased. Beijing’s interest in continuing to increase these imports from Iran was further boosted by the multi-layered benefits of the all-encompassing ‘Iran-China 25-Year Comprehensive Cooperation Agreement’, as first revealed anywhere in the world in my 3 September 2019 article on the subject and also fully detailed in my latest book on the new global oil market order. Even after the U.S. refused to extend China’s waiver on importing Iranian oil in May 2019, Beijing continued to increase its oil imports from Iran. Figures from China’s General Administration of Customs (GAC) at the end of August 2019 showed that China had imported 926,119 bpd of Iranian oil in July, up 4.7% month on month, from an already high base. Indeed, according to various oil industry sources in Iran exclusively spoke to by OilPrice.com at the time, the actual figure was much higher.
The key element that the U.S. had overlooked in this context was that any and all barrels of Iranian oil that did not officially go through China’s GAC were not entered into the country’s customs data and thus did not show up at all, as examined in my latest book. In reality, many millions of barrels each month were being imported to China in such a fashion and were then simply moved the refineries where they were required or stored on land or at sea effectively as part of China’s Strategic Petroleum Reserve, without ever having been recorded by the GAC, and thus – to all intents and purposes – not existing as far as the outside world was concerned. A year later, in another OilPrice.com exclusive, the high-profile reports claiming to underline that GAC data released on 26 July was evidence that China did not import any crude oil from Iran in June “for the first time since January 2007” were shown to be nonsense. Specifically, from 1 June to 21 July (51 days), China imported at least 8.1 million barrels of crude oil – 158,823 barrels per day (bpd) -- from Iran in a number of tried-and-tested ways.
As with Iran, China at that point had always regarded any U.S. sanctions as a fun puzzle to solve. The key factor at play in China’s ability to ignore U.S. sanctions on Iranian oil back then was the lack of exposure of its firms to the U.S. financial infrastructure, particularly to the U.S. dollar. Another key factor was the ease with which Chinese companies could set up new special purpose vehicles to handle ring-fenced areas of their businesses to allow for special situations, such as sanctions. A related example of this operational independence at that stage was that China made no secret that it was going to use its Bank of Kunlun as the main funding and clearing vehicle for its dealings with Iran. The Bank of Kunlun had considerable operational experience in this regard, as it had been used to settle tens of billions of dollars’ worth of oil imports during the UN sanctions against Tehran between 2012 and 2015. Most of the bank’s settlements during that time were in euros and Chinese renminbi and in 2012 it was formally sanctioned by the U.S. Treasury for conducting business with Iran. This sanctioning had no effect on the Bank of Kunlun’s operations either then or subsequently.
Having said all of this, the U.S.’s methodology for imposing and then consistently tightening up sanctions on a target and then its allies appears to be improving. Long-running sanctions directly on Iran have been increasingly augmented by additional sanctions on its key regional accomplice, Iraq, in recent months. A notable recent example came in April, with the ‘No Iranian Energy Act’ introduced to U.S. lawmakers. As highlighted by Chairman of the Republican Study Committee, Congressman August Pfluger, this legislation is part of President Donald Trump’s maximum pressure campaign against Iran’s leaders. “[These] are the world’s most dangerous state sponsors of terrorism, [and] the Iranian regime is not just a threat, its leaders are a genocidal death cult,” he said. The proposed Act will sanction the importation of Iranian natural gas to Iraq, which has for many years formed the foundation of the country’s domestic power sector. Indeed, gas and electricity imports from Iran has historically comprised around 40% of all Iraq’s energy needs. An adjunct piece of legislation – the ‘Iran Waiver Rescissions Act’ -- would permanently freeze Iranian-sanctioned assets everywhere including Iraq and prohibit any standing or future U.S. President from using any waiver authority to lift the sanctions.
For China, there have been warning shots from the U.S, in earlier pieces of U.S. sanctioning related to Iran. In December 2023, the U.S.’s Department of Treasury’s Office of Foreign Assets Control (OFAC) applied sanctions against Iran to a broader part of its international support network. These were focused on 20 individuals and entities for their involvement in financial facilitation networks for the benefit of Iran’s Ministry of Defense and Armed Forces Logistics (MODAFL) and Iranian Armed Forces General Staff (AFGS), and the Islamic Revolutionary Guard Corps-Qods Force (IRGC-QF). “The United States remains committed to exposing elements of the Iranian military and its complicit partners abroad to disrupt this critical source of funds,” said Under Secretary of the Treasury for Terrorism and Financial Intelligence Brian E. Nelson at the time. Interestingly, among the long-suspected list of names and companies that were sanctioned, were firms in Hong Kong that were suspected of being part of the network that sold billions of dollars’ worth of commodities to customers in Europe and East Asia. At that point, it was Hong Kong -- not China directly -- that was targeted by the U.S. because, according to the senior U.S. legal source spoken to by OilPrice.com, Washington needed Beijing to mitigate the chances of a widening out of the Israel-Hamas War.
Subsequent events the conflict appear to have lessened the U.S.’s need for such assistance from China, which may explain the latest moves. In its latest announcement on Iran-related sanctions, the U.S. State Department said last week that it would impose sanctions on 20 entities it believes are engaged in trading Iranian oil and petrochemical products, including China’s Zhoushan Jinrun Petroleum Transfer Co., an oil terminal in the greater Zhoushan port area. In an extremely similar tone and wording to Brian E. Nelson’s comments on sanctions imposed on Hong Kong entities in 2023, the Department said: “The Iranian regime continues to fuel conflict in the Middle East to fund its destabilizing activities, [and] Today, the United States is taking action to stem the flow of revenue that the regime uses to support terrorism abroad, as well as to oppress its own people.” Zhoushan Jinrun was highlighted by the State Department is for: “…knowingly engaging in a significant transaction for the purchase, acquisition, sale, transport, or marketing of petroleum or petroleum products from Iran”. The port is the fourth of China’s to be sanctioned by Washington in recent weeks, following similar actions against Huaying Huizhou Daya Bay Petrochemical Terminal Storage in March, Guangsha Zhoushan in April, and Dongying Port in May. “More is to come,” the very senior U.S. legal source told OilPrice.com last week.
By Simon Watkins for Oilprice.com