Hmmm: Is China Ready to Cut Iran Loose?

Just how stable is the Islamic Republic? A potential decision by its main client may give us a preview of what will come for the Ali Khamenei regime:

Now that the 12-day war is over — for now — one might expect business to return to normal for Iran and China. Instead, the Wall Street Journal reports, Beijing now may move forward with another source entirely for its energy-import needs. And while that would be good news for Vladimir Putin, it smells more like a vote of no confidence in the expiration date of the mullahcracy:

The war between Israel and Iran has revived Chinese leaders’ interest in a pipeline that would carry Russian natural gas to China, according to people close to Beijing’s decision-making, potentially jump-starting a project that has been stalled for years.

The Power of Siberia 2 pipeline project has been mired in disagreements over pricing and ownership terms, as well as Chinese concerns about relying too heavily on Russia for its energy supplies. But the recent war in the Middle East has given Beijing reason to reconsider the reliability of the oil and natural gas it gets from the region, the people said, even as a fragile cease-fire between Israel and Iran takes hold.

China imports around 30% of its gas in the form of liquefied natural gas from Qatar and the United Arab Emirates via the Strait of Hormuz, a maritime chokepoint that Iran threatened to close, according to consulting firm Rystad Energy. Meanwhile, China’s independent refineries, known as teapots, have in recent years become hooked on cheap Iranian crude.

The threat by the IRGC to close the Strait of Hormuz certainly rattled China, but that threat is abated for now. The US helpfully ensured that it would stay open by positioning three carrier battle groups in the Persian Gulf region, with the force many times over to destroy the entire Iranian navy. China will have no trouble getting its LNG through the Strait of Hormuz now, and seemingly for a good long while, too.

The cheap Iranian crude may be another matter. Donald Trump turned a blind eye to Iran’s sales to China before this conflict, which technically is forbidden by international sanctions. Trump signaled earlier this week that he’d likely not make an issue of it as long as the cease-fire holds either, although the White House walked that back a bit yesterday. Trump also made clear this morning that he wasn’t going to lift sanctions on Iran, but absent any more provocations, would not likely increase them. He wants to incentivize an agreement between Iran and Israel to make real peace and to renounce all claims to nuclear development.

So what has made China reconsider its energy-import options in a pipeline deal they clearly didn’t like in previous negotiations with Russia? It’s certainly not a concern in the short term about access to LNG and cheap crude. China did have to turn two tankers around this week when the Iranians jammed commercial navigation systems as a warning about the Strait of Hormuz, but Iran stopped that pretty quickly when China called. Besides, Iran needs these sales more than China needs these imports. They provide the main source of hard currency to an impoverished regime, and now that their drone and missile production resources have been badly damaged, their other exports to Russia are likely going to stop for a long while as well. China’s in position to force the Iranians into even better deals for Beijing.

The answer could be as mundane as keeping options open in case another war breaks out. And that could be part of the reason that China has reconsidered a deal with Putin, although Putin’s political and military position in Ukraine also got seriously weakened by the massive damage Israel inflicted in the 12 Day War. 

The real question for China isn’t access to oil now with this regime, which is desperate for Beijing’s financial support. It’s what happens when this regime falls, and what happens to access when Iranians take back control of their country. China must see those odds as significantly non-zero, and would likely conclude that any successor government to an overthrown Ali Khamenei and his IRGC would be extraordinarily hostile to the partners of the former regime. 

They’re gaming out a post-mullah Iran, in other words. And what’s more, they apparently want to be seen to be gaming out a post-mullah Iran. And that may be a clear if early signal that even its closest trading partners see the writing on the wall for Khamenei and his 7th-century goons.