Potential China-Iran pact has major implications for Pakistan

As speculation abounds over a leaked draft of an economic and security deal between Iran and China, its potential effects on Pakistan stand out as particularly dramatic.

al-monitor China's Foreign Minister Wang Yi talks to Iran's Foreign Minister Mohammad Javad Zarif during a meeting at the Diaoyutai state guest house on Dec. 31, 2019, in Beijing, China.  Photo by Noel Celis/Getty Images.

Jul 28, 2020

After an 18-page draft agreement of an economic and security partnership between Iran and China was leaked earlier this month, there has been wide speculation on what the deal — if realized — would mean for the region. One country that has the potential to be significantly impacted is Pakistan.

As various reports about the deal fed the media hype and prompted domestic criticism in Iran, Mahmoud Vaezi, the chief of staff for Iranian President Hassan Rouhani, said a final agreement could be reached by the end of the current Iranian year in March 2021.

It is unclear why the draft was leaked prematurely, unless Tehran intended to convey the message that it has other options available. However, it is safe to assume that the trade deal would likely resemble agreements China has with 15 other countries in the region as well as Pakistan.

Since Iran and Pakistan are neighbors, any partnership between the former and China is bound to have an impact on Islamabad, and some projects could even become trilateral. In the event that an China-Iran deal is finalized with the terms that have been leaked, here are some of the main implications and benefits for Pakistan:

First, according to the draft agreement, China could be spending a sum of $400 billion in Iran. This figure dwarfs the $46 billion Beijing had set out to invest in the China-Pakistan Economic Corridor (CPEC), a flagship of China’s Belt and Road Initiative (BRI). Even though Beijing would be spending this sum in Iran over a period of 25 years, the sheer scale of the investments would lend Iran more importance than Pakistan. However, going by the slow rate at which Pakistan’s CPEC has moved ahead, the development in Iran may take a lot more time than planned.

According to a brief by Jonathan Hillman and Maesea McCalpin at the Center for Strategic and International Studies, the CPEC has underperformed so far. “Five years later, a quarter of announced projects have been completed, energy projects dominate and industrialization efforts are lagging,” they wrote.

Despite its slow pace for the last two years, the CPEC has picked up some speed this month as it enters its second phase with a couple of new hydro-projects worth $3.9 billion and a $7.2 billion plan to revamp the railway system. With these new deals, the cumulative value of CPEC projects is currently $70 billion and it is the first of the BRI’s six corridors to be approaching completion.

The actual progress on long-term plans can be very erratic. It is possible that Tehran will negotiate even better terms and conditions, but according to reports, Iranian oil and gas supplies will be committed to Beijing for the agreement period of 25 years.

Second, China developing the Chahbahar port — which is located 72 kilometers (45 miles) west of Pakistan’s Gwadar port — could be beneficial to both port cities. Since Chahbahar’s inauguration in 2017, Iran has had an MoU with Pakistan to coordinate activities between the “sister” ports and plans to export electricity to Gwadar.

However, Beijing has plans to develop several more ports in Iran. Bandar-e-Jask port, around 350 kilometers (217 miles) from Chahbahar, is the most important as it is situated outside the Gulf of Hormuz, through which most of the world’s oil transits.

Therefore, Gwadar could lose its special status as the main port of the BRI’s flagship corridor in the long run.

Third, from a security point of view, involving Iran in the BRI would help to secure CPEC as Baluchistan — the province through which the corridor mainly runs — has suffered attacks from across the Iranian border for several months. Both Gwadar and Chahbahar ports have often faced instability in their home provinces of Baluchistan and Sistan-Baluchistan due to cross-border attacks.

Neutralizing this security threat, which has been a major impediment for the success of CPEC, would be beneficial for Pakistan’s economic outlook.

Fourth, Chinese investments in clean energy are also reportedly being planned in the desert region of Iran. Since this area is adjacent to the Pakistani province of Baluchistan, these projects could support Islamabad’s recent move toward green energy sources.

According to the draft agreement, the energy produced would be exported to neighboring countries. Any plans for a Pakistan-Iran-China oil and gas pipeline could also help secure energy reserves. In addition, the transport routes being planned within Iran could also link up with CPEC and enhance connectivity.

Iran has expressed the wish to join CPEC several times. Iranian envoy to Pakistan Mehdi Honardoost recently said, ”We are ready to be a part of CPEC with all our capabilities and resources,” adding, “Maybe without the energy and transit support of Iran, the multi-billion dollar project will not reach its final stage.” 

Finally, since most of the basic points in the leaked Iranian draft are a lot like projects already in progress under the CPEC, the Chinese development projects in Iran could complement ongoing projects in Pakistan.

Notably, the draft also mentions that China and Iran will upgrade bilateral and regional engagement with neighboring countries and there would be “cooperation in developing industrial/service/technology centers in ports and islands, chosen with the aim of joint production and export of services and goods to regional countries.” Thus, some of the projects should work out to Pakistan’s benefit if the strategic partnership under discussion with China does materialize.

Realistically, Iran is under intense pressure as it faces an economic crisis due to sanctions on its oil exports along with the coronavirus pandemic. A partial embargo by the UN Security Council is due to expire in October this year, but Washington is trying to get it extended.

Beijing's silence speaks volumes

In fact, former Chinese Ambassador to Iran Hua Liming recently told the Straits Times that criticism of the deal as unfair to Iran “is something that has been stirred up by the Iranians and turned into a political problem,” stressing that terms of the trade deal being debated by critics “go against the spirit of Chinese diplomacy.”

From a practical aspect, China is expected to be mindful of US sanctions, as it has drastically decreased its oil imports from Iran in the past year. The deal could be dead on arrival, as it would also bring about a conflict of interest with Washington.

Replying to questions about the China-Iran deal, a State Department spokesperson reminded Beijing, “The United States will continue to impose costs on Chinese companies that aid Iran” and added, “By allowing or encouraging Chinese companies to conduct sanctionable activities with the Iranian regime, the Chinese government is undermining its own stated goal of promoting stability and peace.”

For added perspective, just a week after the news emerged that a deal with China was in the works, Iranian Foreign Minister Mohammad Javad Zarif made overtures toward Russia. Visiting Moscow for the third time in six months, Zarif discussed the renewal of a 20-year deal between Iran and Russia that may include nuclear cooperation.

Therefore, it looks like Iran may be looking for support from UNSC members to avoid economic sanctions rather than merely “looking east.”

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