China; The main winner of Iran and Russia oil sanctions

According to the exclusive report of Energy Press, oil income is a way of salvation for the economy of Iran and Russia; However, Western sanctions have threatened both countries’ ability to ship oil and receive payments. In response, Iran and Russia have diverted oil shipments to China (the world’s largest crude oil importer). By 2023, China will save $10 billion by buying crude oil from embargoed countries like Iran and Russia.

In recent years, Beijing and Tehran have developed a system of oil trade that bypasses Western banks and shipping services. After the member countries of the Group of Seven (G7), in December 2022, raised the price ceiling of Russian crude oil to $60 per barrel, Russia also adopted Iran’s methods for exporting the sanctioned oil.

As a result, Iran, Russia and China have created an alternative market for embargoed oil where payments are made in Chinese currency. This oil is often carried by so-called “shadow fleets” tankers that operate outside of maritime regulations and take steps to hide their activities.

By bypassing the western financial system and shipping services, China has created a way to import Iranian oil. Iran sends oil to China using shadow fleet tankers and receives payments in Chinese yuan through small Chinese banks. Shadow fleet tankers operate without a sender to avoid detection. When oil shipments arrive in China, they are rebranded as Malaysian or Middle Eastern crude and bought by small, private refiners in China. These independent refineries have been buying 90% of Iran’s total oil exports since Chinese state-owned refiners stopped trading with Iran due to fears of sanctions.

These refineries pay Iran using smaller financial institutions under US sanctions, such as Kunlon Bank. This strategy allows China to avoid having its major international banks placed on the US financial sanctions list.

Iran’s oil exports to China have been fluctuating from 1.1 million barrels per day in January 2022 to 1.5 million barrels per day in January 2024.

After receiving money from crude oil exports to China, Iran has two options for using Chinese currency: it can buy Chinese goods or save its assets in a Chinese bank. Tehran cannot spend a large amount of yuan outside of China, because this currency is not completely freely exchangeable and other countries are not very interested in this currency as a store of value or currency unit. The yuan’s role in international trade has increased over the past few years, but that is due to China’s trade with its partners, and the currency is rarely used for transactions by two countries other than China.

In 2022, Iran has purchased $2.12 billion worth of machinery and $1.43 billion worth of electronic equipment. Data on financial transactions between Iran and China are not available, however Chinese technology imports to Iran are expected to be denominated in yuan.

Another function that Iran can find for the Chinese currency is to create foreign currency reserves in yuan. The Central Bank of Iran announced in October 2013 that Iran’s foreign reserves are growing due to the growth of oil and non-oil exports. Oil revenues have a significant contribution to the growth of Iran’s foreign exchange reserves, and China buys Iranian oil in yuan (trade data shows that about 90% of Iran’s oil exports go to China), so a significant share of Iran’s reserves can be valued in terms of yuan.