This article was originally published in English on the think tank website Atlantic Council
By Kimberly Donovan e Maia Nikoladze
Oil revenues are a lifeline for the Iranian and Russian economies, but Western sanctions have compromised both countries’ ability to transport oil and receive payments. In response, Iran and Russia redirected oil shipments to China, the world’s largest importer of crude oil. In 2023, Beijing saved about $10 billion by purchasing crude oil from sanctioned countries such as Iran and Russia.
Over the years, Beijing and Tehran have developed an oil trading system that bypasses Western banks and shipping services. Russia adopted Iran’s methods of exporting sanctioned oil after G7 allies capped the price of Russian crude at $60 per barrel in December 2022.
As a result, Iran, Russia and China have created an alternative sanctioned oil market where payments are denominated in Chinese currency. This oil is often transported by “dark fleet” tankers who operate outside maritime regulations and take steps to conceal their operations.
Oil revenues from China are supporting the Iranian and Russian economies and undermining Western sanctions. Meanwhile, the use of Chinese currency and payment systems in this market restricts Western jurisdictions’ access to financial transaction data and weakens their sanctions enforcement efforts.
Iranian oil tanker arrives in Venezuela: Western sanctions weakened (Photo: Nicolás Maduro/Twitter)
How China manages to import sanctioned Iranian oil
China has developed a way to import Iranian oil while bypassing the Western financial system and shipping services. Iran ships oil to China using dark fleet tankers and receives payments in renminbi through small Chinese banks. Dark fleet tankers operate without transponders to avoid detection. When oil shipments arrive in China, they are rebranded as Malaysian or Middle Eastern oil and purchased for “teapots” in China. “Teapots” are small independent refineries that have absorbed 90% of Iran’s total oil exports since Chinese state-owned refineries stopped trading with Iran due to fears of sanctions.
The “teapots” are believed to pay Iran in renminbi, using smaller US-sanctioned financial institutions such as the Bank of Kunlun. This strategy allows China to avoid exposing its large international banks to the risk of US financial sanctions.
How Iran could make use of China’s renminbi payments
Once Iran is paid in renminbi, it will have two options to use the Chinese currency: it can buy Chinese products or park assets in a Chinese bank. Iran cannot spend much on renminbi outside China because the currency is not fully and freely tradable and is therefore less desired by other countries as a store of value or unit of account. The renminbi’s role in international trade has increased in recent years, but is driven by China’s renminbi-denominated trade with its partners. The currency is rarely used for transactions by two countries when one of them is not China.
Consequently, in 2022, Iran purchased US$2.12 billion worth of machinery from China, as well as US$1.43 billion worth of electronic products. Although data on financial transactions between Iran and China is not accessible, there is a high probability that Iranian imports of Chinese technology will be denominated in renminbi.
Another use that Iran could find for the Chinese currency is the accumulation of foreign exchange reserves in renminbi. In October 2023, the deputy head of the Central Bank of Iran said that Iranian foreign reserves are increasing due to the growth of oil and non-oil exports. If oil revenues contribute significantly to the growth of Iran’s foreign exchange reserves, and if China is purchasing Iranian oil in renminbi (trade data indicates that about 90% of Iran’s oil exports are destined for China), then a A considerable part of Iran’s reserves could be denominated in renminbi.
Furthermore, Iran’s desire to find alternative currencies and diversify away from the US dollar coincides with Beijing’s internationalization ambitions for its currency. Thus, Beijing may also have an interest in paying Iran in renminbi and in building up Iran’s renminbi reserves. (The Central Bank of Iran does not publish data on the monetary composition of its international reserves. The absence of data makes it difficult to confirm this theory.)
Russia has copied Iran’s methods of circumventing sanctions
Russia’s large-scale invasion of Ukraine and subsequent imposition of sanctions have placed Russia in a situation similar to that of Iran. Russia has also begun using a “dark fleet” to ship oil to China and has resorted to using the renminbi in trade to circumvent the maximum oil price limit. It should be noted that Russia’s situation is not as dire as Iran’s when it comes to sanctions: trading in Russian oil is tolerated as long as buyers pay $60 or less per barrel, while purchasing Iranian oil is prohibited regardless of price. This gives Russia more flexibility to transport oil to other destinations and, by extension, more power in price negotiations with China.
However, Russia is now heavily dependent on China and has a trade model with China similar to that of Iran: Russia exports oil to China and imports technology. In 2022, Russia received US$88 billion from Beijing from energy exports and paid US$71.7 billion for Chinese products. Since Russia and China switched to national currencies, ruble-renminbi trade has increased 80-fold between February and October 2022.
But China helps Russia only to the extent that it does not harm its own interests. For example, after the United States created a new secondary sanctions authority in December 2023, three of the four largest Chinese banks stopped accepting payments from sanctioned Russian companies. Russian authorities say they are working with their Chinese counterparts to resolve the issue, but it is unlikely that Beijing will again transact with sanctioned Russian entities while the threat of sanctions remains. So, although the secondary sanctions did not directly target China’s oil payments, it shows that if the West threatened to sanction large Chinese companies for importing Russian oil above the price limit, Beijing would likely comply.
How the West can begin to respond
The effectiveness of sanctions against Iran, Russia and other heavily sanctioned regimes should not be analyzed in silos, because these countries do not operate in silos. Sharing knowledge about evasion techniques and economic cooperation with China has allowed both Iran and Russia to mitigate the effects of sanctions.
Western authorities should begin analyzing the financial links between heavily sanctioned regimes, as well as their economic cooperation with China, and consider how evasion techniques developed by previously sanctioned regimes may be used by newly sanctioned countries. This will help Western sanctions officials improve sanctions design and close loopholes before they can be exploited. Such analysis would also help the West develop an understanding of what sanctions can and cannot achieve and the unintended consequences they may result in.
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