What Should Iran Ask from China?
Part 4 (Debt Diplomacy)
An Iranian minister visits China in January of 2022 to sign a 25-year economic plan between Iran and China. As he returns, there is an unsolved question in his mind: “What should we ask from China?”
Well, this article tries to answer that question.
In my previous article I tried to emphasize contributions that China could have on Iranian Railways. Here I expand how Iran could benefit from China’s Belt and Road Initiative.
Debt Diplomacy
China launched the “Belt and Road Initiative” (BRI) in late 2013. Quite in line with this plan, the country lent a total of $120 billion between 2014 and 2017 to developing countries. Under parts of China’s contracts with these countries, Chinese companies were put in charge of constructing the infrastructure. Most of these countries lacked a special economic relationship with China, while these loans provided a huge number of job opportunities for Chinese companies. It’s worth noting that the terms of these loans are usually vague and the repayment brings nothing but dissatisfaction and debt to the borrower.
A 62-billion-dollar Pakistan-China economic corridor includes the construction of modern transportation networks, power plants, and special economic zones. But the high cost of electricity for Pakistani citizens prompted the government to set up an investigative committee. The committee’s findings demonstrated that Chinese companies involved in the construction of power plants are in fact increasing production costs. On June 26, 2020, the Pakistani government called for a renegotiation of the terms of Chinese loan repayments, accusing Chinese companies of falsifying inflation in the project costs. Something similar happened in Bangladesh after a 3.6-billion-dollar infrastructure deal in 2018, where Bangladesh ended up cancelling parts of their contract due in part to Chinese corporate corruption, high construction costs and environmental concerns. In another egregious example, the Sri Lankan government failed to repay a loan with interest rate of 6.3% — and ended up losing a port to a Chinese state-owned company under a 99-year lease.
There are plenty of examples of contracts with vague terms to take over a port in Tanzania, owning Djibouti’s 77% of its total foreign debt, and perhaps the most disastrous of all, Kenya and Zambia almost losing their national sovereignty to China.
Suggestion
As for the 25-year agreement between Iran and China, it is of utmost importance to have an eye for China’s direct investment in Iran’s mines and industries, including Copper and Steel and Ferro-alloys from mine to product. The possibility of using investment loans in industries that are Iran’s competitive advantage (e.g. iron) is highly significant for foreign investors. There are few successful Chinese companies investing in reputable Iranian holding companies active in the fields of mining. For instance, Midco started with Chinese investment and is now one of the export hubs of metals.
If we have a look at the top 20 steel-producing countries in the world, we will find that China ranked first in 2019 with 996.3 million tons of steel, while Iran produced only 25.6 million tons of steel, securing it only the 10th place. Also, thanks to its strategic geographical location, it is possible for Iran to export cheaper steel to European countries due to shorter routes. It should be noted that the European Union (EU) is the second largest importer of steel after the US.
What is keeping Iran from more steel production is the old machinery used in factories which belongs mostly to the Shah’s Era. Also significant is Iran’s need to strengthen drilling rigs using the latest Chinese technology.
In this regard, in one of his first speeches, the Iranian Minister of Petroleum pointed out that: “In recent years, the necessary investment (of $160 billion) in the oil and gas industry has not been done and if the required investment is not done, Iran will turn to an importer of oil in the future”. This warning is from an oil ministry of a country which is a member of the Organization of the Petroleum Exporting Countries (OPEC) and owns the second largest gas reserves in the world and the fourth largest oil reserves. Such direct investment in the oil and gas industry is quite profitable and strategic. Essentially, by repaying oil or oil derivatives from investments in drilling rigs or refineries, Iran will gain the upper hand in the barter game.
However, to avoid losses and to learn from the experiences of the countries that fell victim to the Chinese, Iran ought to be vigilant of conditions such as “concealment of loan provisions”, “the need to open a collateral account in a Chinese bank”, or “non-payment of instability”. These types of terms, clear in the previous examples, could lead to cascading problems for the borrower and end in contractual termination.
What should be important for Iran in the construction of infrastructure projects is first and foremost to prioritize the provision of financial resources and the required goods from mining capacities at home. In the case of projects targeted for external financing, it is necessary to give priority to USD-return-on-investment projects in order to be able to provide the principal and sub-amounts of loans at specific maturities through the projects themselves, therefore avoiding additional debt.
