How Chinese oil imports are helping to support the regimes in Moscow and Tehran

A new report by the Atlantic Council has suggested that China – using a so-called dark fleet in conjunction with Russian and Iran – is effectively getting around existing sanctions on oil purchases from both countries.

In the process, Beijing is also using the Chinese yuan to pay for shipments, in turn helping to prop up both the Russian and Iranian economies.

Both the Iranian and Russian economies rely heavily on revenue brought about from oil exports, but for Moscow in particular, Western sanctions have disrupted their shipments severely in the two years since the start of the war with Ukraine.

As a result, payment mechanisms too have been hit hard by efforts backed by Washington and a number of other Western capitals.

To counter this setback, both Russia, and to a lesser extent Iran, have shifted their oil exports towards China, the world's largest importer of crude oil. As a result, in 2023 China reportedly saved approximately $10bn by procuring oil from sanctioned countries, including Russia and Iran.

India too has long ignored demands, then pleas, by Washington to snub Russian oil imports, saving billions in the process.

This has seen Beijing and Tehran over time establish an alternative oil trade system, bypassing Western banking and shipping channels, with Russia adopting Iran's methods following price restrictions on its own crude exports by the Group of Seven (G7) allies in December 2022.

Consequently, Iran, Russia and China have now created a market for sanctioned oil, conducting transactions in Chinese currency. This trade often involves so-called ‘dark fleet’ tankers according to the Atlantic Council. Such fleets are believed to operate outside conventional maritime regulations.

In a knock-on effect the influx of oil revenue from China is now believed to be bolstering the Iranian and Russian economies while undermining Western sanctions.

Furthermore, the use of the Chinese currency, the yuan (CNY), and Chinese payment systems serve to hinder Western jurisdictions' access to financial transaction data, weakening sanctions enforcement.

China has also developed mechanisms to import Iranian oil outside Western financial and shipping networks. Iran too employs dark fleet tankers to ship oil to China and receives yuan payments in return through smaller Chinese banks.

These tankers typically operate covertly to avoid detection. Upon arrival in China, the oil is then rebranded as Malaysian or Middle Eastern in origin and in turn purchased by smaller, independent Chinese ‘teapot’ refineries.

These teapots have been absorbing the majority of Iran's oil exports since state-owned refiners ceased transactions due to sanction concerns.

It is believed that such transactions are paid for in yuan through smaller, US-sanctioned financial institutions, including the Bank of Kunlun. This strategy in turn shields major banks in China from US financial sanctions risks.

Tehran, however,  has limited options for spending yuan outside China, with the most commonly seen avenue of spending seen in the purchase of Chinese goods or depositing assets in Chinese banks. The growth of Iran's foreign reserves, partly attributed to oil exports to China, thereby suggests a significant portion could be in yuan.

Russia, facing similar sanctions challenges, has also adopted Iran's evasion tactics. Despite differences in sanctions severity, both countries have become heavily reliant on China for oil trade, using national currencies for transactions.

However, with China's assistance to Russia contingent on its own interests, evidenced by Chinese banks putting a halt to payments from sanctioned Russian entities following US secondary sanctions in 2023, this underscores China's cautious approach in managing its involvement with Moscow.

In doing so, Beijing is hoping to avoid hard-hitting Western sanctions whilst all the time benefitting from Russian crude imports.