The US-China trade roller coaster is in a quiet phase as the world waits and sees if the two countries can reach a deal later in 2019. But a major additional economic flashpoint between the Trump administration and Beijing is hiding in plain sight but with the potential to cause major disruptions in the coming months. It revolves around the US threat of economic retaliation over China’s continuing oil imports from Iran and Venezuela.
The administration continues to impose economic sanctions against Iran and Venezuela, hoping to strangle their economies sufficiently to force them to accede to US demands. But China continues to be the main oil customer for both. On September 20, 2019, President Donald Trump announced new but largely redundant sanctions against Iran’s national bank and sovereign wealth fund in retaliation for recent attacks on Saudi Arabian oil fields. But on the energy sanctions that are aimed at blocking Iran oil sales to China, it is significant that US enforcement actions have not yet targeted major Chinese energy firms.
These companies, and the financial institutions involved in executing the trades, remain vulnerable to harsh penalties, including prohibition of dollar transactions, if their activities involve anyone included on the US Treasury’s list of specially designated nationals (SDNs) subject to the US sanctions.
In recent months, China reportedly has taken a substantial share of the global oil exports of Iran and Venezuela. Iranian crude oil exports have dropped from about 2.5 million barrels per day before Trump pulled out of the Iran nuclear pact, in May 2018, to an estimated 500,000 barrels per day in June 2019. Crude oil export volumes continue to plunge; data compiled by ship tracking services indicate that Iran’s crude oil exports were reduced to under 200,000 barrels per day in August 2019, with more than half of those shipments going to China. In addition, China accounts for almost all of Iran’s exports of liquefied petroleum gas (LPG). In contrast to crude oil, Iran’s exports of fuel oil (mostly to Abu Dhabi) and LPG remain stable, generating monthly revenues of about $500 million.
The US approach to China on energy has been marked by hesitation. Initially, China and seven other countries received waivers from US sanctions against Iran in November 2018 on condition that they sharply reduce the volume of oil imports during the six-month waiver period. But on May 2, 2019, the waivers were revoked. Since then, Chinese oil companies and Chinese financial institutions involved in the transactions (including oil-for-debt swaps and barter deals) have been vulnerable to extraterritorial application of US sanctions.
To date, the Trump administration has threatened to strike at Iran’s oil customers but generally has kept its powder dry. The administration may be satisfied with what China has done so far in sharply reducing oil imports from Iran. There have also been similar hesitations in the technology area, with the administration backing off or modifying its punitive actions against China over Chinese telecommunications companies ZTE and Huawei. It is possible that the administration is reluctant to punish the major Chinese oil and financial firms involved in buying Iranian energy to improve the US-China trade atmosphere or to enlist Chinese support for modifying Iran’s behavior or pressuring North Korea on its nuclear program.
The administration’s readiness to act, however, was signaled on July 22, 2019, when US sanctions were imposed against Zhuhai Zhenrong, a low-profile firm owned by the central State-Owned Assets Supervision and Administration Commission (SASAC). Sinopec and China National Petroleum Corporation (CNPC), the two biggest state-owned refiners, sharply reduced oil purchases from Iran in May 2018 to avoid US sanctions; CNPC also pulled out of Iran’s South Pars natural gas project to avoid exposure to US sanctions. But someone in China is buying oil from Iran, and one suspects they are subsidiaries of the major Chinese state-owned energy firms. Hitting Sinopec and CNPC, and major Chinese financial institutions, would dramatically aggravate tensions with China generally, most obviously in the US-China trade war.
China is also a major customer of Venezuela’s oil. In June 2019, China took more than half of Venezuela’s crude oil exports of 1 million barrels per day in repayment for outstanding loans. Russian firm Rosneft also receives crude shipments to repay debts and Spanish firm Repsol swaps oil products for Venezuelan crude oil.
On August 5, 2019, President Trump issued a new executive order (E.O. 13884) expanding the US sanctions imposed in 2018 (E.O. 13835 and E. O. 13850) against the Venezuelan government, including the Central Bank of Venezuela, Petroleos de Venezuela (PdVSA), and any person involved with President Nicolás Maduro’s regime or government-owned entity. The new executive order freezes Venezuelan government assets under US control and prohibits transactions with anyone associated with the government unless granted specific licenses by the US Treasury. The new order presumably does not cover the General License No. 8B provided to Chevron, Halliburton, Schlumberger, Baker Hughes, and Weatherford to maintain operations with PdVSA until October 25, 2019. However, it lays the groundwork for aggressive actions against China.
Since the issuance of E.O. 13884, CNPC has cancelled shipments from Venezuela seemingly to comply with the US sanctions. However, Rosneft reportedly now takes about two-thirds of Venezuela’s exports and transports much of that oil to China. Parties involved in those transactions are now vulnerable to US extraterritorial sanctions. Rosneft has been treated with kid gloves by US sanctions enforcers. But if President Trump wants to escalate his economic war against China over Iran and Venezuela, Chinese energy companies and big financial institutions may not receive such preferential treatment. And hitting those firms would escalate the US-China economic conflict to another level.