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China’s Ascendant Diplomacy – Saudi-Iran Agreement

China's Ascendant Diplomacy

Saudi-Iran Agreement

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In a historic turn of events, China has successfully brokered a groundbreaking agreement between long-standing rivals Saudi Arabia and Iran, marking a significant shift in the geopolitical landscape of the Middle East. The agreement, which focuses on reestablishing diplomatic ties, ending proxy conflicts, and enhancing economic cooperation, highlights China’s growing influence in the region and its expanding role as a global power.
SINOLOGIX Staff
www.sinologix.io
info@sinologix.io
2023-03-10
China's Diplomacy - Saudi-Iran Agreememt

Executive Summary

In a historic turn of events, China has successfully brokered a groundbreaking agreement between long-standing rivals Saudi Arabia and Iran, marking a significant shift in the geopolitical landscape of the Middle East. The agreement, signed by representatives of both countries in Beijing on March 10th, 2023,  reestablishes diplomatic ties, ends long-running proxy conflicts (notably, in Yemen), and enhances economic cooperation between Saudi Arabia and Iran. In addition to the breakthrough between two of the largest political and military actors in the Mideast, the agreement highlights China’s growing influence in the region and its expanding role as a global power.

While the international community cautiously welcomed this development, China’s success in mediating this agreement underscores its emerging position as a challenger to the United States’ dominance in the region. Viewed from the perspective of the collective partnerships it has recently established with Saudi Arabia, the other members of the Gulf Cooperation Council, as well as its strategic relationship with Russia, this diplomatic triumph positions China as a collaborative partner with many countries considered adversaries by the US. Furthermore, the recent agreements with these countries to denominate trade in either Chinese RMB (yuan) or other local currencies continues to elevate the risk profile of the USD as the world’s de facto currency for international trade settlement.

Musaad bin Mohammed Al Aiban, Saudi Arabia Minister of State, Wang Yi, CCP Director of Foreign Affairs, and Ali Shamkhani, Iran Secretary Security Council
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BEIJING, China, March 10 2023 – Musaad bin Mohammed Al Aiban, Minister of State, Saudi Arabia , shaking hands with Ali Shamkhani, Secretary of the Iranian Security Council, accompanied by Wang Yi, CCP Director of Foreign Affairs.

Saudi-Iran Agreement

History of Saudi-Iranian Relations

Saudi Arabia and Iran, two influential powers in the Middle East, have a complex and contentious history. The roots of their strained relationship can be attributed to factors such as religious differences (Saudi Arabia is predominantly Sunni, while Iran is predominantly Shia), regional power dynamics and the competition for influence over other Middle East countries. Relations between the two nations started to decline markedly after the 1979 Iranian Revolution, which led to the establishment of an Islamic Republic in Iran.

Since then, both countries have been implicated in numerous proxy conflicts and have frequently accused one another of supporting terrorism and fostering sectarian violence. The most contentious issue for Saudi Arabia has been Iran’s support for the Houthi rebels in the Yemeni conflict, which has resulted in frequent attacks on Saudi Arabia’s infrastructure.

Source – MapTiler

China Enters the Chat

Chinese President Xi Jinping’s active involvement in the negotiations was instrumental in bringing about the agreement between Saudi Arabia and Iran. Recognizing the potential benefits of increased collaboration and stability in the region, President Xi and other Chinese leaders undertook extensive diplomatic efforts, leveraging China’s status as a leading consumer of their respective oil and gas exports. As a mediator, he built trust between the two parties and provided a neutral ground for negotiations. Through these endeavors, President Xi successfully facilitated talks between the two rival nations, ultimately leading to the historic agreement.

In early 2022, Chinese officials and their counterparts in both Saudi Arabia and Iran initiated preliminary negotiations to lay the groundwork for this agreement. Over the course of several months, President Xi personally facilitated numerous high-level meetings and diplomatic exchanges between the two nations, with China hosting a series of talks in Beijing in mid-2022.

By providing a neutral ground for negotiations and acting as a mediator, Chinese officials were successful in establishing trust between the two adversaries. Over a relatively short time, Saudi and Iranian officials were able to reach a consensus on key issues (see below).

The historic agreement was officially signed on March 10th, marking a significant milestone in the relationship between Saudi Arabia and Iran and ushering in a new era of cooperation in the Middle East. This achievement can be largely attributed to President Xi’s commitment to promoting peace and stability in the region, its laissez-faire policy of non-interference with the domestic affairs of its political and economic partners, and of course, its footprint as the world’s second largest economy.

Details of the Agreement

The stated intent of this agreement was aimed at easing tensions and promoting stability in the Middle East. Key elements include:

Establishing Diplomatic Ties: Both nations agreed to re-establish diplomatic relations by re-opening their respective embassies and exchanging ambassadors.

Ceasing Proxy Conflicts: Both countries committed to putting an end to their involvement in proxy wars and conflicts in the region, focusing on a more peaceful and cooperative approach.

Economic Cooperation: The agreement called for increased trade and investment between the two nations, with a particular focus on energy and infrastructure projects.

Regional Security: Both parties agreed to work together to address common security threats, such as terrorism and extremist groups, while also promoting regional stability through dialogue and cooperation.

Dispute Resolution: A framework for resolving future disputes was established, with China potentially acting as a mediator in the event of disagreements.

Significance of the Agreement

China’s role in successfully brokering this agreement between two of the most important players in Middle East political, economic, and military affairs marked a major milestone for China’s growing influence in the region. It demonstrated China’s ability to act as a mediator and peace broker in a region that has been historically dominated by the United States and its allies. This not only enhances China’s position as a global power, but also challenges the US’s role in the region.

Furthermore, by fostering stability in the Middle East, China stands to benefit economically, as it relies heavily on oil imports from the region. The increased cooperation between Saudi Arabia and Iran could potentially lead to more secure energy supplies and greater trade opportunities for China. Additionally, the agreement strengthens China’s overall position in its global power struggle with the United States, showcasing its diplomatic prowess and ability to foster cooperation between rival nations.

Reactions from the International Community

While the agreement has been publicly well-received by the international community as a step towards peace and stability in the Middle East, some countries, especially the US, have expressed concerns about China’s growing influence in the region. The US has called for vigilance in monitoring the implementation of the agreement, stating that it will continue to support its allies in the Middle East and work towards regional security. Other countries have cautiously welcomed the agreement, hoping that it will bring about tangible improvements in the tense relationship between Saudi Arabia and Iran, and contribute to the overall stability of the region.

SINOLOGIX Analysis

Regional Winners and Losers

This agreement has defused the longstanding animus between the two dominant players in the Middle East – Saudi Arabia and Iran, and both emerged from the negotiations as winners.

Iran has been isolated from the international community; courtesy of US sanctions aimed at limiting its controversial nuclear program, and has been criticized recently over its human rights record, notably its strict rules governing women’s attire. The US and the EU have been especially critical over allegations that Iran has supplied Russia with military drones for use in the Russian-Ukrainian War. This agreement tends to paint Iran in a softer light as more reasonable actor in the region that is willing to abdicate its bellicose rhetoric and opt for diplomatic solutions with its neighbors.

If the terms of the agreement hold, Saudi Arabia may be able to resolve its conflict with Yemen, as the Houthis have depended on Iranian support to sustain their military efforts against Saudi Arabia, both locally in Yemen and on Saudi territory. More importantly, the agreement gives the Saudi government the regional stability it needs to execute its Vision 2030, its strategic framework to diversify its economy.

Equally important for Saudi Arabia’s leadership, Mohammed bin Salman has gained stature as a statesman and has been able to further distance himself from US criticism over the death of Jamal Khashoggi. Furthermore, MBS has solidified his relationship with President Xi of China, while at the same time establishing greater independence from the US.

The Real Winner – Xi Jinping and China

Xi Jinping’s recent political victory, winning an unprecedented third term as China’s President, has been subtly criticized in Western media, which has occasionally not-so-subtly portrayed him as totalitarian dictator hell-bent on maintaining absolute power. His ill-advised 2022 COVID policies, and the attendant domestic protests against mass lockdowns, were widely reported and criticized by US media and political leaders.

But in spite of these criticisms, President Xi has successfully established himself as a world leader who is unafraid to challenge the US economically, politically, and militarily. He burnished his credentials as an international statesman at the China-Arab Summit in November, 2022 (see Related Articles below), and this agreement further enhances his position as an influential leader in the Middle East.

China’s success in mediating the Saudi-Iran agreement also highlights the value and effectiveness of its policy of “non-interference in the internal affairs of sovereign states”, a term that was conspicuously included in the announcements related to the Saudi-Iran agreement.  This stands in stark contrast to the US’ foreign policy that frequently includes regime change to achieve its goals, as evidenced by the Afghan and Iraq Wars, the long-running efforts to depose Syrian President Assad, as well as efforts in Iran (1953), Libyan (2011), and recently, the US’ stated intent to weaken Russia. Notwithstanding criticisms of China’s predatory financing of international projects, its projection of soft power seems to have been well-received by many of its partners in the Middle East, Africa and Latin America.

China, Multilateralism, and the SCO

China and Russia have been outspoken in their opposition to what they claim is the US’ “imperialistic” view of the world, and both countries have actively promoted the concept of the “multipolar Global South” as an alternative to US hegemony.  What is notable about this agreement is that it further cements China’s relationship with two prominent countries that have expressed a strong interest in joining the Shanghai Cooperation Organization (SCO), a Eurasian political, economic, and security organization sponsored by…China.

Although not reported extensively in the US media, the SCO has been growing rapidly and now includes India, Kazakhstan, Kyrgyzstan, Pakistan, Russia, Tajikistan, and Uzbekistan, with Afghanistan, Belarus, Iran and Mongolia as official observers. Armenia, Azerbaijan, Cambodia, Egypt, Nepal, Qatar, Saudi Arabia, Sri Lanka, and Turkey have likewise expressed an interest in joining.

In its current scope, the SCO encompasses 60% of the area of Eurasia, 40% of the world’s population, and more than 30% of global GDP.

This agreement further establishes China’s leadership of the SCO, as well as the related/overlapping BRICS+ organization.

Petrodollar vs Petroyuan

Since the inception of the Mid East oil industry after WWII, the USD has been the de facto currency for oil and gas trade settlement. There has been some debate over the actual influence the US achieves through the role of petrodollars, but collectively, OPEC oil and gas revenues in 2022 exceeded $880B and much of that trade was denominated in USD.

An issue arises with petrodollar recycling through what is called the capital account channel, essentially the purchase of tangible and financial assets held abroad. To the extent that any exporting country purchases US debt instruments to recycle petro (and other) dollars, that country funds the US debt. And as both Russia and Iran have discovered, the US has from time to time frozen these assets over political and military conflicts. In Russia’s case, the exposure is approximately $300B.

In the last several years, both China and Russia have floated the idea of diversifying trade settlement currencies to both reflect their commitment to multilateralism and to limit the risk of future sanctions. SINOLOGIX will explore the ramifications of trade settlement in local and baskets of currencies in a separate paper, but it’s worth noting here that the Saudi-Iran agreement furthers China’s stated objective of purchasing oil and gas in renminbi (Chinese yuan). This was discussed at the China-Saudi Summit in November, 2022 and again during negotiations for this agreement.

Image of Chinese Renminni
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Takeaways for the US

It goes without saying that the US was the one loser in this agreement – while US officials publicly endorsed improved Mideast relations and political stability, that endorsement was quite muted.

From a prestige perspective, the US was entirely left out from the negotiation, a role that it has maintained in many Mideast political transactions. The fact that the Saudis, who have been longtime US allies, chose to work with China, whom the US now consider a major adversary, was surely an embarrassment for the Biden administration.

Moreover, China’s recognition of Iran as a sovereign state, with whom it is conducting substantial trade, undermines US sanctions against the Iranian government. It is increasingly apparent that, in a globalized economy, sanctions are not always effective, as evidenced by Russia’s ability to maintain economic stability (in 2022) and growth (projected in 2023) in spite of what should have been crushing sanctions. China’s support for Russian exports has been a major factor in the failure of US sanctions against Russia. Similarly, the Saudi-Iran agreement, and China’s role in mediating it, is a strong indicator that China will likely undermine US sanctions against Iran.

Once Iran’s oil exports are denominated  in renminbi, and once Iran is accepted into the SCO (high probability), the US’ ability to influence Iran vis a vis sanctions will be quite limited.

NOTES

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Other Data Insights

"Things change gradually at first...

...then all at once..."

China GDP vs UST Holdings (2010-22) (billions)

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China GDP vs UST Holdings (2010-22) (billions)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

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Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Global FX Exchange Reserves (2001-22) (% of total)

(click/tap legend to filter data)
Global FX Exchange Reserves (2001-22) (% of total)

Data Source – World Bank

Western media is starting to pay attention to China’s efforts to influence members of the so-called Global South, or more specifically the BRICS+ and Shanghai Cooperation Organization (with substantially overlapping membership), to denominate international trade in the Chinese Renminbi (RMB), aks the Chinese Yuan (CNY) and/or other local currencies. For very different reasons, Russia has promoted the idea of an entirely new currency for trade settlement. This is an accelerating trend among countries that have formed close economic and political relationships with China.

Coincident with the pivot to the RMB for trade settlement is a growing sentiment among the BRICS+ and SCO members that holding USD as their primary reserve currency poses a risk in the event the US declares sanctions and/or freezes a country’s assets, as happened with Russia and Belarus in 2022.  

The combined effect of these two trends should be observable in a country’s US Treasuries holdings, and that’s exactly what we’re seeing in the chart above – China’s USD and Treasuries holdings peaked at $1.277 trillion in 2013 and declined by more than 32% in 2022.

Things change “slowly at first, then all at once”...

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