China uses Renminbi for Iranian oil deals

China appears bent on evading sanctions against Iranian oil as it continues to make oil purchases using its local currency. Iran, on the other hand is using China’s renminbi to directly purchase China-made commodities.

Sinopec, one of China’s biggest oil firms, together with Zhuhai Zhenrong, a Chinese trading company, oversee most of the oil and non-oil transactions between the two countries.

According to chief executives, trade transactions run up to $30 billion per annum, and that payments for oil are not limited to cash. Some transactions involve bartering, which factors out current crude oil prices. Zhuhai, for instance, offers drilling services in exchange for crude.

According to a bank chief executive in Dubai, “The global financial crisis accelerated the shift from the west to the east.” He commented that the on-going sanctions on Iran have prompted governments of both countries to push for the renminbi in business transactions.

Early on, the U.S. initiated restrictions on Iran’s financial sector. Banks and financial institutions of participating countries were banned from doing financial transactions with the central bank of Tehran.  The U.S. led restrictions have been somewhat effective as countries like India, China, Japan and South Korea slowed down Iranian oil imports. These countries collectively make up for 60 percent of Iran’s oil market.

The U.S. has not stopped monitoring China’s deals with Iran. It has urged the Bank of China to end banking relations with Iran, and the use of Chinese renminbi. The bank acceded to the U.S. request, and curtailed such transactions in Beijing.

China, however, found a way to circumvent the situation by using Russia as a conduit. The monies are coursed through Russian banks, which take advantage of the Iran-China deal through cuts and commissions.

Crude oil prices are currently pegged to the U.S. currency. While China seems bent on using its renminbi, it makes sure that FOREX risks are charged to parties at the other end of the transaction. The move also allows it to lessen the quantity of U.S. currency in its coffers, and eventually reduce risks.

About 21 percent of Iranian crude exports go to China, so China does play a key role in Iran’s survival amid economic sanctions.

Industry sources say that China’s Sinopec has recently re-opened oil deals with Iran, with the former gaining the upper hand in terms of discounts on Iran’s crude oil prices per barrel.

The central bank of Iran and China’s Zhuhai and Sinopec are keeping mum over the terms and conditions of the new agreement, but analysts say that China will soon recover from declines in Iranian oil imports in the ensuing months.

By Chris Termeer

Chris Termeer

Chris Termeer is an oil and gas consultant, industry commentator and analyst. His book, Fundamentals of Investing in Oil and Gas provides a comprehensive overview of all aspects of the oil and gas industry, including exploration, drilling, production, storage, transportation and refining, to name but a few.

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