Iran is accepting renminbi for some of the crude oil it supplies to China, industry executives in Beijing and Kuwait and Dubai-based bankers said, partly as a consequence of U.S. sanctions aimed at limiting Tehran’s nuclear program.
Tehran is spending the currency, which is not freely convertible, on goods and services imported from China.
Most of the oil that goes from Iran to China is handled by the Unipec trading arm of Sinopec, China’s second-largest oil company, and through another trading company called Zhuhai Zhenrong, the oil industry executives said.
The trade is worth as much as $20 billion-$30 billion annually according to industry estimates, but a share of it is in barter form. Zhuhai Zhenrong, for example, pays Iran for its oil by providing services such as drilling, these people add.
“The global financial crisis accelerated the shift from the west to the east,” said the chief executive of one bank in Dubai. “Such measures [as the U.S. sanctions against Iran] will now enhance the acceptability of the renminbi as a transaction currency.”
The U.S. applied sanctions on Zhuhai Zhenrong earlier this year for allegedly brokering gasoline shipments to Iran—which lacks refining capacity—a charge that the company has denied.
Washington has also imposed sanctions that force financial institutions to choose between doing business with Iran or with the U.S. and it has spearheaded restrictions on Tehran’s central bank. The sanctions and a diplomatic push have led to a reduction in Iranian oil imports by Japan, South Korea, India and China, which together buy more than 60 percent of Iran’s crude oil exports.
India, which already settles its oil purchases from Iran in rupees, was again urged on Monday by Hillary Clinton, U.S. secretary of state, to cut its imports further.
The renminbi purchases began some months ago. Initially the non-barter portion of the transactions were settled in Beijing through renminbi accounts but now, as a result of U.S. pressure, domestic banks such as Bank of China have stopped dealing with Iran, the oil executives and bankers said.
Instead, much of the money is transferred to Tehran through Russian banks, which take large commissions on the transactions, these people said.
Beijing has been trying to get its trading partners to use the renminbi, in effect transferring the exchange rate risk to its counterparties, since the price of crude is set in U.S. dollars . It also frees Beijing of the need to hold as many dollars in its reserves.
Iran sells 21 percent of its crude oil exports to China, making Beijing crucial to Tehran’s ability to withstand unilateral U.S. sanctions.
In March, amid growing efforts to isolate Iran, Sinopec renegotiated its contracts and successfully pressed for larger discounts, though “both sides are under strict orders not to talk and nobody knows the exact terms”, one industry source said. There was a sharp drop in Chinese oil imports from Iran in January and February but analysts expect a recovery over the course of the year.
Sinopec, Zhuhai Zhenrong and Iran’s central bank declined to comment on the renminbi for oil trading.