China’s economic presence in Iraq: challenges and survival strategy

Thanks to its growing involvement in the Iraqi market, China continues to reinforce its economic influence in the Middle East. Over the past years, China has taken advantage of the country’s precarious situation to gain even more power over global governance and secure its energy supply. Justine Mazonier tries to decipher this situation.

10th November 2022

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Iraq signs a US$1.07 billion deal in Baghdad on May 8, 2019, with a Chinese company to process gas from the giant Halfaya oil field in southern Iraq ©CHINA NEWS/SIPA

The Wassit thermal power plant. In Iraq, 20% of the country's electricity supply comes from the plant built by a Chinese company. ©CHINE NOUVELLE/SIPA


Authors

.
Justine Mazonier
Independent Consultant
2 Articles

Since the 1980’s, China has entered the Iraqi market to satisfy its increasing energy needs. Beijing has been very active in the country and the region and has been able to develop trade relations with all interested parties. However, Iraq and the Gulf region can be especially volatile and China’s lack of political bias could become untenable. This article is intended to define the Chinese presence in the Iraqi market and this strategy’s interference with the national and regional internal challenges.

Iraq signs a US$1.07 billion deal in Baghdad on May 8, 2019, with a Chinese company to process gas from the giant Halfaya oil field in southern Iraq ©CHINA NEWS/SIPA

Chinese investment strategy in the Middle East and Iraq

-The geoeconomic importance of the Persian Gulf Region for China

China is making massive investments in the Middle East and the Persian Gulf region. China’s capital has grown by 360 per cent in the region since 2021. In 2016, China became the number one investor in the Middle East.

This is driven by China’s need for energy resources access to power its economy.. China, a net importer of oil since 1993, is becoming increasingly interested in the Gulf region, which accounts for 50% of proven oil resources. Since 2013, Saudi Arabia has supplied half of China’s crude oil needs and Iraq has become China’s third-largest supplier.

Since then, the country has launched a global investment program, the new Silk Roads, connecting Asia to Europe through the building of infrastructures and communication networks across the Middle East and Africa. The government plans to invest $1 trillion by 2027. China is thus committed to investing in countries that are often unstable in both economic and political terms. The Chinese Silk Roads Program already includes nineteen Middle Eastern countries, initiating a sharp increase in Chinese capital in the region.

As a result, China is taking a new approach to its economic alliances in the Gulf. It cooperates with States whose interests are competing or conflicting. China is developing trade relations with the Gulf States, Israel and Iran, as well as with Iraq by offering large-scale building projects and long-term partnerships. Political science professor Yitzhak Shichor insists on China “trying to maintain good relations with each party”.

The purpose of diversifying China's partnerships is twofold. On the one hand, it reflects a willingness to secure Chinese oil supplies, as the COVID-19 health crisis has exposed the fragility of economies when faced with an influx or lack of oil. On the other hand with regard to soft power, China adopts a non-aligned and non-interferent approach to political affairs, a strategy that varies from Western requirements to Arab leaders.

In contrast, China refuses any political or partisan alliance with Gulf countries, allowing it to orient itself with any partner and to build solid economic ties while maintaining a neutral power image.

This strategy has many implications. First, China's long-term presence may weaken Western positions in the Gulf region by establishing new legal standards and financial mechanisms for contracts. For instance, the establishment of major oil and gas contracts contributes to the internationalization of the yuan to the detriment of the U.S dollar.

The second consequence stems from the asymmetrical relations that China maintains with the countries of the region. Indeed, for the poorest states, China is often the best, if not the only, financial option. However, the implemented projects may reflect more China's economic interests than the development of the beneficiary countries. As such, the Chinese Silk Roads program is often accused of hiding China’s economic predation. In the Gulf region, Iran and Iraq would fall within this category of countries where political instability, corruption and the absence of rule of law would enable China to take advantage of their resources.

Chinese investments in Iraq

Iraq is China’s main partner in the Gulf region. According to the Chinese University of Fudan, the country is thought to be the third-largest beneficiary of Chinese investments in 2021 as part of the Silk Roads. Nevertheless, these figures are questionable as there are “a multitude of different sources for estimating the investment amounts for the ‘new Silk Roads’ which makes it difficult to obtain a definitive data,” according to Lons, researcher for the International Institute for Strategic Studies. Economic relations between the two countries relie more on contractual relations rater than on Chinese direct investment.

China is definitely interested in Iraq given its large natural resources (oil and gas). The Asian giant imports close to 40% of Iraqi oil and Iraq is China’s third-largest oil supplier after Russia and Saudi Arabia. Beijing is looking at these resources to reduce its dependence on Saudi Arabia, which has strong ties with the United States. Carice Witte, a Chinese foreign policy expert, reports that China is having trade difficulties with Iran, especially when it comes to importing natural resources. Iraq could be one way of diversifying and securing China's imports.

However, Iraqi instability makes it especially difficult for foreign businesses to establish themselves. In 2019, Iraq ranked 172nd out of 190 countries for pro-business regulation. China is one of the very few countries to accept this level of risk, giving it an additional advantage over competition from Western companies.

Chinese companies have been operating in the Iraqi natural resources sector since the 1980's. Since then, Iraq has become the first foreign country for Chinese companies and workers to set up shop. Four big oil groups are present such as China National Petroleum Corporation, Sinopec, China National Offshore Oil Corporation, and Zhenhua Oil. Most Chinese companies in Iraq are state-owned which allows China to steer more easily its trade and contractual relations in the country. Following the two Gulf Wars, “China has shown itself to be opportunist in Iraq,” Jean-François Dufour said.

In the 2000’s, Chinese companies were forced out with the arrival of the United States in the Iraqi market. Trade relations between the two countries only resumed in 2008 and soon focused on Iraq's development aid. The Iraqi state was in “dire need of foreign investment, especially in the infrastructure sector,” said Professor John Calabrese. In 2014, the establishment of the Islamic State (IS) did not hinder Chinese contracts in Iraq and China has strengthened its diplomatic ties with Kurdistan. Chinese companies located in the south of the country did not suffer from political chaos and China imported 50% of Iraqi oil.

Since 2017, with the collapse of ISIS, China has increased its investments in Iraq. The war has caused massive damage and major reconstruction projects are necessary. The Iraqi government wanted to invest in its energy resources to put the country back on its feet. China, which has demonstrated reliability and consistency in its trade relations with Iraq despite political tensions, has been awarded advantageous contracts.

The country has become Iraq's main trade partner, with Iraqi oil imports representing 85% of its budget.

Its relations were reinforced by the “Oil for reconstruction” program formalised in 2019, with the Iraqi government's promise to deliver 100,000 barrels of oil a day to China.. China has thus positioned itself for construction projects such as the Nasiriyah airport, the al Khairat power station and a thousand schools and infrastructure. China also plans to build power plants to meet half of its electricity requirements.

Challenges facing China's companies in Iraq

Iraqi Political Instability

China's presence in Iraq leads to numerous complications. The first challenge relates to economic and social matters. Youth unemployment is extremely high, with a majority of low-skilled workers. This situation led to an anti-Chinese feeling among locals who have no access to jobs in Chinese companies, or basic infrastructure, as promised in negotiations with the government.. The strategy expert, Alaa al-Nashou, reports that “people are now disappointed by the arrival of foreign companies investing in Iraq without providing jobs to nationals.”

Thus, the economically disadvantaged local population perceives the China's presence as economic predation. For instance, numerous anti-Chinese protests in the country were reported in 2022 .

In addition, China hasn’t invested in protecting its businesses and staff in Iraq. China's private security companies are underdeveloped and have a hard time operating in such a volatile environment.. The Asian giant prefers to rely on foreign contractors to keep its companies safe in Iraq.. Chinese criminal law prohibits the use of weapons abroad by employees of private security companies.. According to several reports, Chinese companies have teamed up with Shiite militias in southern Iraq (often pro-Iranian) to ensure their safety. As a result of this safety deficiency, companies were unable to protect their employees and facilities.

For instance, in January 2022, in Maysan province, gunmen attacked two vehicles owned by the Chinese company Sinopec, protected by two Sudanese guards. In December 2021, there were reports of rocket fire at the head office of the Chinese company ZPEC in Dhi Qar province. For Alaa al-Nashou, the poor living conditions of the Dhi Qar people might have been the reason for the attacks against the Chinese company.

To overcome these challenges, China is trying to build a good image within the local population. This strategy frequently relies on promoting development projects. The country is engaged in the construction of schools, medical centers, tourist projects (such as the Happy City project in Kurdistan), universities, dams and houses. A significant example is the advancement of the Chinese language in Iraq. A complete Mandarin curriculum is offered at Salahaddin University where trained students can then apply for positions in Chinese companies but such efforts are not always welcomed in the region. According to the Arab barometer, China is more popular among the country's elite groups than among the poorest. The survey shows that China is often associated with substandard infrastructure and commercialized products unlike Western companies, which have higher standards and better working conditions for local populations. Li Shaoxin says that the Chinese influence will only really be visible in 20 years, when its implementation will be long term.

Another major issue is the growing instability of the Iraqi political power. China is applying its traditional policy of non-alignment and diversification to Iraq, seeking to ally itself with all the country's partners of interest, without playing a zero-sum game. The danger comes from the rivalries among the various political factions that tarnish China's image through its own partnerships. For instance, China is associated with Iran (Through a 25-year partnership signed in 2021, promising major investments in the country) and the Shiite militias employed by Chinese companies. In terms of political power, China could find itself associated with the Iraqi Shiite camp, themselves linked to the Iranian power. This alliance with Iran, although only economic, can be very difficult to assume in Iraq where the Sadrist movement rejects any interference from Iran on their territory.

Iraq expert Ronen Zeidel stresses that “Iranian opponents fear that the violence of pro-Iranian militias is linked to Chinese engagement. They even call it the axis of the silk road”.

The Iraqi government is increasingly suspicious about China's presence. In May 2022, Iraq refused the repurchase of the shares of BP and Exxon Mobil - which wanted to exit the country - by Chinese companies.The Iraqi government wants to diversify as much as possible its investors and contractual partners in order to avoid being under a single foreign influence.

The Wassit thermal power plant. In Iraq, 20% of the country's electricity supply comes from the plant built by a Chinese company. ©CHINE NOUVELLE/SIPA
-International interference and alliances

Western energy companies are abandoning Iraq due to chronic political instability, repeated extortion by militias and greater opportunities abroad. US companies follow closely this situation. However, this American withdrawal implies an additional challenge for Chinese investments in Iraq. It is true that, according to John Calabrese, China’s main ambition is to “implement itself in a country and a region that the West, especially the United-States, historically dominated”. Yet, China is not trying to extend its political and military presence, the country is seeking to import as much resources as possible at least political cost.

“China’s presence is solely based on economic interests so Beijing gladly let the United States take on the responsibility of ensuring regional stability favorable to businesses” recalls Jean-François Dufour, specialist in the Chinese economy..

China’s political power is highly pessimistic when it comes to security matters in the Middle East and categorically refuses to bear the cost of this security burden. For instance, China has never taken military action against ISIS, despite the Iraqi government’s demands. Moreover, Chinese investments can sometimes be counterproductive to Iranian interests. Iran wants to continue exporting gas to Iraq, Iraq being a major source of income for the Islamist Republic. Thus, the Islamist Republic of Iran vehemently objected to the opening of the Kurdish gas market to Iraq’s national market since Iranian gas was now challenged. Chinese companies also prefer Iraqi national gas, through Nasiriyah and Al-Mansuriya fields, to Iranian gaz.

Beijing is also a key trading partner of the Kurdistan government and is interested in increasing its investment in the region. Finally, since the 1980’s, China has been one of Iran's largest providers of heavy weapons, including cruise and self-propelled missiles. Nevertheless, in March 2022, Iran launched 12 ballistic missiles at the villa of Karim Barzinji, one of the most important CEOs of a Kurdish oil company. Experts say the attack was carried out to protest against the opening of the Kurdish gas market with Turkey. China's interests could end up being threatened in Kurdistan by Iran's repeated attacks in October 2022.

To cite this article :
Justine Mazonier, “China’s economic presence in Iraq: challenges and survival strategy", French Research Centre on Iraq, 10/11/2022 [Online]. URL : https://cfri-irak.com/article/la-presence-economique-chinoise-en-irak-defis-et-strategie-de-survie-2022-11-07


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