Iran Bypasses Sanctions with Secretive Trade Mechanism

A secretive trade mechanism has allowed Iran to bypass US sanctions on its oil sales and buy billions of dollars' worth of goods from China, including military gear. The arrangement, in which Iranian oil is exchanged for credits for Chinese imports, has provided a financial lifeline for Tehran in recent years as the US stepped up economic and military pressure over its nuclear program.

The mechanism has also helped China retain access to discounted Iranian oil while shielding banks and companies that export to Iran from international scrutiny or penalties. The US has imposed sanctions on some smaller Chinese entities that buy or facilitate shipments of Iranian oil, but has stopped short of the most punishing measures that could have repercussions on the global economy.

The arrangement has been in place since at least 2021 and was first used to supply medicines and COVID-19 vaccines to Iran. Since then, it is estimated that between $2 billion and $2.5 billion flowed through a special purpose vehicle (SPV) over the last year. The SPV is managed by two entities: a firm acting on behalf of China's Ministry of Commerce and one linked to Iran's central bank.

Iran has used this arrangement to buy medicines, vehicles, and communication equipment from China, all without dealing directly with Chinese companies. There is no indication that the manufacturers were in breach of sanctions. The mechanism was also used at least once in the past year in connection with contracts to supply Iran with air defense equipment worth millions of dollars.

China's leaders want 'plausible deniability' for their banks and companies, according to Andrea Ghiselli, an international politics lecturer at the University of Exeter who studies Beijing's relations with the Middle East. They do not want them excluded from the international financial system.