China Wades Into Mid-East Melodrama As Xi Makes First Presidential Trip To Saudi Arabia, Iran

China is “at the center of a clash between Saudi Arabia and Iran,” WSJ wrote on Tuesday, as Xi Jinping marks his first visit to Riyadh as President.

To be sure, Xi’s trip to the Mid-East comes at a critical juncture. The Sunni and Shiite communities exist in a perpetual state of strife, but Riyadh’s execution of prominent Shiite cleric Nimr al-Nimr threw gasoline on a fire that’s already being fueled by fighting in Syria, Iraq, and Yemen.

Going into the new year, the Saudis find themselves in a tough spot. The kingdom’s move to bankrupt the US shale space by deliberately suppressing crude prices has blown a giant hole in the kingdom’s budget. For 2016, the Saudis expect to run a deficit that amounts to some 13% of GDP. The financial strain has forced Riyadh to rollback popular subsidies, a move that won’t go over well with everyday Saudis. Meanwhile, financing the war in Yemen is becoming expensive. March will mark a year since the Saudis initially intervened to rollback the Iran-backed Houthis and the fighting is still just as fierce today as it was then.

Iran, on the other hand, is now playing from a position of strength. The implementation of the nuclear accord will result in an immediate $100 billion windfall for Tehran and by the end of the year, the country could be raking in as much as $4 billion a month in crude sales. Additionally, Russia’s involvement in Syria’s protracted conflict has tipped the scales back in favor of Hezbollah and the IRGC forces fighting alongside Bashar al-Assad’s depleted army thus ensuring that Damascus won’t be falling to a puppet government of the US and the Saudis anytime soon.

In short, the regional balance of power is shifting in Iran’s favor and the return of Iranian supply to an already oversupplied global oil market means the economic rivalry between Riyadh and Tehran may soon become just as tense as the ideological rift.

As WSJ notes, “China has a strong interest in seeing the regional rivals tamp down their recent war of words [as] the countries accounted for nearly one-quarter of Chinese total imports in the first 11 months of 2015.

Even as China is keen on maintaining its cordial relations with Iran (Beijing buys some 40% of Tehran's exported oil), it’s also important for Xi to preserve ties with the Saudis who are the number one supplier of crude to Beijing (although Russia took the top spot on at least three occasions last year).

Still, the Saudis may need China more than China needs the Saudis - especially now that Iran is set to ramp up crude production. Iran is “aiming much of [its new] crude at China, a country that continued to buy its oil during three years of western sanctions but at diminished levels,” WSJ continues. Here’s more:

China remains the engine of global demand growth, but Bernstein Research this week projected Chinese total oil demand growth would fall to about 3% this year, or 300,000 barrels a day, compared with around 5% growth in 2015.

 

The slowdown is particularly concerning for Saudi Arabia. While Riyadh enjoyed stable demand from China for years, today Chinese oil imports are growing far faster from Russia, Iraq and other producers.

 

Imports of Saudi Arabian crude by China rose just 2% in the first 11 months last year, compared with overall Chinese import growth of about 9%, according to customs data. Imports from Russia—China’s No. 2 supplier after Saudi Arabia—meanwhile jumped nearly 30%.

 

 

Saudi Arabia has sought to build oil ties to China through the building of refineries in tandem with Chinese companies, setting up nearly guaranteed customers for its crude. Aramco has been in yearslong talks with China National Petroleum Corp. about building a 260,000 barrels a day refinery in Yunnan province, but little progress has been made. Aramco is also is in talks to acquire a stake in a China National Petroleum Corp refinery as well as retail assets, a move that will help it sell more of its output to China.

On Tuesday, Saudi Aramco signed a cooperation agreement with Sinopec. “The agency said the agreement was one of 14 agreements and memoranda of understanding signed between Saudi Arabia and China on the first day of a state visit by Chinese President Xi Jinping to Riyadh,” Reuters reports. No details on the Sinopec deal were provided.

In addition to preserving China's energy interests, Xi is "also seeking to protect Chinese influence that accumulated in Iran during the country’s long isolation," Bloomberg says, noting that Xi is "the first major world leader to visit since the U.S. and European Union liftedsanctions Saturday and cleared the way for its reemergence in the global economy." As Bloomberg goes on to point out, "China doesn’t want more strife between Saudi Arabia and Iran, a potential strategic ally sitting at the crossroads of Xi’s Silk Road plan to build railways, pipelines and other infrastructure from Asia to Europe."

“They need Iran to avoid overreliance on Saudi Arabia, and they need Saudi Arabia to avoid overreliance on Iran. It’s all about diversifying risk. It’s less about picking winners and more about modern portfolio theory," Jon Alterman, director of the Middle East programme at the Center for Strategic and International Studies in Washington told FT.

The trip is just as important from an optics perspective as it is from a strategic standpoint. The region is already at war and the prospect of an outright conflict between Iran and Saudi Arabia is a frightening proposition indeed. For Xi to step in and visit both Riyadh and Tehran in the same trip is an example of Beijing throwing its diplomatic weight around in Washington's sandbox at a critical moment in history. The Kremlin has done the same thing with Russia's intervention in Syria and while we can argue about how successful that campaign has been on the ground, what's not up for debate is the fact that Moscow's assertiveness has bolstered Vladimir Putin's international image at a time when the West is doing its best to perpetuate the isolation meme. Xi is essentially making a similar play, only without the warplanes and bombs.

Diplomacy and polite letters (see here) aside, there's little question that if push came to shove, the Chinese would side with the Iranians and as we saw just hours ago when Saudi Foreign Minister Adel bin Ahmed Al-Jubeir told Reuters that his country would pursue a nuclear weapon if Iran obtained one, Riyadh isn't prepared to de-escalate the conflict any time soon.