China’s recent activities in Iraq may mark a new milestone in its increasingly overt attempts to develop an economic and political sphere of influence in lesser developed Asian and African countries.
China has long used its Belt and Road Initiative (BRI) to develop its influence by providing infrastructure loans to developing countries on terms that are heavily favourable to China, using key local and strategic resources as collateral, often resulting in Chinese ownership and control of these resources when the loans cannot be repaid. Needless to say, the degree of corruption and malfeasance present in many of these lesser developed countries make these regions an ideal target for this policy. Examples abound – Sri Lanka, Pakistan, Myanmar, Djibouti, are but a few. In all these endeavours, China has traditionally preferred to deal with and rely on stable State actors and required a signed Memorandum of Understanding to begin any sort of cooperation, thus protecting Bejing in a formal way. This approach tends to insulate China from the political instability prevalent in these regions.
However, China’s recent oil ventures in Iraq appear to be a departure from this policy. In this case, China has relied on its close ties with Iran-backed militia groups operating within Iraq to create a security blanket for Chinese interests in the region, while leaving competitors exposed to a number of difficulties associated with corruption and outright violence against their interests. Iraq has become China’s third largest source of oil imports. In 2021 alone, Beijing struck infrastructure deals in excess of $10 billion USD in Iraq and Baghdad is keen to secure further Chinese investment in its infrastructure sector.
The impetus and timing of these investments isn’t coincidental; the ongoing withdrawal of the USA from the region leaves a profound vacuum in a resource rich region with instability, violence and endemic corruption. A key driver for the favourable deals China has been able to secure is a relative lack of competition due to the unfavourable business environment, in part driven by the concerted actions of Iran-backed Shiite militia groups. These groups have enormous influence and enjoy constitutional legitimacy through their membership of the Popular Mobilization Force (PMF) and, with it, access to the federal budget. These militias are often in direct physical control of Iraqi oilfields and cannot be challenged, as their permission, in return for commissions, is essential to operating oil business in this region.
This represents a significant hurdle for international oil companies, which have been unfavourably impressed with the risk-to-reward presented by the circumstances in Iraq, especially when confronted by the risk of violence and instability in the region. For example, earlier this year, Exxon Mobil finalized a deal to sell its 33% stake in the West Qurna-1 oilfield, one of the world’s largest oilfields with an expected recoverable reserve of more than 20 billion barrels. On the contrary, China’s close ties with Iran and cooperation with Iran-backed militias within Iraq means that Beijing’s own interests are much less affected by the adverse business conditions than those of its competitors. As things stand, it looks like as if the targeted violence and corruption in the region are being weaponized to create a lack of competition, which in turn is allowing favourable terms for Chinese corporations in their dealings, as well as the development of strategic strongholds. Taken together, these developments indicate a growing Chinese confidence regarding its prospects in the Middle-East in the wake of the American exit.
Beijing has demonstrated a resolve to create a sphere of influence notwithstanding the instability and violence in the region, which China likely regards as endemic. This represents a judgement that the rewards outweigh the risks and instability, and warrant a departure from their traditional policy of dealing only with governments while committing to external investments. Another recent example of such opportunism has been the alacrity of Chinese corporations to begin mineral prospecting in Afghanistan almost immediately after the Taliban takeover in August 2021. This state of affairs has been exacerbated by the recent developments in Ukraine, which have caused drastic spikes in the demand for oil and other scarce natural resources.
In light of the increased demand and importance of scarce natural resources, China’s new approach is a matter of potentially grave concern. The newfound willingness to align itself with militia groups, while convenient in this instance, can only have the effect of undermining confidence in sovereignty and represents a serious and growing threat to the rules-based international order.