On 27 March 2021, the 25-year cooperation agreement between Iran and China was signed in Tehran, Iran, by the foreign ministers of the two countries. The subsequent objections and serious concerns of the Iranian people have raised many questions that can all be summed up by simply asking: is China taking advantage of Iran? The quick answer, merely based on the agreement, is no! But is there room for concern? Definitely, yes!
In 2013 China introduced a project known as ’One Belt One Road’, also known as the ‘Belt and Road Initiative’. The project aims at connecting the two ends of Eurasia which consist of an overland and a maritime route. Based on that, China is investing in 70 countries.
‘Cooperate Agreements’ with target countries are among the main means employed in realising the project. ‘Lending contracts’ are alternative instruments ensuing such agreements. It should be noted that China aims at keeping its cooperation agreements and the lending contracts confidential. This article offers a study based on accessible information.
A cooperate agreement is also known as a Memorandum of Understanding (MOU). This is mainly because generic information is included which in some parts is not even feasible but only ideal. As a result, such documents are not enforceable per se, but they usually lead to the conclusion of many other contracts.
Under the cooperation section of China’s Belt and Road Initiative (BRI), the developing countries involved are assisted by China in investment projects. The main goal is to enrich those countries’ infrastructures so they can benefit from global economic advantages.
There is no clear understanding of China’s cooperation agreements with countries based on the confidentiality aspect mentioned above. However, their very recent 25year cooperation agreement with Iran was a highlight in the news. It caused even more tension when Iran’s Government spokesman, Ali Rabiei, announced that they cannot reveal the official text of the agreement, mainly, because China is reluctant to do so.
While there is no access to the signed version of this agreement, the unofficial version in Farsi, that was published in June 2020, is considered below.
The very first question about this agreement is whether it is binding. Based on Article 2.1.a Vienna Convention 1969, it is generally accepted that an internationally binding document (treaty) is something more than its title and the number of instruments involved.
Based on Article 26 (Pacta sunt servanda) of this convention, every treaty in force is binding. However, there are serious doubts that the 25year cooperation agreement could be considered as a binding treaty. This is mainly because this agreement has a strong political voice rather than a legal perspective; the terms are too vague and idealistic. Therefore, even if it is considered as a binding document, a question arises: how exactly should it be enforced?
According to the cooperation agreement, section 6, (Dispute Resolution), has an absolutely political procedure. It also does not follow Article 102 of the United Nations Charter.
Section 6, Supervision and Execution:
In order to coordinate and supervise the implementation of the agreement, parties will consider a mechanism which consists of their delegates.
Delegates will have yearly meetings.
The foreign ministries of the two countries as the responsible entities, along with other ministries including the Commercial Ministry of China and the Ministry of Economic Affairs and Finance, will monitor the execution of this agreement and will present the progress reports to their leaders as it is asked.
It could be construed that this is a political agreement that has reasonable legal consequences.
Section 8 of the document supports multilateralism and mentions the parties’ commitment to the agreement.
It is worth mentioning that Appendix 3 (executive measure) does not consider Iran’s special situation regarding the United States’ sanctions.
Therefore, if any actions take place regarding the United Nations Resolution 2231, it is not expected from China not to put pressure on Iran.
The investment in the energy sector by China is considered as a guaranteed investment; in such investments, the income will be invested (in this scenario in China) again.
Under Appendix 3 (Executive Actions) the first three sections((i) Oil and Energy, (ii)Finance, banking, and insurance, (iii)Transport and infrastructure) have been written in a way that China has a bargaining power. Some of such elements would be as follow:
Concluding cooperation contracts regarding oil contracts between Iran and Chinese companies.
Inviting Chinese investing companies regarding renewable energy projects.
Easing China’s investment in Iran’s Free-Trade-Zone projects.
Easing the enforcement of the previous financing agreements with Chinese organizations and regularly surveying the projects’ financing.
using Chinese funds in electrifying Iran’s main railways
Knowledge exchange and cooperation in constructing desert highways.
Also, Chinese investment projects in Iran have been mentioned in many different sectors. Such investment projects lead to numerous different contracts and agreements.
As the world’s biggest creditor, China has many debt contracts with different countries. Generally speaking, by these contracts, China provides the necessary assets for foreign industries where governments cannot afford the required credit. There are different mechanisms for returning the borrowed assets. While there is very little information about the detail of China’s debt contracts (based on concrete confidentiality clauses), in March 2021, a published report: How China Lends: A Rare Look into 100 Debt Contracts with Foreign Governments; analysed different aspects of such contracts, and shed light on some eccentric characteristics applied in such documents.
Apart from China, there are many other countries/international organizations which act as creditors and lend money to some developing/ least developed countries to accelerate their economy.
The referred report has compared the main characteristics of the standard debt contracts with those concluded by China and concluded that from 2014 onward (after the introduction of the One Belt, One Road project), Chinese debt contracts have included some particular features. These distinct characteristics have been repetitively seen in Chinese debt contracts and can be classified under three categories:
(i) confidentiality clauses,
(ii) seniority and security, and
(iii) cancellation, acceleration, and stabilization clauses which will be analysed respectively:
Confidentiality: based on the Chinese accessible debt contracts, the use of confidentiality clauses in contracts was most likely established after 2014. For example, there was only 1 out of the 37 China Eximbank contracts, before 2014, containing a confidentiality clause, whereas after 2014 all China Eximbank contracts included the confidentiality clause.
It is worth mentioning that sovereign debtors are permitted to disclose the terms of the contract as required by law. However, such a carve-out mechanism is not as broad as to include the disclosure of contractual terms to Paris Club creditors mainly because the Paris club process is known as a soft law in the best-case scenario.
Compared to other creditors’ contracts, China’s debt contracts are much broader in addressing confidentiality. There is no evidence of the judicial enforcement of confidentiality clauses. There is some information regarding the implicit threat from Chinese creditors in the place where the debtor has breached this term of the contract (revealed the terms of Ecuador’s multi-billion-dollar oil-backed debt to CDB).
All debt contracts are confidential to some extent as we can barely find an OECD or non-OECD lender who releases the text of its contract. However, Chinese contracts have met a new level in lack of transparency.
Seniority and Security: Chinese lenders have used different collateral arrangements to maximise their repayment prospects. The most common ways they adopt are the use of escrow or special accounts. During the life of the contract, the sovereign debtor is obliged to fund bank accounts at a bank that is acceptable to the lender or at the lending institution itself. While such accounts are described as part of the repayment process, they practically function as a means of security. Revenues/ cash flows through these accounts are not based on the project funded by Chinese loans.
Based on some of China’s debt contracts (with Argentina, Ecuador, and Venezuela), the lender has the right to prevent the debtor from withdrawing the funds. In such a scenario, the debtor is prevented from undertaking any actions regarding their account and the agreement respectively.
There is also information about the Chinese lenders’ use of physical infrastructure, like a seaport or a power plant as collateral which is in contrast with China’s
media and political narrative.
Nevertheless, Chinese lenders are completely aware of the disadvantages of illiquid physical assets: the security pitfalls, any sale issues, and difficulties in keeping the agreement confidential, away from unfavourable media coverage and political controversy. As a result, they generally prefer collaterals to be in the form of bank accounts. Such accounts with contractual minimum balance requirements ensure them of accessing the cash to seize in the case of default.
A reasonable number of China’s debt contracts exclude the debt from any ‘multilateral restructuring process’ and from ’comparable treatment’. Both of these terms target Paris Club and its provisions. As a result, the debtor’s contract with China cannot be compared with any other similar debt contracts that are in force. It mainly gives priority to Chinese debt refunds. Such a term might not be enforceable in court but combined with other seniority terms, it gives the Chinese lender a bargaining power according to the refund.
The ’No Paris Club' clause has gone even further in some contracts. Three China Development Bank (CDB) contracts with Argentina’s Ministry of Economy have a term as below:
’The Borrower shall under no circumstances bring or agree to submit the obligations under the Finance Documents to the Paris Club for restructuring or into any debt reduction plan of the IMF, the World Bank, any other multilateral international financial institution to which the State is a part of, or the Government of the PRC without the prior written consent of the Lender.’
Cancellation, acceleration, and stabilization clauses:
These clauses allow Chinese lenders to circumvent the target country’s policies.
There are many examples of China’s debt contracts where the lender has retained the right to cancel the loan and asks for immediate repayment based on a wide range of situations, including political and economic events, while such factors do not directly affect the lending relationship. On the other hand, once the contract is concluded, the debtor has only restricted rights to exit the contract. To be more precise, cross-default and cross-cancellation clauses are highly addressed in these contracts allowing the lenders to terminate their contract if a default or cancellation happens regarding other contracts of the debtor.
Chinese parties include terms in their debt contracts that if any new regulations take place in the other party’s country and this regulation has a destructive impact on the debt contract, such impacts will not apply to the mentioned debt contract. This is what is considered as stabilization according to China’s debt contracts.
Such a broad right would destructively affect human rights and sustainable development policies.
Here, we are not talking about those regulations which might have a negative impact on the international agreements, simply because on such occasions the foreign party can take many actions, and most of the time if it can prove that the new situation is not in its favour, it can terminate the agreement and claim for compensation.
Here, the point is that the Chinese party considers the right for itself to exclude the new regulations from affecting its contract. This is completely against the principle of territorial integrity.
Just imagine the following hypothetical scenario:
Based on China's stabilization measures, even if developing countries make new regulations to make progressive changes in their countries, they cannot implement them where debt contracts with China are in action. The most basic question to make is: so, what would the point be for trying to make constructive changes?
Right now, China is the world’s second-largest economy and has many cooperation agreements with other countries.
Because of the confidentiality feature, we do not have access to the other cooperate agreements. It can only be assumed that if the other cooperation agreements are similar to that of China’ with Iran, then there are many opportunities for China to take advantage of the other parties.
This assumption might not be crystal clear in the clauses of such agreements, but it will be reflected in the contracts/agreements that will follow, such as debt contracts. Based on China’s preference, the text of the loan agreements was supposed to be kept confidential by both parties (Chinese creditors and their sovereign debtors). However, the growing risks of financial distress in debtor countries, mainly because of COVID-19, have made the terms of such contracts a matter of global public interest.
By the disclosure of such contracts, the differences between China’s debt contracts and other standard debt contracts emerged.
The best thing that can happen in this regard is to think of disclosing such contracts as a norm, not an exception. While this might be politically difficult, it holds governments accountable for the contracts they sign which are most likely against their citizens' best interests.
Sources for the Visual Materials
Source No 1 - Bar Chart: Gelpern A, Horn S and others ‘How China Lends; A Rare Look into 100 Debt Contracts with Foreign Governments’
Source No 2 - Extract: Ibid
Iran-China 25 year Cooperation Agreement
Vienna Convention 1969
Gelpern A, Horn S and others ‘How China Lends; A Rare Look into 100 Debt Contracts with Foreign Governments’
Radio Westphalia, Episode 16