The End of Dollar Dominance? How Iran’s China Ties Challenge U.S. Sanctions

The evolution of Iran’s oil diplomacy under sanctions marks one of the most significant geopolitical transformations in the global energy market in recent years. Iran was compelled to rearrange its economic alliances radically when the United States reimposed sanctions after it withdrew from the Joint Comprehensive Plan of Action (JCPOA) in 2018. Excluded from international financial systems and stripped of several export markets, Tehran made a bold move toward Beijing, creating a covert oil trading network that avoids Western oversight and successfully incorporates Iran into a different, Chinese-dominated global economic network. This transformation not only altered the balance of power within the Persian Gulf but also challenged the structural dominance of Western sanctions as an instrument of economic coercion.

Pre-Sanctions Diversification and the Collapse of Export Markets

Before 2018, Iran’s oil trade demonstrated a wide range of interconnected relationships with both domestic and foreign partners. The nation shipped 2.2 million barrels a day on average to 16 nations, including Japan, China, India, South Korea, and Turkey. Tehran appeared resilient and stable as a result of this arrangement. But that perceived steadiness vanished almost immediately once the United States reinstituted secondary sanctions. Nearly all of Iran’s traditional importers, with the exception of China, gave in to pressure from Washington and stopped or significantly reduced their oil imports. To prevent isolation from the U.S. financial system, South Korea, Japan, and India—once major purchasers of Iranian crude—completely stopped their operations. In a sanctions regime where American enforcement authority dominated, the diversification that had previously served as Tehran’s shield lost all significance.

The effect was intense and immediate. By 2019, oil shipments have fallen from almost two million barrels per day in 2017 to a little over 650,000. Tehran’s foreign exchange reserves drastically shrank, its earnings declined, and inflation skyrocketed. But even as geopolitical isolation grew, the experience made clear a crucial structural fact: if the sanctioned state finds a strong and willing partner to maintain economic interchange, sanctions cannot continue to exert pressure indefinitely.

The Strategic Turn Toward China

China held a special place in this shifting environment. It was the sole major country with the market size and diplomatic clout to both absorb Iranian goods and protect its businesses. Tehran and Beijing’s 2021 Comprehensive Cooperation Agreement codified what was previously an unwritten fact: Chinese demand, Chinese funding, and Chinese logistical infrastructure were essential to Iran’s economic survival.

The legal and institutional cornerstone of the new oil relationship was this 25-year pact, which reportedly involved $280 billion in Chinese investments in Iran’s energy industry and an additional $120 billion in infrastructure projects. Tehran agreed to supply oil at steep discounts for decades to come in return for these financial assurances. Despite being cut off from the majority of other international markets, Tehran was able to restore production levels that were close to pre-sanction levels between 2020 and 2024 thanks to an almost fivefold increase in Iranian oil exports to China.

But there was a price for this comeback. The extent of Tehran’s reliance was demonstrated by the sharp increase in Iran’s percentage of China’s total oil imports, which went from slightly over 3% in 2020 to more than 14% by 2024. When compared to other Middle Eastern suppliers, Chinese traders were able to negotiate reductions of $7 to $8 per barrel, fully shifting the bargaining power that earlier belonged to several buyers in Beijing’s favor. Iranian light crude regularly traded for $3 to $3.50 less than the going rate and was frequently benchmarked to ICE Brent. From an economic perspective, Iran’s oil diplomacy was similar to a survival strategy that sacrificed sovereignty in favor of continuity.

Building the Parallel Oil System

Iran looked for creative and opaque ways to keep its crude exports flowing as the US strengthened its control over global banking and maritime insurance. This adaptation was best exemplified by the rise of what commentators dubbed the “gray fleet.” Dozens of old ships, often re-registered under convenient foreign flags like Panama, Liberia, or the Marshall Islands, delivered Iranian oil. To hide their origin, cargoes were often marketed as coming from Oman, Malaysia, or even Iraq, and ship-to-ship transfers in international seas became the standard. These actions effectively laid the groundwork for a parallel oil system that combined legal commerce with covert logistics.

China’s Cross-Border Interbank Payment System (CIPS) served as the financial lifeline for the system, supposedly created as a substitute for SWIFT to enable yuan-based international transactions. Although Tehran’s formal involvement in CIPS has not been verified, the large and ongoing volume of bilateral trade suggests that the platform is used indirectly but effectively. To shield the transactions from American law, settlements increasingly took place in yuan rather than US dollars. China subsequently used these agreements to further its overarching strategic objective, which is the internationalization of the yuan and the progressive dismantling of the dollar’s monopoly on world energy commerce.

A significant percentage of Iranian oil exports to China used a barter arrangement in addition to monetary channels. Chinese businesses supplied commodities equal to the value of oil shipments in lieu of direct cash payments. These goods included consumer electronics, automobiles, building materials, and industrial equipment. By allowing Chinese commodities to enter Iran’s domestic market and Iranian crude to support China’s industrial requirements, these barter transactions created a circular economy. This arrangement effectively isolated the economy from Western financial supervision.

Fatigue from Sanctions and the Boundaries of American Pressure

The continuation of Iranian oil exports in the face of numerous sanctions rounds exposed a new phenomenon known as “sanctions weariness.” Constant enforcement and extensive international collaboration are essential to the overwhelming dominance of financial instruments headed by the United States. However, imposing sanctions on Chinese financial institutions or businesses large enough to stop Iranian commerce would have disastrous worldwide repercussions. Washington’s appetite for conflict was severely curbed by the possibility of upsetting the oil markets as well as inflationary threats in the US and Europe.

This dynamic underscored the paradox at the heart of modern sanctions policies. The geopolitical arrangement of power determines how effective they are rather than the degree of their legality. Sanctions gradually lose their coercive power if a sanctioned state is able to establish solid alliances outside of the Western world. This fact was best illustrated by Iran’s flexible oil diplomacy. It successfully protected important facets of its energy sector from isolation by heavily integrating its economy into China’s larger strategic network, which includes the Belt and Road Initiative and trade denominated in yuan.

Comparison with Venezuela and Russia: Parallels and Contrasts

When comparing the adaptability models of Venezuela and Russia, there are parallels as well as differences. Venezuela implemented a strategy that included bartering with political friends like China and Cuba, rebranding cargoes, and smuggling oil under one of the strictest sanctions regimes of the twenty-first century. Similar to Iran, Venezuela was mostly dependent on Chinese funding under the “oil-for-loan” scheme, in which petroleum exports paid back Beijing’s long-term loans. But unlike Tehran, Caracas lacked the diplomatic and infrastructure depth necessary to maintain consistent volumes. Due to years of poor management at the state-owned PDVSA and deteriorating infrastructure, Venezuela was unable to fully use its reserves. By 2021, it was exporting fewer than half a million barrels of oil per day, down from about two million in 2014. Even with a slight improvement brought about by collaboration with Russian logistics and Chinese middlemen, Venezuela’s reliance on illicit trade is still precarious and uncertain.

However, the situation in Russia is more nuanced. Moscow shifted a significant amount of its oil shipments from Europe to Asia, primarily to China and India, after the sanctions were increased in 2022 in reaction to its military actions. Compared to Iran’s gray fleet, Russia’s so-called “shadow fleet” functions similarly and differently, especially in terms of insurance coverage. The Russian fleet has created a more advanced and partially state-backed insurance system than Iran, where the tankers in the gray fleet mostly operate under the guise of convenience and opaque ownership but have no access to Western insurance processes. Despite their strength, Western sanctions are only legally applicable to individuals, businesses, ships, and transactions that fall under the purview of the nations or groups that imposed them. States or entities outside these jurisdictions are not legally required under international law to comply, though they may do so out of economic or diplomatic prudence. However, with its vast Arctic shipping routes, enormous infrastructure capacity, and direct influence within OPEC+, Russia continues to be a global energy behemoth, unlike Iran. On a much wider scale, Moscow’s discounting strategy—selling Urals crude at $20–25 less than Brent benchmarks—mirrored Iran’s previous price diplomacy model. Additionally, sanctions adaptations were easier for Russia and China than they were for Iran at first because of earlier integration through yuan-based settlements and common energy infrastructure, such the Power of Siberia pipeline.

However, there is one significant similarity among the examples of Russia, Venezuela, and Iran: all three have created ways to break free from the financial shackles of the West by creating alternate pathways for settlement, trade, and transportation. Each has played a part in the gradual decline of American monetary power and the emergence of a multipolar energy economy. Iran’s innovation was refining the concept in the face of extreme isolation, turning necessity into a long-lasting parallel commerce system.

A New Energy Diplomacy Map

By 2025, Iran’s reliance on China has developed into a structural aspect of global energy geopolitics, exceeding the level of normal trade relations. This partnership is a symbol of a larger transition from a unipolar to a multipolar economic world, not only bilateral collaboration. The establishment of Tehran’s “shadow oil economy,” which was bolstered by gray fleets, barter commerce, yuan transactions, and logistic camouflage, exposed the limitations of coercive diplomacy in the face of competing financial and geopolitical poles.

This development has long-term ramifications that go well beyond Iran. The consistency of the international sanctions system is being called into doubt more and more as Venezuela, Russia, and even minor suppliers like Myanmar or Sudan experiment with comparable arrangements. When faced with strong trading alliances prepared to pay the price of defiance, the conventional tools of embargo and financial isolation lose their effectiveness.

Iran’s ability to withstand sanctions so serves as an example of a broader shift. Sanctions now serve as spurs for systemic adaptation rather than as tools of economic subordination. Tehran decided to survive by making concessions to Beijing in the conflict between economic reality and coercive strategy. As a result, a parallel oil system is consolidated, one that functions beyond the purview of Western finance, prioritizes continuity above independence, and subtly alters the structure of international energy trade.