How China Buys Iran’s Sanctioned Oil

Oct 12, 2025 - 09:51 Updated: Oct 11, 2025 - 19:22

The Trump administration this week issued new sanctions against several Chinese entities involved in the purchase and import of sanctioned Iranian oil.

Beijing’s support of Tehran—both economically and politically—has continued to grow for nearly three decades. This support has often extended to sanctioned Iranian industries, although the precise mechanisms of China’s support remain somewhat opaque.

The United States has sought to choke off Iran’s sales of oil in recent years due to Tehran’s funding of international terrorism. The Chinese Communist Party (CCP), which rules China as a single-party state, has nevertheless succeeded in maintaining its position as the world’s largest importer of Iranian oil and has largely avoided major blowback by the United States.

Here’s what we know about the illicit oil trade between China and Iran.

A History of Skirting Sanctions

The CCP began reinforcing its relations with Iran in the early 1990s, as it faced international backlash in the West for its violent suppression of student protesters during the Tiananmen Square Massacre.

Relations between Beijing and Tehran began to expand to infrastructure investments and mutual diplomatic support at the United Nations during the mid-90s. In 1997, China pledged to build out a $1 billion oil pipeline connecting the Uzen oil field in Kazakhstan to Iran, although that particular project was never completed.

In the same year, Iran supplied nearly 11 percent of China’s oil imports, according to a report published in 2000 by the RAND Corporation, a California-based think tank. It is during this time that China and Iran are believed to have begun exploring so-called “arms-for-oil” trades, in which Beijing would provide sanctioned weapons to Iran in exchange for Iranian oil, rather than purchasing it outright.

The CCP continued to sign off on multibillion-dollar energy development investments in Iran throughout the early 2000s, even as the scale of Iran’s nuclear weapons program became more clear.

The two powers also signed a comprehesive strategic agreement in 2021, in which both nations denounced the United States and its allies as “trouble-makers” and agreed to bring Iran into China’s flagship Belt and Road infrastructure scheme.

Since that time, “nearly all Iranian petroleum exports” are believed to have gone to China, according to a report by the Congressional Research Service. And Beijing remains the largest purchaser of Tehran’s oil today in spite of international sanctions, with roughly 15 percent of China’s oil imports coming from Iran thus far in 2025.

‘Teapots’ Shield Beijing’s Illegal Imports

The CCP stopped publicly reporting on Iranian oil imports in 2023 while also characterizing international sanctions on Iranian oil as illegal.

As economic and diplomatic pressure from Washington has grown, Beijing has shifted the responsibility for importing Iranian oil away from major state-owned corporations to dozens of smaller entities known colloquially as “teapot refineries.”

Teapot refineries are smaller oil refineries operating in China that often work behind the scenes with larger state-owned corporations and in recent years have become a key mechanism for providing economic support to the CCP’s sanctioned partners in Iran, North Korea, and Russia.

The refineries have steadily risen in prominence as sanctions on oil have increased because they employ deceptive techniques to mask China’s import and processing of Iranian crude oil.

These techniques include the use of shadow-fleet vessels whose ownership is difficult to track, the spoofing of fake GPS information for oil tankers, the mixing of Iranian oil with non-Iranian oil at sea, and the relabeling of petroleum products from Iran, according to another report by the Congressional Research Service.

Likewise, many of these semi-independent refineries also avoid sanctions by limiting any exposure to organizations that connect to the U.S. financial system, which makes them difficult to discover, let alone retaliate against.

Barter Ditches the Dollar

Though China-based teapot refineries account for how the CCP obtains illicit oil from Iran, they do not explain how Beijing pays Tehran for the oil in the first place.

Chinese state-owned entities continue to make barter deals with Iran, thereby circumventing the need for sanctionable currency transactions altogether.

In 2023, for example, Beijing agreed to provide more than $2.6 billion to modernize Iran’s largest airport, opting to be paid in oil rather than currency. China also continues to develop a wide array of other projects in Iran, including oil fields, railroads, power plants, and metal processing facilities.

While this barter relationship is increasingly well recognized, the exact mechanisms for it remain obscure, as CCP officials ceased reporting official numbers from Iranian oil imports in 2023 and have sought to increasingly shield parts of the Chinese economic apparatus from exposure to the international system.

There are an increasing number of media reports that aim to shed light on the issue, but they largely rely on the testimony of unnamed officials in both the United States and China and therefore may not be fully vetted at this time.

One such report by Bloomberg examined a supply line that purportedly shipped partly-made vehicles from China to Iran and was paid in metals including copper rather than cash. Another report, by the Wall Street Journal, suggested that China’s state-owned insurer Sinosure logged oil sales from Iran and then used a backchannel network to funnel the corresponding amount of money to Chinese contractors in Iran who worked directly on infrastructure projects.

U.S. Sanctions are Having Little Effect

Although the illicit oil trade between Iran and China is well known and the mechanisms through which it operates are increasingly coming to light, what is left undecided is how the United States might effectively respond.

The Trump administration has targeted China-based entities engaged in the purchase and import of Iranian oil on four separate occasions this year alone, but those actions appear to have had little effect on the flow of illicit oil from Iran to China.

This is largely because U.S. sanctions on Iranian oil force Iranian oil producers to lower their prices in an effort to persuade buyers to take on the increased risk of circumventing sanctions.

In turn, this means that China’s teapot refineries are able to purchase Iranian oil at a significant discount to global market price, provided they’re willing to disregard U.S. sanctions, and those discounts translate to billions of dollars in savings on oil purchases for China each year.

The risk appears to be one Chinese importers are happy to bear. In fact, China began importing a record amount of Iranian oil after the reimposition of international sanctions in 2022, demonstrating an inverse correlation between sanctions and oil purchases.

Nor is there a shortage of potential buyers in China. When China’s Shandong Port announced that it would ban Iranian oil tankers to avoid sanctions in January of this year, several newer oil terminals not exposed to the U.S. financial system opened the following month to accept those same vessels.

As such, sanctions appear to incentivize teapot refineries to engage in illicit oil trades with Iran, but the removal of sanctions would merely encourage official oil purchases between Iran and China’s state-owned enterprises.