NEW YORK (VINnews) — Iran has been using a secretive barter-like trading mechanism to circumvent U.S. sanctions on its oil exports and obtain goods from China, including military equipment and medicines, according to Iranian and other sources who spoke to Reuters.

The arrangement, which has been operating since at least 2021, allows China to continue purchasing Iranian oil at discounted prices while limiting the exposure of Chinese banks and companies to U.S. sanctions. Reuters reported that between $2 billion and $2.5 billion moved through the mechanism over the past year.

According to two senior Iranian sources and three other people familiar with the system, the money is managed through two entities linked to China’s Ministry of Commerce and Iran’s central bank. The arrangement operates largely outside the international banking system, effectively allowing Iranian oil revenues to be converted into credits for purchases of Chinese goods.

Reuters reported that about 70% of the funds handled through the mechanism are directed toward infrastructure projects in Iran, while the remainder is used to pay Chinese suppliers for goods including medicines, vehicles and other essential products. The system has also reportedly been used at least once in the past year to facilitate contracts for air-defense equipment.

The mechanism illustrates how Tehran and Beijing have developed alternative financial channels to maintain trade despite Washington’s sanctions campaign.

China is by far the largest buyer of Iranian crude. The U.S. Treasury said in April that Chinese independent “teapot” refineries account for the majority of China’s purchases of Iranian oil, with China taking roughly 90% of Iran’s oil exports. Washington has warned financial institutions about the sanctions risks associated with these transactions.

A 2023 academic study also documented the broader use of barter arrangements in Iran-China trade, noting that sanctions had encouraged Tehran to receive part of the value of its oil exports in Chinese goods and services rather than conventional payments.

The latest arrangement has become particularly important as the United States has intensified its economic campaign against Iran. Reuters reported earlier this month that U.S. sanctions and a naval blockade have sharply reduced Iranian oil exports and restricted Tehran’s access to foreign currency. Iranian officials and analysts say the pressure is contributing to severe inflation, currency shortages and difficulties importing essential goods.

Washington has also increasingly targeted financial intermediaries that help Iran convert oil revenues into usable funds. On Sept. 4, the U.S. Treasury sanctioned a Turkish investment bank and two subsidiaries, accusing them of facilitating transactions between China and Iran’s Islamic Revolutionary Guard Corps’ Quds Force, including the conversion of Iranian oil revenues into cash and gold. The bank rejected the allegations.

China, meanwhile, has continued to reject the legitimacy of unilateral U.S. sanctions. In response to Reuters’ questions about the reported barter system, China’s Foreign Ministry said Beijing “has consistently opposed unilateral sanctions” that lack a basis in international law or authorization from the U.N. Security Council.

Chinese officials have similarly defended their country’s continued purchases of Iranian oil, despite growing U.S. pressure. Chinese refiners have remained major customers for Iranian crude, although Reuters reported in August that Iranian oil deliveries to China had fallen sharply as the U.S. blockade and sanctions campaign intensified.

The system also highlights a broader challenge facing Washington: even as the United States attempts to cut Iran off from the international financial system, Tehran and its largest trading partner have developed mechanisms designed to avoid conventional banking channels altogether.