India's relations with Iran and sanctions

India: Strategies to deal with Iran sanctions

India's good relations with the Middle East countries will advance its interests in the region.

the Hindu Business Line,

13 March, 2012

When it comes to Iran, India means business. This was clear from New Delhi's decision to send a delegation comprising officials and businessmen to Tehran. The delegation is exploring the opportunities created by the latest US and EU sanctions on Iran. India's serious pursuit of its economic interest is a welcome turn in its foreign policy. But New Delhi needs to orchestrate its economic and geopolitical moves on the complicated chess-board of West Asia.

The US has imposed sanctions that will penalise financial institutions transacting with the Iranian central bank. In tandem, the EU has slapped an embargo on Iranian crude imports that will come fully into effect in July 2012. American allies in Asia — Japan, Taiwan and South Korea — are also reducing their imports of Iranian crude. In all, Iran could miss out on as much as 35 per cent of its total exports. This leaves China and India as the two largest buyers of Iranian crude. Iran currently accounts for more than 11 per cent of India's oil imports, amounting to $12 billion a year.

TRADE WITH IRAN

Faced with such hard sanctions, it isn't surprising that Iran has agreed to a rupee payment mechanism for 45 per cent of its oil exports to India. This, of course, works rather well for us. It provides a major avenue for Indian exports. Iran is already the largest importer of rice from India, accounting for half of the 2.2 million tonnes exported by India last year. This is the time to surge ahead with exports in some other, higher-value sectors. We could also use this opportunity to upgrade the Chahbahar port and its transportation links with Afghanistan and some other Central Asian countries. Chahbahar was recently used by India to send 100,000 tonnes of wheat to Afghanistan. Investing further in its development will considerably increase India's economic footprint in these parts.

While surging ahead with the opportunities presented by the current situation, India needs to prepare for potential pitfalls in its ties with Iran. For a start, the agreement on the payment mechanism doesn't spell the end of the problems in importing oil from Iran. There is the major issue of insurance for tankers shipping Iranian oil to India. European firms insure more than 90 per cent of tanker fleets globally. Their refusal, following the imposition of sanctions, to cover shipments from Iran presents serious problems for India.

New Delhi is apparently considering extending the sovereign guarantee to Indian ships that fetch Iranian crude. This still leaves us with the issue of covering foreign tankers chartered by India. We may find some interim solution to this. But in the longer run, we need to enhance our own fleet, and foster the development of protection and indemnity insurance in India. The position, vis-à-vis Iran, points to a larger strategic imperative for India. Our energy security hinges on our ability to become a serious maritime power. And historically, there have been few maritime powers that aren't financial powerhouses as well.

GEOPOLITICAL CHALLENGES

The more pressing challenges are geopolitical. As the US and its allies attempt to step up sanctions on Iran, there will be pressure on India to follow suit. So far, India has spoken out against these steps, and has rightly held that it isn't bound to comply with unilateral sanctions. New Delhi should be more forthcoming in pointing out that the sanctions are actually likely to be counterproductive. The heart of the problem is the ambiguity in Washington's approach to Iran.

On the one hand, the imposition of additional sanctions is aimed at forcing Iran to negotiate with the West and halt its nuclear enrichment activities. On the other, there is the unstated but evident hope that the sanctions might lead to regime change in Iran. In this context, Tehran has little incentive to comply with UN Security Council resolutions on its nuclear programme. What is more, having seen the fate of Muammar Gaddafi, who paid for abandoning his nuclear programme with the loss of his regime and life, the Iranian leadership will look for solid reassurances before engaging in serious negotiations.

Making these arguments, if only in private, is important, because India wouldn't like Iran to acquire nuclear weapons capability. The problem isn't that a nuclear Iran would present an existential danger to its Arab neighbours and Israel. The American nuclear umbrella and the Israeli nuclear arsenal are more than adequate to make sure that Iran doesn't even contemplate using nuclear weapons. Nor is it the case that a nuclear Iran will trigger a chain-reaction of nuclear proliferation in West Asia. The Arab countries have, after all, lived with the Israeli bomb for decades. The problem rather is that the acquisition of nuclear weapons might embolden Iran in using its proxies to advance its influence in the region. For the fear of escalation to the nuclear level would constrict the options available to Iran's rivals. The resulting instability will undermine India's interests in West Asia — and not least, the presence of 6 million Indian workers.

INDIA'S INTERESTS

Further, a determined move by Tehran to acquire the bomb will catalyse the incipient rivalry between Iran and Saudi Arabia. This dynamic is currently playing out in third countries like Syria and Bahrain, where Iran and Saudi Arabia are supporting their respective clients. India has important interests in its relations with both Saudi Arabia and Iran. It is no coincidence that even as New Delhi is looking to expand its economic engagement with Tehran, the Indian defence minister went to Riyadh — the first visit of its kind. Similarly, India has interests at stake on both sides of the Iran-Israel divide. The challenge for New Delhi in all these sets of relationships is to avoid taking sides. The recent attack on the Israeli diplomat has led to exaggerated claims on the ‘war' in West Asia coming to India's doorstep, and the need for India to pick its partners.

On the contrary, India's good relations with all these countries provide it more options to advance its interests in the region. This is a game that New Delhi needs to play with patience and finesse.

(The author is Senior Fellow, Centre for Policy Research, New Delhi.)