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India should foster Iran relations despite sanctions

Growing links with US vital to counter China but New Delhi also profits from Tehran ties

Indian Prime Minister Narendra Modi, right, and Iranian President Hassan Rouhani in New Delhi in February.   © Reuters

India is extremely uncomfortable on being caught between the United States and Iran over American President Donald Trump's tough economic sanctions regime.

The U.S., a key strategic partner, is important for India to realize its full economic potential and, equally importantly if not more so, to counter the growing economic and military advances of China in the Indo-Pacific region and beyond.

With Iran, the ties extend far beyond oil to deep historical and even emotional links. Many Indians feel an affinity for Iran, given the bonds the two civilizations have enjoyed for millennia. Some even stretch the history a little, and call the now Shia-majority country essentially an ancient land of fellow-Aryans, with similar cultural roots to many Indians.

Unsurprisingly, therefore, the speeches top leaders of India and Iran at bilateral meetings can be emotional and sometimes even poetic with references to a glorious past.

However, the fact remains that India and Iran have largely struggled in expanding political and commercial relations since the first round of West-led sanctions against Iran, imposed from 2006 onward with ever-tougher restrictions over Tehran's nuclear program.

India then tried hard to follow a middle path, but Iran believes India leaned more to the West than it had expected. Tehran has ever since refused to forget that behavior, most particularly India's vote against Iran at a crucial 2009 meeting of the United Nations atomic watchdog International Atomic Energy Agency.

India claims it stood by Iran on most of the issues during the first round of sanctions that were eventually eased after the 2015 nuclear deal between Iran, the U.S. and other powers.

New Delhi insists Tehran was, is and will always be a special friend. Admittedly, New Delhi is seriously opposed to Iran's alleged efforts to acquire nuclear weapon capability. A nuclear Iran, already known for its hegemonic tendencies, would hugely disrupt the power equilibrium across the Middle East and Central Asia, with serious consequences for India's economic and strategic interests.

But a politically stable and economically prosperous Iran would suit India well. Therefore, New Delhi is keen to engage with Supreme Leader Ayatollah Khameini's Islamic Republic and build a strategic partnership with particular focus on Afghanistan, Central Asia and the Middle East.

Iran acknowledges the value of India's approach and is broadly going along with it. But the pace remains frustratingly slow for New Delhi's liking. Trump's new sanctions against Iran have come as a big dampener, only adding to New Delhi's challenges.

India has somehow secured a waiver from the White House, mainly for importing oil, but government insiders say the waiver is temporary and will expire by April, the likely time of the parliamentary elections. In other words, the new Indian government, which must be sworn in before May 26, would need to renegotiate the waiver.

India is predictably annoyed with the Trump sanctions. The general consensus in New Delhi is that India should ignore the regime and keep strengthening its general ties with Iran. But diplomatic pundits concede that it is easier said than done due to the U.S.'s overall importance for India.

Indian government-owned refiners have booked crude imports of 1.25 million tons from Iran for November. This is in line with recent purchase levels -- last financial year, ended March 2018, India bought 22 million tons of crude from Iran, or close to 10% of its total oil imports.

Indian diplomats maintain that cutting down imports from Iran would only hamper the country's economic growth as the country lacks sufficient energy resources of its own -- imports are 82% of total demand for oil and close to 50% for natural gas.

A frustrated India has decided to maintain oil imports from Iran as long as possible and, at the same time, wait and see how the U.S. implements further measures against Iran. The majority view is that India's crude imports from Iran would have already come down significantly by March, mainly due to the shortage of crude tankers and insurers willing to deal with such cargoes with sanctions in place, since most shipowners and insurance companies have ties with the U.S.

The means of payment would be another headache. Iran prefers all payments in American dollars, but India knows that Trump's sanctions mean this option is no longer available. Payment in Indian rupee would be an alternative. However, Tehran is reluctant, already asking what it would do with so many rupees. Meanwhile, India has allowed a private Iranian bank to open a branch in Mumbai, which some oilmen claim could open up the way to using currencies of other developed countries.

At risk, to India's horror, are several Iran-linked projects worth billions of dollars. New Delhi is keen to expand its role in Iran's huge Chabahar port development, seen by India as a gateway to landlocked Afghanistan, where the Modi government has spent billions in building infrastructure, including hospitals, roads and power plants.

India has also offered to invest up to $12 billion in Iranian oil and gas exploration and production and LNG projects, with a focus on the Farzad B gas field development. A New Delhi-based government company, ONGC Videsh Ltd. (OVL), discovered Farzad B in 2009, but it could not develop it due to the previous West-led sanctions. OVL, backed by the government, now wants to buy a controlling stake and secure operating control of Farzad B, but Iran is reluctant to give this up. India looks certain to press ahead with strategic projects such as Chabahar port, but projects that are purely commercial may suffer delays and even cancellations.

It is clear that the Trump sanctions have come at the time when India probably needs Iran more than ever before.

But what is less obvious is that the US could itself one day benefit from closer New Delhi-Tehran ties. The bilateral partnership with Iran will over time strengthen India's footprint in the Middle East and Central Asia. The influence of a stable democracy in a troubled part of the world would serve American interests by promoting both stability and democracy, not to mention countering China.

But India's frustration is: how does one explain such a long-term strategy to the short-term-minded, "transactional" Donald Trump?

Narendra Taneja is chairman of the Independent Energy Policy Institute, a New Delhi-based think tank.

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