How the U.S. Is Complicating India's Relationship With Iran

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The U.S. waiver allowing India to import oil from Iran doesn't resolve New Delhi's dilemma on its relationship with Tehran, which is facing fierce pressure from Washington.

India still sees advantages in cooperating with Iran on energy and regional security, but the great power competition is an additional complication in navigating its ties with Tehran.

If the United States renews its harshest demands on Iran's oil trade, India may further cut those imports while offering greater concessions to Washington in other areas. But New Delhi will not ask its state-owned energy companies to eliminate oil imports from Iran.

India is facing some hard choices on its ties to Iran in 2019. Oil is crucial to their relationship, and the United States has been targeting Iran's exports of crude with sanctions. Though Washington has given eight countries, including India, a waiver from those penalties, that reprieve lasts until only March. And while New Delhi values its growing ties with the United States, it doesn't want to appear to be subservient to any great power. The question boils down to this: How far will New Delhi go in accommodating U.S. pressure in light of its own interests in the region and the world?

The Big Picture

Stratfor's 2019 Annual Forecast notes that the United States and Iran are on a collision course if U.S. sanctions persist as a major tool of containment policy. India is a major importer of Iranian oil and faces tough choices in navigating its Iranian and U.S. relationships.

Oil, Markets and Mutual Interests

With 1.3 billion consumers, India represents a massive market for the hydrocarbon exporters of the nearby Persian Gulf. Its oil imports are growing at 5 percent a year, adding to its enormous trade burden, and demand isn't expected to level off anytime soon. To ensure its energy security, India has always aimed to diversify its basket of importers among the Gulf Cooperation Council states, Iraq and Iran. But with Iran, India gets favorable credit, insurance and shipping terms. These are valuable incentives to a country where imports make up about 83 percent of oil consumption. In addition, Indian conglomerates such as Reliance Industries, with their large refining capacities, have done lucrative business exporting refined oil products to Iran.

But Indian-Iranian interests go beyond energy security. Both countries border Pakistan, which India considers to be the security threat with the highest potential for major conflict. Following the ideas of ancient Indian geopolitician Chanakya, New Delhi sees the neighbor of a rival as a potential partner. It helped — until recently — that Iran and Pakistan had their own differences rooted in sectarian tensions. Thus, New Delhi has long angled for a friendly Iran that could pose as a hedge against Pakistan. And Iran has seen India's goal of a multipolar world order as being aligned with its interests in diluting America's global dominance.

The two countries have historically had their strongest strategic convergence on Afghanistan. The Taliban government was implacably hostile to New Delhi and allegedly played a supportive role in the deadly hijacking of an Indian airliner in 1999. India has been committed to prevent its return to power. In the past, Iran also has seen the Taliban's anti-Shiite strains as a threat, and the two nearly fought a war in 1998. Both India and Iran strongly backed the Northern Alliance well before the United States realized the magnitude of the terrorist threat and ousted the Taliban government after the 9/11 attacks. 

In another key area of cooperation, New Delhi and Tehran are developing the Iranian port of Chabahar. Pakistan cuts India off from land routes to its west, and the Chabahar development will help break this isolation. Its expansion will enable a north-south corridor for greater trade with Central Asia and provide India with connections to the strategic terrain of Afghanistan. India has promised $500 million to expand three berths in the port and to build a rail line connecting it to the border city of Zahedan, the gateway to Afghanistan. Recognizing India's constructive role in Afghanistan, Washington included Chabahar in its Iran waiver.

Bilateral Irritants

However, New Delhi and Tehran have had their differences. India has consistently backed the international community in pushing for a non-nuclear Iran. It voted with the United States in 2005 on the crucial resolution from the International Atomic Energy Agency referring Iran to the U.N. Security Council; the resolution paved the way for multilateral sanctions and eventually led to the Joint Comprehensive Plan of Action, commonly known as the Iran nuclear deal. Tehran lodged a strong protest against this vote with New Delhi and canceled a liquefied natural gas deal with India in retaliation.

In Kashmir, Iran has occasionally given diplomatic support to dissidents fighting Indian control. It reportedly financed an anti-New Delhi coalition during the controversial 1987 elections in the valley, and the Iranian supreme leader has implicitly criticized Indian actions there. Relations have also been ruffled by India's 2008 launch of an Israeli spy satellite reportedly aimed at Tehran and by Iran's alleged involvement in a 2012 terrorist attack on Israeli diplomats in New Delhi.

Their disagreements have also extended to the energy trade. A deal on a natural gas field, discovered by India's state-owned energy company ONGC, soured in 2010. And talks between the two countries on constructing a major gas pipeline have never been revived after falling apart in 2008. Iran and India view each other as tough bargainers and not always easy to please.

But these differences have not led to a serious fallout. Tehran has offset its sometime involvement in Kashmir by occasionally siding with New Delhi over Islamabad. And Iran has not made the India-Israel partnership a major issue, while India has carefully stayed neutral in the Saudi Arabia-Iran rivalry. Furthermore, sharp disagreements on business deals are not unheard of in international affairs, even among staunch allies. In general, India and Iran see each other in pragmatic terms. Left to themselves, they would be far more likely to choose cooperation over antagonism.

In the short term, New Delhi is most worried about the escalating U.S.-Iranian confrontation.

Great Power Complications

In the short term, New Delhi is most worried about the escalating U.S.-Iranian confrontation. Continued regional tensions and energy market volatility present the most likely risks, and they could affect the general election in the first half of 2019, which is expected to be competitive. A military clash in the Gulf is also plausible, which could choke off the oil and gas shipments to India that pass through the Strait of Hormuz. The conflict could also endanger the lives of more than 7 million of its expatriates in the region, who also send back valuable remittances. 

Over the long term, the great power competition could challenge the India-Iran relationship in new ways. The U.S. pullout from the JCPOA is helping to drive Iran closer to China and Russia, in particular. Moscow is already the great power guarantor of the government of President Bashar al Assad in Syria, long closely allied with Iran. And the Kremlin could deepen its security role in Iran if the confrontation between Tehran and Washington escalates. China's stakes in Iran are more complex, but Tehran remains a vital component of Beijing's Belt and Road Initiative strategy.

The great power competition has also cast its long shadow over the Afghan conflict. The Taliban, long backed covertly by Pakistani security services, now have an upper hand in America's longest war. Any negotiated settlement is likely to legitimize the Taliban's hold on power in large parts of the country. Ironically, traditionally anti-Taliban Iran has, along with Russia, become a supporter of the Sunni militant movement. Broadly speaking, Russia, China and Pakistan have good reasons to draw even closer to Iran, leaving India at a distinct disadvantage in the jockeying over Afghanistan.

Adding Up the Costs and Benefits

Though India can breathe a sigh of relief on U.S. oil sanctions, it is only a matter of time until Washington comes knocking again. The waiver allows India to import up to about 305,000 barrels of oil a day — down 30 percent from fiscal year 2017-18 and 45 percent from fiscal year 2016-17. When the United States exerted such pressure during the Barack Obama presidency, India got time to reduce imports more gradually, and the cut never exceeded about 50 percent. Moreover, the pre-JCPOA sanctions against Iran were multilateral, with the force of international law behind them, making it much easier for New Delhi to comply.

But the Donald Trump administration's unilateral demands for zero imports carry greater costs for New Delhi. In the short term, such a move will worsen India's trade deficit. And India will not get the easy commercial terms it has enjoyed with Tehran (a 60-day credit window, for instance). Also, cutbacks by New Delhi of this magnitude will tend to push up global oil prices, because India is the second-largest destination for Iranian oil. Even if the United States continues to exempt the Chabahar project from sanctions, Iran may end India's participation in retaliation for cutting off imports.

However, Washington's anti-Iran campaign does offer certain opportunities for India. U.S. pressure — up to a point — increases New Delhi's bargaining power with Tehran, and not on just oil deals. The use of each other's currencies in bilateral trade — a practice instituted during the last phase of sanctions, and now revived — benefits India's agricultural exporters and helps reduce its trade deficit with Iran. But these advantages are neutralized in extreme scenarios, such as the one being pursued by the Trump administration.

Washington's campaign also has long-term strategic costs. Nonalignment may be dead in New Delhi, but its successor, dubbed strategic autonomy, remains alive. If anything, it has experienced a revival of sorts in recent months as evidenced by the reset in India-China relations and India's resistance to U.S. sanctions on countries doing business with Russia.

India values its image, particularly among the middle powers, as an independent actor. By agreeing to fully comply with Washington's unilateral demands on isolating Tehran, opposed by practically every other major power including Europe, India risks this image. And if it gives in to the United States, India's rivals — China and Pakistan — will gain a greater voice in Tehran. Voices both within and outside India's influential foreign policy bureaucracy will also oppose such an extreme step.

On the flip side is India's strong relationship with the United States, a key aspect of its grand strategy. Those ties have steadily deepened to the point where Washington is now New Delhi's most valued strategic partner. The government of Prime Minister Narendra Modi has been perhaps the most pro-Washington administration in Indian history; it signed a far-reaching set of defense interoperability agreements during 2018, and their unstated target was China. India will be extremely reluctant to risk this relationship, especially with an unpredictable figure in the White House.

Unappealing Options

Caught between a rock and a hard place, India will give in to some of Washington's demands. To avoid open confrontation with the Trump administration, New Delhi will make a concerted effort to extend the waiver by offering concessions in other areas. These proposals could include greater imports of U.S. energy, defense and other products. (Its imports of U.S. oil are already on an upswing.)

But New Delhi will not ask its state-owned energy companies to eliminate oil imports from Iran; it will shelter them from U.S. sanctions using rupee payments and alternative means of shipping and insurance. It will also press ahead with the Chabahar project now that it has a green light from Washington. 

If India is fortunate, the United States will walk back from its all-or-nothing policy on energy trade with Iran and extend its waiver. This would allow India to stake out a middle ground that it can live with and even benefit from. If India is unfortunate, the U.S.-Iranian standoff will harden and even escalate into an attack on Iran proper. India will oppose any such attack because it will become one of its biggest collateral victims. Considering all these conflicts, 2019 promises to be another stormy year in the India-Iran relationship.