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Rouhani’s visit a reality check for Iran-India relations

Trade connectivity overtakes energy as Tehran and New Delhi move to forge closer cooperation.

At first glance, Iranian President Hassan Rouhani’s recent visit to India made news for all the right reasons. The three-day tour Feb 15-17, his first state visit to India, revolved around furthering economic engagement between the two countries. The optics were great, and the announcements following his “substantive talks” with Indian Prime Minister Narendra Modi received praise. Close observers would have noted, however, that the visit did not break new ground. Rather, it laid bare the reality that both sides are hedging their bets based on the potential exit of the United States from the major powers' nuclear deal with Iran.

Indeed, Iran is once again wooing its Asian customers and partners as European investments continue to be held hostage to President Donald Trump’s rhetoric against the nuclear deal and, more broadly, Iran. India, though keen on the potential gains from the Joint Comprehensive Plan of Action (JCPOA), now anticipates the fallout of a US exit and has recalibrated its investments and expectations accordingly. New Delhi has repurposed its to-do list on Iran, culling it to the absolute essentials key to New Delhi’s primary strategic interest in its neighborhood — namely, connectivity.

India has long worked toward linking its ports to the southeastern Iranian port of Chabahar to be able to bypass Pakistan in moving goods to and from Afghanistan. The route via Iran cuts transit costs and saves time while also offering access to landlocked Central Asia and beyond. It is this connectivity that chiefly drives the relationship between India and Iran today. India is currently financing an upgrade of the Shahid Beheshti Port in Chabahar and is set to spend around $85 million to equip two new terminals by the end of the year. It will also operate the new terminals with an initial 10-year lease.

The Chabahar port project has not, however, been spared the risks associated with Washington's tough talk. A private Indian firm will be responsible for the operation and maintenance of the new terminals and thus integral to its success. The bidding process to select a firm has taken more than a year, and at least two rounds, with the Indian Ministry of Shipping now determined to announce a winner by the end of March. Although the Iranians were keen to attract European equipment for their new terminals, no preferred firms entertained bids. As a result, Shanghai Zhenhua Heavy Industries Company (ZPMC)— a Chinese crane company that in an interesting twist is banned in India — has surfaced as the first to supply equipment.

The long bidding process and other issues forced India and Iran to sign an interim 18-month lease during Rouhani’s visit so the Indians can begin operations in Chabahar with the available Iranian equipment. Still, the lease signing indicates that India is not wavering from the project, and has also communicated this to the United States. When US Secretary of State Rex Tillerson visited India late last year, he responded to a question on Chabahar by saying the United States would not interfere in “legitimate business activities” that would benefit its friends. Still, given Trump’s temperament and the State Department’s seemingly reduced standing in the White House, how much India should really invest in this statement remains anyone’s guess.

Meanwhile, Iranian-Indian energy ties have been relegated to second place. This has less to do with the tensions over the nuclear deal and more to do with a stalemate between India and Iran over an Iranian natural gas field. India had hoped to expand its footprint in Iran’s oil and gas sectors starting with the Farzad B gas field, which it had hoped to develop, in a process dating to 2009. Even after sanctions were lifted, negotiations broke down repeatedly, with both sides engaging in the blame game. By mid-2017, India began moving away from the project and decreasing its oil imports from Iran to signal its displeasure.

New Delhi’s gambit, in part based on fears of sanctions returning, seems to have worked. The Iranian delegation accompanying Rouhani reached out with a proposal for an increased freight discount if New Delhi bumps up its oil purchases. In response, India reasserted its interest in Farzad B along with a new proposal for the South Azadegan oil field. Indian Oil Minister Dharmendra Pradhan acknowledged that such special treatment would incentivize India to boost imports from Iran.

If unilateral US sanctions are imposed on Iranian oil exports, India is better positioned to deal with such a scenario. Unilateral US sanctions targeting Iranian oil exports from 2012 to 2014 cost India dearly, causing New Delhi to prioritize diversification.

Current Iran-India ties are positive in that both sides are working to keep at least an aspect or two of their relationship going. On the flipside, this also means that the “India-Iran strategic partnership” — designated as such in 2003 — lacks depth. A broader conversation between the two countries has been hard to develop. Diverging strategic and political interests in their neighborhood is one reason. India and Iran have been unable to recreate their 1990s partnership in Afghanistan as their goals have diverged.

Iran’s active engagement with the Afghan Taliban, for instance, is anathema to India’s strategic interests in Afghanistan. Iran’s strategies in the Middle East have raised concerns in New Delhi, which watches the deepening Saudi-Iran rivalry with trepidation given the estimated 7 million Indians residing across the Persian Gulf region in Gulf Cooperation Council states. In sharp contrast, such strong people-to-people ties are absent between India and Iran, while business connectivity remains low. Trade between the two stands around $13 billion, while in contrast, that between India and the United Arab Emirates is $60 billion.

India and Iran are looking to swiftly conclude a preferential trade agreement and a bilateral investment treaty. Newly relaxed visa norms announced by Iran in addition to Modi’s unique proposal for Indian businesses to invest in rupees in Iran are all moves in the right direction. Nonetheless, they may be insufficient to cement commercial ties if sanctions do return. The oft-used catchphrase of “historical and civilizational relations” can only steer ties so much. Rouhani’s visit proved to be a much-needed reality check to the India-Iran partnership.

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