Big dilemma for Modi government: Why there are economic and strategic costs to weakening relations with Iran

By: | Published: August 6, 2018 2:58 AM

There are economic and strategic costs to weakening relations with Iran, but even greater downsides of ignoring Donald Trump. Earlier, when Barack Obama instituted sanctions against Iran, India responded by slowing its imports of Iranian crude. It did not win plaudits from Iran, but given the international support for sanctions, Iran was deterred from severing relations. Now, however, the situation is different.

There is the China-factor, too. China has reportedly expressed interest in the Chabahar Port project and Iran may well be responsive if India tacked too closely to America.

Ironically, US President Donald Trump’s erratic approach to international relations has made it easy for India to respond to his latest demand that India reduce its imports of Iranian crude oil to zero by the November of this year. This follows his decision to withdraw from the Joint Comprehensive Plan of Action (JCPOA)—the agreement signed in July 2014 after years of arduous diplomacy by Germany, the UK, China, the US, Russia, France and Iran, to contain Iran’s nuclear programme, and endorsed by the United Nations in July 2015—and to reimpose sanctions on Iran.

Were the demand grounded in law and supported by the international community—as was the case when the Barack Obama administration imposed sanctions before the JCPOA was signed—India may have faced a more challenging dilemma. For, Iran is an important supplier of crude oil to India, and the Chabahar Port development on the southern coast of Iran—which is currently part-financed and led by an Indian consortium and which, when completed, will offer India overland access to the Central Asian market without having to cross Pakistan—does offer us strategic benefits.

On the other hand, America is a mightier economy and India’s “permanent interests” would be more severely impacted if its companies were sanctioned under the US law CAATSA (Countering America’s Adversaries Through Sanctions Act), which empowers the US administration to impose sanctions on companies that have an association with the Iranian Revolutionary Guards. India would then have to walk a tightrope between securing uninterrupted supplies of oil vis-a-vis Iran and, at the same time, protecting its strategic interests encompassing defence, trade, services and technology vis-a-vis America.
As it happens, though, Trump’s demand is not grounded in law, nor does it have the support of the international community, and nor is there evidence that Iran has failed to comply with the conditions of the JCPOA. More pertinent, it is a demand that reflects the personal predilections of an individual and not the opinion of the foreign policy establishment. India cannot cock a snook at the US President, but it should not, under the circumstances, expose itself to the criticism of being unprincipled and a fair-weather ally.

Looked at through the lens of oil-supply security, India has options to divert supplies away from Iran. We could source comparable quality crude oil from Saudi Arabia, Iraq, Kuwait and Venezuela. The switch would cost us, but this increase would be affordable. We would face tighter commercial terms—Iran currently offers 90-120 days’ credit, this would reduce to 30 days; the freight rates would increase because we would not receive the discounts provided by Iranian tankers, and the price might rise depending on the price differential between Iranian heavy and the lighter crudes. The increased costs would not, however, be financially material.

The larger worry arises from the possibility that Iran might decide to blockade the Strait of Hormuz, through which flows almost 22 million tonnes of oil annually. Decision-makers have assumed that Iran does not have the capability to do so, but Admiral James Stavridis, the former Supreme Commander of NATO forces, has forewarned against such complacency. He has written: “Iran could use a variety of means to close the Strait, including widespread mining, swarms of small ultra-fast patrol-posts, onshore-based cruise missiles, manned aircraft and diesel submarines … they would employ a layered offence”. A blockade, even for a few days, would totally disrupt the market and lead to an explosion in prices. If for no other reason than to prevent such a step, India has to and must remain engaged with Iran.

Looked at through the lens of geopolitics, the weakening of ties between Iran and India would give China the space to embed itself further into the nub of the Middle East. China has said it will not comply with the sanctions’ demand and it has not discouraged its companies from investing in Iran. It has, in fact, reportedly, expressed interest in the Chabahar Port project and Iran may well be responsive if India tacked too closely to America.

Prima facie, therefore, India is on the crux of a dilemma. There are economic and strategic costs to weakening relations with Iran. But even greater downsides of ignoring Trump. Earlier, when Obama instituted sanctions against Iran, India responded by slowing its imports of Iranian crude oil. It did not win plaudits from Iran, but given the international support for the sanctions, Iran was deterred from severing relations. Now, however the situation is entirely different. A similar response may be advisable, but it is less defensible. Also, perhaps less required. For, aside from the fact that the American demand does not have legal or international support, it is not even clear whether Trump will stay with his position. He may do a flip-flop once he has appeased his political base for whom Iran remains a part of the “axis of evil”.

Fareed Zakaria has, in his recent article in the Washington Post, described “Trump’s two-step” approach to foreign policy. To paraphrase, it operates as follows: First, hurl an insult or threaten Armageddon, then calm the resultant crisis by offering “unilateral concessions”, and finally claim success for resolving the crisis created by the initial insult. Thus, Kim Jong-un was first a “madman who (did not) mind threatening or killing his own people”, and then a saviour, a leader “loved” by his people and with whom he (i.e. Trump) was happy to talk. Thus, most recently, a twittered threat in “BOLD” letters against Iran: “(It) must never ever threaten the US again or (it) will suffer consequences the likes of which few throughout history have ever suffered”, and then, last week, the willingness to meet its leadership “without preconditions”. Zakaria points out that, whilst Trump and his supporters may believe he is playing a smart game, the fact is this “bluster and flip-flopping … is creating a reputation for the US as erratic, unpredictable, unreliable and fundamentally hostile to the global order”.

In such an environment, India should do no more than stay true to its principles.

-The author is Chairman & Senior Fellow, Brookings India

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