Understanding foreign relations between India and Iran

Rick Rowden - Doctoral Researcher, Centre for Economic Studies & Planning, Jawaharlal Nehru University (JNU), New Delhi

Until the partition of the sub-continent and creation of Pakistan in 1947, India and Iran had long shared a common border as neighbours, with cultural and linguistic ties between the two ancient civilizations going back thousands of years. Indeed, the legacy of Persian influence on Mughal architecture stands to this day in major structures from Lahore to New Delhi, not the least of which includes the famous Taj Mahal. Shortly after Indian independence, the two countries established formal diplomatic relations in 1950.

However, during the early decades of the Cold War, India was aligned with the Soviet Union while Iran, under the Shah, was aligned with the US, which dampened their bilateral relations. Following the 1979 revolution in Iran, India-Iran foreign relations remained strained as Iran supported Pakistan in the long-standing India-Pakistan rivalry, while India supported Iraq during the Iran–Iraq war in the 1980s. But following the end of the Cold War in the 1990s, bilateral relations between India and Iran improved, and the two nations signed a defense cooperation agreement in 2002.

Even as relations improved, however, the countries have disagreed over the NATO occupation in Afghanistan, which India supports and Iran opposes, and over Iranian attempts to build a nuclear programme, which India opposes. Yet, despite these differences, overall diplomatic and economic relations between India and Iran have improved and deepened in the new millennium. For example, India is one of Iran’s best customers for its oil exports.

A love triangle gone bad – India, Iran and the United States

In seeking to understand India-Iran relations, the first thing to consider is how they have been impacted by each country’s relationship with the United States. While the US has considered Iran an adversary since the 1979 Islamic revolution overthrew the pro-US regime under the Shah, it considers India as an important strategic ally, particularly in efforts to contain the growing power of China. The US became closer to India following a breakthrough 2005 civilian nuclear energy deal under which India agreed to separate its civil and military nuclear facilities. The deal saw India agree to place all its civil nuclear facilities under the supervision of the International Atomic Energy Agency (IAEA) in exchange for US cooperation in developing its civil nuclear energy programme (although the deal has been delayed over concerns about liability in the event of a nuclear accident and the financial troubles of the US nuclear energy giant, Westinghouse). The US and India became even closer in 2015, when they signed a 10-year defense agreement that opened the way for huge US military hardware sales to India in exchange for India providing the US military access to its harbours, airfields and bases.

Meanwhile US relations with Iran over the last decade have deteriorated. In 2006, the US led an effort at the UN to impose international economic sanctions against Iran after it refused to suspend its uranium enrichment programme. Following this, India was pressured by the US to curtail its purchases of Iranian crude oil, despite its dependence on such imports. At one point, in 2009, India was pressured by the US to vote against Iran and support sanctions at the UN. However, despite this, India got the US to give it waivers to continue purchasing oil from Iran, which the Obama administration allowed for a certain period. Additionally, India was forced to deposit Iranian payments in a bank account in Kolkata while it waited for sanctions to ease before being allowed to transfer the payments. These difficulties sometimes reduced trade relations to simple bartering in which India traded its rice for Iranian oil.

Following the Joint Comprehensive Plan of Action, signed between Iran and the five permanent members of the UN Security Council and the European Union, in 2016 which saw Iran agree to scale back its nuclear programme the UN sanctions against Iran were finally eased and India began increasing its purchases of Iranian crude oil. India was also finally able to transfer nearly $6 billion in back payments for Iranian oil, and Indian Prime Minister Narendra Modi held a bilateral summit with Iranian President Hassan Rouhani in Tehran in May 2016 in an effort to renew relations. However, because separate unilateral US sanctions remain in place, Indian banks with exposure in the US remain reluctant to finance new Indian trade and investments in Iran.

India on the outside: China’s Belt and Road Initiative (BRI)

Beyond these distortions caused by the India-US-Iran triangle, there are a range of important proposed infrastructure projects on the horizon, all of which provide a window into other shifting geostrategic relationships across Asia. All of them are a response to the super-ambitious China-led infrastructure plan to develop an expansive set roads and railways that would cut across the Central Asian heartland and link China’s eastern seaboard with Russia and Europe as well as all of South Asia, known as the One Belt One Road (OBOR) initiative, or now called the Belt and Road Initiative (BRI). As the biggest infrastructure project ever proposed, the plan is historic, carries tremendous geostrategic implications, and could ultimately include over 60 countries.

However, the Indian government has refused to join the China-led endeavour. India is particularly angry that one small portion of the BRI, the China-Pakistan Economic Corridor, cuts across the Pakistan-controlled side of Kashmir, which India claims is legally part of its state of Jammu and Kashmir.

Chabahar Port and new trade routes

One major initiative between India and Iran is the long-planned Indian investment in the expansion and development of the port of Chabahar on Iran’s Arabian Sea coast. The project is central to India’s hopes to open a new transport corridor for Indian exports into Central Asia and Afghanistan that would bypass its main rival, Pakistan. India committed $500 million to the project as soon as it was clear that UN sanctions on Iran would be lifted. Many see the proposed project as India’s answer to China’s development of Pakistan’s Gwadar port, which lies barely 100 km east of Chabahar on the Pakistani coast.

And Japan, which shares India’s concerns about the growing economic and military strength of China, is likely to partner with India on the development of the Chabahar port in Iran, as well as an adjoining special economic zone. In fact, as part of their response to China’s BRI, India and Japan are partnering in what they call the Freedom Corridor, which would create new road, rail and shipping routes that would stretch from South East Asia to Sri Lanka, Iran and Africa. However, due to continuing US sanctions and a hostile Donald Trump administration, European companies are reluctant to supply equipment for India’s project in Chabahar for fear of renewed sanctions on Iran.

During Modi’s visit to Tehran in 2016, the leaders of India, Iran and Afghanistan signed the Trilateral Transit Agreement (TTA) that established the trade corridor that would link the Chabahar port to Afghanistan. India has also proposed ambitious investment plans for Chabahar’s development, including financing to build railways, roads and fertilizer plants that could eventually amount to $15 billion. The deal is of interest to landlocked Afghanistan because the TTA would provide it with an alternative route to the seas, and hence strengthen its bargaining power with Pakistan by reducing its current dependence on the Karachi port.

The International North-South Transportation Corridor

Another major project is India’s proposed International North-South Transportation Corridor (INSTC), which would develop a network of ship, rail, and road routes for moving goods over 7,000 km from India’s western ports up to the Iranian port of Bandar Abbas, run north through Iran to its Caspian sea port of Bandar Anzali, then across the Caspian Sea to the Russian port of Astrakhan and on to markets in Russia, Europe and Central Asia. The INSTC, which is also seen as an Indian response to China’s BRI, would greatly reduce costs over the current shipping route which runs through the Suez Canal, the Strait of Gibraltar and around the top of northern Europe.

The Farzad B gas field

Finally there is India’s investment in developing Iran’s Farzad B offshore gas field, which is believed to contain up to 12.5 trillion cubic feet of natural gas. The Indian company ONGC Videsh Ltd (OVL) first discovered the field in 2008 and has been in discussions with Iran over the development of the field ever since. After sanctions were lifted on Iran, it was expected an agreement would quickly be reached and production could finally begin. However, discussions are bogged down over disagreements. India has blamed Iran over what it claims are unsatisfactory terms for an agreement, while Iran is unhappy with the $5.5 billion offer by OVL. To put pressure on one another, Iran first cut the time it gave to Indian refiners to pay for oil they buy from it by a third and raised shipping freight rates; in response India began reducing its imports of Iranian oil. Iran then signed an alternative agreement with the Russian company, Gazprom, for the development of the field; and in response, India announced plans to reduce its imports of Iranian crude oil by 20 per cent in 2017-18. Despite the pressure tactics, both sides insist a deal will eventually be worked out.

Shifting sands

Lingering questions about US policy and worsening Sunni-Shia tensions in the Persian Gulf are both factors that create uncertainty for the future of India-Iran foreign relations. Yet, whatever happens next, this bilateral relationship is sure to continue offering fascinating insights into a host of other important developments that are reshaping geopolitics across much of Asia.