For India, an Iranian Question

April 2, 2012 • Blogs, The Globalist Notebook • Views: 867

by Rachel Brown

On Friday, the Obama administration announced that conditions in the global oil market were stable enough to allow for the implementation of new sanctions on the purchase of Iranian oil. While eleven nations are exempt from these sanctions, China and India, two of Iran’s largest oil customers, did not make the list. As tensions continue to rise between Iran and the U.S. over the Iranian nuclear program, the deep trading relationship between Iran and India may become a thorn in the side of the normally close U.S.-India alliance.

India is the second largest purchaser of Iranian oil, and imports approximately 12% of its oil from the Islamic Republic. This trade amounts to approximately $12 billion. Some Indian oil refineries are even specifically designed to use crude oil from Iran and the designs of these refineries would need to be adjusted to accommodate oil imported from other nations. If necessary, however, India can decrease oil purchases from Iran, and has in fact already begun to do so. One solution would be for India to buy more oil from Saudi Arabia, already India’s largest supplier.

Even in this situation India is not likely to stop purchasing Iranian oil entirely, and once the U.S. sanctions are imposed Indian companies will be forced to alter their payment methods for Iranian oil. In order to adapt to the new rules, India and Iran have decided to allow for up to 45% of Indian oil imports to be purchased in rupees. Rupees are not as useful to Iran as dollars or euros would be, because they allow the nation to make purchases in a much smaller number of markets. India may also may for some its Iranian oil through barter of agricultural and commercial products. As long as India continues to cut back purchases overall, using such methods to procure oil is not technically a violation of the sanctions.

This new rupees-for-oil policy will also help India increase its exports to Iran, a goal India had been working towards even prior to the most recent sanctions announcement. In March, India sent a 70-person trade delegation to Iran. The delegation, led by the Federation of Indian Export Organizations, was looking for ways to increase Indian exports to Iran and bring down the nearly ten-billion dollar trade imbalance between the two nations. Discussing the trip, Indian Commerce Secretary Rahul Khullar, noted that “huge opportunities” exist for Indian companies to sell pharmaceuticals, textiles, and other products in the relatively isolated Iranian market. Iranian officials have also expressed a positive outlook on ties between India-Iran, with President Ahmadinejad saying that relations“…are on the right track,” and a former foreign minister stating that “India and Iran are working for each other’s national and regional interests regardless of what the US wants us to do.”

Another important link between the two nations is India’s dependence on Iran for land access to Afghanistan, since routes through Pakistan are blocked. The Indian government helped modernize the Iranian port of Chabahar and financed the construction of a road connecting this port with Afghanistan. As India increases its investments in Afghanistan’s natural resource industry, the strategic value of this transit route through Iran will grow as well.

The tensions surrounding the Iranian nuclear program pose a challenge for Indian foreign policy.

The Indian government walks a fine line in its relationship with Iran however. The Indian government opposes Iran’s possession of a nuclear weapon (but not of a peaceful nuclear power program) and has expressed irritation with Iranian leaders over remarks by Ayatollah Ali Khamenei on the Kashmiri independence movement. Additionally India has strong relations with both the U.S. and Israel – two of Iran’s harshest critics, and these ties impact New Dehli’s calculus on Iran. Recently, India has indicated more willingness to restrict trade with Iran and the government has begun pressuring oil companies to decrease their purchases from Iran. Two weeks ago, a spokesman from the Indian Embassy in Washington announced “crude imports from Iran constitute a declining share of India’s oil imports.”

India’s stance on Iran remains a hot topic in Indian foreign policy circles. Many see India’s struggle to balance its competing interests surrounding Iran as part of the larger discussion on the extent to which the West should influence India’s international relations. India was a key member of the Non-Aligned Movement and some maintain that India should not appear to succumb to Western demands. In an article on India-Iran relations, Kanwal Sibal, a former Indian foreign secretary, argued that “the US should not expect India to share its apocalyptic view of Iran’s nuclear ambitions” and that “India’s rising global role should not require it to give up independence of judgment or always endorse western policies.” Others argue that taking a stronger stance against Iran could in fact strengthen India’s role on the world stage. Writing in Foreign Policy magazine, Sadanand Dhume, a resident fellow at the American Enterprise Institute, noted that “an Indian policy that privileges ties with Iran ahead of the U.S.-India relationship misses the forest for the trees, damaging India’s long-term global aspirations in the pursuit of short-term regional ones.” No matter what the Indian government ultimately decides regarding trade with Iran, these competing perspectives on Indian foreign policy will remain and continue to shape U.S.-India relations.

Rachel Brown ’15 is in Saybrook College. She blogs about current events in South Asia, and has also reported on China  for the print version of the Globalist. Contact her at rachel.brown@yale.edu.

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