Intro: The US-Iran nuclear deal will have a long term economic and strategic implications. Despite apprehensions, India will have to find its own ways of dealing with the deal.
The successful conclusion of the Iran nuclear talks has exposed the deep polarisation in West Asia, and the Muslim world. Israel and the Sunni powers led by Saudi Arabia lobbied hard against the deal; in fact the Israeli Prime Minister Benjamin Netanyahu travelled to Washington DC and addressed the US Congress directly bypassing President Barack Obama. On the other hand, many see the deal as much more than what it is agreed upon. Both the US and the Iranians have stated that the agreement should not be seen as anything more than that. But is this really true?
India has a vital stake in the success of the Iran agreement whose fallout would pose significant economic and political opportunities and challenges. Due to the comprehensive sanctions made worse by falling oil prices, Iran’s economy is in doldrums with very high levels of inflation and unemployment. President Hassan Rouhani’s surprise election victory in the first round itself was attributed to him been seen as somebody who could revive the economy by scaling back/ending the sanctions.
With the phasing out of sanctions, Iran would be able to increase oil sales, which have come down from a high of 2.4 million barrels per day (B/D) to 1.6 million B/D. This would moderate oil prices, which would suit India. Further Iran would be able to attract and invite much needed investment in its oil and gas sector. For this alone India should welcome the nuclear agreement.
Before the full weight of sanctions hit Indo-Iranian economic relations, Iran was India’s second largest supplier of crude, in the range of 425,000-450,000 barrels per day (B/D). Now it has come down to 220,000 B/D, making Iran only the 7th largest supplier to India. Further Iran has accumulated the equivalent of US$ 8 billion plus in an Indian bank rupee account, which it has been unable to use since its import basket from India is limited–rice, sugar, tea, medicines etc.
In fact because of this cash balance that Iran has accumulated in an Indian bank, Iran has stepped its imports from India, which grew from just around US$ 2.2 billion three years ago to US$ 5 billion last year. Till not so long ago, India was Iran’s second largest export destiny, accounting for 19 per cent of all Iranian exports (US$ 11 billion); China topped the list at 35 per cent or US$ 21 billion. But India was only Iran’s fifth largest source of imports, 5 per cent (US$ 2.5 billion). The question is – can India maintain and build on its market share of Iranian imports, or will it lose share now that Iran will be able to source the international markets?
A number of apprehensions have been expressed. Indian exports would face pressure on account of increased competition since with Iran being able to access it foreign currency, using Indian rupees accumulated here. These fears are valid but can be overcome. That is essentially an economic issue that Indian business must handle. But can it make a quantum jump in broadening and deepening economic relations, looking at the broad complementarities of the two economies? It is here that economic relations generally, with trade as a subset, crosses over from economics to politics.
Though Iran did buy nuclear technology and related machinery from Pakistan, relations between the two remain fraught. The frequent attacks on Shias by terror groups patronised by the Pakistani establishment upsets Iran. Insurgent groups of the Iranian province of Sistan-Balochistan like Jundullah, who happen to be Sunni, occasionally seek shelter in Pakistani territory. And it almost went to war with the Taliban regime of Afghanistan when the latter brutally killed eight Iranian diplomats at the Mazar-i-Sharif consulate. Iran, with India and Russia gave assistance to the Northern Alliance as it tried to fend off Taliban’s advance. In the aftermath of the overthrow of Taliban, Iran cooperated with the US in facilitating the establishment of a new Afghanistan.
However, with President Bush placing Iran as one of the three sponsors of state terrorism (‘axis of evil’), Indo-Iranian bilateral relations entered a challenging phase. India twice went along with the US at the International Atomic Energy Agency (IAEA) to refer Iran to the Security Council when it was found in violation of its treaty obligations. This was seen as bowing to US pressure though India did precisely what the international community had argued in the Iraq case. Later, as sanctions hardened, the Iran-Pakistan-India pipeline project was put on the backburner. Again India was seen as caving under American pressure, though the reality of India not willing to make itself hostage to an intransigent Pakistan in the matter of gas supplies. And India’s inability in the face of sanctions and presumably (wrong) strategic considerations in not going for the development of Chabahar port was seen as another misstep in bilateral relations.
However, the past seems to be left behind looking at the renewed upsurge in Indo-Iranian relations. A number of Indian ministers, the last being surface Transport and Shipping minister Nitin Gadkari, have made trips to Teheran in recent times. Prime Minister Modi’s upcoming trip was announced some time ago. Modi and President Rouhani met at Ufa, though the meeting got drowned in the excitement of the meeting with Nawaz Sharif. Pakistan’s subsequent recalcitrant behaviour and the Iranian ambassador’s interview to The Hindu brought some semblance of balance to the coverage of the strategically important Indo-Iranian relations in the Indian media.
Ambassador Gholamreza Ansari promised that Indian business would get preferential treatment in Iran, and that bidding process would be waived. He appreciated India’s role during the period of sanctions. Specifically that Iran wanted India to upgrade their railways, with projects worth US$ 10 billion. India has committed to developing Chahbahar port at a cost of US$ 90 million. With sanctions off, this port could help India access Central Asia bypassing Pakistan. It would also provide the ‘Stans’ with an alternative route to evacuate their oil and gas, and not be dependent only on China or Russia. India’s old interest in the Farzad B oilfields could be renewed. Ultimately, these would require a total investment of US$ 200 billion. If Indian companies are able to even get a part of these projects etc., they would make India a major player in the growing Iranian economy.
However, these are not yet a done deal. The geo-politics of the nuclear agreement must be analysed; its potentialities and pitfalls that must be factored in before passing judgement on how it will affect India. The key question is does the nuclear deal offer the opportunity, and challenge, of reshaping balance-of-power in West Asia? The extreme reactions of Saudi Arabia, Israel and the Republicans in the US suggest that all of them see the agreement as a precursor to a radical realignment of forces. Iran Supreme Leader Ayatollah Khamenei’s strong denunciation of the US and his reiteration that there would be no change in its West Asia policies should be seen in this light. No doubt, his taking this hard-line position against the US could be to mute the opposition among those Iranians who profit on a diet of anti-Americanism and see this agreement as a sell-out. But Khameni's statement also reflects fears that normalisation of ties with the US would weaken the Shia political doctrine that makes the Vilayat-I-Faqih (Supreme Leader) and the clerics the dominant political force in Iran.
Interestingly, the Iranian mullahs and the unlikely Saudis-Israeli partnership stand together in fearing what the agreement would lead to. The Saudis have twin fears due to the US shale oil bonanza and about balance-of-power shifting towards Iran in West Asia. US oil self-sufficiency has hit the oil producing Arab States hard, twice over. Crude prices have halved and may not recover further. Consequently the US is shifting its attention away from the West Asia and would not be led into ‘waging’ war in the region on behalf of its Arab friends. Israel is worried that once sanctions are lifted, Iran would step up it’s funding of Hezbollah (Lebanon) and of Hamas (Gaza), which is not a completely irrational. No US president since Eisenhower has acted so decisively in any West Asian matter overruling Israel. In fact, Netanyahu’s belligerence has potentially weakened Israel’s position in the American strategic calculus, making any Iranian violation of the terms of the deal, were it to occur, that much harder to sanction.
The fear that a much bigger Iran, if its diversified economy is back on rails, would become the dominant power in the region (minus Israel), has driven the Saudi and other Arab sheikhdoms to revive fears of a ‘Shia-Sunni’ clash of civilisations. The replacement in Iraq of Saddam by a democratic order where Shiites are in a majority, Iran support to the Alawite (Shia) Syrian regime against its predominant Sunni rebels backed by the Saudis and the conflict in Yemen in which the Houthis (Shias) have overthrown the pro-Saudi Sunni President have emerged as flashpoints.
The rise of the Islamic State (IS) in Iraq was a direct fall-out of the American occupation and subsequent persecution of Sunni by Iraq’s Shia leadership. The declaration of the Caliphate by IS has overtaken all these developments as it runs a quasi-State, drawing on thousands of international jihadis and sustaining itself by oil sales running into millions of dollars per day.
In Syria, Assad’s forces have been bolstered by Hezbollah forces in preventing IS and al Nusra making further gains. Jihadi and other groups funded by the Saudi and other Arab States have seen large scale defections to these two powerful forces. The US has been forced by the Saudis, and by Israel, to adopt a no-compromise position on Assad's removal. The IS is yet to be seen by Israel and Saudi Arabia as serious risks to their well being, with Netanyahu even calling Iran a bigger threat. The Saudis are reported to have reached out to Hamas in the aftermath of the deal. And during the last Israeli incursion into Lebanon, Hezbollah managed to bog-down the Israeli Army and prevent a military victory. However, Iranian missiles etc supplied to Hezbollah played no role in the conflict; it was the ground forces that were effective. Any reduction of tensions and misunderstanding between Iran and Israel, difficult as it appears but not completely unlikely, would be in India's interest. But even otherwise, the US and Iran could act in concert in Iraq and Syria given the mutuality of interests.
In Iraq, the Americans have given air support to the Iraqi Army. However, the larger fighting force is actually not the army but Shia militias and Iran’s al Quds force led by a serving Iranian general. However, the presence of the Iraqi army serves to camouflage the US-Iran convergence of interest, and coordinated action. Regrettably the US does not extend such support in Syria. And the Saudi-led coalition military intervention in Yemen against the Houthis came just when the Iraqi situation seemed to be turning against the IS. The fig-leaf of alleged Iranian support to the Houthis used by the Saudis as an excuse to justify their intervention is wearing thin in the absence of any evidence of actual Iranian physical support.
The key to better Iranian – American convergence in Iraq would be to pressurise the new Iraqi government to stop its targeting of key Sunni leaders; rather to open up to them and bring back inclusive governance as was done by prime minister Alawi. A stable Iraq could see lots of new investment in its oil fields, both in the South and in the Kurd areas, leading to improved production levels necessary to increase the availability of oil and gas and moderate prices. India would continue to import at higher levels of crude necessary to drive its economy, so any improvement in Iraq's security climate can only be welcomed. Ultimately, it boils down to how the Iranian economy recovers and takes off. Of the P5+1 powers that were involved in the Iran negotiations, China and the EU3 would like to increase trade and investments with Iran. Russia would not play a spoiler as Iran is a potential buyer of its armaments. This creates a substantial international vested interest in the success of the agreement.
But what of Iran itself? The Iranian leadership faces a hard task – it must deliver on economic growth to retain its legitimacy, much as Deng realised the Chinese Communist party did when he allowed reforms. Present indicators favour Iran opening up. The size of the economy, presence of a highly literate population with substantial technical capacity and sophistication of its business elite are factors that favour successful economic transformation. The US, a very popular country in Iran as surveys indicate, must stay the course to ensure that Iran does not, or is not forced, to get diverted. India can only benefit but it needs to step up its economic interactions across sectors, guided by clear and committed political leadership that the Prime Minister Modi has demonstrated successfully in its foreign policy.
Shakti Sinha (The writer is a Retd Civil Servant and presently the Chairman of South Asian Insitute of Strategic Affair.)