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India: The Value of an Iranian Friendship
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India has several reasons for openly seeking to circumvent U.S. and EU sanctions on Iran.


In the face of bolstered U.S. and EU sanctions against Iran, the Indian government is blatantly and publicly discussing ideas on how to circumvent the sanctions and maintain a close trade relationship with Iran. India's energy competition with China is a large part of what is driving India's decision-making on this issue, but there are several other geopolitical interests India is considering in demonstrating its intent to openly flout U.S. and EU sanctions on Iran.


While the United States and its European allies struggle to get capitals and companies to enforce a new round of sanctions against Iran, the Indian government is openly discussing ways of getting around those sanctions. Details of a report on this subject from the Indian Ministry of External Affairs were leaked to the Times of India recently. The report, called "International Sanctions on Iran and Way Forward for India-Iran Relations," suggests several "creative mechanisms" that would allow Indian firms to continue trade with Iran without getting caught in the sanctions dragnet.

The list of "creative mechanisms," as reported by the Times of India, includes:
  • Asking the United States to use the exemption clause in the sanctions text. India's National Security Adviser Shiv Shankar Menon met with his U.S. counterpart in New Delhi July 14-15 to seek assurances from the U.S. administration that U.S. President Barack Obama would use the exemption clause to spare Indian firms from penalties for doing business with Iran. The sanctions clause allows the president to exempt companies from sanctions if it is decided that imposing sanctions on a certain country could harm U.S. national security interests. U.S. presidents have used this exemption clause frequently in the past. It remains unclear whether Menon received the assurances he was seeking.

  • Getting Indian firms to enter consortiums with Russian, Chinese and Kuwaiti companies in investing in Iran. The government is advising Indian firms to pursue this strength-in-numbers strategy, which would make it more difficult for the U.S. administration to single out individual firms.

  • Creating new corporations without assets in the United States or European Union to solve Indian private firm Reliance Industries' quandary. Reliance Industries has been a major gasoline supplier for Iran, but the company has its eyes on several large-scale investments in the United States. This vulnerability has led Reliance Industries to cut back on direct gasoline sales to Iran (though the company is still believed to be shipping gasoline to Iran through third parties.) To alleviate this problem, the Ministry of External Affairs has proposed creating new corporations without assets in the United States or European Union to avoid financial exposure to sanctions.

  • Conducting financial transactions in only Indian rupees and Iranian rials to prevent Indian banks from being blacklisted in U.S. and EU markets. The Iranian government has also suggested that India open letters of credit in rial.

  • Expanding Indian investment in Iran to non-sanctioned areas, including pharmaceuticals, mining, fertilizer, food processing and automobile manufacturing. The report also suggested opening Indian warehouses in Iranian free trade zones to allow Indian businessmen preferential access to the Iranian consumer market.

India's bilateral trade with Iran in 2009 was about $14 billion, and the long-time allies have ambitions to double that trade within the next five years. India's bilateral trade with the United States in 2009 stood at $37.6 billion, with the United States making a concerted effort in the past year to demonstrate to India that there is still much more room for their business relations to grow. As Reliance Industries learned from a series of conversations with U.S. Treasury Department officials over the past year, companies that continue to conduct business with Iran could see their assets in the United States threatened. It thus comes as a bit of a surprise that India has been so blatant in discussing different ways to insulate Indian companies, continue trade with Iran and thus stymie the United States' driving policy against Iran right now.
In the report, the ministry emphasizes how a major factor influencing India's brainstorming on sanctions-busting with Iran is the country's intense energy competition with China. About 8 percent of India's total oil imports came from Iran in 2009. During the same period, about 12 percent of China's oil imports came from Iran, though Chinese oil imports from Iran have dropped by 30 percent in the first half of 2010 compared to the same period last year as China bought more oil from Angola and Saudi Arabia in an attempt to reduce its vulnerabilities in the event of a military confrontation in the Persian Gulf.
The Indians have watched warily as China has dug in its heels in Iran while Western companies have pulled out under the weight of sanctions threats. China is involved in a number of upstream and downstream projects in Iran, including deals for the development of Iran's Yadavaran oil field, North and South Azadegan oil fields, North and South Pars natural gas fields, oil and natural gas pipeline construction and refinery upgrades. With an open playing field in the Persian Gulf, China stands to beat India yet again in the race for energy sources, and India is tired of having to play catch-up in this race. The Indians simply do not have the bureaucratic discipline and deep pockets that the Chinese have to effectively bid and conduct energy business overseas. India thus has an interest in showing Iran its seriousness in maintaining a close trade relationship and willingness to flout sanctions so it can stay in the game against Beijing.
But there is much more to the strategic leaking of this report than India airing its energy security concerns. India finds a great deal of utility in its relationship with Iran, particularly in managing its relationship with the United States. For example, a long-touted natural gas pipeline that would carry Iranian natural gas through Pakistan and on to India is a favorite subject for Indian energy ministers to discuss with their Iranian counterparts. This is not because India truly believes the project is feasible (putting aside all the financial and logistical complications attached to this deal, India is not about to place its energy security in the hands of its Pakistani rival). Instead, India uses mere discussion of the pipeline as a way to capture Washington's attention and assert its independence in foreign policy matters. India and the United States have been developing a closer strategic partnership in recent years as Washington has sought out a more dependable ally in the Indian Ocean basin, but India also likes to remind the United States from time to time that the development of that relationship does not mean New Delhi can be expected to transform its foreign policy orientation to suit U.S. needs.
This is especially true as Indian frustration grows over the U.S. relationship with Pakistan. India has made no secret of its extreme dissatisfaction with Washington easing its pressure on Pakistan about the Pakistani militant proxy network. Even as Pakistan has incurred risks in cracking down on the Pakistani Taliban network, whose prime target is the Pakistani state, and has shared intelligence with the United States on targets in Afghanistan, India maintains that little is being done to contain those militants whose interests are directed against India and whose actions may be endorsed by Pakistan. India also does not have faith in Pakistan's current efforts and worries about a militant revival in Pakistan and Afghanistan that could undermine India's security down the road. India's threats to bolster its relationship with Iran provide New Delhi with some leverage in discussions with U.S. officials over Pakistan's participation in containing the regional militant threat.
India also has little interest in damaging its relationship with Iran over sanctions. Iran and India have long been allies with mutual interests in the region. One such common interest is the containment of the Taliban in Afghanistan -- a project that Iran, India and the Russians have worked together on in the past in bolstering the Northern Alliance against the Taliban. India is nervous about the prospect of the United States negotiating with Taliban and leaving enough political space for the group to reclaim power in Kabul once U.S. forces withdraw. India has tried to use the United States, Turkey and Saudi Arabia as a channel into the negotiations over Afghanistan's political future, but Pakistan is a major obstacle in these talks. India has thus tried to work through the Iranians, who have a direct link to the Pakistanis and who have cooperated with the Pakistanis on Afghanistan even prior to the Taliban's rise, to ensure their interests are met on this issue. Likewise, Iran can use India's need for a channel into the Afghanistan talks as a tradeoff for Indian assistance in helping Iran circumvent sanctions.
As India has learned (has India done this before?), open defiance of sanctions on Iran is a surefire way to rile Washington and capture the attention of the U.S. administration. But India would not be doing so unless it had some knowledge that there is little that the United States can do about the situation. The United States is struggling in its search for an exit strategy from Afghanistan and must rely on Pakistani cooperation to fight this war. The only way it can keep Pakistan's attention focused on the jihadist threat is by maintaining a balance between New Delhi and Islamabad on the subcontinent and staying close to both sides. Retaliating against India over business ties to Iran could threaten that balance, and that is not a risk the United States is likely to take right now.

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