New Leaders Forum

India’s Diplomatic Iran Dance

Recent Features

New Leaders Forum

India’s Diplomatic Iran Dance

Caught between U.S. pressure and its oil needs, India is involved in a delicate diplomatic dance.

As the Belgian-based Society for Worldwide Interbank Financial Telecommunication, or SWIFT, pushes ahead with its plans to expel blacklisted Iranian banks from major state-owned institutions to the Iranian Central Bank, Tehran is on the verge of becoming completely frozen out of the global financial system. Already under a barrage of sanctions, the Iranian economy is reeling from double-digit inflation, marked depreciation in currency, and huge disruptions in foreign trade.

In response, the Iranian regime has moved on two fronts: first, revisiting its nuclear posture by considering substantive dialogue and greater flexibility in terms of transparency and openness to inspection, verification and confidence-building measures; and second, stepping-up its economic engagement with Asian giants to ameliorate its growing isolation. This is precisely where India is central to Iran’s counter-strategy for withstanding international isolation.

India’s “Persian adventure” indicates an increasingly pragmatic and independent character of the country’s foreign policy posturing. India has been able to deepen its ties – almost simultaneously – with both Iran and the United States as it adeptly walks a diplomatic tightrope, with rising tensions over Iran’s nuclear program hitting fever pitch.

On the one hand, India is not only one of the most important non-NATO partners of the U.S. – and increasingly a hedge against China’s purported pacific expansionism – but it is also Israel’s biggest arms importer. Recent years have witnessed growing military and political cooperation between India and both Israel and the U.S. In 2008, India launched an Israeli spy satellite, provoking uproar among Iranian leaders. Since then, India has further strengthened its relations with the U.S. by not only intensifying military cooperation and expanding trade deals, but also agreeing to multiple sanctions and diplomatic censures against Iran’s nuclear program. Under growing American pressure the Indians also dilly-dallied on the Iran-Pakistan-India (IPI) pipeline project, which could have transformed Iran into a major energy player in greater Asia.

Yet, India-Iran relations have remained generally cordial and the countries have grown increasingly economically interdependent. This should be understood within a particular context: The two countries share a long history of stable bilateral relations, despite successive changes in their domestic political landscape, and deep linguistic-cultural affinity. Bilateral diplomatic relations have been comprehensive, with both countries enjoying institutionalized patterns of close cooperation and political dialogue across all pertinent branches of the state apparatus.

Crucially, Iran is also India’s second largest supplier of crude oil after Saudi Arabia. Any disruption in Iranian supply would adversely affect India’s economy, which is already struggling with a growing trade deficit, currency depreciation, and rising inflation. With more than half of the population lacking access to electricity, India has no choice but to ensure security of supply in conventional energy resources.

The Indians have not only expressed their interest in expanding infrastructure- and energy-related investments in Iran, but they have also served as one of the greatest and most important voices of opposition to unilateral sanctions and military threats against the Iranian nuclear program. Moreover, India has also openly brushed off U.S. requests for a dramatic scaling down of Iranian crude imports, drawing criticism from Washington.

In fact, bilateral relations have been embellished with top-level exchanges: while President Mahmoud Ahmadinejad visited his counterpart back in 2008, Prime Minister Manmohan Singh is expected to visit Iran this year, as Tehran seeks to host the 16th Non-Aligned Movement (NAM) Summit amidst growing tensions over its nuclear program.

Nonetheless, Iran-India relations are fraught with uncertainties. Since last year, a combination of Western sanctions and growing American diplomatic pressure has complicated oil transactions between India and Iran. The interim solution was to use a more complicated and expensive alternative: namely, Turkish banks as a financial conduit for bilateral transaction. However, in recent months the Turks – harangued by American pressure and disappointed with Tehran over the Syrian crisis – have begun to show greater reticence, raising serious question as to the viability of Iran-India trade relations. 

Therefore, together with China, India has pushed for larger barter deals with Iran, convincing Tehran to conduct more than 45 percent of its bilateral transactions in Indian Rupees. Since the Rupee is not exactly an international currency, this means that Iran will be forced to buy Indian goods in exchange for its crude. Unsurprisingly, the Indian business community was ecstatic with such a golden opportunity. Immediately, a high-profile, large envoy of Indian industrialists visited Iran to explore new ventures and business opportunities.  

But problems abound. Transaction costs are skyrocketing, while global insurers are increasingly shunning Iranian traders, forcing governments to consider “sovereign insurance” to carry out large-scale oil deals. There are growing uncertainties over the accessibility of Iran’s crude exports as sanctions target Iran’s ports and shipping industry. Recently, India’s largest importer of Iranian oil, the Mangalore Refinery and Petrochemicals Ltd., almost halved its imports for the upcoming fiscal year, which starts on April. It’s an indication of how markets are beginning to reduce their exposure to the Iranian nuclear conundrum.   

At this point, India shows no signs of abandoning Iran. The question, though, is whether India will continue to risk the exposure to growing uncertainties over Iran’s crude exports.

Javad Heydarian is a Manila-based foreign affairs analyst focusing on international security and development issues. His articles have been featured or cited in Foreign Policy in Focus, Asia Times, UPI, the Transnational Institute and the Tehran Times, among other publications. He can be reached at: [email protected].