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India and Chabahar: Navigating the Tides of US Sanctions

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India and Chabahar: Navigating the Tides of US Sanctions

India will develop the Shahid-Behesti Terminal of Iran’s strategic Chabahar port. Can it so do without facing U.S. sanctions?

India and Chabahar: Navigating the Tides of US Sanctions
Credit: Depositphotos

On May 13, Indian Ports Global Ltd. (IPGL) and the Port and Maritime Organization (PMO) of Iran signed a 10-year agreement to operate the Shahid-Behesti terminal of the Chabahar port. This agreement is part of a four-phase development program that began in 2016. Under the new agreement, IPGL will invest $120 million in the terminal’s infrastructure development. Additionally, India has agreed on a $250 million credit line to further develop the Iranian port. The signing ceremony was attended by India’s minister of shipping and waterways, Sarbananda Sonowal, who reiterated Chabahar’s strategic importance in connecting India with Afghanistan and Central Asian countries. 

However, this development was quickly overshadowed by a warning from the U.S. State Department, which raised concerns about potential sanctions risks for IPGL. In response, India has taken a diplomatic route to deter the United States from imposing sanctions stemming from the 2012 Iran Freedom Counterproliferation Act (IFCA) on IPGL, a Public Sector Undertaking (PSU). Previously, Indian PSUs have received exemptions from Washington under the IFCA for their engagements with Iran, including importing oil from the country and developing Chabahar port, considering its regional significance.      

India has four reasons for building the Shahid-Behesti terminal of the Chabahar port. First, it has established a direct trade route from India to Afghanistan and Central Asia, bypassing Pakistan. On October 29, 2017, the first shipment of wheat from India to Afghanistan via Chabahar port marked the terminal’s operational status.

Second, the terminal is part of India’s broader effort to develop the International North-South Transport Corridor (INSTC), which aims to reduce transportation costs and time for goods traded between India and Eurasia. The transport costs via the INSTC are estimated to be 30 percent cheaper compared to the traditional Suez Canal route and can potentially increase trade between India and Russia.

Third, the development of Chabahar port is crucial for ensuring India’s stable energy supplies. Before the re-imposition of U.S. sanctions in 2018, Iran was a key supplier of crude oil to India, ranking as the second-largest supplier with imports reaching about 457,000 barrels per day. Presently, India maintains a position of zero imports of Iranian oil in compliance with the U.S. sanctions. Nevertheless, Chabahar port, strategically located in southeastern Iran, provides India with a direct maritime route for importing oil and gas, circumventing the politically unstable Strait of Hormuz, a critical chokepoint for the world’s oil supply. Moreover, the development of this port is also expected to pave the way for future pipeline projects, such as the proposed Iran-India subsea pipeline, which would enable India to receive natural gas directly from Iran and Central Asia. 

Fourth, the development of Chabahar port is also seen as a strategic counterbalance to China’s influence in South Asia and the Indian Ocean region, particularly through its investments in Pakistan’s nearby Gwadar port under the China-Pakistan Economic Corridor (CPEC). 

The first agreement between India and Iran regarding Chabahar – commonly referred to as the “Chabahar Agreement” – was signed in 2003. That deal laid the groundwork for India’s participation in the development of the port. However, international sanctions on Iran over its nuclear program subsequently hampered India’s ability to invest and collaborate effectively. 

The turning point came in 2015 when the Joint Comprehensive Plan of Action (JCPOA), commonly known as the Iran nuclear deal, was signed between Iran and a group of world powers known as the P5+1: the U.S., the U.K., France, Russia, China, and Germany, along with the European Union. Under the agreement, Iran agreed to reduce its stockpile of enriched uranium by 98 percent, which provided a temporary easing of sanctions, allowing for increased international trade and investment in the country. 

India saw the easing of sanctions as an opportunity to deepen its investments and operational commitments in Chabahar. The following year, in 2016, India and Iran signed a bilateral agreement to develop the Chabahar port. This agreement included India’s commitment to invest $85 million to develop the Shahid Beheshti terminal. India also resumed importing oil from Iran, which had seen severe fluctuations between 2012 and 2015 due to IFCA-led sanctions.

Things again took a turn in India-Iran relations when, on May 8, 2018, then-U.S. President Donald Trump announced that the United States would unilaterally withdraw from the Iran nuclear deal. Trump criticized the deal for not addressing Iran’s ballistic missile program and regional activities and claimed that the JCPOA had provided Iran with significant economic relief without ensuring long-term prevention of nuclear weapon development. Following the U.S. withdrawal from the JCPOA, Trump announced a comprehensive plan to re-impose nuclear-related sanctions on Iran, which had been lifted under the terms of the 2015 Iran nuclear deal. This plan included the reactivation of IFCA provisions.

The IFCA of 2012, enacted as part of the National Defense Authorization Act for Fiscal Year 2013, is a U.S. legislative measure designed to impose comprehensive sanctions on Iran’s energy, shipping, and shipbuilding sectors, as well as on the trade of precious metals and other materials. These sanctions led to a significant reduction in Iran’s oil exports, which dropped from approximately 2.5 million barrels per day in 2017 to less than 0.5 million barrels per day by mid-2019. IFCA also targets financial institutions facilitating significant transactions with designated Iranian sectors. Despite the stringent measures, under Section 1244 of the IFCA, exemptions were granted for humanitarian purposes, allowing the trade of agricultural commodities, food, medicine, and medical devices to continue. Under Section 1245(d), specific waivers were issued to countries that demonstrated significant reductions in Iranian oil imports, enabling them to avoid penalties under the act. After the re-imposition of IFCA sanctions, eight countries received waivers from the United States, including China, South Korea, Japan, Turkey, Italy, Greece, Taiwan, and India.

In April 2019, Washington announced that it would not renew these waivers, thereby ending the exemptions and pushing all countries to suspend their imports of Iranian oil or face U.S. sanctions. The move was part of the Trump administration’s “maximum pressure” campaign aimed at cutting off Iran’s revenue from oil exports and pressuring it to renegotiate the nuclear deal and curb its regional activities. 

At that time, India managed to secure some exemptions related to the development and operation of the Chabahar port due to its strategic importance in supporting Afghanistan’s development and enhancing regional connectivity. The exception covered “three principal activities,” which included the development and maintenance of Chabahar port along with its railway link to Afghanistan, the import of refined petroleum products such as gas, diesel, and liquefied petroleum gas by Afghanistan from Iran, and the transit of non-sanctioned goods through Chabahar port to Afghanistan. India has complied with these rules, creating a plausible case for continued exemptions.

The United States recognizes the role of Chabahar port in facilitating humanitarian aid and economic support to Afghanistan, aligning with its broader goals of promoting stability and development in the region. Exempting India from certain sanctions could be interpreted as a strategic move by Washington to support a key regional ally in countering China’s influence, especially given the strategic rivalry between China and the U.S. There is a prevailing concern in Washington that if India were to abandon the development of the Chabahar port, China would likely step in to fill the void. Offering exemptions could be used as a diplomatic tool to maintain and enhance India-U.S. relations, ensuring that India remains a strong partner in the Indo-Pacific region. 

Following the U.S. State Department’s warning about potential sanctions risks related to IPGL’s involvement in Chabahar, Indian officials, including External Affairs Minister S. Jaishankar, have reaffirmed their commitment to the port project. They have also said that the port’s operations are in line with the IFCA and serve broader regional interests. Furthermore, IPGL has worked closely with Indian authorities to ensure that all activities at Chabahar comply with relevant international regulations and to mitigate any potential risks associated with U.S. sanctions.

In conclusion, the latest agreement between New Delhi and Tehran underscores India’s unwavering commitment to enhancing connectivity with Afghanistan and Central Asia via Chabahar port. This connectivity is facilitated through a blend of port infrastructure, road and rail networks, and trade corridors that ensure the seamless transport of goods. India has already constructed a 218-kilometer highway linking Zaranj, near the Iran-Afghanistan border, to Delaram in Afghanistan, integrating into the Afghan ring road, which connects major cities such as Kabul, Herat, and Mazar-i-Sharif. Plans are also underway to bolster rail connectivity between Chabahar and various regions in Afghanistan and Central Asia. The developing Chabahar-Zahedan Railway aims to link Chabahar port to Zahedan, from where the rail network extends to the broader Iranian national rail grid, thereby enhancing connectivity to Afghanistan and beyond. 

India’s investment in Chabahar port is driven not only by economic and strategic imperatives but also by New Delhi’s vision of regional stability and development. The broader implications of the latest developments in India-U.S. relations vis-a-vis India-Iran relations hinge on diplomatic negotiations and mutual strategic interests. Continued exemptions under the IFCA are possible but require careful diplomatic maneuvering to ensure India’s engagements with Iran do not undermine its relations with the United States.