India’s strategic moves in Chabahar and oil deals with Russia

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Shahid Beheshti terminal, India Port Global Limited, Iran, India, Ports and Maritime Organization, Gulf of Oman, Chabahar Port

On May 13, 2024, India solidified its international trade ambitions by signing a landmark agreement with Iran to develop and operate the Shahid Beheshti terminal at the strategic Chabahar Port for the next ten years. This agreement, between India Port Global Limited (IPGL) and the Ports and Maritime Organization (PMO) of Iran, is not just a significant diplomatic achievement for India but also marks its first foray into managing a foreign seaport. This strategic move underscores India’s intention to bypass Pakistani ports in Karachi and Gwadar, thereby creating a direct trade route to Iran, Afghanistan, and Central Asia. Located on Iran’s southeast coast along the Gulf of Oman, Chabahar Port is poised to become a critical economic hub that enhances India’s connectivity and economic influence in the region.

India’s Union Minister of Port, Shipping, and Waterways, Sarbananda Sonowal, emphasized the strategic significance of the Chabahar Port, describing it as a vital economic route that strengthens supply chain resilience and opens new trade opportunities across the region. According to Sonowal, the port is more than just a bridge linking India with Iran; it is a critical component of the International North-South Transport Corridor (INSTC), designed to boost trade between India, Iran, Afghanistan, and Central Asian countries. This long-term agreement is expected to stimulate significant economic activity and consolidate India’s expanding role in international trade and commerce.

However, this strategic advancement has caught the attention of the United States. The US State Department, through its Deputy Spokesperson Vedant Patel, reiterated the ongoing US sanctions on Iran and highlighted the risks associated with engaging in business with the sanctioned nation. Patel acknowledged the reports of the India-Iran agreement but stressed that any country doing business with Iran risks attracting US sanctions. This statement underscores the delicate balance India must maintain while pursuing its foreign policy and economic interests.

Adding another layer to this geopolitical complexity, India has also intensified its energy trade with Russia. On May 28, 2024, reports emerged that India’s largest private corporation, Reliance Industries, signed a one-year contract with Russian company Rosneft for the supply of up to three million barrels of oil monthly, paid for in rubles. This deal, brokered amidst Western sanctions on Russia due to its military operations in Ukraine, highlights India’s pragmatic approach to securing energy resources at competitive prices.

Under the terms of the deal, Reliance Industries will purchase two shipments of Urals crude each month, with the option to buy additional shipments at a discount to the Middle East Dubai benchmark. Additionally, the company plans to acquire low-sulfur crude oil at a premium to Dubai quotes. Transactions will be facilitated by India’s HDFC Bank and Russia’s Gazprombank, underscoring a shift towards local currency settlements in international trade.

India’s pivot towards Russian oil is driven by substantial discounts offered by Russian exporters, who are eager to attract new markets after losing traditional buyers in the wake of Ukraine-related sanctions. This strategic maneuver has allowed India to increase its imports of Russian crude tenfold in 2023, saving nearly $5 billion. Consequently, Russia has emerged as India’s largest oil supplier, surpassing Iraq, Saudi Arabia, and the UAE.

The US and its allies, including the EU and G7, have imposed extensive sanctions on Russia, aiming to curtail its oil revenues. These sanctions include an embargo and a price cap on Russian crude. In response, Russia has sought to circumvent these restrictions by shifting towards local currencies in its trade transactions, further aligning with nations like India that are also exploring alternatives to the US dollar.

India’s deepening economic ties with both Iran and Russia present a complex challenge for the US State Department. While Washington continues to enforce its sanctions on Iran and Russia, it must also navigate its bilateral relationship with India, a key strategic partner in the Indo-Pacific region. The potential responses from the US State Department could include:

Diplomatic Pressure: The US may intensify diplomatic efforts to persuade India to reconsider its engagements with Iran and Russia. This could involve high-level meetings and negotiations aimed at highlighting the risks and consequences of such alliances.

Sanctions and Economic Measures: Although imposing direct sanctions on India is a complex and sensitive issue, the US could explore targeted economic measures against Indian entities involved in transactions with Iran and Russia. This approach would aim to deter further collaboration without severely damaging bilateral relations.

Strategic Dialogues: The US could initiate strategic dialogues with India, focusing on enhancing cooperation in other critical areas such as defense, technology, and regional security. By strengthening these ties, the US might seek to offset India’s economic dependencies on Iran and Russia.

Multilateral Engagements: Engaging with other allied nations, the US could work through multilateral platforms to present a united front. This would involve coordinating with EU and G7 members to address the broader implications of India’s engagements with sanctioned nations.

Alternative Energy Partnerships: To reduce India’s reliance on Russian oil, the US could propose alternative energy partnerships, offering more favorable terms for energy imports from other allies. This could include increased access to US energy exports or investments in renewable energy projects within India.

India’s strategic moves in developing the Chabahar Port and securing energy deals with Russia highlight its determination to pursue an independent foreign policy that serves its national interests. However, these actions place India in a challenging position, balancing its economic ambitions with the potential repercussions from the US and its allies. The coming months will be crucial in determining how India navigates these geopolitical complexities while striving to maintain its growth trajectory and regional influence.

The development of the Chabahar Port is particularly significant given its strategic location. It not only provides India with direct access to Afghanistan and Central Asia but also reduces its dependency on Pakistan for transit routes. This is crucial for India’s trade and geopolitical strategy in the region. The Chabahar Port is expected to become a major trade hub, facilitating the movement of goods and boosting economic activity in the region. Additionally, the port’s development aligns with India’s broader goal of enhancing connectivity and trade with landlocked Central Asian countries.

Meanwhile, India’s increased import of Russian oil, despite Western sanctions, reflects its pragmatic approach to energy security. As the world’s third-largest oil consumer, India is heavily reliant on oil imports to meet its energy needs. The discounted Russian oil provides a cost-effective solution, allowing India to save billions of dollars. This economic benefit, coupled with the strategic importance of diversifying its energy sources, drives India’s decision to engage with Russia.

US State Department’s response to these developments will be a critical factor in shaping the future dynamics of India’s international trade and diplomatic relations. While the US seeks to maintain its sanctions on Iran and Russia, it must also consider the strategic importance of its relationship with India. Balancing these competing interests will be a challenging task for US policymakers.

India’s agreements with Iran and Russia signify a bold step towards enhancing its strategic and economic clout. However, these moves are fraught with risks, particularly in light of US sanctions. The US State Department’s response will be a critical factor in shaping the future dynamics of India’s international trade and diplomatic relations. As India continues to assert its global presence, it must carefully manage its partnerships and navigate the intricate web of international sanctions and alliances.

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