Sanctioning Iran, Developing Relations With India and the New Eeconomic Order

Iranian President Hassan Rouhani shakes hands with India’s Prime Minister Narendra Modi (R) during a photo opportunity ahead of their meeting at Hyderabad House in New Delhi, India, February 17, 2018. REUTERS/Adnan Abidi

On May 8, 2018, President Donald Trump announced that the United States was withdrawing from the Joint Comprehensive Plan of Action (JCPOA) and would re-impose sanctions on the Islamic Republic of Iran that had been alleviated as part of the six-party nuclear agreement. The U.S. president also threatened any country that “helps Iran in its quest of nuclear weapons” with high levels of economic sanctions. Accordingly, the U.S. began reinstating some of the sanctions on Iran on August 6, 2018, while the remaining sanctions, including those on banking and hydrocarbons that have greater international ramifications, will become effective by early November.

The rationale for the United States to withdraw from the JCPOA is based on the continuation and, in some cases, escalation of Iran’s aggressive behaviour across the region, including in Syria, Yemen, and Israeli airspace and cyberspace, as well as its threats to disrupt international waterways. Additionally, the current administration did not agree with the JCPOA’s lack of any clauses addressing Iran’s ballistic missile development. A recent statement by Iran’s supreme leader Ayatollah Ali Khamenei confirms that the nuclear deal was “not an objective[;] it is only the means” for Iran’s achieving its national interest goals. However, Tehran has abided by the letter of the JCPOA and sees the spirit of the deal from a totally different perspective than Washington—Iran regards the agreement as a tool to safeguard the Islamic system and allow it to expand its influence in the region and beyond, partially as an offensive defence measure to protect itself from direct or indirect U.S.-led threats. The United States went into the agreement with the short-term goal of preventing Iran from producing weapons-grade uranium and with the longer-term hope of eliciting fundamental changes in Iran’s behaviour either through assimilation in the world market or internal political realignments. Unlike the current U.S. position, for the other five signatories of the JCPOA, in varying degrees, Iran’s commitment to the letter of the deal is sufficient, and, thus, they oppose the U.S. unilateral withdrawal.

The true test of the U.S. efforts to pressure Iran to either renegotiate the deal or have an overall massive change of behaviour will be the reaction of China, Russia, and the Europeans (Germany, France, and the United Kingdom) to the reintroduced sanctions regime by the United States. Beyond the role of JCPOA signatories, there is another party to consider: India. On one hand, India is poised to become Washington’s main strategic partner in South Asia and in the Indo-Pacific theatre of operations, but on the other hand, it regards Iran as a strategic asset and a necessary source of its energy requirements. In this paper, the paradoxical case of India will be examined to illustrate the double-edged nature of the new sanctions and their potential to hurt the United States in its broader strategic calculations.

Allies and Adversaries Seeking Alternatives to U.S. Dominance

The success of the sanctions that brought Iran to the negotiating table to conclude the JCPOA was the solidarity between the U.S. and Europeans as well as the acquiescence by China and Russia. Re-imposition of sanctions by the United States and threats of further sanctions have devalued the Iranian rial by more than half of its value against the U.S. dollar and provoked some European firms to withdraw from oil and gas related projects—both infrastructure development and purchasing contracts. However, there are discussions among Europeans on how to minimize the damage to their companies by shielding them from U.S. sanctions and finding new means of financial transactions away from the U.S. dollar. President Trump’s warning that anyone doing business with Iran will not be doing business with the United States is forcing both Washington’s allies and adversaries to find ways to lessen the longstanding American economic clout.

Among allies, German Foreign Minister Heiko Mass penned that, while Europe wants to work with the United States, it has taken steps to provide legal protection to European companies from sanctions and hinted at the establishment of a payment system independent of the U.S., “a European monetary fund and an independent SWIFT system.” Agreeing that there were thousands of details to be worked out, Mass noted that such proposals were necessary to have a balanced partnership between Europe and the United States. Among adversaries, Russia is taking the lead to launch a regional payment plan that could become a tool for Iran to circumvent the dollar and expand its trade with the Commonwealth of Independent States as well as Turkey.

The status and power enjoyed by the United States within the global financial system are very powerful tools in advancing its political and economic strategies, but this influence is not so overwhelming to withstand concerted challenges by friends and foes. Once there are alternatives established to the supremacy of the U.S.-led system and the U.S. dollar, the decades-old dominance by the United States could begin to weaken, most likely irreversible. Despite Iran’s adamancy that there will be no renegotiation of the JCPOA with the current U.S. administration, if a new deal more palatable to Washington and its allies is reached, the frustrations about the unpredictability of U.S. policies and its overuse of sanctions should be expected to remain as well as the search for mechanisms to find viable alternatives to U.S. dominance of the international financial markets.

Hurdles to the Effectiveness of New Sanctions

As the more consequential sanctions affecting financial transactions and hydrocarbons trading come into effect on November 4, 2018, specific short-term action by the three European signatories of the JCPOA will most likely depend on the willingness of Washington to grant exemptions or some flexibility to European companies doing business with Iran. The sanctions are unlikely to be as effective as those triggered by the Obama administration in July 2012 that eventually brought Iran to the negotiating table. Under those sanctions, European buyers of Iranian crude oil, which in 2018 accounted for 40 percent of Iran’s exports, halted importing oil from Iran. With the ongoing trade and political squabbling between Washington and a number of its European allies as well as Tehran’s assurance to the Europeans that Iran would stay in the JCPOA as long as it is able to export its oil, the most likely scenario is for Europe to make some changes but to continue to trade with Iran.

The more significant keys to the effectiveness of the re-imposed sanctions do not lie in Europe, but in China, India, Russia, and Turkey. With the exception of India, the U.S. has imposed sanctions unrelated to Iran on these countries, and all three have indicated that they will continue trading with Iran while seeking alternative means to conduct transactions outside of the scope of the U.S. dollar. China is Iran’s top importer of crude oil, followed by India, and Turkey is fourth on the list. Turkey’s ambassador to Tehran has stated that his country imports half of its crude oil requirements from Iran and that it would be “impossible to meet U.S. demands” on halting these purchases. China never ceased importing oil from Iran even when the most comprehensive sanctions were in effect from 2012 to 2015, and the same scenario is most likely to continue after November whether or not the U.S. grants exceptions for Beijing. Russia stands to gain much political and economic clout from the new sanctions. Russia continues to be the main supplier of oil and gas to countries such as Germany while the emergence of the most economical alternative southern routes to markets as well as Iran’s own oil exports are being hampered by sanctions. Additionally, the myriad hydrocarbon-related infrastructure opportunities in Iran will go to Russian firms. Of the four key countries, the new sanctions are complicating the budding strategic partnership between India and the United States.

Iran Sanctions and India-U.S. Strategic Partnership

India imports 80 percent of its oil requirements from the Middle East, ten percent of that coming from Iran. Similar to cases of China, Japan, and the Republic of Korea, India imported oil from Iran with restrictions during the pre-JCPOA sanction era. Beyond vital oil imports, New Delhi and Tehran are working on other strategic projects, such as the development of the Chabahar Port in the Arabian Sea that will provide India access to Afghanistan and Central Asia, circumventing rival Pakistan and countering China’s influence in the region. Additionally, as part of New Delhi’s strategy to achieve energy security, the two countries have been discussing building an underwater pipeline to connect Iran and Central Asian energy markets to India, away from Pakistani influence present in other envisaged projects, such as the Iran-Pakistan-India or the Turkmenistan-Afghanistan-Pakistan-India pipelines.

Ironically, India’s quest to have direct access to Afghanistan through Iran is in sync with President Trump’s strategy in Afghanistan and South Asia in which he called on New Delhi to help the U.S. in “Afghanistan, especially in the area of economic assistance and development.” India’s efforts to provide assistance to Afghanistan and to maintain a strategic presence in that country as a counterbalance to Pakistan as well in resource extraction competition with China have been curtailed by geography. Pakistan has traditionally kept India out of the Afghan markets. However, after the collapse of the Taliban regime in 2001, New Delhi reentered the Afghan scene and is determined to stay for the long haul. In 2009, India completed the construction of the 78-mile long Delaram-Zaranj Highway, connecting the southwestern part of Afghan-Iranian border with the main ring road in Afghanistan. The highway without access to the Iranian port of Chabahar and a working relationship between New Delhi and Tehran would be useless to India. While Washington has been generally supportive of India’s Chabahar plans, the re-imposition of sanctions on Iran will have a direct negative impact on the overall U.S. strategy in Afghanistan and South Asia in a time when India plays a central and essential role in the regionalization and sustainment aspects of United States’ 4R+S (regionalize, realign, reinforce, reconcile, and sustain) strategy for ending the Afghan conflict.

Beyond U.S. and Indian priorities and strategies in Afghanistan, the looming sanctions on Iranian oil and gas exports are becoming a point of contention in the ongoing U.S.-India strategic partnership. The issue of sanctions on Iran was not part of the official joint statement of the inaugural U.S.-India 2+2 Ministerial Dialogue held in New Delhi on September 6, 2018. The two sides “welcomed India’s enhanced role [emphasis added] in Afghanistan’s development and stabilization,” which could be read in New Delhi as a nod to the Chabahar project. The official statements sidestepped the thorny sanctions issue, as India pursues a waiver to import oil from Iran, but an unidentified U.S. State Department official travelling with Secretary of State Mike Pompeo said that Washington is asking its partners, including India, “to reduce to zero oil imports from Iran,” expressing confidence that the sanctions issues will be part of bilateral U.S.-India discussions.

Two months prior to the 2+2 meeting, U.S. Ambassador to the United Nations Nikki Haley encouraged India to rethink its relationship with Iran, including seeking alternative suppliers of oil. The devil is, of course, in the details. India is already suffering from high oil prices and a very weak rupee against the U.S. dollar. This makes it almost impossible for India to switch to an alternative fuel supplier for more than 10 percent of its needs even if there was a political will to abandon a rising strategic relationship with Iran. Moreover, there is a good chance that a sanctioned Iran would offer India options to purchase cheaper oil than the market prices using currencies than the U.S. dollar or bartering mechanisms. Back to the overall Indian strategy in its neighborhood, concurrent with hosting Pompeo and U.S. Defense Secretary James Mattis, New Delhi also played host to Iran’s Minister of Roads and Urban Development Abbas Ahmad Akhoundi, who announced the impending handover of the Chabahar Port to an Indian firm and a railway project connecting the port to Iranian city of Zahedan close to the Afghan-Iranian border. The concurrence of the two meetings ought to be seen as a vivid display of New Delhi’s intent to work on enhancing its strategic partnership with the United States while continuing its relations with Iran.

The success of the JCPOA was not its comprehensiveness of scope nor its spirit, but rather its multilateral nature and its singular and internationally verifiable aim. Iran did not go into the deal giving up much and was rewarded for circumventing and cheating on its international obligations; however, it has abided by the letter of the deal because it is in regime’s interest to do so. The U.S. desire for fundamental changes in Iranian behaviour has merit, but the over-application of sanctions on allies and adversaries, most of which are sanctioned for bilateral trading issues with the United States, might be a costly and irreversible undertaking for the long-term strategic power of the United States. In the case of India, the new sanctions have direct significant consequences on an emerging partnership that could become the cornerstone of the U.S. South Asia strategy.

 

 

Amin Tarzi is a Senior Fellow with the Foreign Policy Research Institute’s Program on the Middle East, and the Director of Middle East Studies at the Marine Corps University (MCU) in Quantico, Virginia. He wrote this originally for Foreign Policy Research Institute (FPRI)

The views and opinions expressed in this article are those of the authors and do not necessarily reflect the views of The Kootneeti Team

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