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Re-energising India-Iran ties

Shebonti Ray Dadwal is Consultant at the Manohar Parrikar Institute for Defence Studies and Analyses, New Delhi. Click here for detailed profile
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  • May 02, 2008

    National Security Advisor M.K. Narayanan’s announcement at an international seminar that Iranian President Mahmoud Ahmadinejad would be converting what was originally meant to be a refuelling stop into an official stop-over in New Delhi on his way home from Sri Lanka generated much speculation about the reasons for and timing of the visit. Opinions were expressed that the visit would provide the necessary breakthrough in bilateral relations, which had been affected following India’s vote against Iran in the IAEA; that it would provide the necessary incentive to speed up and even resolve long-pending issues on the Iran-Pakistan-India (IPI) gas pipeline project; and that it would help iron out the creases in the 2005 LNG project.

    But is this so? On the face of it, barring some general statements, no major breakthroughs were made during the visit. On the IPI pipeline, India had asked Iran to dedicate a particular gas field for the project and had sought third party certification of its reserves. Alternatively, it wanted reassurance on alternate sources of supply in the event of depletion of reserves. Moreover, it wanted Iran to hand over custody of the gas at the India-Pakistan border and not at the Iran-Pakistan border as had been suggested by Tehran in order to cut transit risk through Pakistan, and it opposed the three-year price revision clause that Iran had demanded. The Iranian President made no commitments on these issues, saying that his Oil Minister would resolve the same with his Indian counterpart, though he did say that a final draft was expected to be worked out by the three countries within the next 45 days. Even Foreign Secretary Shivshankar Menon avoided referring to the project as a done deal, though he said that the pipeline was a “doable” project and added that a “lot of work” needed to be done to ensure that it is commercially viable, secure and provides assured supplies.

    Nevertheless, despite the continuing ambiguity, Ahmadinejad’s visit did help to inject a greater sense of optimism on the beleaguered project than there has been for a long time. More importantly, it also put India-Iran relations, which was seen as sliding, back on track. But why would an increasingly belligerent Iran, which since 2005 has made a virtue of its defiance, decide to make amends with an India that is seen to be moving inexorably into the US camp.

    For Iran, despite public rhetoric, its increasing isolation was beginning to hurt. Though surging oil prices has helped alleviate its economic woes to some extent, it is starved of investment and particularly state-of-the-art technology to develop its vast energy resources and ensure its continued status as a leading energy exporter. Moreover, despite sitting on the world’s second largest gas reserves, it has not succeeded in exploiting its potential. Though several European countries have expressed interest in accessing Iranian gas as an alternative to Russian gas, due to US pressure many of them are wary of getting into big deals that could attract American sanctions. Moreover, it would be difficult for Tehran to breach Russia’s monopoly over the European gas market. Under these circumstances, if Iran succeeds in getting countries like India and China to invest in its energy sector, it would provide the necessary incentive for other countries, including Western states, to invest or expand work in Iran and help the country end or at least lessen its isolation. It is in this context that the IPI project assumes significance.

    For New Delhi too, Iran is important, not only because it is a major supplier of oil to India – around 7.5 per cent of India’s oil imports are sourced from that country – but also because Iran is a potentially large energy supplier and conduit for the energy resources of land-locked Central Asia. With oil prices touching $120 a barrel, India’s need for assured energy supplies, particularly gas, has acquired greater urgency. Though India has other supply options and is in fact diversifying its sources to other regions, given Iran’s geographical location between West and Central Asia and South Asia combined with its vast untapped gas reserves, India cannot afford to ignore Iran’s importance. Moreover, with a general decline in oil fields the world over, Iran’s huge reserves are attractive. With Western companies still hesitant to make large investments in Iran, Indian companies have been provided with a golden opportunity of signing up projects before competition increases.

    Even prior to Ahmadinejad’s visit, there were indications that India and Iran were keen to arrest the drift in their relations. Since 2007, Indian and Iranian officials have resumed bilateral visits as was evidenced by the visit of External Affairs Minister Pranab Mukherjee to Iran in February, and Iranian Deputy Foreign Minister Mehdi Safari’s return trip to India in September. In February 2008, Iran’s Finance Minister Danesh Jafri visited India. During an interaction with the Federation of Indian Chambers of Commerce and Industry, he drew attention to Iran’s geographical location and said that it is well suited to companies interested in the energy sector, both upstream and downstream, as well as mining and the services sector. Trying to allay fears that US sanctions against Iran and the insecure environment in the region were impeding companies from investing in his country, Mr. Jafri emphasised that Tehran had put a legal framework in place and said that the security of foreign investments was ensured through new changes in the law and the Constitution.

    Soon thereafter, the Iranian Offshore Engineering and Construction Company (IOECC) participated in two tenders in the offshore sector of India’s oil industry. The company’s managing director, Mas’ud Soltanpur, said that each project was worth over $1.1 billion, and that the company had a very good chance of getting the deal despite several competitors being in the fray.1

    Again, prior to Ahmadinejad’s visit, a slew of agreements was signed between the two countries. In mid-April, India and Iran signed a memorandum of understanding for co-operation in railways as well as to begin work on the India-Iran-Russia railway line. The MoU also included technical training of Iranian railway personnel, railroad signalling projects, supply of locomotives and spare parts, setting up a joint working group as well as a joint effort to increase co-operation with the national Union of Railways. Iran has also sought India’s help, including investment, in constructing a new track connecting its Free Trade Zone in south-eastern Chabahar to Fahrej, which is located in the central part of the country.2

    In April, a few weeks before the Presidential visit, the board of Iran’s Naftiran Intertrade Company (NICO), a subsidiary of the National Iranian Oil Company (NIOC), had formally agreed to collaborate with the Hinduja Group-ONGC Videsh Ltd. in developing the Azadegan and South Pars fields, an agreement that had originally been signed between the Hinduja Group and NICO in August 2007. At the time, the deal had not taken off due to the influence exerted by China to get the same contract. But by going ahead with the deal, Iran has signalled that it is once again ready to do business with India.

    At the end of the day, President Ahmadinejad’s visit could not have been timed better. With general elections looming round the corner, the Indian government, under increasing pressure from its Left allies to assert its independence, responded firmly that it did not need any guidance on how to conduct its bilateral relations. Neither can Iranian influence on India’s huge Shia community -- the second largest after Iran’s -- be ignored. This was evidenced by India’s surprisingly sharp reply to a statement by US State Department spokesman Tom Casey soon after the presidential visit was announced, that Washington would like to see New Delhi call on Iran to cease enriching uranium and that India should put pressure on Iran to “become a more responsible actor on the world stage.”3

    The Iranian President voiced his appreciation for India’s stance. Stating that India and Iran were “true friends,” Mr. Ahmadinejad admitted that India’s vote against Iran on the nuclear issue did have an impact, but that relations between the two countries were “very deep and historical.” He, however, added that “the issue is related to the past, we are looking forward to building better relations.”4