India’s Iran Policy and The Role of United States of America: Re-Examined

Posted on May 11, 2012 in GlobeScope

By Waled Aadnan:

US Secretary of State Hillary Clinton stopped over in India this week as part of the last leg of her Asian tour that began in China. Surprisingly, the major agenda for her visit wasn’t Pakistan or terrorism. Rather, it was to persuade India to reduce its oil imports from Iran and contribute to the sanctions imposed against that country by the US and Europe.

India’s response to the US’ arm-bending over the issue has hardly been coherent. While External Affairs Minister SM Krishna pointed out to Clinton that the extent of oil imports from Iran would be dictated foremost by national interests, import data released almost parallely told a different story. Indeed, there has been a 34% fall in oil imports from Iran in April compared to March. A large part of this decrease is due to state-run oil companies Indian Oil Corporation (IOC) and Bharat Petroleum Corporation Ltd (BPCL) not importing any Iranian oil last month. If India is indeed standing up to the US stance on Iran, the evidence isn’t very apparent as of now.

The reason for this may be that the Indian administration isn’t willing to appear as if it is buckling under US pressure to act against an old ally. Instead, there have been discreet efforts to meet the US’ expectations while publicly portraying a neutral stance. And the efforts in this regard have hardly gone unnoticed. At a press conference in New Delhi, Mrs.Clinton said “We commend India for the steps its refineries are taking to reduce its dependence on imports from Iran… There’s no doubt that India and the United States are after the same goal (of preventing a nuclear Iran).”

However, it is true that India has been using the sanctions imposed on Iran to improve its own trade balance with that nation. Last year, India spent $988 million on Iranian imports, which consisted mostly of oil, and exported only $91 million worth of Indian goods in return. Following banking restrictions which make regular transactions with Iran almost impossible, Iran has been persuaded to accept payment for 45 percent of oil sales to India in Indian rupees. Since the Indian rupee is not a fully convertible currency i.e. it cannot readily be converted into any other currency like euros or dollars, most of the currency thus received by Iran must be spent on buying Indian goods. This can be considered a foreign policy masterstroke by India that widens its markets in Iran instead of erecting trade barriers as the US suggests.

The Americans aren’t particularly perturbed by the rupee system, but are instead pretty satisfied with the arrangement. The most important reason why sanctions on trade with Iran were imposed, was to starve the Ahmadinejad government of crucial foreign exchange which the US and its allies believe could be used to purchase equipments vital to what it considers Iran’s hostile nuclear project. The barter trade with India under the rupee exchange system restricts the amount of foreign exchange that Iran earns on its oil to only 55 per cent of total value. “This rupee account is very helpful,” said Mr. Dubowitz, executive director of Foundation for Defense of Democracies and an Iran specialist in Washington. “They can’t convert rupees into dollars or euros. They can’t repatriate rupees back to Iran. So the only thing they can do is buy Indian goods.”

However, what will be of interest to American officials is the portfolio of Indian goods that are exported to Iran. While wheat, rice and pharmaceuticals are currently outside the sanctions, India will have to ensure that no goods that are banned under the sanctions, especially certain technologies, are exported to Iran under the system in order to avoid earning the wrath of the USA.

In this regard, a delegation of Iranian traders were visiting New Delhi at the same time as Clinton was lobbying with Prime Minister Manmohan Singh to restrict trade relations. “There is a vast potential for exports and imports between the two countries,” Yahya Al Eshagh, president of the Tehran Chamber of Commerce, Industries and Mines and the leader of the Iranian delegation told the audience, “We feel there is no difficulty regarding goods and their prices.

The next objective of Indian policymakers will be to persuade the Obama administration to grant them exemptions from punitive sanctions arising out of trade with Iran. These exemptions were granted by the US to Japan and 10 European countries earlier this year. However, it had withheld these exemptions for China and India, Iran’s two major trade partners. Mrs. Clinton had then spoken of the need for significant reductions in imports from Iran in order to reconsider granting exemptions to the two Asian giants. How far the rupee exchange system and the sharp drop in oil imports by India goes towards satisfying US expectations is to be seen. Indian policy makers however, are trying hard to manufacture a win-win situation out of Iran’s troubles.