The India-Iran tunnel....

The India-Iran tunnel
By Vijay Prashad

On March 4, Iranian President Mahmud Ahmadinejad received the Indian Minister for New and Renewable Energies, Farooq Abdullah. The public agenda for their conversation was straightforward. Ahmadinejad pointed out that Iran raises "no restriction in expanding comprehensive ties including trade, joint investment, scientific, cultural and tourism with India". Abdullah concurred, saying, "The Indian government seeks an expansion of cooperation in all fields." The tenor of the meeting suggests a buoyancy in relations between India and Iran.

There are three reasons why this meeting was so amicable.

1. Finalized rupee payment mechanism: On Friday, March 2, Rafeeque Ahmed, president of the Federation of Indian Export Organizations (FIEO), released an unexpected statement to the press. "The payment problem with Iran has been resolved with the operationalization of rupee payment mechanism through UCO Bank." A team from the Iranian Central Bank was in New Delhi over the weekend. They sorted out most of the pragmatic problems with the new payment mechanism.

India's deal with Iran responds to an aggressive two-year process led by the United States and the European Union (EU) to isolate Iran's oil industry. In December 2010, the Reserve Bank of India left the Asian Clearing Union (ACU) mechanism through which Indian firms paid for Iranian oil. Arrangements through the Turkiye Halk Bankasi and the Germany-based Europaisch-Iranische Handelsbank AG provided short-term means for Indian firms to reach Iran, but under EU and US pressure these paths were closed down last year. Current EU pressure on the SWIFT network for financial messages seeks to further isolate Iran from its commercial partners.

Over the past two months, the Indian and Iranian governments have been working on a mechanism to sidestep the pressure from the US and the European Union. The March 2 announcement was the culmination of this process. India and Iran will conduct their trade in rupees.

Indian law requires that sales to a non-resident seller must withhold a tax, raising the total liability of doing business with India to 42%. The Indian government continues to debate whether this withheld tax can be exempted. Iran's Parsian Bank has opened an account at Kolkata-based UCO Bank, and will now accumulate its rupees there.

2. 'Huge' Indian trade mission to Iran: Barriers to trade between India and Iran have been lifted 10 days before an Indian trade mission heads to Tehran. This is precisely why FIEO's Ahmed noted that the trade delegation "will now be able to negotiate new contracts diversifying and expanding exports". Anand Seth of FIEO expects that the mission, which will be in Iran from March 10 to 14, will be "huge".

The main areas of interest are sales of Indian iron and steel, pharmaceuticals, rice, tea, and wheat. A government official at the Indian Commerce Ministry told me that there is hope that India will close deals worth US$30 billion, which is considerably more than the current sales of $2.7 billion.

"There is a great deal of interest in the ministry to take advantage of the situation. Many of Iran's previous trade partners are being skittish as a result of the sanctions. India should be ready to fill in where need be, not for any political reason but because we have a commercial interest here," he pointed out.

The Commerce Ministry official is honest in his statement that India is not motivated by any political desire to break the EU/US sanctions. Economic interests seem to be at the forefront.

Overall trade data from January 2012 reveal that Indian exports to the rest of the world grew by only 10.1% from a year earlier to $25.35 billion, while imports increased by 20.3%, to $40.10 billion, leaving a trade deficit of $14.7 billion. With a shaky eurozone and slack demand in US, this trend might be a harbinger of the future. Pointing to these figures, FIEO's Ahmed notes, "Iran is an emerging destination for Indian exports. During last financial year, despite banking uncertainties, our exports [to Iran] went up by about 50% to touch $2.71 billion."

With the rupee payment mechanism solved and the trade mission ready to leave for Iran, Ahmed envisages India's sales to Iran to rise "exponentially".

3. A maritime caravanserai: One of the least commented aspects on the India-Iran relationship is Chabahar (or Chah Bahar) port in southeastern Iran. When China began work on the Pakistani port of Gwadar in Balochistan, the Indians threw in their lot with the Iranians to refurbish the ancient port of Chabahar. Slow work on the port has been speeded up over the last year, with the Indian government putting in resources toward the construction of a railway line to connect the port to Afghanistan's iron ore regions of Hajigak (in Bamyan Province) and its copper mines of Zabul Province.

The Chabahar port is India's answer to China's 21st century Suez Canal, allowing Indian industry to access Afghan and (eventually) Central Asian resources.

The Indian Border Road Organization spent $136 million to assist the Iranians in linking up Chabahar to Afghanistan's main ring-road highway, and so to all its major cities. India, Iran and Russia signed the Inter-Governmental Agreement on the International North-South Transport Corridor in St Petersburg in September 2000 to link India to Central Asia through Iran's ports and Afghan roads.

The Afghan War since 2001 set back this endeavor but it did not stop it. In January 2003, the governments of Afghanistan, India and Iran met in Tehran to sign the Development and Construction of the Transit and Transport Infrastructure memorandum. Based on this, they worked on improvement of the road from Chabahar to Delarm and Zaranj in Afghanistan.

These massive transportation networks mimic those that are being built in Myanmar (the Chinese-built port at Ramree and the Indian-built port at Akyab). These massive infrastructure projects dwarf the language of war.

Since the Indians helped build Chabahar, use of the port and transaction of goods will be largely tariff free. In the first week of March, Indian ships docked at Chabahar and unloaded 100,000 tonnes of wheat headed for Afghanistan. This shipment was of humanitarian aid, and so made it harder for the US State Department to make any unpleasant noises about it. It was also, however, a test for future commercial shipments into the port.

In mid-February, the presidents of Afghanistan, Iran and Pakistan met for their third trilateral summit in Islamabad. Two weeks later, the Pakistani government announced that it would ease restrictions on trade with India, as well as that it would not back down from its trade with Iran.

India hopes to use the Wagah border crossing to send goods into Pakistan and into Afghanistan. The land route is fraught with political tension, as is the 2,700 kilometers "peace pipeline" that India, Iran and Pakistan were to jointly develop so as to carry Iranian natural gas to the markets of India. The tension between India and Pakistan has kept this pipeline on the backburner.

The land routes are the ideal way to link India to the markets of Central Asia, but political considerations have raised the opportunity costs of land transport. Hence Chabahar.

India and Iran seem to have built at least one tunnel to circumvent the attempted embargo by the EU and the US. Other mechanisms are in play, including using Central Asian banks to settle payments for trade between the two countries. These three events indicate that India is under no compulsion to join the embargo against Iran.

On the contrary, India has its own economic and geo-strategic reasons to continue to trade with Iran. Tough talk in Washington, Brussels and Tel Aviv is not being echoed east of Chabahar. In Beijing, Islamabad, Kabul, and New Delhi, the discussions are about percentages and payments rather than strategic strikes and sabotage....