India-Iran Relations

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  • Iran: Its Strategic Importance

    One of the most difficult tasks facing the foreign policy makers in India is the requirement to balance the relations with Iran while enhancing proximity with the United States. This invariably raises questions over the importance of Iran. An ancient civilisation, Iran is located at the crucial junction of South Asia and the Middle East. It also links the Central Asian Republics and the Caucasus region to the Arabian Sea. Historically, it has influenced its neighbours, irrespective of the type of government in power.

    November 2012


    In the two decades since the end of the Cold War, the Islamic Republic of Iran has emerged as one of the two most debated, contested and commented upon foreign policy issues in India. The other has been the US. The US has remained the pre-eminent global player, following the disintegration and demise of the USSR. Despite its preference for multi-polarity, India, like many other countries, had to recognise the new US-dominated world order and calibrate a policy that was radically different from the one it followed during the Cold War era.

    November 2012

    Iran factor in India’s Afghan Policy

    As India plans to stay engaged in Afghanistan beyond 2014, Iran has emerged as a critical component of India’s Afghan policy. Despite US pressures, India needs to adopt a pragmatic approach vis-à-vis Iran and engage it effectively to protect its vital security and geo-political interests in Afghanistan.

    August 24, 2012

    Iran's Nuclear Imbroglio at The Crossroads: Policy Options For India

    Iran's Nuclear Imbroglio at The Crossroads: Policy Options For India

    On account of pertinent international, regional and domestic dynamics, the Iranian nuclear imbroglio is at uncertain crossroads. There are however reasons for optimism. This is because of Iran’s continuing engagement with the IAEA and P5+1 and strong opposition from major powers to a military solution. In the light of the above dynamics, the Paper points out dilemmas being encountered by India and ends by exploring possible policy options in the evolving situation.

    India struggling to cope with sanctions on Iran

    The Indian government is now weighing several options to manoeuvre around the ever-tightening sanctions, including the provision of sovereign guarantees to oil tanker operators.

    June 26, 2012

    Rajat Dubey asked: Why did India decide to withdraw from ACU? How will the new agreement with Iran solve the problem?

    Shebonti Ray Dadwal replies: In December 2010, the RBI decided to stop using the Asian Clearing Union (ACU) to pay Iran for its crude - under US pressure. The ACU, which was established at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) and in operation since 1974, is a currency mechanism set up to help countries economise on their forex reserves by allowing them to conduct bilateral barter trade and make payments using the Asian Monetary Units (currency units indexed to the US dollar and the euro that allowed countries to hold surpluses and deficits outside their formal foreign exchange reserves).

    Washington and its Western allies had been pressuring India not to use the ACU to pay Iran on the grounds that this mechanism was too opaque, thereby making it difficult to ascertain whether the money flowing into Iran's coffers was not being used for the country's nuclear programme. Under pressure from the US Treasury, the Indian government withdrew from the ACU facility. A RBI circular on December 27, 2010 noted that “all eligible current account transactions including trade transactions with Iran should be settled in any permitted currency outside the ACU mechanism.”

    In order to pay Iran, India first turned to a complex mechanism using the Hamburg-based Europaisch-Iranische Handels Bank (EIH) via the German Central Bank and the State Bank of India between February to April 2011 as the procedure did not violate UNSC or EU sanctions. However, pressure on German Chancellor Angela Merkel from the US increased and in April 2011 this route was also closed by Germany. India then made an arrangement with Turkey's Halkbank, 75 per cent of which was owned by the Turkish government, which had refused to abide by US and EU sanctions. But Halkbank too was put under tremendous pressure to close this payment avenue as well.

    India, unlike China, does not have the wherewithal to conduct barter trade with Iran, given the huge imbalance in their bilateral trade. After weeks of negotiations, both countries agreed in February 2012 that India would pay 45 per cent of its oil bill in rupees which would be held in the Kolkata-based UCO bank (which has minimum, if any, exposure to the US market) and IDBI bank and paid out to two Iranian private banks, Bank Parsian and Karafarin Bank. The rest of the oil bill will be sorted out in time. To further facilitate this mechanism, India had also agreed to waive a withholding tax of 40 per cent of net income, i.e., while making payments to Iranian crude oil suppliers, Indian refiners will not have to deduct taxes.

    Moreover, to correct the trade imbalance, India and Iran are trying to substantially increase Indian export basket to Iran. In March, an Indian trade delegation went to Iran for this purpose, but came back largely disappointed. Indian traders had hoped to export wheat, rice, tea, pharmaceuticals, iron and steel. Early this month, a 56-member Iranian team also visited India to look at options to boost trade. While statements, such as potential bilateral trade reaching $24-25 billion, are making the rounds, nothing concrete has come out of the discussions, barring a few small deals in Indian export of soy meal and animal feed to Iran.

    Hence, while the rupee trade has allowed India to pay Iran some $7 billion for earlier oil, India will have to either boost exports to Iran to continue buying oil from Iran or cut its oil imports from the country.

    India and the US: Squaring the Circle on Iran

    Attempts by India and the US to square the circle on the nature of India’s energy cooperation with Iran have hit high gear in the aftermath of Clinton’s visit.

    May 10, 2012

    India’s Iran Defiance

    The American inability to provide effective leadership in the Middle East is a sufficient incentive for Indian defiance over unilateral oil sanctions against Iran. Yes, this defiance has difficulties and problems, but it is worth the price to assert India’s independent foreign policy making.

    March 19, 2012

    Sandeep Madkar asked : How the US factor is affecting India-Iran relations? Can India have good relations with both of them simultaneously?

    Meena Singh Roy replies: Yes, the US-Iran relations are impacting on the India-Iran relations indirectly. Even if the US-EU bilateral sanctions against Iran are not mandatory for India to follow, they do impact on India's relations with Iran. Because of the US sanctions on Iran's oil and financial sectors, India is finding it difficult to make the payments for the crude oil which it buys from Iran. Moreover, the private sector, which has higher stakes in doing business with the US, is gradually pulling out of Iran as they don't want to be black-listed in the US. Under these circumstances, it would be really difficult for India to balance its policy with respect to Iran and the US.

    India and Iran's Nuclear Issue: The Three Policy Determinants

    Three broad policy determinants can be discerned in Indian reactions to the Iranian nuclear issue. These include: ‘strategic autonomy’ as it relates to Indian foreign policy decision making; concerns regarding ‘regional strategic stability’ as it relates to events in its ‘proximate neighbourhood’; and ‘national security’ implications on account of operative clandestine proliferation networks. Issues relating to the role of the US in influencing Indian policy positions at international forums and vis-à-vis domestic policy were prominent as regards the first determinant.

    September 2011