Whatever the Indian foreign secretary whispered to Nancy Powell during his February visit, Finance Minister Pranab Mukherjee contradicted earlier and publically in Washington at the end of January by stating that India “will not decrease imports from Iran." In early February, India revealed that it would pay for 45 percent of its oil imports in rupees. The shift from payment in dollars to Rupees required a modification in the tax code to enable the National Iranian Oil Company to avoid a 40 percent tax.
With the Iranians acquiring so much in difficult-to-convert Rupees, the Indians anticipated a major trade opportunity that was needed to stimulate a slumping economy. In early March, Commerce Minister Anand Sharma took a trade delegation of 70 business and government representatives to Iran. He stressed the overt defiance by India of the American sanctions by concealing the identities of the participants to prevent the U.S. from retaliating against them.
In 2011, trade between the Iran and India was at US$13.7 billion and expected to double by 2015. The cost of imported Iranian oil was US$11 billion, comprising 12 percent of total crude imports.
Moving away from Iranian crude would have proven to be costly. The loss of the 30 percent of refined petroleum sales made to Iran by state-owned refineries and the high cost of retrofitting refineries designed to process the Iranian grade crude would have all been for a six month waiver.
The United States offered to broker supply arrangements with Saudi Arabia and Iraq. At that time, suppliers were hard to find. Saudi Arabia and the Emirates were already India’s main sources, and as India buys 50 percent of their crude from the Arab suppliers, they were reluctant to become even more dependent upon them.
India did follow the U.S.'s urging by redirecting more purchases to Saudi Arabia and Iraq. There is, however, a question about the Iraqi crude which comes mainly from fields along the Iranian border and is of similar quality; there are those in the industry that will say privately that a fair amount of the Iraqi oil originates on the southern side of the border. It allows the Indians to acquire oil compatible with their refining facilities and compatible with the American wishes for them to direct more purchases from Baghdad.
It does make it easier for Washington to praise the Indian effort to submit to its demands and to be able to avoid a conflict by granting a waiver. However, as much as India protests American demands, Delhi has been quietly instructing the state-owned refineries to find other sources. Unconfirmed figures place the flow of reflagged crude at about one hundred thousand barrels per day.
If the Indians openly defy the sanctions, having their banks cut off from the U.S. financial markets would inflict serious economic damage. Even some of the large international corporations have reduced trade with Iran out of concern that what would be considered to be legitimate trade in agricultural or medical supplies could at some point provoke retaliation from what is seen as an often-erratic U.S government.
During the May visit to India by Secretary of State Clinton, Prime Minister Man Mohan Singh and National Security Adviser Shivshankar Menon did agree to reduce oil imports from Iran from 17.5 to 14 million tons. They did specify that their decision was to comply with the United Nation’s sanctions against the Islamic Republic. The reward was to receive the waiver that they had not actually been seeking.
The government needs to present the fiction that it is resisting American demands and upholding Indian sovereignty. Otherwise, the Singh administration would face the outrage of a political opposition already attacking his policies for the high rate of inflation and the contracting economy. If that were not enough to alarm the prime minister, a word from a provoked Ayatollah Ali Khamenei could unleash serious social and political problems from the twenty-five million Shi'a Muslims in the country.
That leaves India trapped between political rhetoric, driven by an American obsession with an Iranian nuclear weapon program, and the reality of its domestic social stresses. Since its independence, India has opted for a non-aligned policy of vigorous indifference to everyone else’s problems. It is how a country with 300 times the population of New Zealand maintains a smaller foreign service with scarcely one thousand diplomats -- they focus upon only what impacts upon Indian interests.
Those interests are restricted to what is seen as the strategic neighborhood from the Strait of Hormuz to the Strait of Malacca and across the Indian Ocean to the shores of East Africa. Included in the strategic neighborhood is Afghanistan, where India and Iran supported the Northern Alliance against the Taliban before the U.S. invasion. The entry of the U.S. displaced India and Iran, and transformed the conflict into an international war.
After the U.S. leaves in 2014, India will be still in Afghanistan, with plans to invest US$11 billion in an iron and steel industrial complex. They will be working alongside the Iranians to neutralize the Pakistanis and weaken the influence of the Chinese in the region. By going along with earlier U.S. and UN sanctions, India watched the Chinese invest US$40 billion in the Iranian petroleum industry and gain a strategic advantage. They will not repeat that error in Afghanistan or elsewhere in their strategic neighborhood.
Even though the agreement was and remains unpopular among many Indians, former Undersecretary of State Nicholas Burns, the chief American negotiator on the 2006 U.S.-India nuclear deal, expects Delhi to show signs of gratitude for the sharing of nuclear technology by opposing Iran. Later, after the Americans have left, Tehran will expect Delhi to work closely with it to stabilize the region; and it will be Iran that will hold the advantages in their relationship.
India will require access through Iran from the Port of Chabahar to reach the resources of Afghanistan and will need Iran for the construction of the North-South Corridor, which would cut by more than half the length of the transportation route from the region to Europe.
Looking down a not-too-long road, five or ten years from now, the U.S. will be engaged elsewhere -- fencing with China in the South China Sea or sheltering in Fortress America -- while India will be facing many of the same problems that it must face today. For now, the Indians need to avoid provoking the United States. At the same time, the Indians can never forget that Iran also lives next door in what can quickly become a much rougher neighborhood.
Photo: An oil delivery in India. C. Frank Starmer