Last week saw the official start of the lifting of crushing western sanctions on the Iranian economy in return for major concessions on the country’s nuclear programme. While this US-Iran thaw has the potential to alter the strategic landscape in West Asia, this relationship’s biggest test is still to come.

With the Obama administration’s time in Washington running out, it’s too early to assess whether the budding diplomacy between the United States and Iran represents a new era of détente that will outlast the current presidents in both states.

Iran, with the world’s second largest gas reserves and fourth largest oil reserves, has more than 80 million people, a diversified economy and could get up to $100 bn in frozen assets following the relaxation of sanctions. Iran expects to receive about $30 billion of its frozen funds in coming months.

In addition, it will save about 20-30 per cent on its international trade operations, worth as much as $20 b per year. For comparison, oil revenues this year are about $20 b. Foreign investments and loans could easily add another $10-20 b per year.

Yet few are optimistic about the Iranian economy which is in its deepest recession since the Islamic Revolution in 1979, and no one expects it to bounce back any time soon. Last month, an IMF report forecast zero growth for the current Iranian year ending on March 20, 2016, and 4-5 per cent growth for next year.

President Rouhani’s promise for economic growth next year, which he is making ahead of the crucial election for the Parliament and the Assembly of Experts next month, is also a modest 5 per cent. Iranian economy is anything but normal and it will be years before the structural deficiencies of the decades are rectified.

India has been recalibrating its Iran policy for some time now. New Delhi has signed an air-services agreement with Iran enhancing the number of flights between the two nations and allowing each other’s airlines to operate to additional destinations. The two sides have also inked a memorandum of understanding that is aimed at increasing bilateral trade to $30 billion from $15 billion.

Plans are afoot for greater maritime cooperation, and Iran has already joined the Indian navy’s annual initiative, the Indian Ocean Naval Symposium, which provides a forum for the navies of the Indian Ocean littoral states to engage each other. More significantly, the two nations have decided to hold “structured and regular consultations” on Afghanistan. Both India and Iran are, however, unlikely to accept an Afghanistan that serves as a springboard for the Pakistan military’s interests.

After years of dilly-dallying under the UPA government, the Modi government decided last year to invest $85.21 million in developing the strategically important Chabahar port in Iran, allowing India to circumvent Pakistan and open up a route to landlocked Afghanistan. Iran’s Chabahar Port, located 72 km west of Pakistan’s Gwadar port, holds immense strategic and economic significance for India.

It is already connected to the city of Zaranj in Afghanistan’s southwestern province of Nimruz and can serve as India’s entry point to Afghanistan, Central Asia and beyond. Delhi and Tehran both view Chabahar as critical to developing connectivity with Kabul and as a geopolitical lever vis-à-vis Pakistan. This issue is one of high priority for the Narendra Modi government.

On Iran’s nuclear aspirations too, India has been making subtle changes in its approach. India has expressed particular disapproval of sanctions by individual countries that restrict other countries’ investments in Iran’s energy sector.

Despite existing sanctions, New Delhi is encouraging Indian companies to invest in Iranian energy so that economic connections can underpin a political realignment, not foreclose it. But Indian bureaucracy has been dragging its feet in a swift implementation of economic and trade deals with Iran.

China’s role

The most significant disruption to this relationship has come in the form of China which is now Iran’s largest trading partner. China has invested massively in Iran, with more than 100 Chinese companies on the ground and seeking to occupy the space vacated by Western firms that have grown skittish about the mounting international pressure on the country. The partnership with China benefits both sides: Iran evades global isolation by courting China which in turn gains access without any real competition to Iran’s energy resources.

India has always enforced dutifully any UN measures against Iran, often to the detriment of its energy investments in the country. Yet China, which as a member the Security Council helps shape UN policy toward Iran, has been able to sustain its own energy business in the country without much trouble.

India has been trying to strike a balance between preserving its strategic interests and adhering to its global obligations. Its ability to manoeuvre in Tehran has been limited so far because of Iran’s inability to find a workable solution with the West on its atomic ambitions.

As Shia-Sunni divide fractures West Asia and as American outreach to Iran begins to reshape the strategic environment of the region, Indian diplomacy will be forced to navigate these tricky waters with diplomatic finesse. The certainties of the past with which New Delhi has lived so far are coming to an end and a new uncertain landscape will challenge Indian foreign policy in the coming years.

New Delhi will have to move away from the ideological trappings of the past where domestic political imperatives continue to constrain India’s options. A thaw in US-Iran relations, heralded by the new nuclear understanding between the two, should alleviate some of Indian concerns and will allow it to push forth with a more purposeful regional engagement.

(The writer is Professor of International Relations, King’s College London)