India tries to balance US ties and Iran oil

Admittedly, the timing was awkward. Secretary of State Hillary Rodham Clinton arrived in New Delhi this week after declaring that India should reduce imports of Iranian oil and comply with western sanctions. Yet across town, India and Iran were trying to figure out ways to do business together.

In the main ballroom of a five-star hotel, an Iranian trade delegation met with Indian exporters, exchanging cards, sipping tea and nibbling on cookies. The Iranians met one Indian trade group Monday, and another Tuesday, and had more meetings planned in the country’s financial capital, Mumbai – a business courtship seemingly in open defiance of Clinton’s hard line.

No doubt, this week’s diplomatic choreography – with the Americans on one side of the capital and the Iranians on the other – could easily have been interpreted as a deliberate provocation at a moment when the once shiny partnership between India and the US seems to have dulled. But if the scheduling was poorly planned, the situation actually provided an illuminating window into the realpolitik of Iranian sanctions and of how the US and India, as well as China, are trying to achieve their divergent goals.

The Obama administration, in attempting to squeeze Iran by choking off foreign currency that might be used for its nuclear programme, is pressuring Iran’s oil customers to sharply reduce imports or face punitive sanctions as soon as next month. Earlier this year, Clinton announced exemptions for Japan and 10 European nations but provided no such waiver to India and China, the biggest importers of Iranian crude and the rising powers of Asia.

China and India had already rejected the threat of sanctions and vowed to act in their national interests. The Obama administration called on both countries to significantly reduce imports. But behind the scenes, officials from all three countries were exploring ways to reduce Iranian oil exports while engineering workaround mechanisms so that India and China can pay for the oil they do buy. Indeed, both countries now have arrangements to buy Iranian oil in their domestic currencies – rather than the dollar – that could increase their exports to Iran and also make Iranian oil cheaper.

“It is a lot more complicated with India and China than with Japan or South Korea,” said Valerie Lincy, executive director of the Wisconsin Project on Nuclear Arms Control, which tracks Iran’s nuclear programme. “The economies are structured differently, the amount of oil they are importing from Iran is different, and the geopolitics are different.”

The Obama administration, which has courted India as a geopolitical partner, recognises that India has its own interests to defend: Indian leaders want to maintain good relations with Washington and avoid crippling sanctions, yet India is heavily dependent on foreign oil, meaning that drastic reductions could damage an already wobbling Indian economy. Moreover, Indian politicians are loath to appear to be doing Washington’s bidding, even if quietly they are working to comply. Analysts say the Indian government has ordered domestic refineries to reduce imports of Iranian oil by more than 15 per cent.

Expanding trade ties

“India is clearly making an effort to reduce its dependence on Iran, and this is recognised by the US,” said Harsh V Pant, an India specialist at King’s College in London, in an email. “But domestically, the Indian government cannot be seen to be buckling under any sort of US pressure. So there is a lot of talk of expanding trade ties with Iran.”

Clinton’s visit to India was the last stop in an Asian tour that began in China. Her agenda in China was overtaken by the plight of dissident Chen Guangcheng, but Clinton also spoke to Chinese leaders about their progress on reducing oil purchases from Iran.

In New Delhi, Clinton discussed Iran and other issues with prime minister Manmohan Singh and others. “We commend India for the steps its refineries are taking to reduce its dependence on imports from Iran,” she said. “And we have been consulting with India and working with them on some areas on alternative sources of supply. There’s no doubt that India and the US are after the same goal.”

Even as India reduces its oil imports from Iran, officials have been trying to figure out how to pay for its remaining Iranian oil purchases. Banking restrictions now make normal transactions with Iran almost impossible. This is why the Iranian trade delegation is in town: Iran has agreed to accept payment for 45 per cent of oil sales to India in rupees, much of which will be used to buy Indian exports.

Mark Dubowitz, an Iran specialist in Washington, said a primary purpose of sanctions is to starve Iran of the dollars and euros it needs to finance the country’s nuclear programme. In the past, India paid for most of its oil purchases in dollars; under the new arrangement, India will purchase nearly half its Iranian oil in rupees, which are not a convertible currency.

“This rupee account is very helpful,” said Dubowitz, executive director of Foundation for Defence of Democracies. “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.”

At almost precisely the moment Tuesday that Clinton was speaking at her news conference, the Iranian trade delegation was a few miles away, in a basement conference hall of one of the city’s most prominent cultural centres, watching a slide show on Indian exports, including Indian rice, tractors, auto spare parts, pharmaceuticals and more.

“We are very keen to work with you,” said Anil K Agarwal, a businessman and officer with the Associated Chambers of Commerce and Industry of India. In fact, the new payment arrangement for oil may help India reduce its enormous trade imbalance with Iran. Last year, India spent $988 million on Iranian imports, mostly on oil, more than 10 times the $91 million in goods that India exported to Iran.

Eshagh, the leader of the Iranian delegation, never directly mentioned the sanctions, nor the fact that Clinton was in town. But he did allude to ‘certain circumstances’ and ‘some problems’ that made trade more complicated. Still, he struck an upbeat tone. “There is a vast potential for exports and imports between the two countries,” Eshagh told the audience, speaking through an interpreter. “We feel there is no difficulty regarding goods and their prices.”

It remains to be seen how extensively, or effectively, the rupee payment system will be used. US officials also will be watching to ensure that no goods that are banned under the sanctions regime are exported to Iran under the system. Wheat, rice and pharmaceuticals are outside the sanctions, but sales of certain technologies, for example, are a cause of concern.

The question now is whether India has made the ‘significant reductions’ required for exemptions. Indian officials believe they have now met the US demand, and many analysts expect the Obama administration officials to grant an exemption during a high-level Strategic Dialogue between the two countries next month in Washington.