As Indian firms line up behind Saudi Arabia and its Gulf partners, their moves are likely to invite Iran's hostility which could easily spill over into the political realm.

India's ties with Iran need urgent attention as an unresolved row over oil payments threatens to drag the relationship, once described as “strategic,” to a new low.

The problem arose in December 2010 when the Reserve Bank of India, under U.S. pressure, decided to no longer use a clearing mechanism to pay Iran for its crude. Washington and its western allies had exhorted India not to use the Asian Clearing Union (ACU) currency swap system to pay Iran. They argued that this mechanism, established at the initiative of the United Nations Economic and Social Commission for Asia and Pacific (ESCAP) and in operation since 1974, was disconcertingly opaque. Consequently, it was difficult to ascertain whether the money flowing into Iran's coffers was not used to fortify the country's nuclear programme. Faced with these objections, India, according to the Financial Times, began using the German bank, EIH, for making payments. However, this channel broke down in May 2011, after the European Union imposed sanctions on Iran.

Iran is India's core energy partner — its second largest oil supplier. Nearly 12 per cent of India's total demand, around 4,00,000 barrels a day, feeds India's refineries and petrochemical complexes. The Mangalore Refinery and Petrochemicals Ltd (MPCL) is the largest oil importer from Iran. The IOC, BPCL, HPCL and Essar are also major consumers of Iranian crude.

Because of the difficulties over payments, Indian companies have accumulated a debt of nearly $5 billion. With the payment row festering, Iran decided to halt supplies to Indian firms for August. However, as the deadline for the payments neared, both sides scrambled to achieve a breakthrough. On July 31, Iran's Oil Ministry website SHANA reported that the payment row had been settled. India would pay part of the debt “promptly” and the rest would be “gradually settled.” The Ministry's optimism notwithstanding, details of the inner workings of the new mechanism and the prospects of its durability remain far from clear. (Media reports say that India and Iran have finalised the settlement of dues through a Turkish bank arrangement.)

The possible collapse of Iranian supplies will have far greater ramifications than a mere commercial impediment in a buyer-seller relationship. Iran's decision not to supply oil, if implemented, will deliver a serious blow to the evolution of a robust geostrategic relationship between New Delhi and Tehran, of which a highly developed energy partnership has to be the core. Aware of the importance of establishing a strong political relationship, India and Iran, with Pakistan as the third party, had begun negotiations on the Iran-Pakistan-India (IPI) pipeline. Had the pipeline materialised, it would have not only generated obvious economic benefits but also imparted regional stability, premised on mutually beneficial interdependence.

Despite the unrealised potential of the IPI or any of its variants, Iranian officials privately concede that the energy relationship between India and Iran should move on. Before threatening to stop supplies, Iran had begun to show fresh interest in seeking Indian investments in its oil and gas sector. Alive to the recent Indian energy forays in neighbouring Central Asia, Iranians were also considering working with India on a possible fuel swap arrangement in the future. Under this mechanism, Iran could export energy to India from its terminals, in return for an equal amount of oil delivered across the border to Iran, which may have been tapped by Indian firms in Central Asia.

Quite recently, India's induction into the United Nations Security Council as a non-permanent member appeared to have led Tehran, to consider afresh, the need for reinforcing its ties with New Delhi. “We realise that India in the future is likely to play an ever-larger global role, and we want to position ourselves well as this process unfolds,” an Iranian academic in Tehran, who did not wish to be named, recently told this correspondent.

Apart from energy, there are two key elements that define the relationship. One of them is trans-continental transit. Iran's port of Bandar Abbas is the starting point of the north-south corridor which can ferry goods northwards towards the Caspian, and further into Russia and Europe. But, more critically, India needs Iran to physically access Afghanistan. It can do so from the Iranian port of Chabahar, from where a land corridor extends northwards before entering Afghanistan. For reasons of geography, Iran is central to India's Afghan policy.

The importance of Iran to fulfil India's aspirations in Afghanistan is bound to heighten as NATO, most likely without imparting much stability, begins to pull out of the country, in accordance with a three-year time table. In a likely political vacuum, there will be demands on India, Iran, its Central Asian neighbourhood and possibly Russia to play a proactive role in Afghanistan. That would, however, require a powerful vision and strategic cooperation, including intelligence sharing and political coordination at an unprecedented level, for which serious preparations have to begin right away. In fact, with western forces stepping out, in a manner not very different from the Soviet withdrawal from the country in 1989, India may find it necessary to initiate the evolution of a regional mechanism, where neither Pakistan nor China is left out, so that Afghanistan — a country prone to multiple influences — has a realistic chance to rebuild.

However, the manner in which the oil payments row is being handled suggests that New Delhi, far from strengthening ties with Tehran from a larger regional perspective, might have, after considerable deliberations and probably in line with the thinking in Washington, decided to scale down its ties with Iran. Alternatively, India-Iran ties, of which Afghanistan is a key component, might have become the victim of governmental drift, reflecting complete liberation from a larger strategic vision that should otherwise inform a vibrant relationship between the two countries.

It is, therefore, disappointing that India, instead of quickly arriving at a new payment agreement with Iran and defusing a major crisis, has apparently decided to place heavier reliance on Saudi Arabia as an alternative fuel supplier.

Reuters has quoted K. Murali, HPCL's head of refineries and international trade, as saying that the company has sought an additional supply of one million barrels in August from Saudi Aramco.

India's greater reliance on Saudi Arabia may not be temporary, confined to warding off its current difficulties with Iran. Indian refiners may already be restructuring their procurements by probing alternative suppliers, especially Saudi Arabia and its Gulf allies, to offset their dependence on Iran. In its annual report, MRPL has noted that given “the enhanced level of sanctions on Iran in future, [and] the non-resolution of the current payment crisis, the availability of Iranian crude may be difficult.”

As Indian firms appear to line up behind Saudi Arabia and its Arab Gulf partners, their moves are likely to invite Iran's hostility, which could easily spill over into the political realm. The decision to increase dependence on Saudi Arabia and reduce procurements from Iran is particularly ill-timed because of the rapid escalation recently of a Cold War between the two countries. Since the advent of the Arab Spring — the expression for the rising tide of pro-democracy movements since January that are sweeping across West Asia and North Africa — relations between Riyadh and Tehran have turned nasty. Saudi Arabia's decision in March to send troops into neighbouring Bahrain to quell, what was described by Riyadh as a pro-Iran Shia uprising, has added a sharp emotive edge to the Saudi-Iran rivalry. Iran's foes have also accused Tehran of fomenting the rise of the so-called “Shia crescent” in the region — a mythical Iran-led Shia alliance that allegedly is trying to foist a sectarian anti-Sunni agenda in the region.

By siding with the Arab petro-monarchies to meet its energy requirements, India has, inadvertently or otherwise, forced itself into the throes of the Saudi-Iran Cold War. For many influential Iranians, India's move would be seen as taking sides — a deliberate decision to join the anti-Iran camp led by the United States and its regional allies, chiefly Saudi Arabia. In highly politicised Iran, which is particularly on edge after the onset of the Arab Spring, this is combustible material, which can rapidly inflame public passions against India and eventually lead to the undermining of New Delhi's core interests in Afghanistan, compulsorily channelled through Iran.

Amid the fluidity of the Arab Spring and its accompanying firmament, India needs to navigate skilfully to establish parallel and independent relations with both Saudi Arabia, the world's largest oil producer, and Iran, its strategic partner, for the protection of its interests in Afghanistan and, later, in energy-rich Iraq, where Tehran's influence runs deep. But a balanced and vibrant relationship with the two regional giants will become possible only if India assesses its difficulties with Iran not as an isolated technical issue but as one which can define the contours of its influence in the region.

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