Published daily by the Lowy Institute

Chabahar: The key to a strategic partnership between India and Iran?

While the Chabahar project could enhance Iran-India political and economic engagement, there are potent obstacles in the way.

Indian Prime Minister Modi, Iranian President Rouhani and Afghanistan President Ghani at the tripartite agreement signing, May 2016 (Photo: Flickr/MEAphotography)
Indian Prime Minister Modi, Iranian President Rouhani and Afghanistan President Ghani at the tripartite agreement signing, May 2016 (Photo: Flickr/MEAphotography)
Published 9 Mar 2017 

Since Iran reached an agreement with India back in 2003 to develop a deep-water port and free-trade zone in Chabahar, on the Makran coast in Iran's Sistan-Baluchestan province, progress has been painfully slow. Partly due to international sanctions against Iran and partly due to bureaucratic lethargy on all sides, the initiative has not progressed beyond rhetoric surrounding broader Iran-India relations. However, despite obstacles, the past year has seen both parties emphasise their commitment to this project, which is seen as key to enhancing the strategic partnership between the two countries.

The project received a much-needed boost in May 2016, when India, Iran and Afghanistan signed a tripartite agreement to create a reliable and efficient 'transport corridor for the smooth transport and transit of goods and passengers through Chabahar Port'. During the same trip, Indian Prime Minister Narendra Modi also announced a plan to invest $500 million towards the project. In addition, as a continuing show of its renewed intent, in February 2017 India for the first time allocated funds from its foreign aid budget specifically to the Chabahar Port project, while Indian companies have begun laying the groundwork to set up shop in the city.

The project is strategically valuable for both countries. For Iran, it facilitates the development of its first deep-water port, capable of hosting larger ships than the port at Bandar Abbas, currently responsible for more than 80% of the country's shipping. It also provides direct access to the Indian Ocean for Iran and removes the risk of large-scale disruption caused by a hypothetical blockade of the Strait of Hormuz in the Persian Gulf. Moreover, it presents an opportunity to enhance the prosperity of Sistan-Baluchestan, Iran's least developed province. This is particularly critical in a post-sanctions environment where foreign investments promised by the government as a result of the 2015 nuclear have not matched expectations.

Chabahar is located approximately 170 kilometres west of the Chinese-operated Gwadar Port in Pakistan, a vital part of the China-Pakistan Economic Corridor project. The Chabahar Port project will enable India and other participating countries to more effectively monitor Pakistan's naval activities as well as China's expanding presence in the Arabian Sea. The increased economic activity generated by the development of the port and free-trade zone at Chabahar might also dampen the prospect of Gwadar serving as a regional shipping hub, and though a gas pipeline (labelled the 'peace pipeline') connecting Chabahar and Gwadar has been proposed, recent reports indicate that, frustrated by repeated construction delays, Iran might cancel the initiative, lending further impetus to the Chabahar Port project.

Furthermore, both Iran and India see Chabahar as a way to strengthen the central government in Afghanistan by providing a trade and investment corridor that would allow New Delhi and Kabul to bypass Pakistani restrictions on bilateral trade. Currently, under the Afghanistan–Pakistan Transit Trade Agreement, Afghan goods can pass through Pakistan to the Indian border; however, no Indian goods are allowed on the way back. Moreover, Chabahar is close to ports on India's west coast and would enable greater connectivity between India and Central Asia as well as bring the International North–South Transport Corridor, of which India and Iran are critical components, closer to fruition.

Iran and India's investment in the project over the last year is also driven by the fact that it would enable further strengthening of ties in areas such as counter-terrorism, security, energy and trade. Relations between the two countries have always been positive, but political and economic ties were minimised as a consequence of the international isolation to which Iran was relegated during talks on the nuclear issue. India voted in favour of UN Security Council resolutions against Iran's nuclear programme twice; it also went from being Iran's second-largest importer of crude oil, behind China, in 2011 to zero oil imports in March 2015 due to mounting US pressure. Modi's trip to Iran in May 2016 to discuss the Chabahar project thus clearly signalled India's readiness to forge deeper ties with Tehran. Indeed, relations have since grown to the extent that for April-December 2016, Iran was India's third-largest supplier of oil.

Similarly, in the past year, Tehran has indicated its preference for strengthening ties with India, which is still perceived as having stood by Iran during the period of international isolation and pressure. India was one of the few countries that, despite sanctions, continued trading with Iran through a rupee-based payment mechanism.

Signalling appreciation for India's stance toward Iran, the Secretary of Iran's Supreme National Security Council travelled to India in August 2016 following Modi's visit earlier that year, stressing the importance for the two countries to revive a document on strategic cooperation initially signed in 1998. 

While the Chabahar project thus constitutes a way for enhancing political and economic engagement, potent obstacles stand in the way of this endeavour.

Security threats are an ongoing problem for the project. Multiple sites along the planned corridor have suffered attacks by the militant organisation Jundallah, with the most high-profile strikes occurring in Zahedan in July 2010 and Chabahar in December 2010. Nevertheless, India's willingness to pursue this project is demonstrated by the fact that it persisted with construction of the Zaranj-Delaram highway in Afghanistan despite of frequent attacks by the Taliban.

An important stumbling block could be the role of the US following Donald Trump's election as President. The sharp downturn in US-Iran relations (and in particular the recent sanctions imposed on numerous Iranian entities in the wake of its ballistic missiles tests) will concern India, which might be forced to further slow progress (and there have been hiccups) on the project in order to sustain its steadily warming relations with the US. In the past, India has engaged with Iran despite US cautions, such as when it reinforced its ambitions for the Chabahar project in May 2015 and when former Prime Minister Manmohan Singh visited Iran for a Non-Aligned Movement summit in 2012. However, such a line might be regarded as unduly risky under the Trump Administration, owing to the bellicosity and perceived unpredictability of the President giving rise to fears of deterioration in the US-India relationship or even indirect sanctions on Indian companies.

Nevertheless, rigorous compliance checks to ensure that no sanctioned companies are involved could help the project move forward. Moreover, since May 2016, Japan has expressed sustained interest in the Chabahar project. Capitalising on Japan's improving ties with India to include a US treaty ally in the project, along with Japanese Prime Minister Shinzo Abe's seemingly positive relationship with President Trump, would help mitigate US concerns and realise this project's full potential, thus enabling the fulfilment of New Delhi and Tehran's strategic ambitions.

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