Despite Iran and India sharing a strong historical and cultural tie over centuries, their relationship was altered when India supported American pressure and sanctions imposed upon Iran because of Tehran’s nuclear program. India dramatically reduced its oil imports from Iran when it was at the time among its top energy partners. 

But now that the sanctions upon Iran have been lifted by the US, India has resumed partnering and negotiating with Iran at different levels. In a context of rivalry between India and China for regional influence, India has signed the Chabahar Treaty, which states that India will substantially help Iran develop the port of Chabahar and will then help the country operate it. China is indeed building a port in Gwadar, Pakistan which will open to the country the Arabian sea and all the maritime trade opportunities attached to it. The treaty is therefore also a way to counter the China-Pakistan Economic Corridor (CPEC), and consequently to challenge China’s New Silk Road. 

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This port of Chabahar is indeed a strategic move: with India boosting its regional connectivity, Iran is becoming India’s gateway to Western & Central Asia, and ultimately to Eurasia and Europe.

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1. The deal – India to build and operate Iran’s Chabahar Port 

Iran’s maritime trade suffers from one key weakness: the absence of deep sea ports in the country. So far, Iran has therefore been handling 85% of its seaborne trade through its most important port: Bandar Abbas. Yet this harbor can only receive 100,000-ton cargo ships, and since most of world shipping is conducted with 250,000-ton cargo ships, Iran has had to rely on the United Arab Emirates to receive big vessels, and then get the merchandise via smaller ones. This is a very costly operation and it makes Iran dependent on UAE. 

This is why Iran has been meaning for decades to develop a deep sea port capable of becoming a hub in the region: the harbor of Chabahar is located in Southeastern Iran in the Gulf of Oman, not far from India’s border. 

After years of negotiation since 2003 with India, a deal has finally been signed few weeks ago: as reported by the BBC, India will be investing $500 million to develop Chabahar port. The Economic Times explains that with the collaboration of Iran, India will invest $85 million to develop 2 container berths of a length of 640 m and 3 multi-cargo berths: a strategic investment which will make the Iranian port one of the major maritime hubs in the region. More money will then be invested to operate it and to develop activity in its Free Trade Zone (FTZ) : a strategic investment worth $16 billion, according to Quartz. Indian companies will be setting up a range of industries going from aluminum smelter to urea plants in this FTZ. Part of the production, especially urea, could then be imported to India through Kandla port. 

As explained by the Economic Times, the contract signed by India has a duration of 10 years, which will be extendable. 18 months will be required to complete the first construction phase. Then, from Year 3, Iran is expecting India to facilitate 30,000 TEUs of cargo at the harbor, and 2,50,000 TEUs by Year 10. It is also worth mentioning that according to EurasiaReview, India’s Export Import Bank (EXIM) will attribute Iran’s Port and Maritime Organisation a credit line of $150 million for the development of the Harbor. 

What does India have to gain from that investment? Stronger commercial and political partnership with Iran, energy sustainability, and the access to a land of opportunities, via transit routes to Afghanistan and Central Asia.

2. Indian investment in Iran, a long term winning bet for connectivity and trade

 As Sanjaya Baru from the International Institute for Strategic Studies explained to Quartz, “Connectivity is key to closer economic and political relations between India and the rest of Asia”.

a. Circumventing Pakistan to trade with Iran, Afghanistan & the West

 The Chabahar port will most certainly yield important offshore commercial gains, given India’s current situation. Indeed, India’s regional and international trade is harmed by its neighboring rival, Pakistan. Indeed, G. Parthasarathy, former Indian diplomat and high commissioner  told Quartz that Pakistan “deliberately delays transit” of Indian goods. Pakistan being India’s only land route to the West, the country has so far had to rely on Maritime roads with Iran to bypass its rival. Yet Iranian port of Bandar Abbas is quite far from India, therefore making both imports and exports expensive and slow. This is the reason why the Chabahar Port is a grand opportunity for India to boost its trade with other countries. Chabahar is actually quite close to Gujarat, on India’s west coast. As India’s transport minister Nitin Gadkari explained when in Tehran (Iran) with Prime Minister Modi a few weeks ago, “the distance between Kandla (a port in Gujarat) and the Chabahar port is less than the distance between New Delhi and Mumbai”.


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He added that “what this agreement does is to enable (India a) quick movement of goods first to Iran and then onwards to Afghanistan and Russia through a new rail and road link”. This harbor, hub of a major trade and transport corridor, will most certainly boost India’s trade ties with Iran, Afghanistan, Central Asia, but also ultimately Russia and other countries from Europe.

b. Importing Energy from the Middle East & Central Asia

This port will also facilitate the import of hydrocarbon to India, and hence fulfill India’s gigantic and still growing needs in energy. It should be mentioned that as explained by Al Jazeera, before 2011-2012, Iran was India’s second largest oil supplier but this ceased because of the sanctions imposed upon Iran by America. Iran indeed detains extremely vast reserves of oil and national gas, just like many other actors from the region. This is why the Indian government intends to bring oil and gas from Central Asia and Iran from Chabahar port to Mundra Port in India. 

Another “Connect Central Asia” project which may benefit from the synergy around the creation of the Chabahar port is the Middle East to Indian Deep-water Pipeline Project (MEIDP), a South Asia Gas Enterprises (SAGE) undersea pipeline, which would bring gas from Oman and Iran to India. As mentioned here, if implemented, it could see 31 million cubic meters of gas daily delivered to India, and diversify India’s Liquified Natural Gas (LNG) importing sources, Qatar being the dominant supplier at the moment.


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c. A better Connectivity across the Eurasian region

 But the investment in Chabahar port is indeed just the beginning: a high potential transportation network is being developed to connect India and Eurasia and this is why we mentioned Iran as India’s gateway to Western & Central Asia. Indeed, as Iranian President Hassan Rohani said, Iran can “connect India through a reliable route to Afghanistan and countries in Central Asia” with Chabahar.


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Christine Fair, professor at Georgetown University explained that “Iran is the only way for India to conduct trade with Central Asia and Russia”.  Chabahar will most certainly allow India to improve its trade exchanges with key regional players besides Iran, such as Russia & Afghanistan but also resource-rich countries in Central Asia, like Turkmenistan and Kazakhstan.

 Iran and Afghanistan are becoming more and more connected, largely thanks to India’s investments made to improve their transportation and logistic networks. Through the Chabahar port, India will have a direct access to Afghanistan and here is why: first of all, Iran built a road from Chabahar up to Milak at the border with Afghanistan, Milak being then connected to Zaranj, on the other side of the border in southern Afghanistan. This gives access from Chabahar to the Zaranj – Delaram road built by India in Afghanistan, which itself gives access to Afghanistan’s Garland Highway, a major route network providing links to 4 majors Afghan cities: Herat, Kandahar, Kabul and Mazar-e-Sharif.


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It can also be mentioned that, as explained in this article, Indian is to fund another route network within Afghanistan, which will enable Iran and its Indian trade to easily reach Tajikistan via its neighbour. There are 3 other ongoing Indian projects or initiatives connecting Iran to Afghanistan that we should mention (PDF-1.2MB): the construction of the Chabahar – Hajigak railway to access this Afghan mineral rich region; the investment in the Chabahar – Faraj – Bam railway, and the creation of a link from Chabahar to Zahedan, at the Iranian border with Pakistan and Afghanistan: a rail link between Chabahar, Zahedan, Mashhad could then be built and extended to Herat and Mazar-e-Sharif in Afghanistan and eventually connected to Tajikistan and Uzbekistan. Through Iran, and subsequently Afghanistan, India is gaining access to a high potential trade route heading west.

 Moreover, by investing in this Iranian hub, India will also benefit from connectivity projects with the region that Iran is implementing. For instance, as mentioned here, Iran signed a memorandum of understanding with Afghanistan and Tajikistan: the plan is to build railway, energy and water lines. A subsequent project in discussion is also of connecting the Khvaf – Herat rail line between Iran and Afghanistan to the railway networks of Central Asia, Turkey and eventually Europe. Iran also signed Memoranda of understanding with Iraq and Syria to ease border trade between the countries, and with Oman, Qatar, Turkmenistan and Uzbekistan to create a transit corridor between those states.

 One can also mention that India will benefit from the "Eurasian Railway Connectivity" through Afghanistan. As mentioned in this article, different projects are indeed in process: the Turkmenistan-Afghanistan-Tajikistan (TAT) rail line, but also the Afghanistan-Turkmenistan-Azerbaijan-Georgia-Turkey transit corridor, the Iran-Turkmenistan-Kazakhstan railroad and finally and most importantly, the “Transport Corridor Europe-Caucasus-Asia” (TRACECA) between states from the European Union, 14 states from Eastern Europe and states from South Caucasus and Central Asia, which are shown on the map below.


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But what should be kept in mind is that Chabahar is only the first stone on the ground works for India’s Silk Road of the 21st century, and the reason why it has so much potential is that it is inserting itself in other logistical projects such as the Ashgabat Agreement, aimed at improving multimodal transportation across Eurasia, between Central Asia and the Persian Gulf: it was signed by India, Oman, Iran, Turkmenistan, Uzbekistan and Kazakhstan. And in synergy with this framework, the Chabahar port will also give momentum to the International North-South Transport Corridor (INSTC), which involves the organization of the ship, rail, and road roads for moving freight between South and Central Asia to North and Eastern Europe: the countries involved are  India, Russia, Iran, European countries such as Azerbaijan, Armenia, Ukraine, Belarus, Bulgaria and other states from Eurasia and the Middle East like Kazakhstan, Kyrgyzstan, Tajikistan, Turkey, Oman or Syria.


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Thanks to this maritime access, India will increase its trade connectivity to other cities, from Mumbai to Moscow, from Tehran to Baku. This new “Silk Road” will be shorter and cheaper than the current transport road connecting India to Europe, through the Red Sea, the Suez Canal and the Mediterranean Sea. This new transport corridor is in comparison expected to be 40% shorter and the cost of trade reduced by 30%.

 

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 Iran’s Chabahar port will undoubtedly boost India’s exchanges with the world, trade wise and energy wise, thanks to the harbor’s connection to a net of transportation networks across Western and Central Asia. It therefore goes without doubt that it will be much easier for businesses in India or overseas dealing with the country, to trade. As mentioned the Economic Times, in World Bank's “Connecting to Compete 2016 - Trade Logistics in the Global Economy” (PDF-2.4MB), India jumped of 19 spots, being out 160 ranked 54th in 2014 and 35th in 2016. India’s trade logistics performance improvement is being applauded worldwide and the country is just getting started. Not only is India developing its transportation infrastructure within the country, but it is doing so in Western and Central Asia as we just saw, and in South Asia and South East Asia.


Cedric Emmanuel | International Trade Junior Consultant - Arsha Consulting

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