The Iran–China 25-years Deal: Where does it leave India?

On 15 July 2020, the New York Times published a report saying that Iran and China had drafted a 25-year strategic partnership agreement to strengthen the areas of the bilateral relationship. According to the deal, China would invest $400bn in Iran in the next 25 years. The agreement consists of at least 100 projects varying from infrastructure to energy resources. China will invest $280bn in developing Iran’s oil, gas, and petrochemical industry. $120bn would be invested in upgrading Iran’s transportation, banking, telecommunication, and manufacturing infrastructure. Iran, in exchange for the Chinese investment, offered few benefits together with a 32 percent discount on all oil, gas, petrochemical purchases over the next 25 years.  

One of the crucial elements in the deal is to deepen the military cooperation, potentially giving China a foothold in the region that has been a strategic preoccupation of the United States (US) for decades. This can change the region’s geopolitics. Military cooperation calls for joint training and exercises, intelligence sharing, research and weapon development, etc. Most importantly, Beijing will deploy about 5000 security personnel in Iran to protect the Chinese project. There may be an additional deployment of personnel to protect the transit of energy resources from Iran to China through the Persian Gulf. This appears a tactic designed to counterbalance the power of the US in West Asia (or the Middle East) in the sea-lanes. Until the last year, China refrained from engaging in West Asia and preferred status quo. It observed the strategic chokepoint Bab-al-Mandeb situated at the mouth of the Red Sea, controlling access to the Suez Canal and the Strait of Hormuz via its base in Djibouti.

Iranian Supreme Leader Ayatollah Ali Khamenei, in an attempt to increase military cooperation between Iran and China, agreed to sign another military deal which was proposed by the Islamic Revolutionary Guard Corps (IRGC). The deal will involve aerial and naval cooperation between Tehran, Beijing, and Moscow. According to some reports, Chinese companies will construct a dual-use facility at Iran’s key ports like Chabahar, Bander-e-Bushehr, and Bandar Abbas, which will be used by Chinese and Russian military vessels. Beijing will also be deploying bombers, like the modified version of Tupolev Tu-22M3s, Sukhoi Su-34, etc., at these places. More details on this pact will be disclosed in the mid – August 2020 after Iran-China and Russia’s meet. If the parties succeed in signing the deal, then, as of November, China-Russia bombers, fighters, and transport planes will have unrestricted access to Iranian airbase.

One of the crucial elements in the deal is to deepen the military cooperation, potentially giving China a foothold in the region that has been a strategic preoccupation of the United States (US) for decades. This can change the region’s geopolitics.

Given the details and the range of the areas that the agreement covers, the US seems to have been cornered by Iran’s new move. Iran would no more be contained under the pressure which the US was trying to put it in. Furthermore, China’s military presence in the Gulf shores is a matter of concern for Washington. In fact, in response to the draft agreement, the Trump administration has warned China that the US will continue to sanction the Chinese companies that deal with or aid Iran. Whether China would risk further sanctions and isolations after retching up the ante in the South China Sea, Hong Kong, and its border tension with India is a matter of conjecture. Quite likely, China may continue to show defiance to the US against Iran.

However, the agreement is not finalized as yet. Before its final approval, it requires to be discussed in the Iranian Parliament and there is a growing skepticism among the Iranians about the nature of the deal. Many see the deal as a manifestation of Tehran’s broader appeasement for China. President Rouhani and Foreign Minister Zarif continue to defend the draft on the pretext of China being the only power capable of bailing out the struggling Iranian economy and helping the country secure vital commodities and technologies. Many Iranians remain unconvinced by this argument. It is much more likely that Iran wants to show the world, particularly the West, that China is in its axis. This may work in the short-term, but Iran will need to calibrate its future actions mainly for two reasons:

• Firstly, its reliance on China may strain Iran’s relationship with the Western and Asian countries who share hostile ties with Beijing. The deal may also attract further US sanctions pushing its economy to the brink of collapse, giving further rise to anti-government sentiments.
• Secondly, the partnership would increase Tehran’s dependence on Beijing in its conduct of foreign policy, eventually resulting in drifting away from its revolutionary principles. In other words, Iran may not be in a position to pursue its goal in the region, as it has to take China’s interests into account. Iran influences several proxy groups in the region via its ideology. If Iran sells that to China, it is likely that it will lose its regional influence, and the proxies will pursue or establish their ideologies, thus bringing more chaos in West Asia. 

In addition, there is no guarantee by the Chinese counterpart that it will not abandon Iran if a better opportunity knocks its door. As the Chinese policies in Africa shows, its approach to the development of other country’s resources is purely mercenary and exploitative.

Where does it leave India?        

For India, Iran remains a strategically significant ally in bilateral and regional aspects. However, a few setbacks have hit this relationship for nearly the past two years mainly because of the US-Iran rivalry. New Delhi’s decision to stop purchasing oil from Iran to avoid the sanctions had an adverse effect on India-Iran bilateral trade.

In 2018, both the countries agreed to trade in Rupee – Rial payment mechanism to bypass the sanctions. Under this deal, the payment for oil imports would be held in Indian banks, which could be used by the Iranian companies to settle payments for Indian goods and services. But since India has stopped importing oil from Iran, there is no due payment. As a result, Iran cannot continue to purchase Indian goods. There is limited money available, which would reportedly suffice Indian exports for four to five months. It is only a matter of time that Indian exporters would start experiencing payment problems with the Iranian counterparts. While discussion related to this is going on, India’s struggle to resolve this issue has raised doubts and questions among the Iranian counterparts.

The biggest setback in India-Iran relations came when the Tehran government announced its decision to exclude India from the Chabahar port project. Iran has also blocked the development rights of the Indian consortium in the Farzad B gas field.

Doubting India’s interest to trade with Iran, Tehran has begun engaging with Beijing, discussing Iran-China strategic partnership behind the curtain. As the talk progressed, Iran sidelined India in various projects like the underwater LNG pipeline construction, which is now being discussed with Beijing. Iran has also blocked the development rights of the Indian consortium in the Farzad B gas field. Tehran has stated that it would develop the gas field on its own. India would get its share of gas at applicable rates decided by the Iranian government.

The biggest setback in India-Iran relations came when the Tehran government announced its decision to exclude India from the Chabahar port project, stating it would finish the construction of railway routes by 2021-22 using its own resources. India, despite getting an exemption for developing the port from the US sanction, feared adverse impact on its business with the US. This slowed down progress on the Chabahar port project. The Indian companies which were supposed to supply the equipment are no longer wishing to jeopardize their business by operating for Iran. Both public and private companies are hesitant to come forward despite the government’s measures to ease the terms and conditions of the tenders.

Interestingly, after dropping India from Chabahar, Iran officially announced its 25-year strategic partnership with China. Within days, the Iranian supreme leader gave a green signal to the deployment of Chinese bombers and the construction of a double-use facility at the Chabahar port. Beijing’s capacity to invest and build infrastructure in a short time has increased the expectations of the government in Tehran. Iran also views China as a crucial ally in its grand strategy of establishing trade and connectivity to Europe, Asia, and Central Asia. In fact, China has made Iran a crucial part of its Belt and Road Initiative (BRI). It had already built a direct freight train connecting China, Iran, and few countries in Central Asia. China has also invested $4.5 billion to establish a high-speed rail connection within Iran, expected to be completed by 2023-24.

Tehran is more confident about Chinese investment and support to the country at a time when India failed to provide such reassurance and resilience. Even if China does not bid a better deal as India, Iran will prefer Beijing for the development of Farzad B.

Tehran is more confident about Chinese investment and support to the country at a time when India failed to provide such reassurance and resilience. At this point, it is certain that if Iran finalizes the strategic partnership with China, Tehran would replace New Delhi with Beijing in Farzad B and Chabahar projects. A section in the deal clearly states that Tehran will provide Chinese companies with the first preference to bid any new, stalled, or uncompleted oil and gas field development and petrochemical projects. Even if China does not bid a better deal as India, Iran will prefer Beijing for the development of Farzad B.

The most challenging factor for India would be that if China manages to establish a base at Chabahar, then New Delhi would have to bid adieu to the key element (port) of its grand Indo-Pacific strategy, along with the Eurasia North-South corridor project. China will always have an eye on the US and Indian activities from the port. In this case, India-Iran strategic investment in other areas will also go for a toss as the port project was being considered as a turning point in the India-Iran relationship.

India needs to pull its diplomatic skills together and engage with Iran. While the talks on Preferential Trade Agreement (PTA) is good to start with, these talks have been ongoing for years with limited progress. There is no progress on the Bilateral Investment Treaty (BIT), which was discussed at the sideline of PTA last year. The simple way to persuade Iran is for India to negotiate with the US, explaining to them how crucial the port project is for its national interest. India also needs to push the Trump administration to act on sanction exemptions its companies have applied for. This would motivate the Indian companies to deal with Iran without any fear of sanctions.

India also needs to take advantage of the fact that the 25 years deal is in favour of China as Iran is not in a position to strike a hard bargain. Iran’s economy is crippled by the US sanctions, following President Donald Trump’s decision to scrap the Joint Comprehensive Plan of Action (JCPOA) in 2018. The sanctions have ensured that the companies dealing with Iran would be removed from the global financial system. Other members, in particular, the European Union (EU) with whom Iran used to seek cooperation for trade and investment, have done little to ensure Iran receives any of its benefits from the JCPOA, as they do not want to be at odds with the US. Iran’s desperation to come out of global economic isolation has made Tehran submit itself to China.

India must continue dialogue with Iran, pushing forward the negotiation on bilateral trade and investment while working towards earning trust and unison.

Meanwhile, the Iranians may also closely watch the upcoming US presidential elections to be held later this year (November). If Joe Biden wins, it is likely that like Trump, he would reject his predecessor’s way of dealing with Iran. He has also hinted at following Obama’s policies. Until then, India must continue dialogue with Iran, pushing forward the negotiation on bilateral trade and investment while working towards earning trust and unison.

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